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September 15, 2004

Feds fine University of Phoenix $9.8 million

The University of Phoenix -- the nation's largest for-profit university -- has been fined $9.8 million by federal regulators who found that it violated a rule banning pay incentives for recruiters in an effort to boost enrollment.



It's the largest fine ever imposed by the United States Department of Education, which oversees federal financial-aid programs and has strict rules against paying recruiters based on the number of students they enroll.

The University of Phoenix is primarily known for online courses, but it opened a local campus in the Polaris area in 2003. The university has 213,074 students worldwide, including 109,784 in its online program.

A Department of Education report gives examples of the university's policy of evaluating recruiters and setting pay incentives based on the numbers of student they enrolled -- all violations of the Higher Education Act -- according to Tuesday's Arizona Republic, which obtained the report.

The practices often resulted in unqualified students being enrolled, many of whom failed or were unable to finish the classes they'd signed up for. The report says the university, which receives federal financial aid, went to extremes to try to hide the practices from the government.

Many of those students received student financial aid from the government, according to the report. In fiscal 2003, Phoenix students got $869 million from the federal government's Title IV student financial aid programs, compared with $338 million in fiscal year 1999, according to the government report.

The government report led the Apollo Group Inc., the University of Phoenix's parent company, to agree to pay the $9.8 million fine to settle the matter, without having to admit liability or wrongdoing.

Apollo has denied the charges and noted that it has not been required by the Department of Education to repay all the federal funds it has received.

Todd Nelson, Apollo's chairman and chief executive, told Wall Street analysts last week that Apollo agreed to settle to put the matter to rest. He also said that a KPMG audit of recruiters' salary changes found that they were based on several factors, not just the number of students enrolled.

Under the settlement, the university also is not required to change its pay practices, but has agreed to set up policies and procedures for notifying and training its recruiters about the rule forbidding incentives and allowing employees, without retaliation, to notify the agency directly and confidentially if the rule are being violated.

Many of the report's findings stem from a lawsuit filed against the school by a current and a former University of Phoenix enrollment counselor from California. The suit claims that the university defrauded the federal government for more than $3 billion during the past six years. The suit was dismissed without prejudice earlier this year, but the decision is being appealed.



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