The University of Idaho will create a nonprofit to acquire the University of Phoenix, one of the nation’s largest for-profit colleges, in a $550 million deal unanimously approved by state education officials Thursday.
Under the deal, which still needs the blessing of the colleges’ accreditors and the federal Education Department, the universities of Idaho and Phoenix would initially operate as separate entities. But Phoenix could eventually be folded into the Idaho system, university officials said.
Torrey Lawrence, provost and executive vice president at the University of Idaho, said the affiliation would give the state university access to a robust technological infrastructure and online academic programs, such as nursing and counseling, not currently offered at the school. The public research university in Moscow, Idaho, has 11,507 students.
“This is an opportunity for us to learn from each other,” Lawrence said in an interview. “The combination gives us a chance to collaborate in a way that is quite unique.”
The deal also could raise money for the university. The planned nonprofit will issue municipal bond debt to finance the purchase, which the University of Idaho anticipates will yield at least $10 million in annual revenue.
“The affiliation will diversify our revenue streams to provide greater economic stability for delivery of educational opportunities,” University of Idaho President Scott Green said during Thursday’s meeting of the Idaho State Board of Education, which serves as the governing body of the university.
The deal emerges from the ashes of Phoenix’s failed proposed union with the University of Arkansas System. Board members, faculty, staff and other stakeholders were deeply divided over the arrangement. While some welcomed the opportunity for the University of Arkansas to generate more revenue, others feared Phoenix carried too much legal baggage that could imperil the reputation of the Arkansas system.
University leadership in Arkansas insisted that Phoenix, with its brand power and online courses that enroll some 80,000 students, was far more of an asset than a liability.
“We are not surprised that another university also saw the value in pursuing an affiliation with the University of Phoenix,” said Nathan Hinkel, a spokesman for the University of Arkansas System. “We understand well the value and importance of the University of Phoenix’s mission of providing high-quality learning opportunities for working adults and other nontraditional students.”
On Thursday, Green told the state education board the deal would help the University of Idaho achieve goals it set in 2017, such as expanding online offerings for working adults and establishing a statewide digital delivery solution. He stressed that the higher education landscape is changing and that it is imperative that universities seek innovative ways to meet students’ needs.
Idaho has been in talks with Phoenix since March, but discussions accelerated after the Arkansas board vote against a deal last month, according to John Woods, chief academic officer and provost for the University of Phoenix. He said Phoenix has had conversations with roughly a dozen schools over the years and Idaho was “really a good fit” because of the dedication to first-generation college students and innovation.
“We just felt like there was a really good synergy,” Woods told The Washington Post. “Those synergies and the differences make up a more complete institutional landscape moving forward.”
If the deal with Idaho goes through, Phoenix would gradually shed its for-profit status and break free from federal regulations that target such schools. The Education Department, which must sign off on the deal, has been wary of for-profit colleges masquerading as nonprofits to avoid regulations while still reaping the financial benefits of operating as for-profit institutions. As a result, it has imposed a number of conditions to approve similar deals in recent years.
In a Q&A on its website about the deal, the University of Idaho said Apollo Global Management, the parent company of Phoenix, will have no role in the school once the deal is complete. Apollo Global will give the newly minted nonprofit full control of the university and provide $200 million in cash as working capital. Idaho will be the sole member of the nonprofit and the state board of education will appoint trustees.
“While this transaction is more than just a financial decision, we cannot gloss over the fact that moving from a for-profit to not-for-profit will enable operational successes to be reinvested in students and institutions without factoring returns to investors,” Green told the Idaho education board.
There are risks with the arrangement. If the nonprofit misses payments on debt related to the acquisition, the University of Idaho will guarantee up to $10 million a year to cover the obligation, according to the university’s Q&A. Idaho, however, assures that Phoenix currently generates roughly $100 million of unrestricted cash flow. University leaders nonetheless anticipate Idaho could see a minor downgrade of its credit rating because of the transaction.
Phoenix comes with other potential liabilities. Thousands of its former students have filed requests with the Education Department to have their student loans discharged over allegations the university defrauded them. The department can recoup money from Phoenix for approved claims, though it has not taken action to date. If that changes, Idaho would be liable. Green said Idaho is negotiating insurance that could cover such liabilities.
Accusations of deceitful advertising and recruiting have dogged Phoenix for decades, culminating in regulatory actions taken by the Department of Defense and the Federal Trade Commission. Phoenix has denied all wrongdoing and noted that many of the probes into its business practices have been dismissed.
“We’re aware of the concerns and we’ve carefully looked at them,” Lawrence said. “Some of these problems are from quite long ago when the university was under very different leadership. We’re very confident about the University of Phoenix leadership team and what they’ve done … to improve the institution.”
Lawrence said the university has engaged the faculty senate about the proposed deal and received a lot of good feedback and support. The senate declined to comment.
During the board meeting, members said they received letters from faculty questioning why they had learned about the acquisition only a day before the board vote and whether Phoenix posed too much reputational risk to Idaho. Some also questioned the quality of the education at Phoenix, which according to the Education Department’s College Scorecard has a graduation rate of 27 percent. By comparison, the University of Idaho’s graduation rate stands at 60 percent.
Della Justice, vice president of legal affairs at Veterans Education Success, an advocacy group that spoke out against the Arkansas-Phoenix deal, said she was dismayed with the Idaho board’s decision. “We are disappointed that the Idaho State Board of Education rushed into this decision and seemed to show little regard for the students who attend the University of Phoenix,” Justice said. “The board did not demand to see job placement rates or earnings, and discounted the University of Phoenix’s low graduation rate.”
The universities will need the blessing of their accreditors, the Higher Learning Commission and the Northwest Commission on Colleges and Universities. To get on the Higher Learning Commission’s meeting agenda for November, the universities must submit their application by Friday.
correction
A previous version of this article misstated the last name of a University of Phoenix official. He is John Woods. The article has been corrected.