Washington Post 2010 Annual Report Download - page 22

Kaplan’s business and operations. The Company has filed public comments related to the proposed rulemaking on gainful
employment. The Department of Education plans to issue final rules in early 2011, to become effective on July 1, 2012.
Incentive Compensation. Under the incentive compensation rule, an institution participating in Title IV programs may not
provide any commission, bonus or other incentive payment based directly or indirectly on success in securing enrollments
or financial aid to any person or entity engaged in any student recruiting or admission activities or in making decisions
regarding the awarding of Title IV funds. The Department of Education’s current regulations establish 12 “safe harbors” that
clarify which specific types of compensation can be paid without violating the broadly worded prohibitions under Title IV
regarding the payment of incentive compensation. On October 29, 2010, the Department of Education adopted final
rules, effective July 1, 2011, which amended the incentive compensation rule by, among other things, eliminating the 12
safe harbors (thereby reducing the scope of permissible payments under the rule) and expanding the scope of payments
and employees subject to the rule. The Department of Education has stated that it does not intend to provide private
guidance regarding particular compensation structures in the future and will enforce the regulations as written. Kaplan
cannot predict how the Department of Education will interpret and enforce the revised incentive compensation rule and are
presently unable to predict which forms of compensation will be permitted under the rule, or the full effect the new rule will
have on the results of the Kaplan Higher Education division. Kaplan Higher Education believes that it will have to modify
some of its compensation practices as a result of the revisions to the incentive compensation rule. These changes to
compensation arrangements for its personnel could adversely affect its ability to provide adequate incentives to promote
superior job performance and may make it more difficult to attract students and retain qualified personnel.
The 90/10 Rule. Prior to the enactment of the Higher Education Opportunity Act, any for-profit postsecondary institution
(a category that includes all of the schools in Kaplan Higher Education) would lose its Title IV eligibility for at least one
year if more than 90% of the institution’s receipts for any fiscal year were derived from Title IV programs, as calculated on
a cash basis in accordance with the Federal Higher Education Act and applicable Department of Education regulations.
Under amendments to the Federal Higher Education Act, a for-profit institution loses its eligibility to participate in the Title
IV programs for a period of at least two fiscal years if the institution derives more than 90% of its receipts from Title IV
programs in each of two consecutive fiscal years, commencing with the institution’s first fiscal year that ends after
August 14, 2008. An institution with Title IV receipts exceeding 90% for a single fiscal year ending after August 14,
2008, will be placed on provisional certification and may be subject to other enforcement measures. The 90/10 rule
calculations are performed for each OPEID unit. The largest OPEID reporting unit in Kaplan’s Higher Education division in
terms of revenue is Kaplan University, which accounted for approximately 67% of the Title IV funds received by the
division in 2010. In 2010, Kaplan University derived less than 88.7% of its receipts from the Title IV programs, and other
OPEID units derived between 68.3% and 87.1% of their receipts from Title IV programs. In 2009, Kaplan University
derived less than 87.5% of its receipts from Title IV programs, and other OPEID units derived between 68.0% and 87.2%
of their receipts from Title IV programs.
The Ensuring Continued Access to Student Loans Act of 2008 increased student loan limits and expanded eligibility for
and increased the maximum amount of Pell Grants. The Higher Education Opportunity Act provides temporary relief from
the impact of the loan limit increases by excluding from the 90/10 rule calculation any amounts received between July 1,
2008, and June 30, 2011, that are attributable to the increased annual loan limits. Absent relief from the loan limit
increases, Kaplan University would have a 90/10 ratio of 91.7%, and the remaining Kaplan Higher Education OPEID
numbers would have 90/10 percentages between 75.3% and 94.5%.
A majority of Kaplan Higher Education students are enrolled in certificate and associate’s degree programs. Kaplan
Higher Education’s revenue from certificate and associate’s degree programs is composed of a higher percentage of Title
IV funds than is the case for revenues from its bachelor’s and other degree programs. Kaplan Higher Education is taking
various measures to reduce the percentage of its receipts attributable to Title IV funds, including emphasizing direct-pay
and employer-paid education programs; encouraging students to carefully evaluate the amount of Title IV borrowing; and
developing and offering additional non-Title IV-eligible certificate preparation, professional development and continuing
education programs. These efforts include the integration of the existing Kaplan Professional unit with Kaplan University to
become part of the Kaplan University School of Continuing and Professional Education, effective January 1, 2011.
Although Kaplan is taking steps to address compliance with the 90/10 rule, there can be no guarantee that these
measures will be adequate to prevent the 90/10 rule calculations from exceeding 90% in the future.
Given that schools do not control, and generally may not limit, student lending, one of the more effective methods of
reducing the 90/10 rule percentage is to increase tuition prices above the applicable maximums for Title IV student loans
and grants, requiring other sources of funding to cover the remaining tuition balance, in order to reduce the percentage of
revenue from Title IV sources. Although modification of the 90/10 rule could limit this potential undesirable impact on
tuition, there is no assurance that the Department of Education, or Congress, will address this problem. Furthermore, the
90/10 rule and schools’ inability to limit students’ lending will make it more difficult for Kaplan’s schools to comply with
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