The U.S. Education Department wants Purdue University to absorb the debts and liabilities of Kaplan University as a condition for approving the state school’s controversial purchase of the for-profit college, a request that critics say could place Indiana taxpayers at risk.
Purdue, a renowned public university in Indiana, acquired Kaplan’s 15 campuses and learning centers in April to form a new online college, dubbed NewU. The deal was met with swift resistance from some Purdue faculty, consumer groups and liberal lawmakers because of the for-profit company’s continued involvement in the new public university. Foes of the deal asked whether NewU would require public funding.
But Purdue president Mitch Daniels, the former governor of Indiana, said the new venture would not receive or require taxpayer dollars. Those assurances are now in question as details of an Education Department review of the acquisition have emerged.
In a letter obtained by The Washington Post, Michael Frola, a senior official at the Education Department, takes issue with Purdue’s unwillingness to cover all liabilities arising out of Kaplan’s participation in the federal student aid program. The state university said it would take responsibility only for liabilities tied to NewU, not those that Kaplan may have accrued before the closing of the deal. Those liabilities can include tuition refunds to students or reimbursing the department for the canceled loans of former students.
Frola said the department will not approve the change of ownership unless Purdue will “assume responsibility for liabilities resulting from the operation of Kaplan University as an educational institution, whether they are known or unknown, and whether they accrue prior to, or after the closing of the transaction.”
The debts and liabilities backed by Purdue “constitute an instrumentality of the state of Indiana for the purpose of the department’s regulations,” he said. In other words, the department ultimately holds Purdue and the state of Indiana responsible for liabilities resulting from the operation of Kaplan University.
The schools need the Education Department to bless the acquisition so that students of NewU can receive federal grants and loans to attend. Frola said Purdue could have Kaplan Higher Education cover the costs of any liabilities, an option that Purdue spokesman Brian Zink noted was already included in the contract.
But Zink said nothing in the department’s stipulation prevents Purdue, NewU and Kaplan Higher Education from divvying up the responsibility for all debts and liabilities.
“This is a basic principle of freedom of contract,” he said. “The department has been very clear that it recognizes this principle in calls it has had with representatives of Purdue and Kaplan.”
Purdue will pay $1 for Kaplan’s academic operations. The for-profit company will provide a range of services in exchange for 12.5 percent of the NewU’s total revenue. But Kaplan will get paid only after the new school generates enough revenue to cover its operating costs and other expenses.
Kaplan, an affiliate of Graham Holdings, referred all questions to Purdue. Graham Holdings is a renamed version of the company that previously owned The Washington Post, until Jeffrey P. Bezos bought The Post in 2013.
Robert Shireman, a senior fellow at the think tank Century Foundation, said the conditions being imposed by the Education Department conflict with Indiana law that prohibits use of public money for NewU.
“Governor Daniels wanted to be able to profit off of something he would call a public institution, but without the public taking any of the responsibility. And the federal government is saying no,” said Shireman, a former undersecretary of education and critic of for-profit colleges.
The state legislature has affirmed Purdue’s right to have the new venture included in the public university system, but only as an affiliate without access to public funds. NewU will rely on donations and tuition to stay afloat.
“I don’t think there is any fear in the General Assembly that the state of Indiana is going to end up accruing additional liability because of the deal with Kaplan,” said Indiana state Rep. Robert Behning (R-Indianapolis), chairman of the House education committee.
Behning said the Indiana Commission for Higher Education, which approved the Kaplan purchase in August, thoroughly vetted the transaction and he said he has “a great deal of faith” that Daniels would not place the university in harm’s way.
“Folding Kaplan into a traditional institution of higher ed, I would think, would be a positive thing for the U.S. Department of Education,” Behning said. The acquisition uses “some of the market powers and services” Kaplan has “to drive costs down.”
The services Kaplan will provide NewU have been a point of contention among opponents of the deal, who say the for-profit company will have too much control. Kaplan will provide operational support, including marketing, human resources and financial aid administration, to the new institution for an initial term of 30 years. After six years, Purdue can buy out Kaplan.
The arrangement prompted Sens. Dick Durbin (D-Ill.) and Sherrod Brown (D-Ohio) to write Purdue’s president in September urging him to take steps to protect students from Kaplan’s “long history of troubling practices.”
Attorneys general in Illinois, Delaware, Florida and North Carolina have launched investigations into the recruiting and enrollment practices of the for-profit chain in recent years. Kaplan officials have said they were only inquiries, and in the case of Florida, the attorney general found no violations. Still, 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 paid $1.3 million to resolve a federal whistleblower’s allegation that the company employed unqualified instructors in Texas.
“The very organization — and in some cases individuals — responsible for Kaplan’s shameful record as a for-profit college are slated to continue to be responsible for a variety of key functions of New University,” Durbin and Brown wrote in the letter. “Without clear protections for students built into this transaction by Purdue . . . Indiana taxpayers risk becoming owners of a predatory for-profit college.”