The currently delayed rules permit loan discharges based on substantial misrepresentations, breaches of contract, or judgments against the school; in some cases, by classes of students as well as individual students. In addition, the final rules amend the ED’s financial responsibility regulations by, among other things, imposing two sets of triggers for determining whether the ED may require the institution to furnish the ED with a letter of credit or other form of acceptable financial protection and to accept other requirements the ED might impose. The rules also require schools not meeting a loan “repayment rate” threshold calculation to provide an ED-prepared warning to current and prospective students and to include the warning on its website and in promotional materials and advertisements. The rules also include new provisions related to arbitration and class-action lawsuits, including prohibitions regarding an institution’s use of pre-dispute arbitration agreements and class-action waivers. The Company cannot predict how the ED would interpret and enforce the new borrower defense to repayment rules if they are no longer delayed; however, the new rules could have a material adverse effect on Kaplan’s business and results of operations.
If the proposed transfer of KU is consummated, Kaplan would no longer own or operate KU and would no longer be subject to loan discharge actions as an institution. However, Kaplan would face the risks discussed above in connection with providing services to the new university.
Regulatory Changes Could Have a Material Adverse Effect on Kaplan’s Business and Operations
The implementation of new Title IV and other regulations have required and will require Kaplan to change its practices to comply with new requirements. These changes have increased and will continue to increase its administrative costs and overall risk. Changes to its practices or Kaplan’s inability to comply with the final regulations could have a material adverse effect on Kaplan’s business and results of operations. Moreover, the ED or other U.S. or international regulatory bodies could implement new regulations or amend existing regulations in a manner that could have a material adverse effect on Kaplan’s business and results of operations.
Changes to the Regulations Regarding Incentive Compensation Make It Difficult for Kaplan to Attract Students and Retain Qualified Personnel and Add Compliance Risk
Under the incentive compensation rule, an institution participating in the Title IV programs may not provide any commission, bonus or other incentive payment to any person or entity engaged in any student recruiting or admission activities or in making decisions regarding the awarding of Title IV funds if such payment is based directly or indirectly on success in securing enrollments or financial aid. On July 1, 2011, regulations went into effect that amended the incentive compensation rule by reducing the scope of permissible payments under the rule and expanding the scope of payments and employees subject to the rule. KHE modified some of its compensation practices as a result of the revisions to the incentive compensation rule. Due to a lack of clear guidance from the ED, there is no assurance that these modifications will in all cases be found to be in compliance with the ED’s interpretation of the regulations. Additionally, these changes to compensation arrangements make it difficult to attract students and to provide adequate incentives to promote superior job performance and retain qualified personnel. The Company believes that this change in Kaplan’s approach to recruiting has adversely impacted, and will continue to adversely impact, Kaplan’s enrollment rates, operating costs, business and results of operations. The Company cannot predict how the ED will interpret and enforce all aspects of the revised incentive compensation rule in the future, and any changes in this regard could have a material adverse effect on Kaplan’s business and results of operations.
ED Rules Regarding Gainful Employment Have Had and Could Continue to Have a Material Adverse Effect on Kaplan’s Business and Operations
Under the Higher Education Act, certain education programs, including all programs offered by KU, are required to lead to gainful employment in a recognized occupation in order to be eligible to participate in the Title IV programs. The ED has defined the phrase “gainful employment” to mean employment with earnings high enough to meet specific student debt-to-income ratios. The ED tied an education program’s Title IV eligibility to whether the program meets that definition. These regulations are known as the “gainful employment” rules or “GE” rules. Under these regulations, the ED calculates two debt-to-earnings rates for each program subject to the GE regulations: an annual debt-to-earnings rate and a discretionary debt-to-earnings rate. Under the debt-to-earnings rates for Kaplan’s programs that were released in January 2017 for the 2014–2015 award year, which are the first rates to be issued under the GE rules, none of KU’s active programs currently accepting students failed the GE test. KU has five other programs that failed the GE test. Of these five programs, two have been discontinued, have no students and are no longer being offered, and the remaining three are not currently accepting enrollments. KU also has 16 programs in the warning zone status. Four of these programs are active and currently accepting students. These four programs accounted for approximately $51.1 million and $44.5 million in revenue for 2016 and for 2017, respectively. Of the remaining 12 programs in the warning zone, five have been discontinued, have no students and are no longer being offered, and seven of these programs are active but not currently accepting enrollments. The ED has stated that it has the ability to combine, for future GE debt-to-earnings calculations, any new programs that it determines to be “substantially similar” to other current or past programs. KU started a number of new programs after the effective date of the GE rules. If the ED determines that these new programs are substantially similar and combines the new