Into Big Operator
Of Trade Schools
By DANIEL GOLDEN
and MATTHEW ROSE
Staff Reporters of THE WALL STREET JOURNAL
BOCA RATON, Fla. -- In a call center here, 148 sales representatives work the phones, following their training manual's exhortation to "sell the dream." Their jobs and raises hinge on meeting quarterly sales goals. They adorn their cubicles with colored flags, denoting completed interviews with prospects and allowing supervisors to check progress at a glance.
These marketers are pitching something unusual: an education. Known as admissions advisers, they seek online students for Kaplan College, the largest of 57 colleges owned by Kaplan Inc., a company better known for coaching students on entrance exams to selective colleges and graduate schools.
Kaplan has transformed itself into one of the fastest-growing players in the booming business of for-profit higher education. Its colleges, mostly two-year trade schools and all acquired or opened in the past five years, serve more than 40,000 students and generate $250 million in annual revenue.
At the same time, Kaplan's swift expansion into adult education has transformed its parent, Washington Post Co. Kaplan says it expects higher revenue this year than Washington Post's venerable flagship newspaper -- or any other unit of the company.
Kaplan's growth is taking Washington Post into a market with a new set of risks for the media giant. Trade schools such as Kaplan's play an important economic role by giving workers new skills that help them get jobs. But the entire for-profit adult-education industry is rebounding from scandals in the early 1990s involving schools that didn't deliver on job training. Those failures saddled many low-income students with debts they couldn't pay. Because for-profit colleges depend heavily on federal grants and loans for their tuition, the failures left the U.S. government with piles of defaulted student loans.
Today, Kaplan's colleges, which attract adults with an average income of $25,000, account for 40% of its revenue. Almost all applicants are accepted. That creates the danger for Kaplan, as it does for its rivals with similar admissions policies, that many students will drop out. If they do, taxpayers could end up footing the bill for a growing number of bad loans.
The challenge of making sure students get their degrees is heightened when they are studying from afar via the Internet. At Kaplan College, about 12,000 students, or 94%, take their courses online, up from only 42 students three years ago. Kaplan, the country's sixth-largest for-profit higher-education company, is one of 16 institutions that have waivers from a government rule against providing financial aid to students at colleges where most courses are delivered online.
The loan-default rate for Kaplan College nearly doubled, to 17.6%, for the fiscal year that ended Sept. 30, 2001, compared with the prior year. (Those are the most recent figures available.) Kaplan attributes the rise in loan defaults at Kaplan College to a one-time glitch in loan processing at the school's bricks-and-mortar campus in Davenport, Iowa. Kaplan says some of the students counted in that default rate left college prior to Washington Post's acquisition of the Davenport campus in August 2000. Schools with default rates of 25% or more for three consecutive years can lose eligibility for federal financial aid.
Kaplan Chief Executive Jonathan Grayer says the company is taking steps to address these issues. "The opening up of access, in the way we are, brings risks," he says. "It's important we don't have students who can't do the work."
To weed out unsuitable applicants and cut down on dropouts, Kaplan College will introduce an entrance exam next year tailored to online students. The school had dropped an earlier admissions test this year in an effort to get more students to sign up.
Mr. Grayer says Kaplan makes sure that online students are "intimately connected" to professors, academic advisers and other support staff for guidance. While some of its rivals say Kaplan's recruiting is the most sophisticated in the industry, in other regards, the company's practices are fairly typical of the for-profit sector.
"We're the inheritors of the vocational high school," Mr. Grayer says. "No one is going to come to Kaplan College if we don't help them achieve their goals." The company's offerings range from medical-office management to sports management to graphic design.
Kaplan's rapid growth is also spurring the company to look for new sources of income. The federal government enforces a 90% ceiling on the proportion of a for-profit college's revenue that comes from federal aid. Kaplan College exceeds 80%. Overall, the company's schools are at about 75%.
In part to reduce reliance on federal money, Kaplan College is adding bachelor's and master's-level programs in criminal justice, business and other subjects. School officials expect that applicants for these four-year and graduate degrees will be more likely than students seeking two-year associate degrees to afford their own education or get their employers to subsidize their tuition. The college charges about $1,200 for a five-credit course.
Boosted by acquisitions, Kaplan's revenue soared to $621 million last year, up from $75 million a decade earlier. Revenue grew another 31% in the first nine months of this year. After losing money for years, Kaplan had net income of $20.5 million in 2002. The company would have posted higher profits for 2003 were it not for a large batch of options-related payments to Kaplan senior executives. Due largely to these payments, Kaplan reported a loss of $23.6 million for the first nine months of 2003. Kaplan College's online operations are expected to earn about $5 million this year, becoming profitable for the first time.
Founder Stanley Kaplan began tutoring students in his parents' basement in Brooklyn, N.Y., in 1938. After building the country's largest test-preparation service and attaining grudging acknowledgment from academic elites that his coaching could improve scores on college-entrance exams, he sold the business to Washington Post in 1984.
In her 1997 autobiography, Katharine Graham, then Washington Post's chairman, recalled her "lack of interest" in Kaplan. She wrote that she told Richard Simmons, then Washington Post's president: "I don't give a s- about it, but if you think it will be profitable, let's do it."
Her son, Donald, now Washington Post's chairman, paid closer attention. In the early 1990s, he says, Kaplan was losing $4 million a year, and company officials discussed selling it or shutting it down. Instead, Washington Post turned to Mr. Grayer. A former marketing director at Post's Newsweek, he joined Kaplan in 1991 and was appointed chief executive in 1994, at the age of 29.
Mr. Grayer solidified Kaplan's leadership in the test-prep market and then pursued a strategy of diversifying into related educational businesses. In 1998, Kaplan opened its online law school, Concord Law. In 2000, when Mr. Grayer was negotiating to buy Atlanta-based Quest Education Corp., which owned 30 mostly two-year colleges in 11 states, he called Mr. Graham for the go-ahead. The acquisition -- the only time Washington Post has bought a publicly traded company -- ultimately cost $178 million, or about double Quest's market value. Although it was a Sunday, Mr. Graham immediately called financier Warren Buffett, an influential Washington Post investor and board member. After a 10-minute conversation, Mr. Graham called back Mr. Grayer with what Mr. Graham says was "the world's fastest board-approval process."
A couple of years ago, Washington Post executives began referring to the parent company as a "diversified media and education company," adding the education part. Today, two-thirds of the company's employees work for Kaplan. At the parent company's annual meeting last May, Mr. Graham said, "Kaplan continues to go gangbusters."
Mr. Graham says Washington Post executives used to joke about Kaplan reaching $1 billion in revenue, "because it seemed so wildly unlikely." Now that goal seems within reach.
He says one reason Washington Post has focused on educational acquisitions is that television stations and other media properties it might otherwise seek to acquire have grown too expensive. "Given prices in media, education has been the bulk of where we have had to grow, and I love the way Kaplan grows," he says.
At Kaplan College, much of that growth comes from adapting telemarketing techniques to higher education. The company says its sales representatives don't make cold calls to find students. Instead, each representative in the Boca Raton call center is assigned prospects who have called for information or filled out an online "self-evaluation."
Kaplan instructs its sales people to read to prospective students from a script that says, "I've reviewed your self-evaluation, and it appears you have many of the characteristics that successful online students possess." But Carrie Spencer, a 29-year-old senior sales representative, says she doesn't read that line because the self-evaluation provides scant guidance to online-educational success. The line is "heavy-handed," she says. One-third of sales representatives' annual pay increase depends on how many prospective students they enroll. If they miss goals for more than two quarters, they can lose their jobs.
A company manual advises sales employees to "cover all possible objections" by prospective students. "It cannot be stressed enough that objections which are not overcome during the initial interview will later become the primary reason that a student decides not to attend school," the manual adds.
Like Kaplan, the entire for-profit-education market is growing quickly. Often called proprietary schools, for-profits saw their enrollment soar nearly 48% from 1996 to 2000, the latest year for which there are national data. Public and private nonprofit schools had only a 5.7% rise during the same period. Total for-profit revenue grew 29%, to $11.6 billion, from 2000 to 2002, according to Boston-based Eduventures Inc., and share prices have climbed accordingly.
The U.S. Department of Education generally has supported the growth of for-profit schools. Moreover, the agency, which oversees federal student aid, doesn't consider online colleges a greater risk for loan defaults than other schools, spokeswoman Susan Aspey says. Following department policy, she declines to comment on Kaplan in particular.
The for-profits -- including University of Phoenix, Corinthian Colleges, Strayer Education and other financial success stories -- are all riding the same demographic reality: nearly three-fourths of Americans older than 25 lack bachelor's degrees, a prerequisite in today's society for most well-paying jobs. The for-profits tailor their courses, schedules and marketing to these adults, a mass audience largely neglected by traditional colleges.
At Hesser College, a Kaplan school in a converted mill in Manchester, N.H., 46 students are enrolled in a 48-week, $9,900 massage-therapy program, which prepares them for a state-licensing exam. "I don't want to be a health aide any more," says Linda Tilden, a 53-year-old medical-records clerk. "I work long hours for very little money, and it's very taxing." Massage therapy, she says, pays better, has more-flexible hours and "gives you a rewarding feeling."
Mona Colsch, a 34-year-old St. Paul, Minn., legal assistant, is enrolled in Kaplan College's two-year paralegal-studies online program in hopes of increasing her salary. "I've had my share of classes that you'd consider a skate, but the legal classes are definitely rigorous," she says. She describes Kaplan as "student-friendly," citing her frequent phone and e-mail contact with professors and her academic adviser.
For-profit schools can't offer tax deductions for donations and, in any event, generally lack the sort of affluent alumni corps who help build endowments. As a result, for-profits rely solely on tuition, usually paid by federal financial aid or private employers. Because they are so dependent on tuition, for-profits invest heavily in recruitment. Kaplan's annual marketing budget for its residential colleges alone is about $30 million, according to a person familiar with the matter.
For-profits can't afford to reject many applicants, and most require only a high-school diploma for admission. Kaplan says it doesn't keep overall dropout or graduation rates. But the average Kaplan College online student is enrolled for only 5½ quarters, significantly less than the eight ordinarily required for a two-year degree, according to the person familiar with the matter. Some students may enroll having earned credits elsewhere and thus may not have to stay for the full eight quarters. Kaplan declines to comment on these figures.
There are other signs that dropout rates are substantial. Excluding graduations, Kaplan says 78% of its students overall in 2001 remained enrolled in 2002, meaning that 22% left. At Kaplan College, about 15% of online students each quarter don't stay for the next quarter, again excluding those who graduate, according to Mary McKenna, the school's dean of students.
Mr. Grayer says Kaplan's student-retention rates are "very respectable," compared with other for-profits and community colleges that aren't selective in admissions. But Kaplan College executives say they hope to reduce attrition with more first-term academic advising and other measures. Of its graduates, Kaplan says 87% find a job in their field of study or, if already employed in that field, a higher-paying position. "Just because we're a for-profit, that has no bearing on educational quality," Mr. Grayer says.
Kaplan says the loan-default rate for students in all of its colleges was 9.4% in the federal fiscal year that ended Sept. 30, 2001, the latest year the government has tallied. That was slightly higher than the national average of 9% for for-profit schools. The overall national average, including private nonprofits and public schools, was 5.4%.
As Kaplan has grown, Mr. Grayer and other top executives have received handsome rewards. The payments to top Kaplan officials that are causing the company to show a loss so far this year stem from special options Washington Post pegged to Kaplan's performance, among other factors. Washington Post decided to pay out millions due Kaplan executives this year and is planning to replace the options arrangement with a more traditional cash-incentive plan.
Mr. Grayer says the federal-aid programs that boost Kaplan's revenue were designed "to give individuals access to the education they need to better their lives. That's exactly what Kaplan does." In some months this year, the share of Kaplan College's revenue coming from the government has climbed to 87% or 88%, the company says. The proximity to the federal 90% limit recently motivated Kaplan officials to lobby Congress to abolish or modify the ceiling.
Kaplan is also lobbying Congress to repeal another federal law -- the so-called 50% rule, which prohibits colleges receiving federal financial aid from offering more than half of their courses via distance education rather than in the classroom. Kaplan, which has a waiver from the rule until 2005, says the restriction -- aimed at fraudulent correspondence colleges -- is an anachronism that could impede its long-term growth.
The Department of Education reported in July that not applying the 50% rule to Kaplan and the 15 other educational institutions with waivers hasn't "resulted in any problems." Possible changes to the 50% rule and the 90% federal-funding limit are expected to be debated next year when Congress reauthorizes overall federal aid for higher education.