Regulatory Hurdle for Purdue-Kaplan Deal

October 9, 2017

The U.S. Department of Education is scrutinizing an aspect of the proposed acquisition of Kaplan University by Purdue University, The Washington Post reported Friday. Purdue, however, said the reported potential regulatory problem is not an issue.

Purdue is seeking to create a new online university through its complex deal with Kaplan, a for-profit that enrolls roughly 30,000 students. As Inside Higher Ed has reported, one of the biggest controversies and likely the highest regulatory hurdle for the arrangement is the extent to which the boundary-pushing new university will behave like a public institution.

Mitch Daniels, Purdue's president and a former Republican governor of Indiana, has said the state will not pay for the new university, which will be supported solely through tuition and fund-raising. Although the new university technically will be a state institution, Indiana's Legislature exempted it from some public records requirements. And while state universities are subject to less scrutiny from the federal government because states are on the hook in the event of a financial collapse or other problems that would require the forgiveness of student loans, it's unclear if that would be the case for Purdue-Kaplan, which Daniels has promised poses "virtually no financial risk to Purdue or the state."

However, as observers had predicted, it appears that the Education Department will require Purdue to absorb liabilities that Kaplan accrued prior to the proposed acquisition.

The feds last month granted initial approval to the deal. But a department official, in a letter the Post obtained, said Purdue and Indiana will be responsible for Kaplan's liabilities. Those could include tuition refunds or covering loan balances, the newspaper reported.

The department will not finalize its approval of the deal unless Purdue agrees to "assume responsibility for liabilities resulting from the operation of Kaplan University as an educational institution, whether they are known or unknown, and whether they accrue prior to or after the closing of the transaction," the official wrote, adding that those liabilities "constitute an instrumentality of the state of Indiana for the purpose of the department’s regulations."

Purdue said its contract with Kaplan states that the for-profit will cover its liabilities from prior to the deal's closing. The public institution also said the department acknowledged the liability arrangement and did not challenge it in the letter.

"The Department of Education recognizes that the parties can agree -- and in fact already have -- that Kaplan is responsible for pre-closing liabilities," a Purdue spokesman said via email. "This agreement shields both Purdue and Indiana taxpayers from financial risk."

The university said the contract was structured to conform with a federal requirement for a single institution to be responsible for liabilities as part of the standard change in control process.

"Contrary to the article's assertion, there was nothing for the department to 'take issue' with, since Purdue doesn't, and never did, have any problem with the department's position," Purdue said. "Indeed, Indiana's own enabling legislation is consistent with the department's position. There's simply nothing new here."

Indiana's state government has formally backed the deal. The Higher Learning Commission, which is the regional accreditor for both Purdue and Kaplan, also must sign off on the arrangement for it to move forward. Experts have said that decision poses the biggest challenge for the new university.

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