The Story of the University of Phoenix

   by Emily Hanford

There are a lot of unlikely things about John Sperling's story -- like the fact that he even made it to college at all.

John Sperling in 2005 at his home in Phoenix. He has a Ph.D. from Cambridge University. (Photo: Jeff Noble)

He did not expect to go. Sperling was born in 1921 in the Missouri Ozarks. His family was poor.

"We always lived in tiny houses," Sperling writes in a memoir, Rebel with a Cause, published in 2000. "We ate mostly what came out of the garden, the henhouse, and two milk cows." His mother was constantly worried that her children -- three boys and two girls -- would starve.

Sperling's father was an unsuccessful farmer who spent a lot of time looking for other ways to make money. At one point he "sold drinks and snacks on a train that ran between Kansas City and somewhere," writes Sperling.

No one in Sperling's family had gone to college. "I had no idea that college was even a possibility," he said in an interview with American RadioWorks.

After high school Sperling joined the Merchant Marine. It was 1939, the tenth year of the Great Depression, and he writes that his fellow seamen were "socialists plus a sprinkling of communists." Sperling came from a family of Republicans, but the culture of the left appealed to him and he became a socialist.

Socialism ignited an intellectual curiosity in Sperling that led him to enroll at a community college in San Francisco when he got out of the Merchant Marine. He went to class during the day and worked at a gas station at night. He had always hated school, but "this time school was different," he writes in his memoir. "All the classes were easy for me and I got straight A's."

Community college didn't last long. He had started in the fall of 1941. When the Japanese attacked Pearl Harbor in December, Sperling enlisted in the Navy Air Corps. While he waited to be called, he enrolled at Reed, a prestigious liberal arts college in Portland, Oregon; his family was now living in Portland. "Had it not been for my one semester of junior college A's plus the fact that Reed desperately wanted males to replace the ones leaving daily, I would not have made it in," he writes.

Class Conflict

Reed College was John Sperling's first interaction with people from the middle and upper classes, and he hated them.

"I loathed them," he said, "because of their privilege. They were always saying, 'I got where I did because of hard work,' and I thought, 'You stupid son of a bitch, you don't know how privileged you are.'"

Sperling found the coursework at Reed more challenging than at San Francisco City College. His classmates were from private high schools or very good public schools, and they were much better prepared than he was. In his memoir Sperling writes that he spent a lot of time "brooding over the fact that, as someone born poor with a lousy education, I was in an unfair competition... these students had been acculturated to value education and they looked forward confidently to future careers in academe, government, business, and the professions."

Sperling was eventually called up for flight training but never saw action in the war. He returned to Reed after his military service and graduated with a bachelor's degree in 1948. He didn't know what to do after that. He says if he'd had the right connections, he might have gone to work on Wall Street. But he didn't, so he decided to go to graduate school.

Sperling went to the University of California, Berkeley for a Ph.D. in history. While at Berkeley he won a fellowship to study for three years at King's College Cambridge in England, completing his Ph.D. at Cambridge. He says the only thing all that education prepared him for was life as a professor. He got a faculty job in the humanities program at San Jose State in California. But he was perpetually unhappy in what he saw as the bourgeois world of academia.

Sperling's passion was union organizing. He became president of the faculty union, and in 1968 he organized a professors' strike. It was a huge failure. Very few professors were willing to walk. Sperling says he become the most hated man on campus because of all the trouble he had caused with the administration. But he learned a valuable lesson that he says later allowed him to become a successful entrepreneur. "The lesson was simple," he writes in his memoir. "Ignore your detractors and those who say that what you are doing is wrong, against regulations, or illegal."

Sperling's experience with the strike cemented his hatred for the higher-education establishment. He was convinced the establishment would always be against the things he believed in. The only way forward was to fight.

The Beginning of a New Career

Reflecting on the 1968 professors' strike in his memoir, John Sperling called it "one of the most liberating experiences of my life" because he no longer cared what anyone in academia thought about him. And he decided he was going to find a way out.

The opportunity to leave traditional academia arrived in the form of a federal grant designed to lower the juvenile delinquency rate among working-class kids in the city of Sunnyvale, Calif. Sperling thought the best way to do that would be to work with local teachers and police officers.

He enrolled 30 teachers and police officers in a class and divided them into groups. Each group had to design, conduct and evaluate a project that addressed the problem of juvenile delinquency. Sperling encouraged them to use their experiences at work to inform their research. At the end of the class, all but two of the students signed up for another class. When that class was done, they told Sperling they wanted to take more classes.

"They got fascinated with the process of education," he says. "It grabbed their minds and they said, 'Oh my God, this is fascinating. And we want to stay. Not only do we want to stay, we want degrees.'"

The police officers wanted bachelor's degrees -- they all had associate's degrees already. The teachers wanted master's degrees.

A photograph of University of Phoenix students in 1979, posted on a bulletin board at Apollo Group headquarters in San Francisco. (Photo: Emily Hanford)

"In 1970, adults lacked effective access even to ineffective higher education," writes Sperling. "Supposedly, the mission of my own university was to serve the entire community, but a working adult wanting to pursue a degree was offered courses designed for kids just out of high school, taught by professors who considered it their job to deliver the subject matter in lectures scheduled for two or three nights per week. With great persistence, an adult learner could expect to earn a degree in 6 to 10 years -- for some, it took 20."

Sperling decided what higher education needed was a new way for working adults to go to school. So he sketched out a degree program that looked a lot like what he'd been doing with the teachers and police officers. "The students loved it and insisted it would draw hundreds of working adults," he writes.

But when he went to San Jose State administrators with his idea, they said no. "The people who would have to approve the program didn't like me, and didn't give a damn about having more students, especially adults," writes Sperling.

A colleague told Sperling that if he wanted to invent something new in higher education, he was going to have to find a school that was struggling and needed new students. At the time, an established university like San Jose State had plenty of taxpayer funding and plenty of students who wanted the degrees they already offered.

Sperling saw the university's rejection of his idea for a degree program as a form of class bias, and he was not going to be deterred. So he took his idea to a Jesuit university in California that was in financial trouble and needed new students. Soon Sperling got a contract with another struggling college, and then another. His business was called The Institute for Professional Development, or IPD. At the age of 53, Sperling had begun his career as an entrepreneur. He took a year's leave from San Jose State, and, "because fortune smiled," he never returned.

Founding the University of Phoenix

Sperling's new career as an entrepreneur was anything but secure. The organization that accredits colleges and universities in California, the Western Association of Schools and Colleges (WASC), opposed what Sperling was doing. Documents quoted in Sperling's memoir indicate that WASC officials were uncomfortable with the number of group projects IPD allowed; WASC thought only individual projects should be permitted. IPD was giving students college credits for their work experience and WASC believed IPD was giving too much credit. WASC was also concerned that IPD was "making excess profits." WASC officials threatened to strip accreditation from the schools Sperling was working with.

By the time Sperling started IPD, he was no longer a socialist. He believed the free market was the best way to bring innovation to higher education. He writes that being for-profit imposed a kind of "discipline" that was missing at traditional universities. "It left us no alternative but to produce a service for which customers were willing to pay a price high enough to sustain a growing concern."

The pushback that Sperling got from WASC and from people at traditional schools, some of whom called IPD a "diploma mill," was par for the course, in Sperling's opinion. He writes in his memoir:

The battles fought by IPD... against the educational establishment were... largely proxies for cultural battles between defenders of 800 years of educational tradition, and an innovation that was based on values of the marketplace -- transparency, efficiency, productivity, and accountability. To me, the defenders of academic traditions were protecting undeserved middle-class entitlements.

Sperling eventually decided that the only way he would be successful was to start his own university. That is no small task. The layers of regulatory and political approval are immense. Sperling determined there was no way he would be able to do it in California, where the higher education accrediting association was already against him. So he moved to Arizona, where a different accrediting body had control and where laws made it easier to start a new university.

Muriel Duncan holding her bachelor's degree from University of Phoenix. (Photo: Emily Hanford)

In 1976, Sperling rented space in a Boilermakers' union hall in Phoenix, hired lawyers and a lobbyist, and opened for business. He had eight students to start. They were all working adults who had some college already and were looking for a way to finish their degrees.

Muriel Duncan was one of the first students. She had started college when she was 18 but quit because it was too expensive. When someone -- she can't remember who -- told her about this new school, Duncan was 50 years old. She was working for the Arizona Department of Juvenile Corrections. Her husband was on disability and they relied mostly on her income. She traveled a lot for her job and says she couldn't take time off to finish her degree.

"At that point I didn't see myself going back to a four-year college," she says.

But the University of Phoenix made her think again. Classes were just one night a week. She could manage that with her travel schedule and family demands. And Phoenix was offering her college credit for her work experience. It was an opportunity too good to pass up. She paid cash for the classes because when Sperling opened for business the University of Phoenix was not yet accredited. That meant students weren't eligible for federal grants or student loans. The classes were about $200 each. It was worth it for Muriel Duncan. She was a member of the first graduating class, in 1979. She says her University of Phoenix degree allowed her to move up at work.

Becoming One of the World's Biggest Universities

There was a big demand for what the University of Phoenix offered.

A decade after opening, Phoenix had 6,000 students -- more than many colleges in America. But John Sperling wanted his university to get much bigger.

Phoenix started online classes in 1989, long before most other universities were doing it.

"Online learning was the craziest idea I thought John Sperling ever had," says Terri Bishop, who has been working with Sperling since the early days in Arizona and is now a senior advisor to the company CEO.

Sperling tapped Bishop to start the online program. At that point, most people didn't even have email, but there was an electronic communication service called Prodigy that techies and business people were starting to use. Bishop developed an online MBA program and targeted the growing community of Prodigy users. She took out what she calls a "teeny, tiny ad" on Prodigy. "I think we received like 200,000 requests for information in a week," she says, laughing. "And we were, of course, sending out [information] in the mail."

Sperling also created a parent company called the Apollo Group that would allow him to expand his business. In 1994, he decided to take the Apollo Group public.

The security operations center at the University of Phoenix headquarters in Phoenix, Ariz., where employees monitor the university's worldwide computer systems. (Photo: Emily Hanford)

"Apollo was a rocket ship of a stock," says Trace Urdan, an equity analyst at Wells Fargo Securities who covers the for-profit education sector.

The capital from Wall Street allowed the University of Phoenix to grow quickly. Within five years of going public, the school had more than 100,000 students. Enrollment was growing by more than 25 percent a year.

Seeing the success of the University of Phoenix, several other for-profit colleges went public during the 1990s, too. Many of them were small trade schools that had been around for decades -- even longer. The University of Phoenix proved higher education could be big business. Phoenix and other for-profits rode a huge wave propelled by the rising demand for higher education and one of the greatest bull markets in U.S. stock market history.

Once it went public, the University of Phoenix was under intense pressure from investors to keep growing. "The management team now faced the iron law of the quarter," writes Sperling in his memoir. "Every quarter, the company must meet or beat analysts' expectations, or the stock tanks." Wall Street wanted bottom line growth of 30 to 35 percent per year, he writes, "no excuses accepted."

To grow, Sperling expanded the school's online degree programs and built campuses in more states and also overseas. By the year 2000, Apollo stock had increased in value by 1,700 percent since its IPO. It was the nation's largest and fastest-growing private university, with operations in 35 states and a growing population of students from all over the world taking classes online. John Sperling was a billionaire.

The University of Phoenix Changes Direction

In 2004, Apollo stock hit an all-time high of nearly $100 a share. And then the company's business started slowing.

"Part of it was that they had really been serving a baby boomer audience, and the baby boomer was starting to age out of the market where going back to school was even relevant," explains Wells Fargo equity analyst Trace Urdan. "So they decided that they needed a product for Generation Y, the children of the baby boomers."

The University of Phoenix believed what that generation needed was associate's degrees. These degrees -- which typically cost less and take less time to earn -- had been gaining in popularity as more people began to pursue postsecondary education. Phoenix created a new college called Axia that offered associate's degrees online. The degrees were priced so that students could cover the full cost using just government grants and loans. "And they enrolled a lot of students," says Urdan.

But Axia ended up causing a big problem -- one the University of Phoenix is still trying to recover from.

The Online Central Campus in Phoenix, Ariz., where advisers talk with prospective students. (Photo: Emily Hanford)

Most of the students who started in the online associate's degree program ended up dropping out. An investigation by the U.S. Senate's Health, Education, Labor and Pensions Committee, chaired by Democrat Tom Harkin, found that in 2008 and 2009 more than 177,000 people enrolled in the online associate's degree program. A year later, 66 percent of them had left.

Senator Harkin says the business model of the University of Phoenix -- and the business model at other for-profits -- is to sign up as many students as possible. "What drives the profits is how many students they enroll," says Harkin. "The school gets the money. They pay their shareholders, they pay their school administrators. And the student drops out and has this debt hanging over his or her head for the rest of their life," says Harkin. "It's unfair."

Harkin is particularly concerned about how much money the University of Phoenix gets from the government. In 2011, 86 percent of revenue at the University of Phoenix came from the federal government in the form of student loans and Pell Grants. That's not unusual in the industry. Senator Harkin's Senate committee estimates that in 2009, the nation's 15 publicly traded for-profit education companies received 86 percent of their revenue from taxpayers. That total includes federal loans and Pell Grants, as well as government money that helps military members and veterans pay for school.

This is a big change from the early days of the University of Phoenix, when students like Muriel Duncan had to pay with cash or a credit card because there was no way of getting federal aid. Once the university was accredited, in 1978, students could begin getting federal student loans and grants. Still, as recently as 2001, the University of Phoenix got less than half its revenue from federal financial aid programs. Most of the money came from students paying out of pocket and employers helping through tuition assistance programs.

The University of Phoenix gets a higher proportion of its money from student aid programs because it serves more low-income students than it used to, and low-income students are eligible for both Pell Grants and the maximum student loan amount. In recent years the federal government has increased the amount of aid low-income students can get. More than half of undergraduate students at the University of Phoenix used Pell Grants in 2010. Nationally, 27 percent of undergraduates received Pell Grants.

This shift towards more low-income students has been happening at other for-profits too. Research by the Institute for Higher Education Policy finds that in the last decade, low-income students have been increasingly drawn to for-profit colleges. They now attend for-profits at four times the rate of other students.

John Sperling's Legacy

Critics of for-profits are concerned that so many low-income and military students choose for-profit schools. Compared to community colleges and state universities, for-profits are expensive. The investigation by Senator Tom Harkin's Senate Committee found that bachelor's degree programs average about 19 percent more at for-profits than at flagship public universities; associate's degree programs cost four times as much at for-profits as they do at community colleges.

Senator Tom Harkin would like to see more students, especially low-income students, choose public colleges and universities.

But that is becoming increasingly difficult for some students. California is a prime example. Drastic state budget cuts in recent years have forced colleges and universities to turn away hundreds of thousands of students because there is not enough money to educate them. Thousands more can't get the classes they need because of overcrowding.

What's happening in California is a more dramatic version of what's happening all over the country: State support for higher education is going down, tuition is going up, and students are being turned away, or can't get the classes or the counseling they need to be successful.

John Sperling looks at what is happening, especially in California, and sees the same problem he was trying to solve back in the 1970s.

"Traditional education has slammed the door," he says. "Where in the hell are you going to educate these people?"

His answer, of course, is the University of Phoenix.

John Sperling at his home in Phoenix. (Photo: Jeff Noble)

But critics are uncomfortable with the fact that John Sperling can make so much money when the traditional system fails. Sperling has no patience for that kind of criticism.

"Why should [people] be critical?" he says. "What are you supposed to do in life? Am I supposed to work hard to be a failure?"

Sperling is in many ways the epitome of the American Dream. He was born with nothing and through education and hard work became wildly successful. That path to success is more expensive today. College tuition has been rising faster than inflation for decades, and students at all schools are being asked to pay more of the cost. The only way most of them can do it is to borrow lots of money.

Critics of for-profit colleges say that, with tuition so high already, there's no room for big profits in higher education. But advocates for the University of Phoenix and other for-profit schools say they're good for the country because their business model allows them to expand and innovate rapidly.

Even many experts who have mixed feelings about for-profits say America needs them in order to meet the growing demand for higher education.

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