University of Phoenix Faces More Charges of Illegal Incentive Pay For Recruiters


In 2004 the University of Phoenix agreed to a $9.8 million settlement with the U.S. Department of Education, after the department found that the school has “systematically” and “intentionally” broken federal rules against paying recruiters based on the number of students they enrolled–basically, on a commission basis.

Those rules exist for a very good reason. Recruiters who increase their income each time they sign up a student are motivated to enroll students who are unqualified to do the academic work or unlikely to find paying work in the field if they do manage to graduate. Those students then take out federal or state student loans to pay for school, thus often leaving them without a meaningful education and in debt. And the students aren’t the only losers; since those students are more likely to default on their loans, taxpayers often get stuck with the tab.

Of course, there is a winner in this scenario: the University of Phoenix, which keeps the student loan funds and other tuition payments regardless of student performance.

The university did not admit wrongdoing in the 2004 settlement. Nor did it do so in 2009 when it agreed to pay $78.5 million to settle a federal whistleblower lawsuit that had gone on for more than six years. The suit was filed by two enrollment counselors, again charging the university had knowingly violated federal law by providing incentive pay to recruiters based on students enrolling or securing financial aid.

You would think that a $78 million settlement payment, on the heels of a $9 million payment, would cause the University of Phoenix to rethink its compensation practices. But apparently settlement payments are just a cost of doing business. “At the University of Phoenix, they got billions of dollars in federal aid,” attorney Nancy Krop told The New York Times. “So even paying $78 million to settle a case, they end up with a lot of money.”

In fact, as we reported at the time the whistleblower suit was settled, federal financial student aid accounted for 86% of the school’s nearly $3.8 billion in revenue in the previous fiscal year.

Now the university faces another whistleblower suit, again filed by two former enrollment counelors, again charging it with making improper incentive payments to recruiters. According to a story in The Chronicle of Higher Education:

The new suit seeks to recover millions of dollars in federal and California state student-aid funds provided to the university’s students since the prior case was settled. As with similar cases, it cites the False Claims Act in contending that the university fraudulently obtained the aid by falsely certifying to the federal and state governments that it was complying with student-aid rules….

The two former recruiters…allege in the suit that, in salary determinations for recruiters, the university and its parent company, the Apollo Group, created “fake or imaginary qualitative criteria in the Apollo Performance Matrix, while the only criterion for recruiters that truly counts is the number of students enrolled.”

They also allege that the fraud is “blatant and systemic and is a direct result of the institution’s business plan.” In August 2010 compliance officers ordered recruiters to copy and destroy all documents related to training and “sales scripts,” the suit asserts.

The University of Phoenix is the nation’s biggest for-profit college. The second-largest for-profit college operator is Education Management Corporation (EDMC)–and now it too faces a whistleblower suit charging violations of the ban on incentive compensation. Coincidentally, or not, EDMC’s chief executive is Todd S. Nelson, the former chief executive of the University of Phoenix who signed the 2004 settlement with the Department of Education. Tamar Lewin wrote in The New York Times:

Given the cast of characters — along with Mr. Nelson, a half dozen former Phoenix executives are now at EDMC — the complaint against EDMC says that “senior management knows that the compensation system it administers violates the incentive compensation ban.”

Lewin points out that Nelson’s predecessor as EDMC’s chief executive, and now the chairman of the corporation’s board, is former Maine governor Jock McKernan.

Mr. McKernan is married to Senator Olympia Snowe, a Republican from Maine whose 2010 financial disclosure form lists EDMC stock and options worth $2 million to $10 million. Scott D’Amboise, who is challenging her in the 2012 Republican primary, has called on Ms. Snowe to resign because she benefited from her husband’s receiving “millions of our hard-earned tax dollars.”

EDMC operates Argosy University, Brown Mackie College, South University and the Art Institutes, with a combined enrollment of about 150,000. According to the Times, those schools account for “about 12 percent of the nation’s higher-education students, the colleges get a quarter of all federal student aid and account for nearly half of all student loan defaults.” Nearly 90% of the company’s net revenue in the fiscal year ended June 30, 2010, came from federal financial aid.

Here’s more about the whistleblower case against the University of Phoenix that settled in 2009:


J.G. Preston is Press Secretary for the Consumer Attorneys of California (CAOC).


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