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Why Purdue U is buying Kaplan

April 27, 2017

One of the nation’s largest for-profit college chains is poised to become a public university via acquisition by a major Midwestern land-grant university.

Purdue University is acquiring Kaplan University, the institutions announced Thursday. Under the terms of the agreement, which requires approval from state and federal regulators, Kaplan’s faculty and students will form a third, online-focused tier of Purdue, joining the school’s West Lafayette, Ind., flagship campus and its three commuter campuses throughout the state. Kaplan’s 32,000 students, 15 campuses and 3,000 employees would become part of the new entity, known for now as New University.

Mitch Daniels, Purdue’s president, framed the acquisition as a “national first” and an opportunity for the university to become a “21st century land grant school.” Folding Kaplan into Purdue, the school will be able to reach working adult students who typically would not have access to Purdue, Daniels said in a presentation to Purdue’s board of trustees. The acquisition will also allow Purdue to ramp up its online offerings at a time when that market appears to be growing rapidly, he added.

But the acquisition comes amid growing skepticism of the for-profit-college sector. Two major for-profit college chains have shut down over the past few years, amid accusations that they lured students into taking on high debt loads with misleading promises about future earnings. Kaplan has its own controversial history, including probes by multiple state law-enforcement officials and the U.S. Department of Justice into its practices.

The Obama administration tried to crack down on bad actors by requiring for-profit colleges to prove they prepare their students to earn a decent living. Kaplan was one of more than 200 schools that appealed the government’s ratings of some of its programs under the law. If the Purdue acquisition is approved, Kaplan will no longer be subject to that oversight.

“It’s not surprising that Kaplan was looking for a way out,” said David Halperin, a lawyer and advocate who works on for-profit-college issues. “It’s admirable that Purdue wants to do more to get into career education — helping students train in careers like health and information technology — but what it means is that Purdue may well be acquiring toxic assets.”

Daniels and Donald Graham, the chairman of Graham Holdings GHC, -0.03% , which owns Kaplan, defended the school, citing income gains for Kaplan graduates as well as a record of successfully working with students who might not have otherwise pursued higher education.

“To us it isn’t that this silences all critics and answers all questions, but it is a heck of an answer to our effectiveness at Kaplan University’s traditional mission, which is to prepare students for employment. Purdue has a different mission,” Graham told reporters, adding that he’s excited by the idea of “joining an institution of the eminence of this one.”

When asked whether he was concerned that acquiring a for-profit college would dilute the Purdue brand, given that the sector has been the subject of so much controversy over the past several years, Daniels answered that the question is now a “moot point.”

“It becomes a public entity in this state and will operate as such going forward,” he said. “I’ve always thought the right question in higher education has nothing to do with business form; it has to do with outcome.”

The deal represents the latest effort by Daniels, a former Republican governor of Indiana, to innovate in the higher-education space. He launched a program last year that allows students to pledge a portion of their future income to pay for college instead of taking on a loan.

The transaction offers a similar model to how other higher-education institutions have approached scaling up their online education infrastructure — contracting with an already established provider, said Kevin Kinser, an education professor at Pennsylvania State University who has studied for-profit education extensively. More typically colleges contract with firms solely dedicated to helping traditional schools boost their online offerings for this purpose.

Under the terms of the agreement, Purdue paid one dollar to acquire Kaplan University’s assets and Kaplan will continue to run the school with essentially the same staff and faculty. In return, Kaplan will be entitled to a fee worth 12.5% of the new public, nonprofit benefit corporation’s revenue, according to documents that Graham Holdings filed with the Securities and Exchange Commission. The parties are still determining whether the new institution will carry the Purdue name, Daniels told reporters, but both he and Kaplan representatives stressed that the new school will meet the quality standards that the Purdue brand represents.

Still, Kinser said he’s surprised a public university would be willing to take on a former for-profit college given the scrutiny placed on the sector in recent years. “It represents the fire-sale nature of for-profit higher education right now,” Kinser said. “If you’re an owner and you want to unload it, there’s not a lot of people who want to buy. So if someone comes along and says, ‘We want to take this off your hands,’ they might get a really good deal.”

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