Eleven years ago, one of Washington’s most tradition-bound companies placed a bet that would transform its fortunes.
The wager, by The Washington Post Co. and its Kaplan division, took the form of a $165 million purchase of an Atlanta-based chain of for-profit vocational schools that catered to low-income students.
The bet was big — the price equal to the profits earned that year by The Post Co.’s print-media pillars: this newspaper and Newsweek magazine. So was the payoff.
The acquisition of the firm, called Quest Education, turbocharged the rise of Kaplan, a modest business that had until then mainly prepared students for standardized tests.
Today, Kaplan is a multinational, multibillion-dollar enterprise with 70 campuses and nearly 100,000 students, many of them online, many of them reliant on government aid. This newspaper, meanwhile, has struggled to remain profitable amid dramatic changes in the news industry. Newsweek was sold. The Post Co. now calls itself an education and media company — no longer the other way around.
But what proved a deftly timed business move brought other, less welcome scrutiny to a family-run company that had long prided itself in serving the public interest.
The Education Department is now imposing stringent new conditions on the federal student loans that have become the lifeblood of for-profit schools, including Kaplan. Heavy lobbying keeps pushing back the release date of one especially controversial proposal, but other regulations are already biting: Last week, many traditional colleges mailed acceptances to their picks from among record numbers of applicants; Kaplan’s new enrollments, by contrast, have plunged by nearly half.
“We’re trying to walk a fine line to make sure the good actors are supported and bad actors can’t take advantage of people trying to better their lives,” Education Secretary Arne Duncan told department employees last week, according to a report in the Chronicle of Higher Education. “We are very, very close.”
As damaging as the new rules could be, Kaplan is also reeling from a storm of criticism of the industry’s practices and of The Post Co., an institution more accustomed to publishing news of others’ foibles.
The company was snared in a government sting that found Kaplan employees pushing students to take on loans without regard to whether they could afford them. It has been hammered by congressional critics, sideswiped by hedge fund investors and investigated by journalists. In the end, The Post Co. reluctantly conceded it would have to revamp Kaplan’s business model and turn away many prospective low-income students it once wooed.
The challenges have never jeopardized The Post Co.’s survival, but they cast a spotlight on management decisions and raise a question: How did The Post Co. end up here?
Post Co. executives blame outside forces, including a drop in political support for private-sector education companies and “financial and corporate agendas.” They also acknowledge missteps. Current and past officers say The Post Co. did not keep close-enough tabs on its fast-sprawling education unit, even as it focused heavily on customers who were poorer and thus at the riskier end of the business. But they say serving that disadvantaged population is important.
“I believe in what Kaplan Higher Education does. I think its work benefits its students and in a sense benefits the country by educating people who need the education,” Donald E. Graham, chief executive of The Post Co. and patriarch of the family that controls it, said at a UBS global media conference in December. “I will go anywhere and meet with anyone to make the case for our work.”
Graham has also noted some of the hazards of the Kaplan higher-education group’s fast growth. In the company’s 2006 annual report, he wrote that challenges Kaplan was facing even then “were the complex result of too-rapid acquisitions outgrowing our management structure.”
One past director of The Post Co.’s board said that members were better versed in media than education but that the lure of big profits was hard to resist.
Another, Dick Simmons, president of the company when it acquired Kaplan, said, “At a time when the largest part of The Washington Post Company, the . . . newspaper, was sinking, sinking, sinking, and here this relatively new player . . . was growing, growing, growing — how do you think anybody would react to that?”
The Post Co. reacted the way many companies do when things are going well: by doubling down, and then doubling down again, ramping up the number of students enrolled in Kaplan.
Along the way, The Post Co.’s reliance on federal student loan money grew. By the end of 2010, more than 90 percent of revenue at Kaplan’s biggest division and nearly a third of The Post Co.’s revenue overall came from the U.S. government.