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Purdue acquires for-profit Kaplan University

Stadium Mall on the campus of Purdue University in West Lafayette, Ind. (Daniel Acker/Bloomberg)

Purdue University said Thursday it has acquired for-profit Kaplan University to extend its reach into online and adult education, an unusual move for a public institution.

“None of us knows how fast or in what direction online higher education will evolve, but we know its role will grow, and we intend that Purdue be positioned to be a leader as that happens,” Purdue President Mitch Daniels said in a statement. “A careful analysis made it clear that we are very ill-equipped to build the necessary capabilities ourselves, and that the smart course would be to acquire them if we could.”

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Instead of folding the for-profit school into its operations in Indiana, Purdue plans to form a new, public university comprising of all 15 campuses and learning centers of Kaplan University, as well as 32,000 students and 3,000 employees. The state university will pay $1 upfront and enter into an agreement with an affiliate of Graham Holdings Company, the parent of Kaplan Inc. and Kaplan University, that could yield the company 12.5 percent of the new university’s revenue.

The deal calls for Kaplan to provide operational support, including marketing, human resources and financial aid administration, to the new institution for an initial term of 30 years with a buyout option after six years. Kaplan is not entitled to any expense reimbursement, until the new university has covered all of its operating costs and set aside $10 million in each of the first five years. Once those conditions are met, Graham Holdings will be reimbursed for its costs and receive a percentage of the school’s revenue, according to a company filing.

“This is a deal fraught with dangers,” said Century Foundation senior fellow Robert Shireman, a former undersecretary of education. “The bulk of the operations is still run by Kaplan. … There is nothing in this deal about the pricing of these programs and there’s barely guidelines around Kaplan’s costs.”

Purdue is still hashing out the cost structure of the new university, but it said Indiana residents will receive discounted tuition. The newly formed school, still to be named, will rely on tuition and fundraising to cover operating expenses, not state appropriations. It will primarily operate online, with no plans to expand the physical footprint beyond the existing 15 locations.

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On Thursday, the Purdue board of trustees voted in favor of the deal. The next step is approval from the Education Department and the Higher Learning Commission, an accreditation agency. Although the Obama administration rejected similar deals to turn for-profit schools into nonprofit operations, Purdue and Kaplan may stand a better chance under the Trump administration.

Asked about the prospects for approval, Daniels said on a call with reporters: “We never take anything for granted, but we believe this is such a sound transaction, so in the public interest … that we’ll be working hard in the next few months to start quickly when we get approvals.”

Converting Kaplan University into a nonprofit school is sure to draw scrutiny. Many higher education experts have criticized such moves as end-runs around regulations aimed at for-profit colleges. Nonprofit schools are not subject to what’s known as the 90/10 rule, which bars for-profit colleges from getting more than 90 percent of their operating revenue from federal student aid. But as long as the new university offers career training programs, it will have to adhere to rules that measure whether graduates of such programs obtain “gainful employment” to repay student loans.

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In many ways, the acquisition is in line with the entrepreneurial moves Purdue has made in recent years, including providing education funding in exchange for a percentage of students’ future earnings. But the latest deal could be risky. The for-profit college industry has suffered blows from government lawsuits, regulatory scrutiny, depressed student enrollment and the closure of several marquee chains.

“The right question in higher education has nothing to do with business form, it has to do with outcomes, and this organization has been producing them,” Daniels said of Kaplan.

Kaplan has drawn its share of scrutiny from authorities. Attorneys general in Illinois, Delaware and North Carolina have launched separate investigations into the university in recent years, which Kaplan officials say were only inquiries. Massachusetts reached a settlement with Kaplan College in 2015 over allegations that it misled students about job placement rates for its vocational programs. That same year, Kaplan also paid $1.3 million to resolve a federal whistle-blower’s allegation that the company employed unqualified instructors at its campuses in Texas.

“There has been a lot of criticism of the sector, and we’ve always tried to respond by proving what we believe, which is we’ve been doing a good job for our particular students,” Donald E. Graham, chairman of Graham Holdings, said on the call. “We are excited by joining an institution of the eminence of this one and by having a leadership that wants to expand our student body into new programs, new fields.”

Two years ago, Kaplan sold 38 campuses to the Education Corporation of America, but held onto the 15 locations that will now be transferred to Purdue. Like other for-profit schools, Kaplan has seen its enrollment slide recently, with a 22 percent drop in the last year. Revenue at Kaplan Higher Education also fell 27 percent during that time, according to Graham Holdings’ annual report.

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Graham Holdings is a renamed version of the company that previously owned The Washington Post, until Jeffrey P. Bezos bought The Post in 2013. It will continue to hold Kaplan International and Kaplan Test Preparation. Those divisions contributed to more than 60 percent of Kaplan’s revenue last year.

“There is a potential upside to a public college taking over a problem-plagued for-profit college,” said Shireman, a fierce critic of the for-profit industry. “By putting a new brain in the beast maybe it causes better behavior. The big question is whether this is a new brain in the beast.”

Read more about for-profit colleges:

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