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COMMENTS

Interview: Brian Mueller

“[Phoenix] just broke the mold, forced people to think about who the student was, their needs-- not the faculty member or the university.”
brian mueller

Former president of the Apollo Group, 2006-'08, he's now CEO of Grand Canyon University, a small Christian college that investor Michael Clifford helped revive. This is the edited transcript of an interview conducted on Feb. 3, 2010.

We want to tell Grand Canyon University's story, but I want to begin with yours, which starts in the '80s when you joined University of Phoenix.

Yeah, if I could go back just a little bit. I started out as a high school teacher. I had gone to Arizona State to enroll in a Ph.D. program and was going to finish that and go back into teaching and coaching. But I had three kids. I had a fourth one on the way, so I wandered over to the University of Phoenix to see what was going on there. And I found out some interesting things.

What did you know about it before you wandered over to Phoenix?

Not a single thing. I kept driving by. The sign was there: University of Phoenix. I had no idea what it was. I had heard no advertising. I didn't know anybody who went there. They said they had job opportunities, and a day or two later I interviewed and was hired -- and never intended to stay more than a couple years.

But after being there for about six months, as an educator and somebody who was master's-prepared in education and pursuing a Ph.D. program, I looked and said: "Boy, these people really have something going here. They really know what they're doing. This is the right product at the right time. I have a lot of interest in staying here."

What did they understand that impressed you?

Well, initially [University of Phoenix founder] Dr. [John] Sperling, when he conceived this idea, he saw the Vietnam War coming to an end, and he saw a lot of military personnel who had been in Vietnam for a lot a years. And they were going to come back to the States now, and most of them were not college-prepared, and the economy had changed. ...

Many of them had families, and they weren't going to be able to go back to college in the traditional structure, which, as we know, it was structured for 18- and 19-year-olds, who would commit basically full-time to live on campus and have that experience.

These people needed education, but they couldn't go to school that way. So his idea was, this is going to be a big growing market. Adults are going to have to go -- not just these Vietnam War veterans, but as [the] economy changes, there's going to be a higher percentage of Americans that are going to have to go to college. ...

So what kind of structure can be put together that was built exclusively and only for working adult students? ...

So you joined it as a teacher.

I joined it as an enrollment counselor.

And what did that entail?

Phoenix in those days was really growing, and the economy was on a tremendous uptick, and we had all these large companies that had very generous tuition reimbursement packages. They wanted their employees back in school. There was Motorola, Intel, Honeywell, and there was Allied Signal.

Those were the people interested in our program. They'd be 35 or 36 years old, and they would have started a degree at some point in their life. They got married; they got a good job; they joined the service. Something happened, and they dropped out of school. Now the next job that they have their sight on requires a baccalaureate degree. So we provided them a chance to go back and earn that degree or a master's degree.

Where did you find the students? How did you connect with the prospective student?

We would go and talk to human resources vice presidents, and we'd say: "We have this program. A lot of people are calling about it. We'd be happy to come over and give an information meeting." And they would do some advertising. People would assemble. We'd talk to them about how the program works, and those that were interested, we would get moving down the application, those kind of things.

There was some advertising in those days, but it was a lot of word of mouth, and there was a lot of just going out and talking to companies about our programs and how it worked.

And it was growing quickly.

We had campuses in the Southwest, and it was growing fairly quickly. Most campuses were growing at a rate of maybe 20 percent.

In '89 the University of Phoenix offered its first online courses. Were you a part of that thinking?

I was part of the initial meetings, because I remember Dr. Sperling saying to a number of us, "Go into a room, and I want you to think about how we're going to use the Internet to deliver education, because the Internet's going to be a tremendous communication tool."

It was kind of a funny story, because a lot of us went into a room, and we spent a lot a time and came back out and told him that our students really need to be in a classroom, and they need to be with an instructor, and there need[s] to be the face-to-face interaction. And he looked at us, and I won't tell you exactly what he said, but we went back in the room. ... Eventually, [current Executive Vice President of External Affairs for Apollo Group, Inc.,] Terri Bishop took on the responsibility to develop the first online courses and build the first online program, and she did a remarkable job.

But you were skeptical?

I was skeptical at first. I was a teacher, and I loved the classroom.

And what did he see that you didn't?

The thing that people miss about online-delivered education -- when I took over in '97 in order to grow it, the thing I quickly realized was that, if you gave most people an 8.5-by-11[-inch] sheet of paper and said go ahead and write out what you think traditional education means to you and to most people, they would write out what [you] do in online education at Grand Canyon and at University of Phoenix.

The reason is that it's instructor-led. It's small group; it's very interactive; it's very collaborative; it's very social; it's very discussion-based. It's not lecture-based. It's not 500 students in a large lecture hall being lectured by one person taking notes. And it's not a passive experience. It's a very interactive experience. ...

But somebody's going to listen to that and say: "Wait a minute. It's on the Internet. It's impersonal. There's no face-to-face contact; there's no classroom; there's no campus; there's no student union. What are you talking about?"

Yeah. And it's interesting, because we were meeting with Yahoo! and Google, Microsoft just before I left University of Phoenix, and we're still meeting with those people now. When we sat down and showed them -- Google, for example. We showed them our classroom, and we showed them how it worked.

This was [CEO] Eric Schmidt of Google.

Eric Schmidt did attend one of the meetings, yes. They looked at it and said: "You guys were Internet v2.0 before any of us were even talking about it. You just didn't know it." As an educator, it took me a while to figure that out, but not long.

If I have students in a classroom and we have two hours, and there's 15 students, and we've got good content, and I ask good questions, we can have a very good, very vibrant discussion. And we can get to deeper levels of understanding because of the group of us thinking about something together. But you can't get [to] the same place as you can in our online classroom.

The reason is the way it works: The content is delivered on Monday and Tuesday early in the week. The discussion question is proposed, and students participate in the discussion the entire week. So I may not know why I disagree with your comment in that thread of discussion on Wednesday, but Thursday, while I'm taking a shower, it dawns on me, and I can go right back in, and I can challenge your idea that you delivered on Tuesday. Then you have the ability to challenge my idea.

That goes on for the entire week, and the faculty members, they're facilitating that. So you get to think through for a seven-day period of time versus a two-hour period of time. ... And you have to be very careful. You have to think very deeply, because [anyone] can go back at anytime and challenge you and challenge what you say.

And we do very common-sense things in online learning. The actual content of a course grows as the weeks go by, because if somebody writes a great analysis of a case study, the faculty member asserts that into the main classroom as part of the curriculum. So it really is a participative and a collaborative kind of educational experience, not that in-face classroom can't, because it can. But it's the time. And it's not like I'm segmented out two hours today to go to school. It's kind of on your mind the entire day.

Three years after you joined the University of Phoenix, you're in charge of marketing and enrollment. What did you bring to the job?

I think what I brought to the job was that I came at it from an educator's standpoint. Most people who know me and my history at University of Phoenix would say that they see me primarily as a businessperson because I headed up business operations and was the president of Apollo Group. And what I brought was the perspective of being an educator. ...

Not long after that the Nunn Commission, [officially called the Senate Permanent Subcommittee on Investigations,] starts looking hard at these student loan programs and abuses in federal aid. What effect did that have on University of Phoenix?

There [were] always changes in compensation rules, and there were safe harbors or there weren't safe harbors. If you look at the entire industry, the entire industry just kind of moved right through that period of time.

I mean, the Higher Education Act was amended, and there's restrictions put on how students can be recruited and enrolled.

And compensated. But if you look at the history of the growth, none of those things impacted the growth. The companies kept growing. And what people miss is that it really -- the whole enrollment counselor thing had a slight impact on how we did business, but it wasn't the driver.

The driver was the customer-centric focus. The driver was we understand that a 32-year-old student that's working and going to school at the same time is a different person. They've got life experience. They've got work experience. They've got scheduling challenges.

[What] you've got to do is put that person in the middle and build curriculum instruction, instructional strategy, scheduling around the needs of that person. That was what contributed to the success of the market-funded institutions.

But you were slapped on the wrist for marketing practices. What was that about?

There was a lack of clarity around what you could do and what you couldn't do. Nobody knew for sure what it was, so you did your best to adapt to what you thought was permissible. And there were some struggles in that time period. But we just kept moving right through it.

There was testimony in those hearings about people in some universities recruiting the poor, the homeless. What was the truth behind that?

If you go back and look at all the players in the space -- the University of Phoenix and DeVry [University] and ITT [Technical Institute] and Strayer [University] -- those are all real good universities. Accrediting bodies always came away saying: "Boy, these people are really strong educators. They deliver great instruction. Their students graduate. Their students pay back their loans."

But some were punished. Like over 1,000 of them during that period lost student loan program eligibility for having excessive default rates.

I don't know anything about that number.

That's the Department of Education statistic.

[There] are hundreds of very small mom-and-pop organizations that operate in the vocational-technical area. Some of them are very good, and some of them are not -- you know, people that do refrigerator training, people that do cosmetology, those kinds of things. And we were never really in that space.

By the end of the '90s, you've gone from, I don't know, 3,000 students to something like 10,000 students online. Your initial reticence about the online component of this had gone through some changes, I imagine.

Oh, absolutely. ... I embraced that very quickly as an educator.

Now, the thing of it that I understood was that, as a businessperson, we're there [before] anybody else. This is an untapped market. We're going to help meet the needs of a lot of people. And there were a lot of good things that were done at that time. But the best decision that was made was not to deviate from the learning model.

The learning model means instructor-led, small group, interactive, collaborative, discussion-based, lots of writing, lots of critical thinking. The tendency for others at that time was to say: "You know, we could turn this into a cash cow. Let's put 1,000 students in a classroom with one instructor online. ..."

Wasn't Wall Street eager to have you churn a little bit more profit? A lot of people will say, "I'm not comfortable with this model because it puts profit before education."

That's very interesting, because one of the first meetings I had as an Apollo president with a significant part of the Street was about that issue. They tend to look at things very quantitatively and said, "Well, couldn't you squeeze out some additional points if you just increase the class size?"

And the response, obviously, is, "Yes, you could." And you'd probably give it away in student outcomes, and you would probably give it away in retention.

What we had figured out before other people was that, for 90 percent of the population, education is a social experience, and if you take the social element out of the experience, the retention levels of students and their achievement levels go down.

Our model was small group, interactive, collaborative; everybody gets to know each other. The faculty member makes it a very personal experience for all the students. What's going on at your company? How would you apply this concept to your company? How about to your life? Working adults, especially -- even more so than 18- and 19-year-olds -- they've got to have this stuff applied to their life.

And they have to be able to talk about how that applies to their life and what they're doing at work or what they're doing in their life. When that happens, and you get that kind of engagement, the interest level goes up, and the retention levels improve.

Phoenix is a tremendous success story, isn't it? In terms of business, it's a tremendous business success story.

[Phoenix] just broke the mold, forced people to think about who the student was and their needs, and not the faculty member, the university. So, yes, it was a tremendous success story from an education standpoint. It was a successful story, in my opinion, from a business standpoint in two ways. Number one, it took a tremendous amount of pressure off the taxpayers, because if you think about the tremendous subsidy required by a state university or a community college to subsidize a student, all these market-funded institution students aren't being funded by the state taxpayers.

So if you think about today, there are 20 million students going to college and about 2 million are in these market-funded institutions -- that's a tremendous relief from the standpoint of the taxpayer, because those students aren't requiring subsidy from the taxpayers.

And somebody's going to say: "Wait a minute. The money they get is taxpayer money. It's federal loans --"

Title IV. Yes. If you are a university or a technical school in this space who has low graduating rates and high default rates, the taxpayer has lost, the same way the taxpayer loses if a community college or state university has high default rates. So there's no difference between the publicly funded versus the state university or community college in that sense.

Except you've got all these critics out there that say, "The default rate for for-profits is higher than it is for the rest of the space."

The problem is oversimplification. Just like every state university and community college is not the same -- there are good ones and there are bad ones -- the tendency to lump everybody that works on the market-funded side or the private side together is unfair.

If we are selecting the right students and we're providing the right services and the strong academic program so that students get in and graduate that rates are commensurate with what your mission is and you have low default rates, you're providing a tremendous service. If you're not, then that needs to be scrutinized just as it is for a non-market-funded institution.

Is it true that some of the big, reputable companies in the for-profit university world have pretty high default rates?

Well, I don't want to speak on their behalf. There's lots of really strong institutions that I have tremendous respect for out there. With regard to default rates on student loans and graduation rates, I've always said that you have to be fair and take a look at the mission of the institution. And then you have to compare across institutions that have like missions.

So take graduation rate, for example. If you're Harvard or you're Yale and you're very restricted in who you take -- the top 1 or 2 percent of the population -- you're going to have very high graduation rates and very low default rates because you're very closed as an institution in terms of who you'll take.

If you're a community college, which is on the other end of that, their mission is to be very open and very accepting in who they take. You can't expect to hold them to the same graduation rates or the same default rates because they're expected in their mission to take at-risk students.

At a comprehensive institution like Grand Canyon, where we have doctoral programs, master's programs, baccalaureate degree-completion programs and some associate['s] programs, we measure our effectiveness at each one of those levels. Graduation rates and default rates in terms of the admission standards in those programs.

So the admission standards in the doctoral program are pretty stiff. We expect that the graduation rate default rates will be very low. Master's degree students are very similar to that. Now, what we're doing at Grand Canyon is we're making sure that as we build our student body and grow our students that we work with some low-credit students who are inexperienced, who are at more at risk. But we're limiting their number.

The school that you run now, Grand Canyon University, it began in 1949, run as a Baptist university -- first a college, then a university. It gets into trouble in the early 2000s. What happened?

It was just a financial struggle. Private universities all over that weren't heavily endowed had to figure out a way to make this thing go without raising tuition, especially private universities that don't have the Ivy League or the Notre Dame kind of cache. And there were a lot of small, private universities, colleges like Grand Canyon, that didn't have a huge endowment, that got into financial trouble.

This was particularly true in the late '90s or early 2000s?

It still exists today.

But what was happening in the economy that was creating this?

The problem with Grand Canyon was that they were very, very good at teacher education. Then in that same time, they got very good at health care and nursing. In fact, today there's relationships with over 60 hospitals because they developed such a strong program in that area as well. These were bachelor's degrees.

The trouble with the teachers and nurses is that they provide tremendous service, but they don't become Wall Street executives. They don't become millionaires, and they are not able to give millions back. So Grand Canyon wasn't able to build up a large endowment. It was about that time that California made an interesting move. They created what was called the Cal Grant, which was a $9,500 subsidy that if you were a California resident, you could get that for attending a private, accredited university in California.

Well, Arizona never did anything like that to help its only private, traditional university, so they were kind of left on their own.

And then what pulled Grand Canyon out of its financial troubles?

Brent and Chris Richardson, brothers who had been doing some business with Grand Canyon on the working adult online side as Grand Canyon was experimenting a little bit, knew about the university and made an offer to buy the university. It was a bold move on their part because there was significant debt at that point.

They had watched us at University of Phoenix, and their idea was, well, we'll extend our admission by offering an online program. We can get that online program profitable, which could restore financially the university. They built a program very similar to University of Phoenix's, and within three or four years, they got the university to a level of profitability. They eliminated debt.

Through the online offerings. So that was where the cash came from that kept the university afloat?

Yes.

And what was [education entrepreneur] Michael Clifford's role?

I don't know. Michael had something to do, I think, with brokering the deal.

From a magazine article in 2004: "GCU hires Clifford's Significant Ventures firm to shore up the debt-ridden college and expand its enrollment."

Yeah, there were three principle investors: the Richardsons; Significant Ventures, Michael Clifford's group; then eventually Endeavor Capital, an investment firm in Oregon. They got the university back to profitability.

When we were talking the other day, you were saying that the small liberal arts colleges were really facing a crisis, that there's going to have to be a shakeout in many of these places because the economics of it just don't work.

The people are more cost-conscious. A higher percentage of the population today has to earn a bachelor's degree at least to compete in the marketplace. And there's not as many people who are willing to have that traditional four-year experience and all the expense that that incurs if they can do it less expensively. There's an increasing percentage of people saying: "I'll stay home. I'll work and go to school at the same time."

Again, there's a lot of small, private liberal arts colleges that are doing well. But if you don't have an additional source of funding like an endowment, like an online program, like investment from the public markets, it is more difficult.

... Some would say it's a corporatizing of education. You're centralizing control and losing the democracy that exists in a diverse faculty where there's academic freedom to teach as you see fit.

And you would hear that from university professors. You would not hear that from many consumers of education. I will tell you that students, by and large, at places like Grand Canyon University find the curriculum and the instruction to be as good or better because of that total quality management process.

You bring the four or five best people together to develop a course. You make sure that you're getting the latest in content. Think about areas like IT [information technology], for example, where content changes every six months. How do you know if you're not making an attempt to manage the process whether students are getting the latest in content, the best in content? You don't. You're hoping. Whereas in a place that is managed more like a business [that] has as its priority the learning that students get to make sure that it's the most up to date, the most relevant, the most application-based, I think you can make a very strong argument that this is a superior way to do it.

Phoenix has a huge online component, but it also has campuses, classrooms. How does that compare with what you're doing here?

It has working adult campuses that are very good, their classrooms and office complexes by convenient freeway locations. They have class in the evening where students come.

What's different here is that we have a traditional campus for 18- to 22-year-old students who are leaving high school and they're coming to a traditional educational institution. We have the opportunity to build strong academic programs for them and strong programs in the area of fine arts, music, theater, dance, visual arts, build a strong athletic program.

That in itself is a lot of fun. But working adults want to be connected to that. So there's a special niche that we're developing here. There's not another market-funded institution really that has a chance to build a powerhouse academic institution in a traditional sense and then connect working adult students to it at a distance.

Is it as good a business to carry the costs here of a traditional campus with all that requires?

Yes, it is. It is.

It doesn't make as much money as going online.

The thing we've learned since we've been here in the last 18 months -- myself and the management team that I've brought -- is that you've got an infrastructure in place that you use to run a higher educational institution. So you have admissions offices and financial aid offices, and you've got marketing, and you've got enrollment, and you've got faculty; you've got curriculum.

You've got to have that infrastructure whether you apply over a traditional strategy or a nontraditional strategy. But when we applied it over both, what we found is greater efficiency than we thought.

It's showing up in the fact that our tuition increases are minimal. Our tuition increase on the online side, where we're already very low as a private institution, will be around 3 percent. We've frozen tuition on the traditional side. In fact, we've implemented a $4,500 in-state grant for in-state students who want to come to our traditional campus. So it takes a lot of explanation for me when I go talk to the Street, because they always --

To Wall Street?

Wall Street, because they all think of pricing flexibility as your strongest. That's most important to them. And so it did take some explanation.

They don't like the traditional campus model.

Until they understand how we're doing it and why it works.

But some are skeptical, I imagine.

Some are skeptical. But you have to understand that most of them are Ivy League-educated, and that's their experience educationally.

And so you're getting the benefit of being identified as a traditional four-year college with the great benefit of being able to run an online university and all that entails.

That's correct. And it gives you the opportunity to help build the brand. Because of the tuition rates, the scholarships, the room and board rates that we're able to offer our traditional students, we are continually upping the average incoming G.P.A of our traditional students.

Is the online university therefore subsidizing the traditional four-year school?

People think that. But the more that we are into this, the more we realize that even as we offer academic scholarships to good, incoming traditional students, because of the synergy that exists between the two populations spreading the costs of this across a common infrastructure, the traditional students are profitable as well.

Explain to me what you mean when you say "building the brand."

We want to grow the traditional campus and grow it with really good students. The higher the average incoming G.P.A. of our traditional campus students, the better, the more strengthened the brand gets. The more we grow the traditional campus, the more we can add professors, full-time professors who are living, working and teaching on our campus. The higher the profile of the professors, the stronger the brand gets.

And the third area is performance. The bigger we grow the student body and the more profitable the overall organization becomes, the more that we can put money back into performance areas that helps build the brand.

So, for example, in the fall of 2010, we're bringing back fine arts. That's an investment. But theater, music, dance, the visual arts, those are things that appeal to the emotion; they're exciting. People like that. We can stream our basketball games, which we do.

And our alumni across the country will tune into those streamed games. Hopefully at some point we'll be good enough where they'll be on television. So through performance, you also strengthen the brand, grow the visibility of the university, create excitement. Those are all things that you can do with that traditional campus.

And then you can attract more people to the online side of it from far and wide.

Absolutely, absolutely.

I get it.

I was going to give an example that's really interesting in the athletic area. Gonzaga was a Catholic school in Spokane, Wash., 10 years ago that was very regional. They happened on a tremendous basketball coach. They built a great basketball program to now where they're a national powerhouse. Their enrollment went from 3,500 to 7,000. They built 18 new buildings, raised $254 million in donations, and their average incoming S.A.T. score went way up.

And what have you gone from?

Our average incoming G.P.A. went up 20 percent from the first year that we were here in a traditional campus to last year.

And how many students have you added on?

We went from 1,100 to 1,800. And we are going to add about 1,700 new students next year, which will take us somewhere between 3,000 and 3,500.

And what about online?

We are at 37,000 students and growing. But we're growing at a conservative rate compared to what we could grow.

Why not grow faster?

Because we're trying to build the brand with that traditional campus. But we're also trying to build it with the online campus. We're trying to keep about 45 percent of our students studying at the graduate level, so we're adding doctoral programs and master's programs and about 55 percent of the students at the undergraduate level. The makeup of that student body with so many graduate students gives you credibility. It helps build your brand.

So could we grow faster? Yeah, we could. But we're going to be very image-, very brand-conscious here.

At the University of Phoenix, you headed the move toward the younger student. What was the thinking there?

The reason for that move at that time is that those students were coming to the University of Phoenix as inexperienced students -- students that are 29, 30 years old, with not a lot of college experience.

The University of Phoenix model was built on students who were coming with 40, 45, 50 college credits -- experienced students, experienced professionals. The model was built with a focus on them taking responsibility for a lot of their education. It was a very good model. Students loved it; faculty loved it. It flourished. You take that same model, and you try to apply it to a little bit less experienced student, they're not ready for it. They become very frustrated.

What we had to do with those students is put together a model that was not five-week courses but nine-week courses; that was not as much group-oriented, where people got more individual attention directly from the faculty member. For example, each student in those courses had a specific relationship with a faculty member in terms of an inbox, etc.

So you're going to compete with Phoenix where Phoenix doesn't. Phoenix has, do you believe, diluted their credibility with all their advertising, with all their push, with all the money spent on the online ads, with junk mail, really? Did that hurt Phoenix? Did you go too far in that regard?

I talk about the University of Phoenix online obviously with a lot of affection, because I ran that. And two things happened. Number one, University of Phoenix really learned how to teach education using the Internet in a very high-quality way. So it started in '89. It took three or four years to figure it out. But by the time the Internet started to take off, we were really good at it, and it was really well thought out.

But the other thing that happened is that Internet marketing came of age. You could get frequency and reach with Internet advertising that you could never get with traditional media, and it worked tremendously.

But a lot of that was a sort of unrelenting flow of spam into people's mailboxes from the University of Phoenix, and they didn't know what it was. ...

Yeah, yes we did. We were very prevalent. We were out there.

Aggressive.

We were aggressive, yes. But the fortunate thing is that it worked so well that University of Phoenix now in the last five years has had the money to put together very, very high-quality, very enriching branding advertising that talks about the quality of the education, the quality of the professors, the quality of the students. I think what they're doing now really has helped soften that.

But that did create something of a dilution of credibility.

I think for a period of time it maybe did. But I think they've done such a good job of overcoming that in the last three or four years.

The other criticism -- that more money is spent on marketing than is spent on faculty in some of these for-profit schools. At the University of Phoenix, how many people were in the financial and enrollment/recruiting departments?

Let me talk about how we look at the structure. The single greatest strength of these institutions, and I'll go back to it, because we talked about it before, is their focus on servicing the student both from a faculty standpoint and from a student service standpoint.

The investment in those people that recruit students, provide financial aid, academic counseling, build schedules, get to know the students in very much a team framework. When you talk about secret sauce, that's the secret sauce: the service.

People come to Grand Canyon online because we're going to provide them a lot of attention. You're a working adult person; you've got a job; you've got a family. You can't read a 300-page catalog and figure out what courses you should be taking. We're going to work hard with you understanding what program you want, what your career goals are. We're going to take time to evaluate your transcripts, see where it fits.

We're going to build you a schedule, make sure it works for you. We put a lot of emphasis on that. The other place we put a lot of emphasis on, we put one faculty member in with 16 or 17 students at a time when students need the most help in their freshman and sophomore years of college. We don't put you in a lecture hall of 500 students. We don't put you in a lecture hall with 500 students and a graduate assistant. We give you the same kind of attention in your first year that you would get in your major field of study at state universities. So when -- without being able to explain the entire P&L it's difficult to show you, but the reality is --

That's the profit and loss statement.

Yeah. The reality is Grand Canyon University grows because we care about students. Now, are we as good as we could be and should be? No, but we really work hard at it. That's a focus. More than anything, that's why these institutions win.

The market-funded universities, have they suffered, because -- I mean, people are saying it all the time: "Look, they're spending too much of their resources on recruitment and getting new students than they are on teaching and faculty." Now, you may say that you're not doing that at Grand Canyon University. OK, but there are a lot of schools that are spending an enormous amount and do have larger recruitment budgets than they have faculty budgets.

I can't speak to the P&Ls of all those companies, but it's more complex than most people are looking at it.

It always is.

A major state university loses lots of dollars, lots of dollars on their athletic programs. The students and the taxpayers subsidize those programs. In very few universities can you build a football program to subsidize the rest of the athletic programs. For most universities, that is absolutely a loss.

Is that the right thing to do? Who's paying for those scholarships and for those facilities and those trips? The students who are not competing and the taxpayers. It's a tremendous outreach. They represent the university well.

Is that an educational experience? Is that a PR thing? Is that a marketing cost? How should you look at that? The very high-end professor who is a tremendous mind and has done great research but doesn't really teach for the institution, is that an educational or is that a marketing cost?

I will tell you that, yes, centrally developed curriculum provides a quality control mechanism that makes the teaching of adjunct professors a lot more efficient. But I will tell you this: If you look at the counseling dollars spent by these institutions to help students, it dwarfs the expense of a state university in that area.

But the rap that you get is that you're going after the vulnerable, that they don't know --

I don't want to be the spokesperson for the industry. You know what --

Everybody that is in the industry is the spokesperson for the industry in the viewers' eyes. As much as they understand that you run GCU -- and we will make that clear -- there's just no getting around the fact that if I interview a number of people in your business, in your space, people will piece together the mosaic. Everybody becomes sort of a quasi-representative. At the same time, they know that if I interview a member of the armed forces that it doesn't represent every --

OK, right.

So you've got a good, strong brand, and that's your intent here. But now you're growing. You've got 37,000 students online. How can you be sure that all of those students are of high quality and that you're not getting too thin on the quality front there?

That's a good question, and it's really integral to our strategy. On the traditional side, obviously the better we get, the higher the incoming average G.P.A. So there's a whole strategy around that. But there's also a strategy around online, and we know from experience who the best students are. It starts with our doctoral students. So we build out doctoral programs. Next is our master's degree students, and our strongest ones are in health care and education. Business is next.

And then the next group of students that we know by experience are going to be very strong in terms of graduation rate and default rate and academic performance is what we call bachelor's degree-completing students. They came to us with 40, 50, 60 college credits, maybe an associate's degree. They dropped out of school for whatever reason. Now they're coming back to finish.

But they're an experienced student. They've been in college before, so they've got a track record. You can look at their grades. Those are solid bets, so to speak.

So there's a person that's maybe making $25,000, $30,000 that wants to make $50,000 a year?

Or making $50,000 and wants to make $70,000 or $80,000 a year, yeah. And some of them just want to complete something that they started and didn't finish, and it feels like it's a hole in their life. Most of the people, however, are doing that because they want to increase their competitiveness in the job market. The at-risk students are those students who are for the most part first-generation college goers in their family.

A higher percentage of Americans are having to go to college. There are lots of people at 26, 28, 29 years old that are saying: "You know what? This didn't work for me like it worked for my parents." I mean, 1960, the largest employer in the country was General Motors. Today it's Wal-Mart, and therein lies a problem for these people. So they decide to go back to college, but they've never been to college before or have had very little college experience.

It's within our mission to work with those students. But we're going to control the number that we work with, because we're going to try to protect the brand of the institution. And because of our size currently, we can do that.

And a lot of them now in a struggling economy are coming to you because things look pretty shaky for them. But what can you promise them?

We can promise them lots of support. The endgame is you've got to do the work. And what we can tell them is we'll put them in courses with 15 or 16 students, one faculty member. We'll give them tremendous amounts of academic support with the library, with labs, with academic counselors. So --

And you'll help them get financing?

We'll help them with financial aid. We'll keep them under the loan limits. And we'll give them a chance to graduate. The other thing we'll tell them is it's one course at a time, so you are not making an investment in anything more than the first course that you take. And if it goes well, you try the second course. And if it goes well, you try the third course.

Yes, will you owe that money if it doesn't go well? Yeah. But you're not going to owe any more than you received service for. Are you going to get the graduation rate with those students that you get with your doctoral students? No. Are you going to get the graduation rate with those students that you get with the master's or bachelor's-completing students? No.

But if you're good and you provide lots of service to those students, you'll get a graduation rate that's much higher than the communication college because of the service that you offer. So is it a good bet for those people? I think it is.

It is a good bet in this economy? I mean, you're expanding from 37,000 online students upward in an economy that's fairly shaky. What kind of jobs can these guys get?

Well, it all depends on what area they're going into. If they're going into the areas that we focus on, which are education and health care, the job outlook in those areas is very, very good.

We have students in business where the job outlook isn't as certain. But we control the number there. I think we're doing what we should be doing as responsible participants in Title IV funding. Obama's been very clear about it, and I think he's right.

Number one, colleges should make sure that they're offering programs in areas where there's going to be job growth. We're doing that. Secondly, he wants universities to control cost. We're controlling cost tremendously well. Again, you're not going to get as high a graduation rate with those students as you're going to get over here, but there's tremendous success stories there, and those people deserve a chance.

But how many can you attract? I mean, Phoenix is now close to or above 500,000 students.

I think it's 400,000.

So Phoenix is now above 400,000. You've got DeVry and Strayer and ITT and EDMC [Education Management Corporation] and all these schools expanding rapidly online. You've got 37,000. You want to expand. I mean, where are these people coming from? What kind of quality are you recruiting?

Well, we're controlling the quality of our students very carefully. And I'll talk about that again, because it's really important.

But how many are out there? I mean, it seems that you look across the for-profit universities, they have to be going after a lower- and lower-quality student as the numbers rise so precipitously.

I think to paint a broad brush there would be unfair. You'd have to take that university by university. Within this space, there are significantly different missions.

For example, if you go to DeVry, that's a regionally accredited institution, but it's going to be really strong in IT in areas like that. The job placement rate with a company like DeVry is tremendous. If you look at a company like UTI [Universal Technical Institute, Inc.,] or a company like ITT Tech, those are very strong academic institutions who have great reputations in the accrediting area, and they have high job placement rates as vocational-technical schools.

But I think you'd have to take each institution if you want to evaluate their effectiveness as an individual institution. Grand Canyon? We are growing at a rate that we can support in a couple ways. Number one, we want to keep our incoming average G.P.A. of these students going up. And we want to keep our percentage of undergrad/grad students in a 45/55 relationship.

The students who are going into master's and doctoral programs are experienced professionals. They have academic credentials. We have admission standards. There's plenty of those students that need to go back to school and benefit from our programs, and they're really good students. Baccalaureate degree completers, again, are really good students.

The at-risk students [are] the first-generation college goers with very little academic experience that you've got to provide a lot of support for. I won't speak for the other universities. I will tell you from our standpoint, we limit that number.

As you grow beyond 37,000, it would seem it would necessarily become a larger and larger percentage of that incremental --

And the reason it won't is because our plan calls for adding doctoral programs, adding master's degree programs and adding programs at the bachelor's level that allow us to get the growth that we need without getting it here.

So, what percentage of your student body is going for an associate's degree?

Not an associate's degree. But they're starting their bachelor's program with very little credits. It would be 20 to 25 percent.

And some are going for associate's degrees?

Yes.

Right. So? Together with those getting bachelor's degrees --

The total population of people who are basically starting out at the beginning of their program is between 20 and 25 percent, whether it's a bachelor's program or an associate's program.

While you're serving them, there's a lot of people criticizing the space. Is it just an elitist educational establishment that doesn't like you guys, or is it the bad actors in your space that bring it on?

I think there's some criticism. But I think there's a lot more support than there is criticism. At least that's my experience. I have to compare the way things were 20 years ago where Phoenix -- nobody understood what they were doing, and the amount of criticism that existed at that point compared to where we are today. And the strides have been tremendous.

I wanted to ask you about this whistleblower, Ronald Irwin, who's filing a suit against Grand Canyon.

Right.

What's that about?

I don't know. Are you familiar with 10-K lawsuits? It's a 10-K lawsuit where somebody who is in this case, it's one person, was not able to get anybody else to join his suit. But he was somebody who accused Grand Canyon of misapplying the compensation rules around enrollment compensation.

In other words, he accused you of paying enrollment counselors for getting more students to enroll? Sort of piecework, if you will?

The official language in the safe harbors around compensation is that you can incent them for their effectiveness at recruiting students as long as it's not the sole criteria used for their incentive or increased compensation. That's the exact law in the safe harbor. And so Grand Canyon, like we were at University of Phoenix, is very, very conservative with regard to that law and the application of it in our compensation practices. But [it] doesn't keep somebody from justly or unjustly thinking that we misapplied it.

But there are a number of these kinds of lawsuits that other schools in the for-profit world are facing.

And some in the not-for-profit.

But they plague the for-profit world particularly?

A little bit more, yes.

Have there been abuses by for-profit universities that have led to these lawsuits?

I can only tell you my experience of where I've worked, and the answer to that is no.

Not at University of Phoenix?

In my opinion, no.

And University of Phoenix has made cash settlements. Why not go to court and get it over with and prove your innocence? Why make these cash settlements?

It's been vigorously debated, believe me. At institutions that have faced this challenge, it's been vigorously debated.

So what's the thinking? Give me the both sides of the debate.

Well, on the one side, it's going to always be an overhang. You're a publicly traded company. You have to return to your investors, and you measure the overhang of that versus the settlement and how much it's going to cost you to settle.

By overhang, you mean the cloud -- it depresses the stock price.

It's a cloud that hangs over the entire institution, yes. So you make a decision.

But it appears to be some admission of wrongdoing to make these cash settlements out of court?

It's very, very unfortunate. Exactly. We debated that for years at the Apollo Group, because the official language is that the university admits no wrong. There is a settlement. Now, unfortunately, people write about it, and they use the wrong word. They say "fine." It was never a fine. It was a settlement.

But when one looks at the world of business, these settlements are often made in every business when there is guilt, when there is culpability.

Or when the best business decision is not to pursue it all the way down the road.

You believe that these were all made in the spirit of "Let's just make it go away and give them the money, and let's move on"?

Yes, because we were very, very good at maintaining a very strong legal department that knew exactly what we believed was both the spirit and the letter of the law. Now, if you've got 15,000 employees, are you ever going to have an employee that does something wrong? Of course. With 15,000 employees you will.

So what is your response to that? But in terms of the spirit and letter of the law and our application of it both at Grand Canyon and Apollo Group, we were very good at making sure that we were law-abiding citizens.

But this wouldn't be a case of an individual counselor doing something wrong. The charge here is that there was a policy on the part of the school to incentivize its counselors to get more recruits?

Yeah.

And to lower standards?

It was really not that the policy was wrong, because everybody's policy obviously is going to read that it's in compliance. It's the disagreement about the implementation. And what's interesting about this particular person in the Grand Canyon case is, number one, it was only one person. Number two, that person, actually, if you look at his record, was not very good at his job, but his salary was not decreased.

But also Grand Canyon is under investigation by the Department of Education's Inspector General for similar kinds of alleged abuses?

Yeah, if the Department of Education receives a complaint, it's the Office of Inspector [General] that sends the team in to take a look and see is it justified or is it not.

But wasn't that another separate complaint from the Irwin complaint?

No. There's only been one K-10 lawsuit.

OK. So just generally, there's all these people out there that are just really uncomfortable with merging for-profit incentives with education, [who feel] that education should be delivered separate of concern for stock prices and IPOs [initial public offerings]. And you're not uncomfortable with that at all?

Oh, absolutely not. In fact, I think even President Obama has moved in that direction to a certain extent, right? He really favors incentive compensation for faculty members. He favors incentive based upon the achievements of students in the classroom. If you're asking me, personally, absolutely, I think to be fair, state institutions, for example, have got some obligations that some of us don't have.

Research, for example. We're a teaching institution. They're both a teaching institution and a research institution, so there's some responsibility there that we don't have. But to say that that economic model is not seriously flawed would be not to be paying attention, you know? When you take 500 or 600 or 700 students and you've got to crowd them into a classroom and deliver a graduate assistant who lectures to those students, and that's the very time when they're more at risk, well, why does that economic model exist? Because when you move students into their junior and senior year where you've got to teach them in their major fields of study in smaller class sizes -- you can't teach them in 500. The economic models says, "I've got to bring in lots of students, and I've got to ferret them out so there's not nearly as many by the time we get here."

In a state university or a community college, a student is an expense item, not a revenue item. So the financial model is a very flawed model.

We should be doing just what we're doing. Every single student that you let in is somebody extremely important that you're going to want to make every possible effort to get at that other end, which is graduation and better productivity.

So when you look at the 2 million students out of the 20 million that are now coming out of this space, you say: "How can they do that when they're not subsidized? [It's] the tuition that covers the cost. There's no tax subsidy. Why does it work?"

It works because of the tremendous amount of effort that we put into making sure we provide students with the utmost opportunity to be successful. That's the only way our model works. So think about it. The only way our model works is if you push high levels of graduation. The only way the other model works is if you get lower levels of graduation, because you can't teach these students out here with 500 students in a classroom.

And again, I'm not of the state university or community college system. They have obligations, responsibilities that we don't necessarily have. But to turn it around and say that this thing is not working would be a very flawed way of looking at it.

When people ask me about University of Phoenix, I say: "Come on. With 400,000 students, 30 years of experience, probably approaching a million graduates, you don't get that far without being an organization that has a lot of quality to it and that provides a lot of benefit to students."

What's your default rate for your students in your associate's degree programs?

Our overall default rate is a little bit over 3 percent.

And for those at-risk students?

-- break it out, it's going to be higher than that. I don't know exactly what it is, but it's going to be well under, for example, where a community college is.

Is that a number you have, though, that --

I can't give it to you -- yes, I don't know that.

... I can give you other anecdotes. I mean, there are students that have taken computer courses at Phoenix who have never touched a computer in their whole time there. How does that happen?

I would have no idea, and I would highly doubt that. I'd have to have a lot more information than that.

People say, "An online degree can't match an on-campus degree in quality."

Well, I'll go back to University of Phoenix, which has the largest amount of assessed learning outcomes of any university probably in the country. For four, five, six years, I don't remember how many, we had a giant project under way. We called it a comprehensive assessment test.

We give every incoming student in every single program a three-hour examination -- test them in all the major areas they're going to study; put them through the program; test them at the end. We learned a lot through that. It's a way to assess what you're doing in terms of curriculum instruction and continually improve it.

But right in the middle of that project was when online was growing, and people had questions. Well, here's the reality. The reality was that our online students came in scoring a little bit higher, which in the early years that would have been expected, because not everybody had computers. More successful people had computers. So their incoming scores were slightly higher. Their outgoing scores were higher, and the gains they made were greater. So lots of universities are making a big effort. Most online students would tell you the work is probably more work.

It's really interesting, and I don't know why so many people in this space don't want to talk about it, why there seems to be this fear of publicity.

Well, of course I thought about it. But I've been in higher education for 30 years. I've been in this area for 22 years. Even people on Wall Street are -- I tend to be a person people are coming to. Maybe it's not smart for me to do it. I think I have confidence in it because I have an academic background.

And I come at it from an academic perspective more than a business perspective. I think if you tried to face these questions and you had to face them only with the knowledge of how the business works, I think you'd be a huge deficit, and you probably would not come across looking very good.

I try to address the academic part of it, and I think I have a large amount of confidence that what we're doing academically is absolutely the right thing. We're not perfect by any stretch of the imagination. None of us are.

But here's another reason. For years, at Phoenix, we had a six-hour presentation that we'd give anybody who wanted to come and take a look, because we'd have traditional universities come in and say, "We're very interested in what you're doing, but we're hugely skeptical." I'd say, "Come in, we'll give you our time." We would go through everything that we did: how we built curriculum, how we hired instructors, how we trained instructors.

We'd put them through faculty training if they wanted to go through faculty training. We'd put them in the class if they wanted to go through a class. We'd let them audit a class. But we showed them everything: how we did it, how we built curriculum, hired instructors, trained instructors, evaluated instructors, how we assessed learning outcomes, the whole thing.

And in fact, it's 100 percent of the time, they walk away saying: "Wow, there's a huge amount of thinking that goes into this thing. We had no idea." I would challenge you to that, if we would put an online class out there and say, "Let's walk you through how it works, just show you how it works, and how much thinking goes into this."

Then how do you account for the bad rap that online, for-profit universities get?

People haven't taken the time to understand. They just haven't taken the time to look at it. I'll give you an interesting example. I will never forget this. I've been through accreditation visits at high school level, private four-year level, University of Phoenix. I particularly remember when I was running the campus at San Diego. We were one of the campuses chosen as part of the university accreditation, so they came to visit campus -- and these are all educators.

So they want to see files. They want to see admissions files. They want to see financial aid files. They want to see files. So you open up the room; you give them everything, and they look through.

Our students come at 6:00, and it got to be 5:30, and they're packing their stuff. I said: "Where are you going? Stay. Our students and faculty are coming. You can sit in any classroom that you'd like." They left.

But has the sector now given up on explaining itself to the general public other than through its marketing? Has it given up on the media?

Oh, no. I wouldn't say that at all.

But there's a reluctance to talk?

I don't know about this, you know? I don't know about this project or this discussion. But go look at educational conferences out there. You're going to have representatives from Phoenix and Grand Canyon and DeVry and all those schools. They'll be heavily represented in many of those conferences because people are interested in what we do.

I do the same thing here. If people want to come and take a look at how we do it, we'd love them to come in.

Well, you've been very open and generous. I appreciate it. Maybe we can look around the campus now.

Absolutely. And we want you to come back in two years, because in two years, there will be $70 million worth of additional buildings here, and there will be 5,000 students instead of 1,800 on the campus. We'd love to have you come take a look.

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posted may 4, 2010

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