Apollo Group: What Happens If the Phoenix Loses Accreditation?

Just when you think it can’t get any worse for Apollo Group (NASDAQ:APOL), it gets worse.

The for-profit educator’s two schools — University of Phoenix and Western International — are bound for a “probation” status based on the Higher Learning Commission’s recent recommendation.

Barring a successful appeal, the probation status could eventually lead to the school losing its accreditation, which in turn means none of its students would be eligible for federally funded student loans.

The potential impact is no small matter, either, as 60% of Apollo’s students tap into the federal student loan program. Although the lack of government-funded student loans won’t inherently mean the school’s enrollment will plunge by 60%, the reality is a huge chunk of that student body won’t be able to attend without those loans.

Ergo, this isn’t a mere minor setback.

He Said What?

Just in the interest of detail, the Higher Learning Commission has taken two separate actions here.

Apollo’s Western International University has been recommended for probation based on issues regarding the university’s autonomy (or lack thereof) relative to the parent company, on top of problems with its institutional financial stability and student assessment. At the same time, Apollo’s better-known University of Phoenix has been recommended for probation because the subsidiary is “not in compliance with Criterion One of the Criteria for Accreditation, Core Component 1d, and certain of the related Minimum Expectations.”

Apollo intends to appeal the recommendation, of course, but has already begun garnering public support. In the same SEC filing that announced the possible probation, the company also noted “that it is neither remarkable nor improper for a parent corporation to exercise appropriate influence over its wholly owned subsidiary” — a reference to the Higher Learning Commission’s concern that Western International and parent company Apollo might have been a little too close for comfort.

Apollo’s chief of staff Mark Brenner was quoted as saying, “We are confident that University of Phoenix and Western International University will be successful in achieving institutional reaffirmation.”

Had that been the beginning and end of the comments on the matter, the market might have digested the bad news and moved on. It wasn’t, though. Michael Clifford, who is considered by some to be one of the pioneers of the for-profit school industry, opined, “This massive disruption is around accreditation for all high education institutions. Unions are circling the wagons to protect their stranglehold, but entrepreneurs with new models will win the day. Apollo is in the crosshairs of this battle, but they will prevail.”

The emotionally charged underdog speech might have worked for Mel Gibson in Braveheart, but when used in defense of a school that could possibly lose iits accreditation, it just feels awkward … and desperate.

Then again, it doesn’t come across as desperate as Brenner’s follow-up comment: “The HLC review team notes in its draft report that University of Phoenix is well-resourced and innovative and has a number of strengths, including a high level of relevant student services, technology and systems that benefit students … In fact, University of Phoenix was found to be in compliance with substantially all criteria associated with academic matters.”

While it is true that the University of Phoenix has a “number of strengths,” it clearly doesn’t have one thing it does need.

Now What?

The appeal process will take until June. While the company has expressed optimism that it will be able to stave off probation, that might just be wishful thinking; the Higher Learning Commission has been reviewing all facets of the for-profit school for a while.

If the probationary status does indeed come to pass, it would last at least through the fall of 2014. And, unless Apollo can resolve the issues the commission has between now and then, it’s possible the probation could last beyond that. If the probation lasts for two years, the school could entirely lose its accreditation.

Even without an extension of the probation, though, one bad year might be enough to crush the company. A school just can’t risk cutting off as much as 60% of its student body, then expect a crowd to come rushing back with open arms if and when the school resolves its problems — the question mark is just too big.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2013/02/apollo-kod-what-happens-if-the-phoenix-loses-accreditation/.

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