Kaplan quest for profits at taxpayer expense ensnares veteran

By DANIEL GOLDEN | BLOOMBERG NEWS Published: November 8, 2010

After Keith Melvin, a disabled and decorated veteran, returned from Iraq, he wanted to earn a bachelor’s degree in legal studies.

He filled out a form on a website, and recruiters for online for-profit Kaplan University contacted him. They told him the government would pay his tuition, that he could move on after graduation to Kaplan’s law school, and that he could trust Kaplan because the prestigious Washington Post Co. owns it, Melvin said in a telephone interview.

When Melvin hesitated, Kaplan admissions adviser Wendy Robinson warned him in an e-mail that “I came very close to letting your space go to another student” -- even though online colleges don’t have the physical limits of traditional campuses. Melvin enrolled at Kaplan in March 2009, and rues it. His federal grants didn’t come through, and the unemployed construction project manager couldn’t afford the tuition. Kaplan blocked his online access to classes and sent his $4,125 overdue bill to a collection agency, he said.

“With Kaplan having its credentials backed by the Washington Post, I thought, ‘How can this go wrong?’” Melvin said. “It sounded too good to be true, and it was.”

Repeated Calls

Melvin is among thousands of returning veterans enticed by for-profit colleges through repeated phone calls and e-mails, advertising in military-oriented publications, and alliances with veterans’ organizations eager for corporate contributions. Admissions advisers woo veterans with visions of high-paying jobs and easy access to federal grants. While some veterans succeed at these colleges, others are hindered by red tape in getting federal funding and the inability to complete degrees and find well-paying jobs after graduation.

Aggressive recruiting by for-profit colleges leads to low graduation rates, said Donald Overton, executive director of Veterans of Modern Warfare, a service organization in Silver Spring, Maryland, which has 5,000 post-1990 veterans as members.

“As long as the recruiters meet their quotas and bring in veterans, their job is done,” Overton said in a telephone interview. “The colleges are lacking support services, and their programs are fast-paced.”

Washington Post fell $11.55, or 2.9 percent, to $390.60 at 4 p.m. in New York Stock Exchange composite trading. The shares have dropped 28 percent since closing at a 52-week high April 15 as Kaplan and other for-profit colleges have come under scrutiny this year by Congress, the Department of Education, and the Government Accountability Office.

Active Recruiter

Kaplan University has become one of the most active colleges in the U.S. in targeting veterans -- and the increased government funds for their tuitions. Federal spending on veterans’ education will more than double this year to $9.6 billion from $4.2 billion in 2009, according to the U.S. Department of Veterans Affairs. Kaplan University ranked third among U.S. colleges in 2009 in the number of students funded by veterans’ benefits, behind two other for-profit institutions, the University of Phoenix and Charles Town, West Virginia-based, American Public University System, according to the department.

Two-thirds of Kaplan’s students drop out, Kaplan spokesman Ron Iori said in an e-mail. Its graduates earn less than the national average, according to Payscale, a Seattle-based online provider of employee compensation data.

Kaplan recently curtailed some of the practices that brought in veterans, such as paying recruiters based on how many students they enroll. It offers a course for new students in academic strategies as well as online tutoring in math and writing, and has a higher graduation rate than many traditional schools that also serve a predominantly low-income student body, Iori said.

‘Fear, Uncertainty’

Formed in 2004, Kaplan’s military team has 300 admissions advisers, financial aid counselors, and academic advisers based in Florida and Chicago, Iori said. Admissions advisers are trained to recruit veterans by sowing “fear, uncertainty, doubt” about competing colleges, according to a 2009 Kaplan manual obtained by Bloomberg News.

About 11,000 Kaplan University students, or 15 percent of its enrollment, are veterans, active-duty service members or military spouses, up from 8,500 a year ago, Iori said.

Kaplan markets to the more than 1.2 million veterans of the Iraq and Afghanistan wars by advertising in Army Times, Navy Times and G.I. Jobs magazine, exhibiting at job fairs for current and former service members, and sponsoring events held by Amvets, the country’s fourth-largest veterans’ organization.

Once known primarily for preparing high school students for the SAT, Kaplan derived 64 percent of its revenue in the quarter ended July 4 from its higher education division, which includes predominantly online Kaplan University, with 75,000 students, as well as Kaplan colleges, which have 37,000 students on 60 campuses.

Post’s Lifeblood

The higher education division contributed $1.54 billion in 2009 to Washington Post Co.’s revenue of $4.57 billion, or about one-third. Federal student aid accounted for about $1.3 billion of the division’s revenue. Kaplan also reaped millions of federal dollars from the Department of Veterans Affairs and the Defense Department to educate veterans and active-duty service members.

“Kaplan higher education is the lifeblood of the Washington Post, and military students and veterans have become an increasingly large component of Kaplan higher education,” said Bradley Safalow, chief executive of New York-based PAA Research, which analyzes higher education stocks.

Duncan’s Concern

Senate and House committees are examining how for-profit colleges recruit current and former service members, while U.S. Secretary of Education Arne Duncan expressed concern Sept. 24 in an interview that the schools are pursuing veterans’ benefits to circumvent a law limiting the proportion of their revenue they can derive from federal aid to 90 percent.

Enrolling veterans helps Kaplan stay below the threshold because GI Bill benefits don’t count as government assistance under the law. Kaplan University, which derived 87 percent of its revenue from federal student aid in 2009, may have exceeded 90 percent if revenue from the GI Bill and Department of Defense tuition assistance for active-duty service members were added, said Safalow of PAA Research.


Kaplan helps veterans who are often overlooked by traditional colleges, said spokeswoman Melissa Mack.

“Active-duty military personnel and veterans are often under-served by traditional institutions,” Mack said in an e- mail. “Kaplan has received significant interest from veterans because of our military-friendly practices.”

Veterans “ought to be the folks that should be educating our children, running for public office, and leading us in our corporate boardrooms,” Brian Sayler, Kaplan director of military affairs, said in an August 12 speech to the Amvets national convention in Louisville. “So our mission is to see that veterans are better represented” in colleges.

Donald Graham, chief executive of the Washington Post Co., declined to comment.

Kaplan’s online courses enable veterans to juggle jobs and family, said Justin Whitehead, a Kaplan University student who served as an Army communications specialist.

“Online is 100 times better,” the 27-year-old networking technology major, who is married with a daughter and works as a technical support representative for BPM Microsystems in Houston, said in a telephone interview. “I don’t have to spend the time in traffic trying to go to night school.”

Harder Courses

Kaplan courses are “harder than any state college,” said another student, Air Force veteran Thomas Vidal-Engaurran. When he wanted to switch majors from business management to criminal justice, “I called my guidance counselor on a Monday, and I was enrolled in criminal justice courses by Friday,” said Vidal- Engaurran, 27. “I didn’t miss a beat.”

To ensure that prospective students are a good fit, Kaplan University in September began to allow undergraduates, including veterans, to attend classes for a trial period -- and then opt out without owing any tuition.

Complying with the education department’s pending ban on incentive compensation, Kaplan has stopped linking pay for admissions advisers to the number of students they bring in who start classes, Iori said. Kaplan also suspended enrollment at two of its campuses after an undercover GAO investigation released Aug. 4 found recruiters were exaggerating how much applicants could earn from a Kaplan education. The GAO report prompted Florida’s attorney general to open an investigation into Kaplan and other for-profit colleges. Kaplan intends to cooperate fully, Iori said.

‘Unusual’ Penalties

In May 2009, the Department of Veterans Affairs revoked approval for a Kaplan campus in Fort Worth, Texas, to train veterans, as a result of deficiencies in keeping student records. After Kaplan corrected the problem, the department reinstated the campus in July 2009.

The VA withdraws approval for about 40 campuses a year, or less than 1 percent of the 6,500 educational institutions authorized for veterans’ benefits.

“It’s pretty unusual for us to have to go to that degree of penalty,” Keith Wilson, director of the VA’s education service, said in an interview. “We would have liked to see them respond quicker.”

Kaplan “inadvertently failed” to respond to the finding that five student files lacked proper transcripts, and the suspension didn’t ultimately affect students’ VA benefits, Iori said.

Graduation Rates

Only 22 percent of first-time, full-time candidates for four-year degrees at for-profit colleges graduate, compared with 55 percent at public institutions and 65 percent at nonprofit private schools, according to the National Center for Education Statistics.

At Kaplan University, which doesn’t make public a graduation rate for veterans, 30 percent of two-year students and 33 percent of four-year students earn degrees, Iori said. Many students come from low-income and minority populations and are the first in their families to attend college, increasing the chance they will drop out, he said.

Recipients of bachelor’s degrees at Kaplan University from 2006 to 2010 have a median salary of $38,100, below the national average of $40,500 for recent four-year graduates, according to Payscale. People with master’s degrees in business administration from Kaplan earn $41,800, compared with $59,600 for all MBA’s.

Corporate Hiring

While they hire applicants with online degrees for entry- level jobs, many Fortune 500 companies seeking veterans for leadership development programs prefer graduates of traditional colleges, said Drew Myers, chief executive of RecruitMilitary in Loveland, Ohio, which runs career fairs for veterans and helps them find jobs.

After receiving an associate’s degree at another online college, Iraq War veteran Scot Reynolds transferred to Kaplan University. Kaplan recruiters led him to believe the university would help his career, he said in a telephone interview.

Reynolds, who earned his bachelor’s degree in management in 2009, works as a telemarketer in Coudersport, Pennsylvania. He used his GI Bill benefits for living expenses and funded his Kaplan education with student loans. He owes more than $12,000, he said. He makes $8 an hour plus commission -- less than another company paid him before he graduated.

“My income has drastically dropped,” said Reynolds, 27. “Kaplan was extremely limited with help in finding work.”

Kaplan University provides a wide array of placement services, including resume building, mock interviews and networking assistance, Iori said. Payscale data are “unreliable” and “not statistically valid,” he said.

Melvin’s Family

Kaplan recruiters approached Keith Melvin in 2009. His experience, based on interviews with him and his wife, e-mail correspondence between Melvin and Kaplan, and a review of his Education Department and Veterans Affairs records, shows the obstacles some veterans encounter at Kaplan.

Melvin, 32, lives with his wife and four daughters, aged one to 13, in a rented house in Nashport, Ohio. His wife’s income as a retail manager and his disability pension support the family.

Melvin’s parents were factory workers. From 1996 to 1999, he attended nonprofit Heidelberg University in Tiffin, Ohio, and was on its wrestling team. He left one year short of a degree because he couldn’t cobble together enough financial aid.

He joined the Ohio National Guard in 2001 and was deployed from 2005 to 2006 in Baghdad as a mechanic and as a gunner guarding a lieutenant colonel’s vehicle. Melvin was promoted to sergeant and awarded a medal for his “outstanding dedication to duty.” His commanding officer’s recommendation for the citation heralds his “exceptional discipline, soldierly conduct and initiative.”

Shoulder Injury

Repairing a Humvee during combat, Melvin injured his left shoulder, which has limited range of motion and sometimes pops out of its socket. He is considered 80 percent disabled by Veterans Affairs.

Coming home, he returned to his old construction job, building compressor stations for natural gas pipelines. He was laid off early in 2009.

“It’s hard to work construction with one arm,” he said.

He decided to go back to college to become a lawyer. Robinson, the Kaplan admissions adviser, notified him on March 4 that she had received an information form he completed online.

“Because of the immense interest in this program and the limited size of our classes, I will be calling you soon,” she wrote.

Overcoming Objections

While Melvin was skeptical of online education at first, Kaplan recruiters swayed him, he said. Managing objections from prospective students “is an integral part of the advisor’s job,” according to a 2008 Kaplan training manual. “Techniques to Overcome Objections” include “State the objection to the person, then empathize with them.”

A 2009 Kaplan manual tells military admissions advisers to “establish yourself as the university official, not a telesales person.”

The manual also says, “Limit your objectives. If the agenda sounds very long or complicated, prospective students will be on guard from the beginning.”

Under Kaplan’s compensation system for admissions advisers, veterans were more valuable than active-duty service members, said Cameron Huff, who was on the military team from November 2006 until his dismissal last April. A veteran counted for seven points, and a service member for five points. A service member’s spouse counted the most, 10 points, Huff said.

Tuition Discounts

The number of points assigned each group correlated with the amount of its tuition, Huff said. Kaplan reduces tuition by 10 percent for spouses, 38 percent for veterans, and 55 percent for active-duty military.

Robinson, the admissions adviser, told Melvin that Kaplan was connected through its parent company to such luminaries as Post directors Warren Buffett and Melinda Gates, Melvin said.

“I was more familiar with Jimmy Buffett than I was with Warren Buffett,” he said. “I looked into it” and was impressed by Buffett’s investment acumen.

Invoking Buffett, chairman of Berkshire Hathaway Inc., and Gates, co-chair of the Bill & Melinda Gates Foundation, is a common Kaplan tactic, Huff said.

“One of the things that I always said was, ‘As you may know, Kaplan is owned by the Washington Post, a paper known for having really high ethics,” he said. “’As you can imagine, the Washington Post would never involve itself in anything that would reflect poorly on its reputation.’”

Gates, Buffett

While it’s appropriate to inform students about Kaplan’s ownership, mentioning Buffett and Gates isn’t sanctioned or encouraged, and rarely happens, Kaplan spokeswoman Mack said.

“Kaplan University in no way supports this,” she said.

Gates and Buffett didn’t respond to requests for comment.

When Melvin told advisers on the military team that he was also considering the University of Phoenix, owned by Apollo Group Inc., they responded that Phoenix was under federal investigation, he said.

The military team is trained to foster “fear, uncertainty, doubt” in prospects’ minds about other online colleges, according to the 2009 manual.

“Statements such as, ‘Some schools require group projects where your grade depends on another’s participation,’ instill FUD regarding the features of competitors’ programs,” the manual said. Phoenix, which has more veterans enrolled than any other college, emphasizes group work.

Kaplan has dropped the term “FUD” from training manuals “in favor of clearer language that will continue to encourage advisers to cite the distinctive benefits of a Kaplan education without being misinterpreted,” Iori said. “Admissions advisers are prohibited from disparaging other institutions.”

Phoenix spokesman Manny Rivera declined to comment.

Law School

One competitive advantage cited by Kaplan recruiters was its law school. They told Melvin that, once he finished his bachelor’s degree, he could enter Kaplan’s online Concord Law School. Admissions advisers are supposed to say that “we lead the way with our online technology and established the first online law school,” according to a 2009 script.

Melvin wasn’t told that a Concord law degree was of little use in his own state, Ohio, he said. Only graduates of law schools accredited by the American Bar Association can practice in Ohio, said Ohio Supreme Court spokesman Chris Davey. Concord isn’t ABA-accredited.

Students aren’t usually informed that Concord graduates are permitted to take the bar exam in only one state, California, Huff said.

Undergraduate admissions advisers at Kaplan refer prospective students who express interest about Concord to the law school’s staff, Mack said. It isn’t their job to provide details about Concord programs, she said.

‘Doubtful’ Benefits

Robinson told Melvin in an e-mail that it was “doubtful” he would qualify for the GI Bill, which pays for veterans to go to college. Melvin and his wife said Robinson and other Kaplan advisers assured him in telephone conversations that the government would cover his tuition either through federal student aid or veterans’ benefits, with money left over for living expenses.

“We were under the impression that his education would be paid for,” Terri Melvin, 34, said in a telephone interview.

Many returning soldiers turn to veterans’ service organizations for advice on benefits. Kaplan and other for- profit colleges gain credibility by forging relationships with these groups.

Kaplan recently allied with the Washington-based Military Benefit Association, which sells life insurance and other products to almost 100,000 active-duty service members, veterans and federal employees. Members receive a tuition discount to attend Kaplan, Iori said.

Offers Discounts

Amvets, which is based in Lanham, Maryland, and has 180,000 members, counts three for-profit colleges as corporate partners: Phoenix, Kaplan, and DeVry University. The colleges offer scholarships or discounts to Amvets members, who can link to their websites through advertisements on its home page.

Kaplan was the most visible corporate sponsor at the Amvets national convention in Louisville in August. Its representatives addressed hundreds of members of Amvets and their families at three sessions, and pitched veterans visiting its table in the exhibition hall. Veterans “can virtually go to Kaplan with no out-of-pocket expenses,” Kay Houghton, Kaplan director of corporate alliances, said as she handed out brochures.

Kaplan paid a $2,500 exhibitor fee, Iori said. It paid the same fee to be an exhibitor in 2009 and to sponsor an awards banquet in March, he said.

Service organizations shouldn’t accept financial contributions from for-profit colleges, said Overton, the executive director of Veterans of Modern Warfare.

‘Monetary Gain’

“We all know these schools are after the monetary gain of a healthy benefits package, not necessarily what’s in the best interest of students,” said Overton, a veteran who was blinded in the Gulf War.

Only two students in the past two years have enrolled at Kaplan after linking to the university from the Amvets site, Iori said.

“Kaplan supports Amvets because of the services the organization provides to the veteran community,” he said.

Melvin started classes on March 25, 2009, even as it remained unsettled how he would pay. When he applied for federal student aid on March 11, 2009, he was deemed ineligible for Pell grants for low-income students based on his family earnings from the prior year, when he was working. While he could have received student loans, he didn’t want to take on debt while unemployed, he said.

Documenting Payment

Most colleges require students to document a method of payment or financial aid award before starting classes, said Justin Draeger, president of the National Association of Student Financial Aid Administrators, based in Washington.

Former Kaplan students often fall behind on their loans, jeopardizing the university’s access to federal financial aid, its main funding source, according to Education Department figures.

Twenty-eight percent of former Kaplan University students repay the principal on their loans, below the 35 percent minimum set by proposed federal standards for colleges participating in financial aid programs, according to the Education Department.

The rate of Kaplan University student loans that entered repayment in 2008 and defaulted in two years was 17.2 percent, up from 5.9 percent in 2005, according to the department. Colleges with 25 percent or higher default rates for three consecutive years may lose access to financial aid.

Eligibility Denied

On April 27, 2009, Kaplan notified Veterans Affairs of Melvin’s enrollment so that it could begin paying his tuition. Reviewing his case, the department determined that he didn’t qualify for benefits.

The GI Bill then in effect only covered active reservists. Melvin had left the Ohio National Guard in 2007. Even when his stint in Iraq was tacked on, as the rules allowed, he fell short. His eligibility expired on Feb. 18, 2009. Under the new GI Bill which took effect Aug. 1, 2009, veterans who served at least 90 days on active duty since Sept 10, 2001, as Melvin did, may be eligible for education benefits.

Many colleges enroll military students before benefits are approved so they can start school sooner, said Kaplan spokeswoman Mack.

“We carefully follow the VA’s guidance on what’s appropriate and permissible,” she said.

The Veterans Affairs department encourages colleges “to allow adequate time for the enrollment, eligibility, and payment processes to work,” spokeswoman Katie Roberts said.

Top Grades

Melvin had a 4.0 average in his first semester. When the next semester began June 10, Kaplan told him that he couldn’t participate in class until he paid for the prior courses.

Melvin was stunned. The Veterans Affairs department hadn’t notified him that it was denying his benefits. He contacted his Kaplan academic adviser for help. By the time she responded, the deadline for dropping second-semester classes had expired, he said.

Kaplan blocked his online access and referred his unpaid bill to Minneapolis-based Pinnacle Financial Group Inc. which called him as often as five days a week. Pinnacle didn’t return phone messages for comment.

Dropped from Kaplan’s student body, Melvin applied to public Ohio University. He was stymied because Kaplan was withholding his transcript. Ohio University requires transfer applicants to submit transcripts from each college attended.

‘Sour Taste’

“I have a very sour taste in my mouth about Kaplan,” Melvin said. “They’re supposed to be a military-friendly school. They assured me that everything was taken care of with financial aid. They told me that a lot of veterans here end up making money because of all the funding we qualify you for.”

About 2.5 percent of veterans are “terminally blocked” from attending class, “as a last resort, only after months of nonpayment and typically because of a lack of response” to Kaplan’s efforts to work out a solution, spokeswoman Mack said. In addition, Kaplan often blocks access temporarily “to alert students that they need to get their ducks in a row vis-a-vis payment or paperwork,” she said.

Most colleges withhold transcripts until payments are up to date, Mack said.

After being asked by Bloomberg News about Melvin’s case, the Department of Veterans Affairs plans to pay his Kaplan bill retroactively through a vocational rehabilitation program for disabled veterans, department officials said. If so, Kaplan would release his transcript, and he could finish his degree at Ohio University’s campus in Zanesville, near his home, Melvin said.

“We had a goal that he would go to school and become a lawyer and support the family financially,” Terri Melvin said. “It’s just going to take that much longer now.”

To contact the reporter on this story: Daniel Golden in Boston at dlgolden@bloomberg.net;

To contact the editors responsible for this story: Jonathan Kaufman at jkaufman17@bloomberg.net.

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