$191 Million University of Phoenix Settlement is Much Ado About Nothing

The Federal Trade Commission announced on December 10, 2019 a record $191 million settlement against the University of Phoenix. This is the largest settlement against a for profit school in history. Unfortunately, the settlement is fairly useless and does little to reimburse taxpayers and students for the total cost of their alleged deceptive practices.

While government and agency officials should be proud of the settlement, I'll explain why this FTC announcement is a strategic victory for the University of Phoenix and why former students should not get as excited as headlines would lead you to believe.

FTC University of Phoenix Settlement Does Not Include Private or Federal Student Loans

USA Today notes that the settlement does not forgive federal or private student debt.

According to AZCentral.com, the quarterly revenue for University of Phoenix in late 2016 was $484 million. Owler estimates current annual revenue at $1.6 billion. So it appears the university earned revenues at least in the low ten figures during the 2012 to 2016 settlement period.

Besides cash from students and the GI Bill, where did all this revenue come from?

Most of it came from student loans. There's no way to know how much is owed because of University of Phoenix degrees, but it is likely in the billions of dollars.

Hence, a typical student likely owes a larger sum to the federal government and / or private lenders compared to what they owe to the school directly.

Why University of Phoenix Settlement Relief Isn't Coming for Most Students

The $191 million settlement is split into two parts:

• $50 million of cash to wronged students
• $141 million of debt cancellation for debts owed to the school

You must have first enrolled between October 2012 and December 2016 to qualify at all.

If you do, only your loans owed to the school directly would be forgiven.

The $50 million cash portion of the settlement seems like a lot, but consider that the school had hundreds of thousands of students during the four year time frame discussed in the settlement.

If you're lucky, you might view that sum of money as representing $100 per student.

So to recap, the vast majority of student debt from UOP is not covered in this settlement, and the cash payment to borrowers amounts to a pittance of the billions of dollars students probably owe.

The 90-10 Rule is One Reason University of Phoenix Can Write This Debt Off as a Win

The 90-10 rule has been around since the 90s. It stipulates that for profit colleges must not access more than 90% of their revenue from Title IV federal aid.

In other words, you can't use federal student loans for your entire revenue source.

GI Bill funds don't apply to that cap though.

Hence, schools have a huge incentive to recruit as many veterans as possible since fewer private lenders are willing to lend for their programs.

The money from the GI Bill can allow a for profit school even more lucrative access to federal student loans.

Of course, if you are University of Phoenix and want to survive, you probably want to be a little more conservative than that. That's why I believe the school must have gotten into direct lending.

Worst case scenario, they could write off the debt and possibly have an easier time maintaining access to federal funds. Best case scenario lending to their own students would allow the school to earn higher profits.

The FTC Settlement is a Small Percentage of Overall Revenue For University of Phoenix

If we assume revenue during the 2012 to 2016 settlement window was $6 to $10 billion, then this settlement represents less than 2% of revenue for the company during that time.

Much of the debt owed to the school was likely already heavily written down. Also, the money owed to the school was simply tuition inflation the school hoped to collect on.

The only real impact is the $50 million cash settlement, which is a drop in the bucket in the overall financing of University of Phoenix.

This settlement allows them to continue to exist and access federal funds, gives government officials a win, and does little to help prior students.

In fact, I predict many prior students will take a while to discover how limited the benefit of this settlement actually is.

Other Schools Deserve Scrutiny Too

One can only hope that the FTC looks into advertising strategies of not for profit universities too.

University of Phoenix estimated revenue might be $1.6 billion, but I estimate NYU dental school alone to cost $100 million to $150 million per year.

UOP appears guilty of running a misleading advertising campaign that was easy to record and use as evidence.

Plenty of universities of the for profit and not for profit categories rely on misleading recruiting tactics. They just haven't been caught yet.

Hopefully settlements in the future will go after for profit and not for profit universities. Additionally, you have to address access to federal student loans for institutions to really care.

Otherwise 2% of revenue looks like a cost of doing business. And the phoenix will continue to rise from the ashes after every wrist slap.