Washington Post 2014 Annual Report Download - page 21

program’s graduates’ debt payments exceed 8% of the graduates’ mean and median annual earnings and 20% of the
graduates’ mean and median discretionary earnings, the program will be placed on a warning status requiring certain
disclosures to the public. Four consecutive years on a warning status will result in the program becoming ineligible for
federal aid Title IV participation. If a program’s graduates’ debt payments exceed 12% of the graduates’ mean and
median annual earnings and 30% of the graduates’ mean and median discretionary earnings, the program will fail the
gainful employment test. If a program fails the test two times within three years, it will become ineligible for federal aid
Title IV participation.
The regulation also includes revised requirements for program approval and public disclosure of certain outcomes
(graduation, placement, repayment rates and other consumer information). In addition, the regulation includes a
“certification” requirement that each program be included in the school’s accreditation grant and have programmatic level
accreditation if required for licensure in the occupation. This “certification” requirement may have a material negative
impact on Kaplan University’s Concord Law School’s Juris Doctor program, which accounted for less than 0.1% of KHE
2014 revenue. Because it is completely online, that program does not have accreditation necessary to allow graduates
to take the Bar Exam in any state other than California. Accordingly, unless the ED provides guidance that narrows the
rule as written, Concord may be required to cease enrollments in multiple states.
Some of the data needed to compute program eligibility under the regulatory language are not readily accessible,
including graduate incomes, which will be compiled by the Social Security Administration. In addition, the continuing
eligibility of programs for Title IV funding may be affected by factors beyond Kaplan’s control, such as changes in the
actual or deemed income level of its graduates, changes in student borrowing levels, increases in interest rates, changes
in the U.S. Federal poverty income level relevant for calculating one of the proposed metrics and other factors. As a
result, the ultimate outcome of GE regulations and their impact on Kaplan’s operations are still uncertain. Kaplan is
making efforts to mitigate the potential negative impact of GE. These efforts include increasing career services support,
implementing financial literacy counseling, creating program-specific tuition reductions and scholarships, and revising the
pricing model to implement a tuition cap for at-risk programs. Although Kaplan is taking these and other steps to address
compliance with GE regulations, there can be no guarantee that these measures will be adequate to prevent a material
number of programs from either failing the GE tests or being put on warning status. This could cause Kaplan to eliminate
or limit enrollments in certain educational programs at some or all of its schools, result in the loss of student access to Title
IV programs and have a material adverse effect on KHE’s revenues, operating income, cash flows and the estimated fair
value of the reporting unit.
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. Effective July 1, 2011, the ED enacted changes to the incentive compensation
rule that reduced the scope of permissible payments under the rule and expanded the scope of payments and employees
subject to the rule. Prior to the effective date of the rule, the ED issued a “Dear Colleague Letter,” providing guidance on
these rules. Kaplan has taken steps to comply fully with these rules and the guidance. Among the actions taken, Kaplan
has revised its compensation plans for admissions personnel and eliminated enrollment results as a component in the
determination of compensation. Kaplan believes that this change in its approach to recruiting has adversely impacted,
and will continue to adversely impact, its enrollment rates, operating costs, business and results of operation. Kaplan
cannot predict how the ED will interpret and enforce all aspects of the revised incentive compensation rule in the future.
The 90/10 Rule. Under regulations referred to as the 90/10 rule, a KHE school would lose its eligibility to participate
in 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, as calculated on a cash basis in accordance with the Higher Education Act and applicable ED regulations,
in each of two consecutive fiscal years. An institution with Title IV receipts exceeding 90% for a single fiscal year would
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 KHE in terms of revenue is Kaplan University,
which accounted for approximately 73% of the Title IV funds received by the division in 2014. In 2014, Kaplan
University derived less than 81% of its receipts from the Title IV programs, and other OPEID units derived between 65%
and 91% of their receipts from Title IV programs. Kaplan’s Cleveland ground campus is the only OPEID that received
more than 90% of its receipts in 2014 from Title IV programs, which was due in part to the announced closure of the
school. Kaplan expects that all courses in progress at the Cleveland location will be completed by the end of the first
quarter of 2015, at which time all operations at the campus will cease. In 2013, Kaplan University derived less than
81% of its receipts from Title IV programs, and other OPEID units derived between 69% and 89% of their receipts from
Title IV programs.
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