By Derek Newton
Reposted from Forbes, with permission
Nearly seven years ago, one of the oddest and most confusing education rearrangements became arranged – the sale of for-profit, mostly online, Kaplan University to the public, land-grant Purdue University. The resulting institution is Purdue Global, the online sister of the Indiana flagship.
There have been other similar deals in which a for-profit, online college was sold to or consumed by a public school. For example, the University of Arizona, bought for-profit Ashford University. And the University of Idaho is finalizing a deal to buy the for-profit University of Phoenix.
Usually in these deals, as was the case with Purdue and Kaplan, the school is sold for a token amount – Purdue paid $1 – but the selling, for-profit company is then hired on a long-term contract to provide support, infrastructure, and marketing services to the school. Those deals usually include a revenue-share provision in which the seller and new manager takes a share of the tuition revenue. In the Kaplan sale, Kaplan’s contract provides them with 12.5% of the school’s proceeds, plus fixed payments for services. In practice, the deals are very similar to the arrangements of online program management (OPM) companies which have fallen under recent heavy scrutiny and market pressures.
Generally, the Purdue Global management agreement has avoided that spotlight. But according to recent financial reports and filings from Purdue University and from Graham Holdings Company (GHC), the parent company of Kaplan Higher Education, the market pressures that are roiling OPM businesses may be squeezing both Purdue Global and Kaplan.
According to Graham Holdings Company’s recent SEC filing, Purdue Global owes it a ton of money. “As of September 30, 2023, Kaplan had a total outstanding accounts receivable balance of $127.8 million from Purdue Global related to amounts due for reimbursements for services, fees earned and a deferred fee,” GHC told the SEC.
But the real problem is that it’s a bill that Purdue Global probably can’t pay either. According to the most recent annual report from Purdue University, Purdue Global simply does not have the money.
Purdue Global, the report says, had a “net operating revenue” loss of $95 million, it has about $142 million in current liabilities, and, according to the report from Purdue, “Cash and Cash Equivalents at Purdue Global consist of funds held in checking, savings, and money market accounts. Balances, excluding money market funds, at June 30, 2023 and 2022 were approximately $2,600,000 and $300,000, respectively.”
For comparison, the same report says of Purdue University, “the bank balance of the University’s deposits (demand deposit accounts) as of June 30, 2023 and 2022, was approximately $103,888,000 and $87,338,000, respectively.”
A spokesperson for Kaplan noted that the “net operating revenue” loss of $95 million reported by Purdue does not include non-operating revenue, which he said was about $88 million. Though this would still create a situation in which, according to Kaplan’s spokesperson, “the loss was $7.5 million.”
The same Purdue report shows that Purdue Global has a net negative financial position of $38.8 million, despite reporting cuts in spending and despite a reported 5% increase in enrollments at Purdue Global, according to the GHC document.
The position of Purdue Global and the size of the debt may make it unrecoverable, a reality GHC told its shareholders. “The Company will continue to assess the collectability of the fee with Purdue Global on a quarterly basis to make a determination as to whether to record all or part of the fee in the future,” GHC wrote.
Back in 2017, when the deal was announced, many celebratory forecasts and predictions were made. None of them involved Purdue Global losing money and defaulting on its debt. For former Purdue President Mitch Daniels, who invested his and Purdue’s reputation on the success of this venture, the upside-down finances and unpaid debt aren’t flattering.
“Purdue Global continues to struggle financially, unable to pay its bills to Kaplan,” said Dahn Shaulis, Editor of the Higher Education Inquirer and early skeptic of the Purdue Global arrangement. “It hasn’t been the money maker that Mitch Daniels thought,” he said.
Asked to confirm or comment on the debt to Kaplan, a spokesperson for the Purdue first directed the question back to Kaplan and GHC but later said, “In the normal course of our business, we owe money to lots of vendors, including Kaplan.”
Jerry Dervin, Chief Financial Officer of Kaplan North America, disputed the characterizations of the financial position of Purdue Global. Dervin wrote, in part, “the Purdue Global-Kaplan relationship calls for PG to reimburse Kaplan for its expenses incurred on behalf of PG. Sometimes the outstanding payable is at a seasonal high (as it was at September 30, the highest period of the year), and sometimes it’s at a seasonal low. But throughout the relationship the reimbursement of expenses by PG to Kaplan and all its other providers has always been made, in full, as a matter of course out of the cash flow of the institution.”
“Purdue Global has cut costs by closing campuses, campuses that provided value to consumers. The problem now is how can they cut costs even more?” Shaulis asked.
But if the school has a $128 million bill that it cannot pay even after cutting cost and growing enrollment, it’s not a sure thing that cutting its way out of debt will work. Or whether that’s even the best plan. Educationally, cheaper is not better.
Dervin also wrote, “from the onset of its formation, Purdue and Kaplan have been aligned in investing in Purdue Global’s mission to serve adult learners, veterans, first generation students, all from different backgrounds. PG has increased its investment in academic, student support and awareness with a goal of building a long-enduring institution that delivers quality outcomes for students and stakeholders.”
However Purdue Global and Kaplan square their debts and receivables, the issues may run deeper. It may be that recycling, repainting, and rebranding a subprime for-profit college may simply be a financial anchor instead of the lifeline some believed it to be.
The University of Arizona, for example, is mired in a public financial crisis where the University of Arizona Global Campus, the product of Arizona’s purchase of for-profit Ashford University, recently reported an $18.5 million operating deficit – a bill the university itself will have to pay. And while it’s not clear at all what caused Arizona to fall short in its budget projections by some $250 million, more than a few suspect that outsized investments in Arizona Global Campus/Ashford have been major contributors to the debacle.
Even if that turns out not to be true, it is true that both Arizona Global Campus and Purdue Global are losing money.
“The issues with Purdue Global, along with the Arizona Global mess, should serve as a cautionary tale for Idaho, with its pending acquisition of University of Phoenix,” Shaulis said.
Critics can and will say whatever they please about the University of Idaho merger with the University of Phoenix. But if it does not turn out as promised, no will be able to say it was a surprise.
Updated, Dec. 20: This article has been updated with comments by the chief financial officer of Kaplan, Jerry Dervin, who sent an email after the article was initially published. His comments have been added.
Updated, Dec 21, 22: A full description of the account balances at Purdue University and Purdue Global, as well as a more context regarding its operational losses, as provided in the University’s annual report, were added for further clarity.
