What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-02-29 compared with 2023-02-27 · 452 added, 600 removed, 910 unchanged (54% of the section changed)

41 unchanged sentences

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Strayer University Graduation Fund Liability – Undergraduate Degree Programs

As described in Note 4 to the consolidated financial statements, the Company’s Strayer University Graduation Fund liability was $46.8 million as of December 31, 2022, of which $41.7 million related to students enrolled in undergraduate degree programs.

Strayer University offers the Graduation Fund, a program which allows undergraduate and graduate students to earn tuition credits that are redeemable in the final year of a student’s course of study if he or she successfully remains in the program.

The Company defers the value of the related performance obligation associated with the credits estimated to be redeemed in the future.

Management’s estimate of the benefits that will be redeemed in the future is based on the Company’s historical experience of student persistence toward completion of a course of study within this program and similar programs.

As disclosed by management, estimated redemption rates of eligible students vary based on their term of enrollment.

The principal considerations for our determination that performing procedures relating to the Strayer University Graduation Fund liability for undergraduate degree programs is a critical audit matter are (i) the significant judgment by management in estimating the liability and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s estimate of the liability and the estimated redemption rate assumption.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the estimation of the Graduation Fund liability for undergraduate degree programs, including controls over the estimated redemption rate assumption.

These procedures also included, among others, testing management’s process for estimating the Graduation Fund liability for undergraduate degree programs, including (i) evaluating the appropriateness of the methodology;

(ii) testing the completeness and accuracy of the underlying data used in management’s estimate;

and (iii) evaluating the reasonableness of the estimated redemption rate assumption for the undergraduate degree programs.

Evaluating management’s estimated redemption rate assumption involved evaluating whether the assumption was reasonable considering (i) historical estimated redemption rates and (ii) whether the assumption was consistent with evidence obtained in other areas of the audit.

Goodwill Impairment Assessment – Australia and New Zealand (“ANZ”) Reporting Unit

As described in Notes 2 and 10 to the consolidated financial statements, the Company’s consolidated goodwill balance was $1,251 million as of December 31, 2022, of which $519 million relates to the ANZ reporting unit.

Management assesses goodwill at least annually for impairment during the fourth quarter, or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of the respective reporting unit below its carrying amount.

In 2022, management elected to bypass a qualitative impairment assessment for goodwill assigned to the ANZ reporting unit and proceeded directly to a quantitative impairment assessment using the first day of the fourth quarter of 2022 as the assessment date.

Management used an income-based approach to determine the fair value of the ANZ reporting unit.

The income approach consisted of a discounted cash flow model, which involved the use of critical assumptions and estimates related to the amounts and timing of expected future cash flows such as new international student enrollment growth, the discount rate, and the terminal growth rate.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment for the ANZ reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the ANZ reporting unit;

(ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to new international student enrollment growth, the discount rate, and the terminal growth rate;

Goodwill Impairment Assessment – Strayer University Reporting Unit

As described in Notes 1 and 9 to the consolidated financial statements, the Company’s consolidated goodwill balance was $1,252 million as of December 31, 2023, and the goodwill associated with the U.S.

Higher Education segment, which includes the Strayer University reporting unit, is $632.1 million.

The Company assesses goodwill at least annually for impairment during the fourth quarter, or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of the respective reporting unit below its carrying amount.

Given the length of time since the last valuation, in 2023 the Company elected to bypass a qualitative annual impairment assessment for goodwill assigned to the Strayer University reporting unit and proceeded directly to a quantitative impairment assessment using the first day of the fourth quarter of 2023 as the assessment date.

Management used an income-based approach which consisted of a discounted cash flow model to determine the fair value of the Strayer University reporting unit.

The assumptions and estimates used in determining the estimated fair value of the Strayer University reporting unit include, but are not limited to, the amounts and timing of expected future cash flows, student enrollment growth, operating margins, the discount rate, and the terminal growth rate.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the Strayer University reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the Strayer University reporting unit;

(ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to student enrollment growth, operating margins, and the discount rate;

and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the valuation of the Company’s ANZ reporting unit.

These procedures also included, among others, (i) testing management’s process for developing the fair value estimate of the ANZ reporting unit;

(ii) evaluating the appropriateness of the income approach;

(iii) testing the completeness and accuracy of

underlying data used in the income approach;

and (iv) evaluating the reasonableness of the significant assumptions used by management related to new international student enrollment growth, the discount rate and the terminal growth rate.

Evaluating management’s assumptions related to the student enrollment growth involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit;

These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Strayer University reporting unit.

These procedures also included, among others (i) testing management’s process for developing the fair value estimate of the Strayer University reporting unit;

(ii) evaluating the appropriateness of the discounted cash flow model used by management;

(iii) testing the completeness and accuracy of the underlying data used in the discounted cash flow model;

and (iv) evaluating the reasonableness of the significant assumptions used by management related to student enrollment growth, operating margins, and the discount rate.

Evaluating management’s assumptions related to the student enrollment growth and operating margins involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the Strayer University reporting unit;

(ii) the consistency with external market and industry data;

and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.

Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the Company’s income approach;

and (ii) the reasonableness of the discount rate and the terminal growth rate assumptions.

Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the discounted cash flow model and (ii) the reasonableness of the discount rate assumption.

Strayer University Graduation Fund Liability – Undergraduate Degree Programs

As described in Note 3 to the consolidated financial statements, the Company’s consolidated Strayer University Graduation Fund liability was $44.5 million as of December 31, 2023, of which $40.6 million related to students enrolled in undergraduate degree programs.

Strayer University offers the Graduation Fund, a program which allows undergraduate students to earn tuition credits that are redeemable in the final year of a student’s course of study if he or she successfully remains in the program.

The Company defers the value of the related performance obligation associated with the credits estimated to be redeemed in the future.

The principal considerations for our determination that performing procedures relating to the Strayer University Graduation Fund liability for undergraduate degree programs is a critical audit matter are a high degree of auditor effort in performing procedures and evaluating audit evidence related to the liability.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the

determination of the Strayer University Graduation Fund liability for undergraduate degree programs.

These procedures also included, among others (i) evaluating the appropriateness of the methodology used by management to determine the Strayer University Graduation Fund liability for undergraduate degree programs;

(ii) recalculating the Strayer University Graduation Fund liability for undergraduate degree programs;

and (iii) testing the completeness and accuracy of the underlying data used in determining the Strayer University Graduation Fund liability for undergraduate degree programs by testing, on a sample basis, certain underlying data related to current and historical students.

/s/ PricewaterhouseCoopers LLP

Washington, DC

Washington, District of Columbia

February 29, 2024

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Tuition receivable, net 62,953 76,102

Income taxes receivable 313 —

Other current assets 43,285 44,758

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Additional paid-in capital 1,510,924 1,517,650

Accumulated other comprehensive income (loss) 9,203 ( 35,068 )

Accumulated other comprehensive loss ( 35,068 ) ( 34,247 )

Retained earnings 159,690 168,871

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Net income $ 55,087 $ 46,670 $ 69,791

Other comprehensive income:

Other comprehensive income (loss):

Foreign currency translation adjustments ( 39,392 ) ( 43,425 ) 533

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Balance at December 31, 2020 24,418,939 $ 244 $ 1,519,549 $ 179,646 $ 48,880 $ 1,748,319

Impact of adoption of new accounting standard — — — ( 3,311 ) — ( 3,311 )

Issuance of common stock in public offering 2,185,000 22 220,226 — — 220,248

Stock-based compensation — — 18,094 55 — 18,149

Exercise of stock options, net 20,522 — 1,244 — — 1,244

Exercise of stock options 1,632 — 113 — — 113

Issuance of restricted stock, net 248,496 3 ( 2,997 ) — — ( 2,994 )

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Foreign currency translation adjustment — — — — ( 39,392 ) ( 39,392 )

Unrealized gains on marketable securities, net of tax — — — — 579 579

Unrealized losses on marketable securities, net of tax — — — — ( 285 ) ( 285 )

Net income — — — 55,087 — 55,087

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Stock-based compensation — — 21,763 29 — 21,792

Exercise of stock options, net 1,632 — 113 — — 113

Exercise of stock options 377 — 14 — — 14

Issuance of restricted stock, net 422,520 4 ( 2,917 ) — — ( 2,913 )

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Stock-based compensation — — 19,557 215 — 19,772

Exercise of stock options, net 377 — 14 — — 14

Exercise of stock options 4,138 — 223 — — 223

Issuance of restricted stock, net 128,860 1 ( 5,048 ) — — ( 5,047 )

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Foreign currency translation adjustment — — — — 533 533

Unrealized losses on marketable securities, net of tax — — — — ( 846 ) ( 846 )

Unrealized gains on marketable securities, net of tax — — — — 288 288

Net income — — — 69,791 — 69,791

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(in thousands)

For the Year Ended December 31,

2021 2022 2023

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Cash flows from investing activities:

Cash paid for acquisition, net of cash acquired ( 628,759 ) — ( 800 )

Purchases of property and equipment ( 49,433 ) ( 43,170 ) ( 36,943 )

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Proceeds from sale of property and equipment 8,331 6,525 5,890

Proceeds from other investments — — 457

Other investments ( 1,292 ) ( 335 ) ( 314 )

Cash paid for acquisition, net of cash acquired — ( 800 ) ( 530 )

Net cash used in investing activities ( 33,094 ) ( 31,360 ) ( 48,545 )

Cash flows from financing activities:

Net proceeds from issuance of common stock 220,248 — —

Proceeds from long-term debt 145,630 — —

Common dividends paid ( 59,045 ) ( 59,240 ) ( 58,780 )

Net payments for stock awards ( 24,741 ) ( 2,938 ) ( 3,004 )

Payments on long-term debt — ( 40,000 ) ( 40,000 )

Payment of deferred financing costs ( 1,940 ) — —

Net payments for stock awards ( 2,938 ) ( 3,004 ) ( 4,828 )

Repurchase of common stock ( 5,905 ) ( 40,116 ) ( 9,999 )

Net cash provided by (used in) financing activities 279,187 ( 67,888 ) ( 142,360 )

Net cash used in financing activities ( 67,888 ) ( 142,360 ) ( 113,607 )

Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 2,353 ) ( 4,090 ) ( 496 )

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Strategic Education’s portfolio of companies is dedicated to closing the skills gap by placing adults on the most direct path between learning and employment.

As discussed in Note 2 and Note 3, the Company completed its acquisition of Torrens University and associated assets in Australia and New Zealand (“ANZ”) on November 3, 2020.

The accompanying consolidated financial statements and footnotes include the results of the Company’s three reportable segments:

Higher Education (“USHE”), which is primarily comprised of Strayer University and Capella University and is focused on providing flexible and affordable certificate and degree programs to working adults;

Higher Education (“USHE”), which is primarily comprised of Capella University and Strayer University and is focused on providing flexible and affordable certificate and degree programs to working adults;

(2) Education Technology Services, which is primarily focused on developing and maintaining relationships with employers to build employee education benefits programs;

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All intercompany accounts and transactions have been eliminated in the consolidated financial statements.

Certain immaterial prior year amounts have been reclassified to conform with the current year’s presentation.

On November 3, 2020, the Company completed its acquisition of ANZ, whereby the Company was deemed the acquirer in the business combination for accounting purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Accordingly, the financial results of the Company as of and for any periods ended prior to November 3, 2020 do not include the financial results of ANZ and therefore are not directly comparable.

Below is a description of the nature of the costs included in the Company’s operating expense categories.

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General and administration expense also includes the facilities occupancy and other related costs attributable to such functions.

Amortization of intangible assets consists of amortization and depreciation expense related to intangible assets and software assets acquired through the Company’s merger with Capella Education Company (“CEC”) and the Company’s acquisition of ANZ.

Merger and integration costs include integration expenses associated with the Company’s merger with CEC, and transaction and integration expenses associated with the Company’s acquisition of ANZ.

Restructuring costs include severance and other personnel-related expenses from voluntary and involuntary employee terminations, as well as early lease termination costs and impairments of right-of-use lease assets and fixed assets associated with vacating leased space in connection with the Company’s restructuring plan.

Restructuring costs include severance and other personnel-related expenses from voluntary and involuntary employee terminations, right-of-use lease and fixed asset impairment charges, gains on sale of real estate and early termination of leased facilities, and other costs associated with the Company’s restructuring activities.

See Note 4 for additional information.

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The functional currency of each of the foreign subsidiaries is the currency of the economic environment in which the subsidiary primarily does business.

Financial statements of foreign subsidiaries are translated into USD using the exchange rates applicable to the dates of the

financial statements.

Financial statements of foreign subsidiaries are translated into USD using the exchange rates applicable to the dates of the financial statements.

Assets and liabilities are translated into USD using the period-end spot foreign exchange rates.

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Equity accounts are translated at historical exchange rates.

The effects of these translation adjustments are reported as a component of accumulated other comprehensive income (loss) within shareholders’ equity.

The effects of these translation adjustments are reported as a component of accumulated other comprehensive income (loss) within stockholders’ equity.

For any transaction that is in a currency different from the entity’s functional currency, the Company records a net gain or loss based on the difference between the exchange rate at the transaction date and the exchange rate at the transaction settlement date (or rate at period end, if unsettled) in the consolidated statements of income.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash maintained in mostly FDIC-insured bank accounts and cash invested in bank overnight deposits and money market mutual funds.

Cash and cash equivalents consist of cash maintained in mostly FDIC-insured bank accounts and cash invested in money market mutual funds, bank overnight deposits, and U.S.

treasury bills.

The Company places its cash and temporary cash investments with various financial institutions.

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These balances are recorded as restricted cash and included in other current assets in the consolidated balance sheets.

As part of commencing operations in Pennsylvania, the Company is required to maintain a “minimum protective endowment” of at least $ 0.5 million in an interest-bearing account as long as the Company operates its campuses in the state.

As part of conducting operations in Pennsylvania, the Company is required to maintain a “minimum protective endowment” of at least $ 0.5 million in an interest-bearing account as long as the Company operates its campuses in the state.

The Company holds these funds in an interest-bearing account, which is included in other assets.

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Marketable Securities

Management determines the appropriate designation of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date.

All of the Company’s marketable securities are designated as available-for-sale and consist of tax-exempt municipal securities and corporate debt securities.

Available-for-sale marketable securities are carried at fair value as determined by quoted market prices or other inputs either directly or indirectly observable in the marketplace for identical or similar assets, with unrealized gains and losses, net of tax, recognized as a component of accumulated other comprehensive income (loss) within shareholders’ equity.

Investments in marketable securities are carried at either amortized cost or fair value.

Investments in marketable securities that the Company has the positive intent and ability to hold to maturity are carried at amortized cost and classified as held-to-maturity.

Investments in marketable securities that are not classified as held-to-maturity are carried at fair value and classified as either trading or available-for-sale.

Management determines the appropriate designation of marketable securities at the time of purchase and re-evaluates such designation as of each balance sheet date.

All of the Company’s marketable securities are designated as either held-to-maturity or available-for-sale.

The Company’s available-for-sale marketable securities consist of tax-exempt municipal securities and corporate debt securities, which are carried at fair value as determined by quoted market prices or other inputs either directly or indirectly observable in the marketplace for identical or similar assets, with unrealized gains and losses, net of tax, recognized as a component of accumulated other comprehensive income (loss) within stockholders’ equity.

Management reviews the fair value of the portfolio at least quarterly, and evaluates individual securities with fair value below amortized cost at the balance sheet date for impairment.

In order to determine whether there is an impairment, management evaluates whether

the Company intends to sell the impaired security and whether it is more likely than not that the Company will be required to sell the security before recovering its amortized cost basis.

In order to determine whether there is an impairment, management evaluates whether the Company intends to sell the impaired security and whether it is more likely than not that the Company will be required to sell the security before recovering its amortized cost basis.

If management intends to sell an impaired debt security, or it is more likely than not the Company will be required to sell the security prior to recovering its amortized cost basis, an impairment is deemed to have occurred.

The amount of an impairment related to a credit loss, or securities that management intends to sell before recovery, is recognized in earnings.

The amount of an impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other available-for-sale securities as a component of accumulated other comprehensive income (loss) within shareholders’ equity.

amount of an impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other available-for-sale securities as a component of accumulated other comprehensive income (loss) within stockholders’ equity.

The cost of securities sold is based on the specific identification method.

Amortization of premiums, accretion of discounts, interest, dividend income and realized gains and losses are included in other income.

Amortization of premiums, accretion of discounts, interest, dividend income and realized gains and losses are included in other income (loss).

The contractual maturity date of available-for-sale securities is based on the days remaining to the effective maturity.

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Tuition Receivable and Allowance for Credit Losses

The Company adopted Accounting Standards Update (“ASU”) No.

2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASC 326”) on January 1, 2020, which revised the accounting requirements related to the measurement of credit losses and requires organizations to measure all expected credit losses for financial assets based on historical experience, current conditions, and reasonable and supportable forecasts about collectability.

The Company records tuition receivable and contract liabilities for its students upon the start of the academic term or program.

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Allowance for credit losses, beginning of period $ 49,773 $ 48,783 $ 47,113

Impact of adopting ASC 326 4,571 — —

Additions charged to expense 43,040 41,226 48,444

Additions from merger 3,503 — —

Write-offs, net of recoveries ( 44,030 ) ( 42,896 ) ( 48,302 )

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Property and equipment are stated at cost, less accumulated depreciation and amortization.

In accordance with the Property, Plant, and Equipment Topic, ASC 360, the carrying values of the Company’s assets are re-evaluated when events or changes in

circumstances indicate that the carrying amount of an asset may not be recoverable.

In accordance with ASC 360 Property, Plant, and Equipment , the carrying values of the Company’s assets are re-evaluated when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

If it is determined that an impairment loss has occurred based on expected undiscounted future cash flows, then a loss is recognized using a fair value-based model.

During the years ended December 31, 2021 and 2022, the Company recognized $ 2.7 million and $ 2.5 million, respectively, of impairment charges related to property and equipment, which is included in Restructuring costs on the consolidated statements of income.

During the years ended December 31, 2021, 2022, and 2023, the Company recognized $ 2.7 million, $ 2.5 million and $ 0.4 million, respectively, of impairment charges related to property and equipment, which is included in Restructuring costs on the consolidated statements of income.

Depreciation and amortization of property and equipment is calculated using the straight-line method over the estimated useful lives ranging from three years to 40 years.

Depreciation and amortization expense was $ 59.1 million, $ 52.0 million and $ 48.4 million for the years ended December 31, 2021, 2022, and 2023, respectively.

Included in the 2020, 2021, and 2022 depreciation and amortization expense amount is $ 6.9 million, $ 7.2 million and $ 3.2 million of depreciation expense, respectively, related to computer software acquired in the Capella Education Company merger in 2018 and content acquired in the ANZ acquisition in 2020, which is included in Amortization of intangible assets on the consolidated statements of income.

Included in the 2021, 2022, and 2023 depreciation and amortization expense amount is $ 7.2 million, $ 3.2 million and $ 2.6 million of depreciation expense, respectively, related to computer software acquired in the CEC merger and content acquired in the ANZ acquisition, which is included in Amortization of intangible assets on the consolidated statements of income.

Repairs and maintenance costs are expensed as incurred.

As discussed in Note 5, the Company’s 2020 restructuring plan included an evaluation of the Company’s owned and leased real estate portfolio, which resulted in the consolidation and sale of underutilized facilities.

Over the last several years, the Company has been evaluating its owned and leased real estate portfolio to identify underutilized facilities to either downsize or exit.

The Company sold two of its owned U.S.

Higher Education campuses in 2021 and one of its owned U.S.

Higher Education campuses in 2022.

The Company sold the long-lived assets, consisting of land, buildings, and building improvements, related to these owned campuses and recognized a $ 2.7 million and $ 2.9 million gain on sale during the years ended December 31, 2021 and 2022, respectively, which are included in Restructuring costs on the consolidated statements of income.

Construction in progress includes costs of computer software developed for internal use, which is accounted for in accordance with the Internal-Use Software Topic, ASC 350-40.

Higher Education campuses in 2021 and sold one owned U.S.

Higher Education campus in both 2022 and 2023.

The Company sold the long-lived assets, consisting of land, buildings, and building improvements, related to these owned campuses and recognized a $ 2.7 million, $ 2.9 million and $ 2.1 million gain on sale during the years ended December 31, 2021, 2022, and 2023, respectively, which is included in Restructuring costs on the consolidated statements of income.

Construction in progress includes costs of computer software developed for internal use, which is accounted for in accordance with ASC 350-40, Internal-Use Software .

Computer software development costs that are incurred in the preliminary project stage are expensed as incurred.

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Deferred Costs

The Company defers certain commissions earned by third party international agents that are considered incremental and recoverable costs of obtaining a contract with customers of ANZ.

The Company defers certain commissions earned by third party international agents that are considered incremental and recoverable costs of obtaining a contract with customers in the Australia/New Zealand segment.

These costs are amortized over the period of benefit which ranges from one to two years .

In accordance with ASU 2018-15, which the Company adopted on January 1, 2020, the Company defers implementation costs incurred in cloud computing arrangements and amortizes these costs over the term of the arrangement.

The Company also defers implementation costs incurred in cloud computing arrangements and amortizes these costs over the term of the arrangement.

The Company determines if an arrangement is a lease at inception.

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See Note 7 for additional information.

The Fair Value Measurement Topic, ASC 820-10 (“ASC 820-10”), establishes a framework for measuring fair value, establishes a fair value hierarchy based upon the observability of inputs used to measure fair value, and expands disclosures about fair value measurements.

Assets and liabilities are classified in their entirety within the fair value hierarchy based on the

lowest level input that is significant to the fair value measurement.

ASC 820-10, Fair Value Measurement , establishes a framework for measuring fair value, establishes a fair value hierarchy based upon the observability of inputs used to measure fair value, and expands disclosures about fair value measurements.

Assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.

Under ASC 820-10, fair value of an investment is the price that would be received to sell an asset or to transfer a liability to an entity in an orderly transaction between market participants at the measurement date.

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The Company has authorized 32,000,000 shares of common stock, par value $ 0.01 , of which 24,402,891 and 24,406,816 shares were issued and outstanding as of December 31, 2022 and 2023, respectively.

On August 10, 2020, the Company completed a public offering of 2,185,000 shares of its common stock for total cash proceeds of $ 220.2 million, net of underwriting discounts and offering costs of $ 9.2 million.

The Company also has authorized 8,000,000 shares of preferred stock, none of which is issued or outstanding.

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Stock-Based Compensation

As required by the Stock Compensation Topic, ASC 718, the Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors, including employee stock options, restricted stock, restricted stock units, performance stock units, and employee stock purchases related to the Company’s Employee Stock Purchase Plan, based on estimated fair values.

In accordance with ASC 718, Stock Compensation , the Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors, including employee stock options, restricted stock, restricted stock units, performance stock units, and employee stock purchases related to the Company’s Employee Stock Purchase Plan, based on estimated fair values.

The fair value of restricted stock awards granted is measured using the fair value of the Company’s common stock on the date of grant or the most recent modification date, whichever is later.

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The forfeiture rate used is based on historical experience.

The Company also assesses the likelihood that performance criteria associated with performance-based awards will be met.

The Company also assesses

the likelihood that performance criteria associated with performance-based awards will be met.

If it is determined that it is more likely than not that performance criteria will not be achieved, the Company revises its estimate of the number of shares it believes will ultimately vest.

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Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the periods.

Diluted earnings per share reflects the potential dilution that could occur assuming conversion or exercise of all dilutive unexercised stock options, restricted stock, and restricted stock units.

Diluted earnings per share reflects the potential dilution that could occur assuming conversion or exercise of all dilutive unexercised stock options, restricted stock, and restricted stock units (“stock awards”).

The dilutive effect of stock awards was determined using the treasury stock method.

Under the treasury stock method, all of the following are assumed to be used to repurchase shares of the Company’s common stock:

Under the treasury stock method, the following are assumed to be used to repurchase shares of the Company’s common stock:

(1) the proceeds received from the exercise of stock options, and (2) the amount of compensation cost associated with the stock awards for future service not yet recognized by the Company.

Stock options, restricted stock, and restricted stock units are excluded from the computation of diluted earnings per share when their effect would be anti-dilutive.

Stock awards are excluded from the computation of diluted earnings per share when their effect would be anti-dilutive.

Set forth below is a reconciliation of shares used to calculate basic and diluted earnings per share for each of the three years ended December 31, 2023 (in thousands):

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Comprehensive income (loss) includes net income and all changes in the Company’s equity during a period from non-owner sources, which for the Company consists of unrealized gains and losses on available-for-sale marketable securities, net of tax, and foreign currency translation adjustments.

As of December 31, 2020 and 2021, the balance of accumulated other comprehensive income was $ 48.9 million, net of tax of $ 0.3 million and $ 9.2 million, net of tax of $ 0.2 million, respectively, and as of December 31, 2022 the balance of accumulated comprehensive loss was $ 35.1 million, net of tax of $ 0.1 million.

During the year ended December 31, 2020, approximately $ 25,000 , net of tax of $ 10,000 , of unrealized gains on available-for-sale marketable securities was reclassified out of accumulated other comprehensive income (loss) to Other income on the consolidated statements of income.

As of December 31, 2021, the balance of accumulated other comprehensive income was $ 9.2 million, net of tax of $ 0.2 million, and as of December 31, 2022 and 2023, the balance of accumulated comprehensive loss was $ 35.1 million, net of tax of $ 0.1 million, and $ 34.2 million, net of tax of $ 0.1 million, respectively.

There were no reclassifications out of accumulated other comprehensive income (loss) to net income for the years ended December 31, 2021, 2022, and 2023.

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Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized.

The Income Taxes Topic, ASC 740, requires the company to determine whether uncertain tax positions should be recognized within the Company’s financial statements.

ASC 740, Income Taxes , requires the company to determine whether uncertain tax positions should be recognized within the Company’s financial statements.

The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense.

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The Company accounts for the investments in limited partnerships under the equity method.

The Company’s pro-rata share in the net income (loss) of the limited partnerships is included in Other income on the consolidated statements of income.

The Company’s pro-rata share in the net income (loss) of the limited partnerships is included in Other income (loss) on the consolidated statements of income.

The Company also holds investments accounted for at cost less impairment as these investments do not have readily determinable fair value.

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Recently Issued Accounting Standards Not Yet Adopted

Accounting Standards Updates recently issued by the FASB but not yet effective are not expected to have a material effect on the Company’s consolidated financial statements.

Business Combinations

Acquisition of Torrens University and associated assets in Australia and New Zealand

On November 3, 2020, the Company completed its acquisition of Torrens University and associated assets in Australia and New Zealand pursuant to the sale and purchase agreement dated July 29, 2020.

The acquired operations include Torrens University Australia, Think Education, and Media Design School, which together provide diversified student curricula to approximately 19,000 students across five industry verticals, including business, hospitality, health, education, creative technology and design.

Pursuant to the purchase agreement, the aggregate consideration paid was approximately $ 658.4 million in cash, which reflected the original agreed upon purchase price of $ 642.7 million plus cash acquired in the transaction.

The Company applied the acquisition method of accounting to ANZ, whereby the excess of the acquisition date fair value of consideration transferred over the fair value of identifiable net assets was allocated to goodwill.

Goodwill reflects workforce and synergies expected from cost savings, operations, and revenue enhancements of the combined company that are expected to result from the acquisition.

The goodwill recorded as part of the acquisition was allocated to the Australia/New Zealand reportable segment in the amount of $ 546.3 million, and is not deductible for tax purposes.

The Company incurred $ 8.1 million of acquisition-related costs related to this acquisition.

These costs were primarily attributable to legal, financial, and accounting support services incurred by the Company in connection with the acquisition, and are included in Merger and integration costs on the consolidated statements of income.

During the year ended December 31, 2021, the Company finalized the fair value of assets acquired and liabilities assumed.

In 2021, the Company recorded a measurement period adjustment that reduced Property and equipment, net by $ 0.3 million and increased goodwill by $ 0.3 million.

This measurement period adjustment is reflected in the fair value of assets acquired and liabilities assumed in the table below.

The fair value of assets acquired and liabilities assumed as well as a reconciliation to consideration transferred is presented in the table below (in thousands):

Cash and cash equivalents $ 16,082

Tuition receivable 24,447

Other current assets 17,713

Property and equipment, net 41,508

Right-of-use lease assets 44,229

Intangible assets 103,161

Goodwill 546,315

Other assets 2,799

Total assets acquired 796,254

Accounts payable and accrued expenses ( 33,876 )

Income taxes payable ( 229 )

Contract liabilities ( 33,309 )

Lease liabilities ( 9,685 )

Deferred income taxes ( 18,712 )

Lease liabilities, non-current ( 34,544 )

Other long-term liabilities ( 7,520 )

Total liabilities assumed ( 137,875 )

Total consideration $ 658,379

The table below presents a summary of intangible assets acquired (in thousands) and the weighted average useful lives of these assets:

Fair Value Weighted Average

Useful Life in Years

Trade names $ 68,774 Indefinite

Student relationships 34,387 3

The Company determined the fair value of assets acquired and liabilities assumed based on assumptions that reasonable market participants would use while employing the concept of highest and best use of the assets and liabilities.

The Company utilized the following assumptions, some of which include significant unobservable inputs which would qualify the valuations as Level 3 measurements, and valuation methodologies to determine fair value:

• Intangible assets

▪ Trade names - to determine the fair value of the trade names, the Company used the relief from royalty approach, which involved the use of estimates and assumptions with respect to the timing and amounts of future cash flows, revenue growth rates, royalty rate, and discount rate.

Key assumptions used in the valuation included revenue growth rates ranging from 2.5 % to 6.3 % per year, a royalty rate of 2.5 % and a discount rate of 11 %.

▪ Student relationships - to determine the fair value of the student relationships, the Company used the excess earnings method, which involved the use of estimates and assumptions with respect to the timing and amounts of future cash flows, earnings before interest and taxes margins, annual attrition rate, and discount rate.

Key assumptions used in the valuation included an annual attrition rate of 60 % and a discount rate of 11 %.

• Property and equipment - Included in property and equipment is course content of $ 10.0 million.

To determine the fair value of course content, the Company used the relief from royalty approach, which involved the use of estimates and assumptions with respect to the timing and amounts of future cash flows, revenue growth rates, royalty rate, and discount rate.

Key assumptions used in the valuation included revenue growth rates ranging from 5.6 % to 6.2 %, a royalty rate of 3 % and a discount rate of 11 %.

The course content will be amortized over 3 years.

All other property and equipment was valued at estimated cost.

• Contract liabilities - The Company estimated the fair value of contract liabilities using the cost build-up method, which represents the cost to deliver the services plus a normal profit margin.

Based on this method, fair value of contract liabilities were estimated to be 70 % of carrying value as of the acquisition date.

• Other current and noncurrent assets and liabilities - The carrying value of all other assets and liabilities approximated fair value at the time of acquisition.

The operations of ANZ were included in the consolidated financial statements as of the acquisition date.

The revenue and net loss for ANZ reported within the consolidated statements of income for the year ended December 31, 2020 were $ 23.4 million and $ 10.5 million, respectively.

Pro Forma Financial information

The following unaudited pro forma information has been presented as if the ANZ acquisition occurred on January 1, 2020.

The information is based on the historical results of operations of the acquired business, adjusted for:

• The allocation of purchase price and related adjustments, including the adjustments to amortization expense related to the fair value of intangible assets acquired;

• The exclusion of acquisition-related costs incurred during the year ended December 31, 2020;

• Associated tax-related impacts of adjustments;

• Changes to align accounting policies.

The pro forma results do not necessarily represent what would have occurred if the acquisition had actually taken place on January 1, 2020, nor do they represent the results that may occur in the future.

The pro forma adjustments are based on available information and upon assumptions the Company believes are reasonable to reflect the impact of this acquisition on the Company’s historical financial information on a supplemental pro forma basis.

The following table presents the Company’s pro forma combined revenues and net income (in thousands).

Pro forma results for the years ended December 31, 2021 and 2022 are not presented below because the results of ANZ are included in the Company’s December 31, 2021 and 2022 consolidated statements of income.

Pro Forma Combined

Year Ended December 31, 2020

Revenue $ 1,244,440

Net Income 105,431

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07 , Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which requires disclosure of significant segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”) and included within each reported measure of segment profit or loss.

The standard also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of segment profit or loss in assessing segment performance and deciding how to allocate resources.

Additionally, ASU 2023-07 requires all segment disclosures to be provided on an annual and interim basis.

ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted and the amendments must be applied retrospectively.

We are currently evaluating the impact that the standard will have on our financial statement disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740)—Improvements to Income Tax Disclosures (“ASU 2023-09”), which requires disclosure of specific categories in the effective tax rate reconciliation.

Further, the standard requires certain disclosures of state versus federal income tax expense and taxes paid.

ASU 2023-09 is effective for fiscal years beginning after December 15, 2024.

Early adoption is permitted and the amendments should be applied on a prospective basis although retrospective application is permitted.

We are currently evaluating the impact that the standard will have on our financial statement disclosures.

Other ASUs recently issued by the FASB but not yet effective are not expected to have a material effect on the Company’s consolidated financial statements.

Revenue Recognition

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Tuition revenue is deferred and recognized ratably over the period of instruction, which varies depending on the course format and chosen program of study.

Strayer University’s educational programs and Capella University’s GuidedPath classes typically are offered on a quarterly basis, and such periods coincide with the Company’s quarterly financial reporting periods, while Capella University’s FlexPath courses are delivered over a twelve-week subscription period.

Capella University’s GuidedPath classes and Strayer University’s educational programs typically are offered on a quarterly basis, and such periods coincide with the Company’s quarterly financial reporting periods, while Capella University’s FlexPath courses are delivered over a twelve-week subscription period.

Torrens University offers the majority of its education programs on a trimester system having three primary academic terms, which all occur within the calendar year.

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Contract Liabilities - Graduation Fund

Strayer University offers the Graduation Fund, which allows undergraduate and graduate students to earn tuition credits that are redeemable in the final year of a student’s course of study if he or she successfully remains in the program.

Students registering in credit-bearing courses in any undergraduate or graduate degree program receive one free course for every three courses that the student successfully completes.

To be eligible, students must meet all of Strayer University’s admission requirements, and must be enrolled in a bachelor’s or master’s degree program.

Strayer University offers the Graduation Fund, which allows undergraduate students to earn tuition credits that are redeemable in the final year of a student’s course of study if he or she successfully remains in the program.

Students registering in credit-bearing courses in any undergraduate degree program receive one free course for every three courses that the student successfully completes.

To be eligible, students must meet all of Strayer University’s admission requirements, and must be enrolled in a bachelor’s degree program.

Students who have more than one consecutive term of non-attendance lose any Graduation Fund credits earned to date, but may earn and accumulate new credits if the student is reinstated or readmitted by Strayer University in the future.

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The portion of the Graduation Fund balance related to students enrolled in undergraduate degree programs was $ 41.7 million and $ 40.6 million as of December 31, 2022 and 2023, respectively.

The remaining Graduation Fund balance related to students enrolled in master’s degree programs.

Contract Liabilities – Tuition Cap

Students in certain programs at Capella University and Strayer University may be eligible for tuition cap pricing, wherein their tuition is waived once the student has reached the designated dollar cap threshold for their program.

The Company defers the value of the related performance obligation associated with this tuition benefit estimated to be redeemed in the future based on the underlying revenue transactions that result in progress by the student towards reaching the tuition cap.

The Company’s estimate of the benefits that will be redeemed in the future is based on its historical experience of student persistence toward completion of a course of study within these programs or similar programs.

Each quarter, the Company assesses its assumptions underlying these estimates.

As of December 31, 2022 and 2023, the Company had $ 4.7 million and $ 11.8 million, respectively, of contract liabilities in the consolidated balance sheets related to tuition cap benefits that are estimated to be redeemed in the future.

The amount estimated to be redeemed in the next 12 months is $ 4.7 million and is included as a current contract liability in the consolidated balance sheets.

Unbilled Receivables – Student Tuition

Academic materials may be shipped to certain new undergraduate students in advance of the term of enrollment.

Under ASC 606, the materials represent a performance obligation to which the Company allocates revenue based on the fair value of the materials relative to the total fair value of all the performance obligations in the arrangement with the student.

Under ASC 606, the materials represent a performance obligation to which the Company allocates revenue based on the fair value of the materials relative to the total fair value of all performance obligations in the arrangement with the student.

When control of the materials passes to the student in advance of the term of enrollment, an unbilled receivable and related revenue are recorded.

Costs to Obtain a Contract

Certain commissions earned by third party international agents are considered incremental and recoverable costs of obtaining a contract with customers of ANZ.

Certain commissions earned by third party international agents are considered incremental and recoverable costs of obtaining a contract with customers in the Australia/New Zealand segment.

These costs are deferred and then amortized over the period of benefit which ranges from one year to two years .

Restructuring and Related Charges

The Company incurs severance and other employee separation costs related to voluntary and involuntary employee terminations that are not tied to a formal restructuring plan.

During the year ended December 31, 2023, the Company incurred $ 12.0 million of severance and other employee separation charges related to the elimination of certain positions.

These severance and other employee separation charges are included in Restructuring costs on the consolidated statements of income.

The following details the changes in the Company’s severance and other employee separation costs restructuring liabilities for the year ended December 31, 2023 (in thousands):

Severance Restructuring Liability

Balance at December 31, 2022 $ —

Restructuring and other charges 12,015

Payments ( 11,220 )

Balance at December 31, 2023 (1)

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(1) Restructuring liabilities are included in accounts payable and accrued expenses.

The Company has also been evaluating its owned and leased real estate portfolio, which has resulted in the consolidation and sale of underutilized facilities.

During the years ended December 31, 2021, 2022, and 2023, the Company recorded right-of-use lease asset charges of approximately $ 18.9 million, $ 1.2 million, and $ 5.1 million, respectively, related to facilities consolidated during the period.

The Company recorded net benefits related to the early termination and related extinguishment of lease liabilities of approximately $ 0.2 million, $ 1.2 million and $ 0.1 million during the years ended December 31, 2021, 2022, and 2023, respectively.

During the years ended December 31, 2021, 2022, and 2023, the Company recorded gains from the sale of property and equipment of owned campuses that were previously closed of approximately $ 2.7 million, $ 2.9 million and $ 2.1 million, respectively.

The Company also recorded fixed asset impairment charges of approximately $ 2.7 million, $ 2.5 million and $ 0.4 million during the years ended December 31, 2021, 2022, and 2023, respectively.

These right-of-use lease asset and fixed asset impairment charges, net benefits from early lease terminations, and gains on the sale of property and equipment are included in Restructuring costs on the consolidated statements of income.

In the third quarter of 2020, the Company began implementing a restructuring plan in an effort to reduce the ongoing operating costs of the Company to align with changes in enrollment following the COVID-19 pandemic.

Under this plan, the Company incurred severance and other employee separation costs related to voluntary and involuntary employee terminations.

The following details the changes in the Company’s severance and other employee separation costs restructuring liabilities for the years ended December 31, 2020, 2021, and 2022 (in thousands):

The following details the changes in the Company’s severance and other employee separation costs restructuring liabilities related to restructuring plans for the years ended December 31, 2021 and 2022 (in thousands):

Integration Plan (1)

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___________________________________________________________

Restructuring and other charges — 1,241 1,241

Payments — ( 2,853 ) ( 2,853 )

Balance at December 31, 2022 $ — $ — $ —

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(1) Restructuring plan implemented following the Company’s merger with CEC.

(2) Restructuring liabilities are included in accounts payable and accrued expenses.

The 2020 restructuring plan also included an evaluation of the Company’s owned and leased real estate portfolio, which resulted in the consolidation and sale of underutilized facilities.

During the years ended December 31, 2020, 2021, and 2022, the Company recorded right-of-use lease asset charges of approximately $ 0.4 million, $ 18.9 million, and $ 1.2 million, respectively, related to facilities consolidated as a result of the restructuring plan.

The Company recorded benefits related to the early termination and related extinguishment of lease liabilities of approximately $ 0.2 million and $ 1.2 million during the years ended December 31, 2021 and 2022, respectively.

During the years ended December 31, 2021 and 2022, the Company recorded gains from the sale of property and equipment of owned campuses that were closed in connection with the 2020 restructuring plan of approximately $ 2.7 million and $ 2.9 million, respectively.

The Company also recorded fixed asset impairment charges of approximately $ 2.7 million and $ 2.5 million during the years ended December 31, 2021 and 2022, respectively.

All severance and other employee separation charges, right-of-use lease asset and fixed asset impairment charges, benefits from early lease terminations, and gains on the sale of property and equipment are included in Restructuring costs on the consolidated statements of income.

The final severance payments under the CEC integration plan and the 2020 restructuring plan were made in the third quarter of 2021 and 2022, respectively.

Marketable Securities

The following is a summary of available-for-sale securities as of December 31, 2022 (in thousands):

The following is a summary of available-for-sale and held-to-maturity securities as of December 31, 2023 (in thousands):

Amortized Cost Gross Unrealized Gain Gross Unrealized (Losses) Estimated Fair Value

Available-for-sale securities:

Tax-exempt municipal securities $ 10,055 $ 2 $ ( 144 ) $ 9,913

Corporate debt securities 3,202 — ( 79 ) 3,123

Total $ 22,992 $ 2 $ ( 715 ) $ 22,279

Total available-for-sale securities $ 13,257 $ 2 $ ( 223 ) $ 13,036

Held-to-maturity securities:

Term deposits $ 27,175 $ — $ — $ 27,175

The following is a summary of available-for-sale securities as of December 31, 2022 (in thousands):

Amortized Cost Gross Unrealized Gain Gross Unrealized (Losses) Estimated Fair Value

Available-for-sale securities:

Tax-exempt municipal securities $ 15,852 $ 2 $ ( 507 ) $ 15,347

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Total $ 22,992 $ 2 $ ( 715 ) $ 22,279

The Company had no held-to-maturity securities as of December 31, 2022.

The unrealized gains and losses on the Company’s investments in corporate debt and municipal securities as of December 31, 2022 and 2023 were caused by changes in market values primarily due to interest rate changes.

As of December 31, 2022, there were no securities in an unrealized loss position for a period longer than twelve months.

The Company has no allowance for credit losses related to its available-for-sale securities as all investments are in investment grade securities.

As of December 31, 2023, the fair value of the Company’s securities which were in an unrealized loss position for a period longer than twelve months was $ 12.0 million.

The Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell these securities prior to the recovery of their amortized cost basis, which may be at maturity.

No impairment charges were recorded during the years ended December 31, 2020, 2021, and 2022.

As such, no impairment charges were recorded during the years ended December 31, 2021, 2022, and 2023.

The Company has no allowance for credit losses related to its available-for-sale or held-to-maturity securities as all investments are in investment grade securities.

The following table summarizes the maturities of the Company’s marketable securities as of December 31, 2022 and 2023 (in thousands):

December 31, 2022 December 31, 2023

Available-for-sale securities Held-to-maturity securities Available-for-sale securities Held-to-maturity securities

Due within one year $ 9,156 $ — $ 12,553 $ 27,175

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Total $ 9,300 $ 6,420 $ 9,800

The Company recorded approximately $ 35,000 in gross realized gains and $ 0.8 million in gross realized losses in net income during the years ended December 31, 2020 and 2021, respectively.

The Company did no t record any gross realized gains or losses in net income during the year ended and December 31, 2022.

The Company recorded approximately $ 0.8 million in gross realized losses in net income during the year ended December 31, 2021 related to the sale of marketable securities.

The Company did no t record any gross realized gains or losses in net income during the years ended December 31, 2022 and 2023.

Property and Equipment

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Fair Value Measurement

Assets and liabilities measured at fair value on a recurring basis consist of the following as of December 31, 2022 (in thousands):

Assets measured at fair value on a recurring basis consist of the following as of December 31, 2023 (in thousands):

Fair Value Measurements at Reporting Date Using

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Money market funds $ 92,231 $ 92,231 $ — $ —

Marketable securities:

treasury bills 5,000 5,000 — —

Available-for-sale securities :

Tax-exempt municipal securities 9,913 — 9,913 —

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Total assets at fair value on a recurring basis $ 110,267 $ 97,231 $ 13,036 $ —

Assets and liabilities measured at fair value on a recurring basis consist of the following as of December 31, 2021 (in thousands):

Assets measured at fair value on a recurring basis consist of the following as of December 31, 2022 (in thousands):

Fair Value Measurements at Reporting Date Using

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Money market funds $ 217 $ 217 $ — $ —

Marketable securities:

Available-for-sale securities :

Tax-exempt municipal securities 15,347 — 15,347 —

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Total assets at fair value on a recurring basis $ 22,496 $ 217 $ 22,279 $ —

Deferred payments $ 658 $ — $ — $ 658

The Company measures the above items on a recurring basis at fair value as follows:

• Money market funds — Classified in Level 1 is excess cash the Company holds in money market funds, which are included in cash and cash equivalents in the accompanying consolidated balance sheets.

• Money market funds and U.S.

treasury bills — Classified in Level 1 is excess cash the Company holds in money market funds and U.S.

treasury bills with original maturities of three months or less, which are included in cash and cash equivalents in the accompanying consolidated balance sheets.

The Company records any net unrealized gains and losses for changes in fair value as a component of accumulated other comprehensive income (loss) in stockholders’ equity.

The Company’s cash and cash equivalents held at December 31, 2021 and 2022, approximate fair value and are not disclosed in the above tables because of the short-term nature of the financial instruments.

• Marketable securities – Classified in Level 2 and valued using readily available pricing sources for comparable instruments utilizing observable inputs from active markets.

The Company’s cash and cash equivalents and held-to-maturity securities held at December 31, 2022 and 2023, approximate fair value and are not disclosed in the above tables because of the short-term nature of the financial instruments.

• Available-for-sale securities – Classified in Level 2 and valued using readily available pricing sources for comparable instruments utilizing observable inputs from active markets.

The Company does not hold securities in inactive markets.

• Deferred payments — The Company acquired certain assets and entered into deferred payment arrangements with the sellers in transactions that occurred in 2011.

The Company did not change its valuation techniques associated with recurring fair value measurements from prior periods and did not transfer assets or liabilities between levels of the fair value hierarchy during the years ended December 31, 2022 or 2023.

The Company acquired certain assets and entered into deferred payment arrangements with the sellers in transactions that occurred in 2011.

The deferred payments were classified within Level 3 as there was no liquid market for similarly priced instruments and were valued using discounted cash flow models that encompassed significant unobservable inputs.

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The final payment related to the deferred payment arrangements was made in the first quarter of 2022.

Changes in the fair value of the Company’s Level 3 liabilities during the years ended December 31, 2021 and 2022 are as follows (in thousands):

December 31, 2021 December 31, 2022

Changes in the fair value of the Company’s Level 3 liabilities during the year ended December 31, 2022 were as follows (in thousands):

December 31, 2022

Balance as of the beginning of period $ 658

Amounts paid ( 658 )

Other adjustments to fair value 470 —

Balance at end of period $ —

Goodwill and Intangible Assets

During the first quarter of 2021, the Company reallocated a portion of its goodwill to the Education Technology Services segment based on a relative fair value analysis performed using several probability weighted scenarios.

The following table presents changes in the carrying value of goodwill by segment for the years ended December 31, 2022 and 2023 (in thousands):

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Balance as of December 31, 2021 $ 632,075 $ 553,789 $ 100,000 $ 1,285,864

Reporting unit reallocation (1)

( 100,000 ) — 100,000 —

Additions — 947 — 947

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Balance as of December 31, 2023 $ 632,075 $ 519,813 $ 100,000 $ 1,251,888

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(1) Represents the reallocation of goodwill as a result of the Company reorganizing its segments in 2021.

(2) Represents a measurement period adjustment recorded in 2021 related to the Company’s acquisition of ANZ, as discussed in Note 3.

In 2022, the Company performed a qualitative impairment assessment of goodwill assigned to all reporting units, except for the goodwill assigned to the ANZ reporting unit, using the first day of the fourth quarter of 2022 as the assessment date.

In 2023, the Company performed a qualitative impairment assessment of goodwill assigned to all reporting units, except for the goodwill assigned to the Capella University and Strayer University reporting units, using the first day of the fourth quarter of 2023 as the assessment date.

The Company evaluated the likelihood of impairment by considering qualitative factors relevant to the reporting units, such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and any other factors that have a significant bearing on fair value.

Based on the results of its qualitative impairment analysis, the Company determined that no impairment indicators existed for these reporting units as of the assessment date.

In 2022, the Company performed a quantitative impairment assessment for goodwill assigned to the ANZ reporting unit using the first day of the fourth quarter of 2022 as the assessment date.

The Company used an income-based approach to determine the fair value of the ANZ reporting unit.

The income approach consisted of a discounted cash flow model that included projections of future cash flows for the ANZ reporting unit, calculating a terminal value, and discounting such cash flows by a risk adjusted rate of return.

Given the length of time since the last valuation, in 2023 the Company elected to bypass a qualitative annual impairment assessment for goodwill assigned to the Capella University and Strayer University reporting units and proceeded directly to a quantitative impairment assessment using the first day of the fourth quarter of 2023 as the assessment date.

The Company used an income-based approach to determine the fair value of the Capella University and Strayer University reporting units.

The income approach consisted of a discounted cash flow model that included projections of future cash flows for the two reporting

units, calculating a terminal value, and discounting such cash flows by a risk adjusted rate of return.

The determination of fair value consists of using unobservable inputs under the fair value measurement standards.

The Company believes that the most critical assumptions and estimates used in determining the estimated fair value of the ANZ reporting unit include, but are not limited to, the amounts and timing of expected future cash flows, new international student enrollment growth, the discount rate, and the terminal growth rate.

The Company believes that the most critical assumptions and estimates used in determining the estimated fair value of the Capella University and Strayer University reporting units include, but are not limited to, the amounts and timing of expected future cash flows, student enrollment growth, operating margins, the discount rate, and the terminal growth rate.

The assumptions used in determining the expected future cash flows consider various factors such as historical operating trends, particularly in student enrollment and pricing, anticipated economic and regulatory conditions, reasonable expectations for planned business expansion opportunities, and long-term operating strategies and initiatives.

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The Company believes that these assumptions are consistent with a reasonable market participant view while employing the concept of highest and best use of the asset.

Based on the results of its quantitative impairment assessment, the Company concluded that the fair value of its ANZ reporting unit exceeded its carrying value.

Based on the results of its quantitative impairment assessment, the Company concluded that the fair values of its Capella University and Strayer University reporting units exceeded their carrying values.

Accordingly, no goodwill impairment charges were recorded during the years ended December 31, 2021, 2022, and 2023.

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Total $ 451,666 $ ( 191,125 ) $ 260,541 $ 451,625 $ ( 200,002 ) $ 251,623

The Company’s finite-lived intangible assets are comprised of student relationships, which are being amortized on a straight-line basis over a three-year useful life.

The Company’s finite-lived intangible assets are comprised of student relationships, which were amortized on a straight-line basis over a three-year useful life.

Straight-line amortization expense for finite-lived intangible assets reflects the pattern in which the economic benefits of the assets are consumed over their estimated useful lives.

Amortization expense related to finite-lived intangible assets was $ 44.3 million, $ 11.1 million, and $ 8.9 million for the years ended December 31, 2021, 2022 and 2023, respectively.

In 2023, the Company will recognize the remaining $ 9.1 million of amortization expense related to its finite-lived intangible assets.

As of December 31, 2023, all finite-lived intangible assets were fully amortized.

Indefinite-lived intangible assets not subject to amortization consist of trade names.

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The Company assesses indefinite-lived intangible assets at least annually for impairment during the fourth quarter, or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of the respective indefinite-lived intangible asset below its carrying amount.

In 2022, the Company performed a qualitative impairment assessment related to its indefinite-lived intangible assets, except for the ANZ trade names, using the first day of the fourth quarter of 2022 as the assessment date.

In 2023, the Company performed a qualitative impairment assessment related to its indefinite-lived intangible assets, except for the Capella University trade name, using the first day of the fourth quarter of 2023 as the assessment date.

The Company evaluated the likelihood of impairment by considering qualitative factors, such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and any other factors that have a significant bearing on fair value.

Based on the results of its qualitative impairment analysis, the Company determined that no impairment indicators existed for these indefinite-lived intangible assets as of the assessment date.

In 2022, the Company performed a quantitative impairment assessment for indefinite-lived intangible assets related to the ANZ trade names using the first day of the fourth quarter of 2022 as the assessment date.

The Company used an income-based approach to determine the fair value of the ANZ trade names.

The income approach consisted of a discounted cash flow model, using the relief from royalty method, which included a projection of future revenues for ANZ, identifying a royalty rate, calculating a terminal value, and discounting such cash flows by a risk adjusted rate of return.

The determination of fair value of the ANZ trade name primarily consists of using unobservable inputs under the fair value measurement standards.

The Company believes that the most critical assumptions and estimates used in determining the estimated fair value of the ANZ trade names include, but are not limited to, the amounts and timing of future revenue growth rates, the royalty rate, the discount rate, and the terminal growth rate.

In 2023, the Company elected to perform a quantitative impairment assessment for indefinite-lived intangible assets related to the Capella University trade name using the first day of the fourth quarter of 2023 as the assessment date.

The Company used an income-based approach to determine the fair value of the Capella University trade name.

The income approach consisted of a discounted cash flow model, using the relief from royalty method, which included a projection of future revenues for Capella University, identifying a royalty rate, calculating a terminal value, and discounting such cash flows by a risk adjusted rate of

The determination of fair value of the Capella University trade name primarily consists of using unobservable inputs under the fair value measurement standards.

The Company believes that the most critical assumptions and estimates used in determining the estimated fair value of the Capella University trade name include, but are not limited to, the amounts and timing of future revenue growth rates, the royalty rate, the discount rate, and the terminal growth rate.

The assumptions used in determining the expected future revenue growth rates consider various factors such as historical operating trends, particularly in student enrollment and pricing, anticipated economic and regulatory conditions, reasonable expectations for planned business expansion opportunities, and long-term operating strategies and initiatives.

The royalty rate is based on the Company’s assumption of what a reasonable market participant would pay to license the ANZ trade names, expressed as a percentage of revenues.

The royalty rate is based on the Company’s assumption of what a reasonable market participant would pay to license the Capella University trade name, expressed as a percentage of revenues.

The discount rate is based on the Company’s assumption of a prudent investor’s required rate of return for assuming the risk of investing in a particular company.

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The Company believes that these assumptions are consistent with a reasonable market participant view while employing the concept of highest and best use of the asset.

Based on the results of its quantitative impairment assessment, the Company concluded that the fair value of the ANZ trade names exceeded its carrying value.

Based on the results of its quantitative impairment assessment, the Company concluded that the fair value of the Capella University trade name exceeded its carrying value.

Accordingly, there were no impairment charges related to indefinite-lived intangible assets recorded during the years ended December 31, 2021, 2022, and 2023.

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Restricted cash 13,287 12,944

Cloud computing costs 5,019 7,859

Cloud computing arrangements 7,859 6,870

Other 3,066 4,916

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Equity method investments 13,879 16,068

Cloud computing arrangements 5,957 7,507

Cloud computing arrangements, net of current portion 7,507 12,806

Other investments 3,396 2,806

4 unchanged sentences

Long-term prepaid expenses primarily relate to payments that have been made for future services to be provided after one year.

In 2020, pursuant to the terms of the perpetual license agreement associated with JWMI, the Company made a final one-time cash payment of approximately $ 25.3 million for the right to continue to use the Jack Welch name and likeness.

In 2020, pursuant to the terms of the perpetual license agreement associated with the Jack Welch Management Institute, the Company made a final one-time cash payment of approximately $ 25.3 million for the right to continue to use the Jack Welch name and likeness.

As of December 31, 2022 and 2023, $ 17.7 million and $ 16.2 million, respectively, of this payment is included in the prepaid expenses, net of current portion balance, as the payment is being amortized over an estimated useful life of 15 years.

12 unchanged sentences

Other Investments

The Company holds investments in education tech start-ups focused on transformational technologies that improve student success.

The Company holds investments in education technology start-ups focused on transformational technologies that improve student success.

These investments are accounted for at cost less impairment as they do not have readily determinable fair value.

1 unchanged sentence

Non-current tuition receivable, net, represents tuition that the Company expects to collect, but not within the next 12 months.

Other is comprised primarily of deferred financing costs associated with the Company’s credit facility, deferred contract costs related to commissions paid by ANZ to third party international agents, and refundable security deposits associated with the Company’s leased campus and office space.

Other is comprised primarily of deferred financing costs associated with the Company’s credit facility, deferred contract costs related to commissions paid in the Australia/New Zealand segment to third party international recruitment agents, and refundable security deposits associated with the Company’s leased campus and office space.

Accounts Payable and Accrued Expenses

4 unchanged sentences

Accrued student obligations and other 12,154 6,653

Accounts payable and accrued liabilities $ 95,518 $ 90,588

Accounts payable and accrued expenses $ 90,588 $ 90,888

Long-Term Debt

On November 3, 2020, the Company entered into an amended credit facility (“Amended Credit Facility”), which provides for a senior secured revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of up to $ 350

The Amended Credit Facility provides the Company with an option, subject to obtaining additional loan commitments and satisfaction of certain conditions, to increase the commitments under the Revolving Credit Facility or establish one or more incremental term loans (each, an “Incremental Facility”) in the future in an aggregate amount of up to the sum of (x) the greater of (A) $ 300 million and (B) 100 % of the Company’s consolidated EBITDA (earnings before interest, taxes, depreciation, amortization, and noncash charges, such as stock-based compensation) calculated on a trailing four-quarter basis and on a pro forma basis, and (y) if such Incremental Facility is incurred in connection with a permitted acquisition or other permitted investment, any amounts so long as the Company’s leverage ratio (calculated on a trailing four-quarter basis) on a pro forma basis will be no greater than 1.75 :1.00.

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The Company paid approximately $ 1.9 million in debt financing costs associated with the Amended Credit Facility, and these costs are being amortized on a straight-line basis over the five-year term of the Amended Credit Facility.

Borrowings under the Revolving Credit Facility bear interest at a per annum rate equal to LIBOR or a base rate, plus a margin ranging from 1.50 % to 2.00 % depending on the Company’s leverage ratio.

On June 13, 2023, the Company amended its Revolving Credit Facility to replace references to LIBOR with alternative benchmark rates, including Term SOFR with respect to loans denominated in U.S.

dollars, beginning on June 30, 2023.

There were no other significant changes to the Revolving Credit Facility related to the amendment.

Borrowings under the Revolving Credit Facility bear interest at a per annum rate equal to Term SOFR or a base rate, plus a margin ranging from 1.50 % to 2.00 % depending on the Company’s leverage ratio.

The Company also is subject to a quarterly unused commitment fee ranging from 0.20 % to 0.30 % per annum depending on the Company’s leverage ratio, times the daily unused amount under the Revolving Credit Facility.

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Coverage ratio is defined as the ratio of trailing four-quarter EBITDA and rent expense to trailing four-quarter interest and rent expense.

Department of Education (“Department” or “Department of Education”) Financial Responsibility Composite Score of not less than 1.0 for any fiscal year and not less than 1.5 for any two consecutive fiscal years.

Department of Education (“the Department” or “Department of Education”) Financial Responsibility Composite Score of not less than 1.0 for any fiscal year and not less than 1.5 for any two consecutive fiscal years.

The Company was in compliance with all the covenants of the Amended Credit Facility as of December 31, 2023.

As of December 31, 2022 and 2023, the Company had approximately $ 101.4 million and $ 61.4 million, respectively, outstanding under the Revolving Credit Facility.

Approximately $ 3.6 million and $ 3.4 million was denominated in Australian dollars as of December 31, 2021 and 2022, respectively.

During the year ended December 31, 2022, the Company repaid $ 40.0 million of the outstanding balance under the Revolving Credit Facility.

Approximately $ 3.4 million was denominated in Australian dollars as of December 31, 2022 and 2023.

During each of the years ended December 31, 2022 and 2023, the Company repaid $ 40.0 million of the outstanding balance under the Revolving Credit Facility.

During the years ended December 31, 2021, 2022 and 2023, the Company paid $ 2.7 million, $ 4.2 million and $ 6.8 million, respectively, of interest and unused commitment fees related to its Revolving Credit Facility.

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Contract Liabilities

As discussed in Note 4, in connection with its student tuition contracts, the Company has an obligation to provide free classes in the future should certain eligibility conditions be maintained (the Graduation Fund).

In connection with its student tuition contracts, the Company has an obligation to provide free classes in the future should certain eligibility conditions be maintained.

Long-term contract liabilities represent the amount of revenue under these arrangements that the Company expects will be realized after one year.

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The maximum term of the awards granted under the 2018 Plan is ten years .

The original number of shares of common stock authorized for issuance under the 2018 Plan was 700,000 , plus the number of shares available for grant under the 2015 Plan at the time of stockholder approval of the 2018 Plan, plus the number of shares which may in the future become available under the 2015 Plan due to forfeitures of outstanding awards.

The original number of shares of common stock authorized for issuance under the 2018 Plan was 700,000 , plus the number of shares available for grant under the 2015 Plan at the time of stockholder approval of the 2018 Plan, plus the number of shares which may become available under the 2015 Plan due to forfeitures of outstanding awards.

On April 27, 2022, the Company’s shareholders approved the First Amendment to the 2018 Plan, which increased the total number of shares of common stock available for issuance under the 2018 Plan by the number of shares that were available for issuance under the 2014 Capella Plan as of the effective date of the First Amendment, plus the number of shares that may become available upon the future expiration, forfeiture or cancellation of outstanding awards under the Capella Plans.

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The amount of intrinsic value will change based on the fair market value of the Company’s common stock.

The Company received $ 1.2 million, $ 0.1 million, and $ 14 thousand of net cash proceeds related to stock options exercised during the years ended December 31, 2020, 2021, and 2022, respectively.

The aggregate intrinsic value of the stock options exercised during the years ended December 31, 2020, 2021, and 2022 was $ 2.0 million, $ 24 thousand, and $ 15 thousand, respectively.

Valuation and Expense Information under Stock Compensation Topic ASC 718

The Company received $ 0.1 million, $ 14 thousand, and $ 0.2 million of net cash proceeds related to stock options exercised during the years ended December 31, 2021, 2022, and 2023, respectively.

The aggregate intrinsic value of the stock options exercised during the years ended December 31, 2021, 2022, and 2023 was $ 24 thousand, $ 15 thousand, and $ 0.1 million, respectively.

Valuation and Expense Information under ASC 718, Stock Compensation

At December 31, 2023, total stock-based compensation cost which has not yet been recognized was $ 41.4 million for unvested restricted stock and restricted stock units.

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Stock-based compensation expense, net of tax $ 13,340 $ 16,304 $ 14,616

During the year ended December 31, 2020, the Company recognized a windfall tax impact of approximately $ 2.8 million and during the years ended December 31, 2021, and 2022, the Company recognized shortfall tax impacts of approximately $ 18 thousand, and $ 1.5 million, respectively, related to share-based payment arrangements, which were adjustments to the provision for income taxes.

During the years ended December 31, 2021, 2022, and 2023, the Company recognized shortfall tax impacts of approximately $ 18 thousand, $ 1.5 million, and $ 1.4 million, respectively, related to share-based payment arrangements, which were recorded as adjustments to the provision for income taxes.

Other Employee Benefit Plans

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The Company’s U.S.

Higher Education institutions participate in various federal student financial assistance programs which are subject to audit by agencies, including the Department of Education, the Veterans Administration, and the

Department of Defense.

Management believes that the potential effects of audit adjustments, if any, for the periods currently under audit will not have a material adverse effect, individually or in the aggregate, on the Company’s consolidated financial position, results of operations, or cash flows.

Management believes that the potential effects of audit adjustments, if any, for the periods currently

under audit will not have a material adverse effect, individually or in the aggregate, on the Company’s consolidated financial position, results of operations, or cash flows.

The income tax provision for the years ended December 31, 2021, 2022 and 2023 is summarized below (in thousands):

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Total provision for income taxes $ 21,512 $ 22,899 $ 30,935

and foreign components of income (loss) before income taxes for the years ended December 31, 2020, 2021 and 2022 are summarized below (in thousands):

and foreign components of income before income taxes for the years ended December 31, 2021, 2022 and 2023 are summarized below (in thousands):

2021 2022 2023

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As of December 31, 2023, Loss carryforward consists of net operating losses related to the states where the Company does not file a consolidated return.

The company has state net operating loss carryforwards of $ 20.2 million which will expire from

2027 through 2043 and $ 14.3 million which have an indefinite carryover period.

The change in the valuation allowance for deferred tax assets as of December 31, 2021 and 2022 was $ 0.6 million and $ 1.2 million, respectively, and is primarily related to net operating loss carryforwards in states where the Company does not file a consolidated tax return.

The company has state net operating loss carryforwards of $ 30.9 million which will expire from 2027 through 2044 and $ 25.1 million which have an indefinite carryover period.

The change in the valuation allowance for

deferred tax assets as of December 31, 2022 and 2023 was $ 1.2 million and $ 0.8 million, respectively, and is primarily related to net operating loss carryforwards in states where the Company does not file a consolidated tax return.

The Company concluded that it was more likely than not that the deferred tax asset for the net operating loss carryforwards would not be realized due to negative evidence outweighing the positive evidence regarding the realization of the deferred tax assets.

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Ending unrecognized tax benefits $ 948 $ 948

The Company does not anticipate significant changes to unrecognized tax benefits within the next 12 months.

The Company anticipates a significant decrease in unrecognized tax benefits within the next 12 months as the statute of limitations on all positions will expire in 2024.

As of December 31, 2023, $ 0.9 million of the Company’s total unrecognized tax benefits would favorably affect the Company’s effective tax rate, if recognized.

5 unchanged sentences

Nondeductible compensation 1.9 2.4 1.9

Change in valuation allowance — 0.8 1.7

Excess tax benefit on share-based compensation — 1.7 1.1

Transaction costs 0.6 — —

Change in valuation allowance 0.8 1.7 0.8

Other ( 1.2 ) ( 0.1 ) 0.1

6 unchanged sentences

Higher Education, Education Technology Services, and Australia/New Zealand.

The USHE segment provides flexible and affordable certificate and degree programs to working adults primarily through Strayer University and Capella University, including the Jack Welch Management Institute MBA, which is a unit of Strayer University.

The USHE segment provides flexible and affordable certificate and degree programs to working adults primarily through Capella University and Strayer University, including the Jack Welch Management Institute MBA, which is a unit of Strayer University.

USHE also operates non-degree web and mobile application development courses through Hackbright Academy and Devmountain, which are units of Strayer University.

The Education Technology Services segment is primarily focused on developing and maintaining relationships with employers to build employee education benefits programs that provide employees with access to affordable and industry relevant training, certificate, and degree programs.

The employer relationships developed by the Education Technology Services division are an important source of student enrollment for Strayer University and Capella University, and the majority of the revenue attributed to the Education Technology Services division is driven by the volume of enrollment derived from these employer relationships.

relevant training, certificate, and degree programs.

The employer relationships developed by the Education Technology Services segment are an important source of student enrollment for Capella University and Strayer University, and the majority of the revenue attributed to the Education Technology Services segment is driven by the volume of enrollment derived from these employer relationships.

Education Technology Services also supports employer partners through Workforce Edge, a platform which provides employers a full-service education benefits administration solution, and Sophia Learning, which enables education benefits programs through the use of low-cost online general education-level courses recommended by the American Council on Education for credit at other colleges and universities.

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Consolidated revenues $ 1,131,686 $ 1,065,480 $ 1,132,924

Income (loss) from operations

Income from operations

Higher Education $ 104,914 $ 38,605 $ 59,628

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Consolidated income from operations $ 73,912 $ 70,760 $ 95,321

The following table presents a schedule of significant non-cash items included in segment income (loss) from operations by reportable segment (in thousands):

The following table presents a schedule of significant non-cash items included in segment income from operations by reportable segment for the years ended December 31, 2021, 2022, and 2023 (in thousands):

2021 2022 2023

4 unchanged sentences

Amortization of intangible assets 51,495 14,350 11,457

Merger and integration costs — — 336

Restructuring costs 2,036 2,480 385

19 unchanged sentences

However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could materially affect future results of operations in a particular period.

Wright, et al.

Capella Education Co., et al.

(now captioned Ornelas, et al.

Capella, et al.) was filed several years ago in the United States District Court for the District of Minnesota, Case No.

After the court granted Capella’s motion to dismiss in relation to all but one plaintiff, the plaintiff filed a motion for leave to file a second amended complaint on October 5, 2020, seeking to add six named plaintiffs as well as additional sub-classes and causes of action to the lawsuit.

On September 22, 2021, the court affirmed a magistrate’s order granting plaintiff’s motion to amend, and plaintiffs subsequently filed their second amended complaint.

The parties entered into a confidential settlement which became effective on April 20, 2022, and on April 25, 2022 the parties filed a joint stipulation of dismissal with prejudice.

On May 17, 2022, the court entered an order of dismissal with prejudice.

On April 20, 2021, Capella University received a letter from the Department of Education referencing Wright, et al.

Capella Education Co., et al.

and indicating that the Department would require a fact-finding process pursuant to the borrower defense to repayment regulations to determine the validity of more than 1,000 borrower defense applications that have been submitted regarding Capella University.

(subsequently captioned Ornelas, et al.

Capella, et al.

), United States District Court for the District of Minnesota, Case No.

18-cv-1062, and indicating that the Department would require a fact-finding process pursuant to the borrower defense to repayment regulations to determine the validity of more than 1,000 borrower defense applications that have been submitted regarding Capella University.

According to the Department, some of the applications allege similar claims as in the Wright matter concerning alleged misrepresentations of the length of time to complete doctoral programs.

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Miguel Cardona and the United States Department of Education , United States District Court for the Northern District of California, Case No.

3:19-cv-03674-WHA, the Department joined a proposed class settlement agreement that would result in a blanket grant of automatic, presumptive relief for all borrower defense to repayment applications filed by students at any of approximately 150 different listed institutions, including Capella University, through June 22, 2022.

The class settlement agreement would also provide certain expedited review of borrower defense claims related to schools excluded from the automatic relief list, as well as for borrowers who applied during the period after execution of the settlement and before final approval.

The Sweet settlement received preliminary court approval on August 4, 2022.

A joint motion for final approval was filed on September 22, 2022, which multiple intervening higher education institutions and companies opposed.

Following a fairness hearing, the court granted final approval of the settlement on November 16, 2022.

Intervenors have appealed the court’s order and moved to stay the court’s final judgment approving the settlement pending resolution of the appeal.

3:19-cv-03674-WHA, the Department joined a proposed class settlement agreement that resulted in a blanket grant of automatic, presumptive relief for all borrower defense to repayment applications filed by students at any of approximately 150 different listed institutions, including Capella University, through June 22, 2022.

The class settlement agreement also provided certain expedited review of borrower defense claims related to schools excluded from the automatic relief list, as well as for borrowers who applied during the period after execution of the settlement and before final approval (“Post-Class Applicants”).

The district court granted final approval of the settlement on November 16, 2022.

Intervenors, including multiple intervening higher education institutions and companies, appealed the district court’s order.

Intervenors’ request to stay the district court’s final judgment approving the settlement pending resolution of the appeal has been denied.

It is unclear whether the Department might seek recovery for the amounts of loans discharged pursuant to the automatic relief provision in the Sweet settlement.

In a July 25, 2022 filing in the same litigation, the Department stated that providing automatic relief to such borrowers “does not constitute the granting or adjudication of a borrower defense pursuant to the Borrower Defense Regulations, and therefore provides no basis to the Department for initiating a borrower defense recoupment proceeding against any institution identified” on the list.

It is unclear whether the Department would attempt to seek recovery from Capella University for the amounts of discharged loans.

recovery for the amounts of discharged loans, Capella University would dispute and defend against such efforts.

The Department has indicated that any recoupment against institutions “could be imposed only after the Department initiated a separate, future proceeding, in accordance with regulations that require the Department to prove a sufficient basis for liability and provide schools with notice and an opportunity to be heard.” If the Department were to seek recovery for the amounts of automatically discharged loans of Capella University students under the Sweet settlement, Capella University would dispute and defend against such efforts.

At this time, the Company is unable to predict the ultimate outcome of Capella-related borrower defense applications.

If the Department were to successfully seek recovery for the amounts of discharged loans from Capella University in future proceedings, any such recovery could have a material adverse effect on our business.

As a result of the Fifth Circuit’s August 7, 2023 nationwide injunction of the 2022 Borrower Defense to Repayment Regulations, the Department announced that while it will not adjudicate any borrower defense applications under the 2022 Borrower Defense to Repayment Regulations unless and until the effective date is reinstated, it will continue to adjudicate

applications under a prior version of the rule if required pursuant to a court ordered settlement.

For the Sweet Post-Class Applicants, the Department agreed to adjudicate such claims under the 2016 BDTR Rule, and, if the Department does not adjudicate the applications by January 28, 2026, it will provide the applicants “Full Settlement Relief” (i.e., federal student loan(s) associated with the borrower’s attendance at the school will be discharged, the Department will refund any amounts paid to the Department on those loans, and the credit tradeline for those loans will be deleted from the borrower’s credit report).

The Department has informed institutions that:

it is notifying most schools of all applications received by the Department from June 23, 2022 to November 15, 2022 (constituting Sweet Post-Class Applicants) in a single send (and anticipates completing notification to all schools by approximately April 2024).

On January 25, 2024, Capella University received notice that the Department received approximately 6,700 borrower defense to repayment applications with claims for forgiveness of loans taken out at the University and filed between June 23, 2022 and November 15, 2022.

On February 1, 2024, Strayer University received notice that the Department received approximately 1,900 borrower defense to repayment applications with claims for forgiveness of loans taken out at the University and filed between June 23, 2022 and November 15, 2022.

In the notices received, the Department indicated that:

(1) the notification was occurring prior to any substantive review of the application as well as its adjudication;

(2) it would send the applications to Capella University and Strayer University in batches of 500 per week;

(3) it is optional for institutions to respond to the applications;

and (4) not responding will result in no negative inference by the Department.

The Department has also explained that it will separately decide whether to seek recoupment on any approved claim and that any recoupment actions the Department chooses to initiate will have their own notification and response processes, which include providing additional evidence to the institution.

The Department has indicated that an institution will learn of the Department’s determination only if it approves a BDTR application and the Department seeks recoupment.

In relation to the 2021 notice received by Capella University, the Department indicated there were more than 1,000 applications pending, but the Company only ever received approximately 500 actual claims, and after an exhaustive review and response process the Company believes that none properly stated a claim for loan forgiveness.

At this time, the Company is unable to predict whether the Department will grant BDTR relief for the claims noticed on January 25 and February 1, or if so, whether it will seek recoupment from Capella University or Strayer University.

If the Department were to seek recoupment, Capella University and Strayer University would dispute and defend against such efforts.

However, if the Department were to successfully seek recovery for the amounts of discharged loans from Strayer University and Capella University in future proceedings, any such recovery could have a material adverse effect on our business.

United States Regulation

On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.

Among other things, the $2.2 trillion bill established some flexibilities related to the processing of federal student financial aid, established a higher education emergency fund, and created relief for some federal student loan borrowers.

Through the CARES Act, institutions of higher education were provided relief from conducting a return to Title IV (R2T4) calculation in cases where the student withdrew because of the COVID-19 pandemic, including removing the requirement that the institution return unearned funds to the Department of Education and providing loan cancellation for the portion of the Direct Loan associated with a payment period that the student did not complete due to the COVID-19 pandemic.

The CARES Act also allows institutions to exclude from satisfactory academic progress calculations any attempted credits that the student did not complete due to the COVID-19 pandemic, without requiring an appeal from the student.

Additionally, under the legislation, institutions are permitted to transfer up to 100% of Federal Work-Study (“FWS”) funds into their Federal Supplemental Educational Opportunity Grant (“FSEOG”) allocation and are granted a waiver of the 2019/2020 and 2020/2021 non-federal share institutional match.

Institutions may continue to make FWS payments to student employees who are unable to meet their employment obligations due to the COVID-19 pandemic.

The Department issued sub-regulatory guidance to institutions regarding implementation of the provisions included in the CARES Act.

The CARES Act also suspended payments and interest accrual on federal student loans until September 30, 2020, in addition to suspending involuntary collections such as wage garnishment, tax refund reductions, and reductions of federal benefits like Social Security benefits during the same timeframe.

On March 30, 2021, the Secretary of Education also extended student loan relief to all Federal Family Education Loans (“FFEL”) not previously covered.

Through a series of administrative actions, student loan relief has been extended, including on August 24, 2022, when the Department announced, “a final extension of the pause on student loan repayment, interest, and collections through December 31, 2022.” The restart of student loan repayments has subsequently been postponed further.

Finally, the CARES Act allocated $14 billion to higher education through the creation of the Education Stabilization Fund.

Fifty percent of the emergency funds received by institutions must go directly to students in the form of emergency financial aid grants to cover expenses related to the disruption of campus operations due to the COVID-19 pandemic.

Students who were previously enrolled in exclusively online courses prior to March 13, 2020 are not eligible for these grants.

Institutions may use remaining emergency funds not given to students for costs associated with significant changes to the delivery of instruction due to the COVID-19 pandemic, as long as such costs do not include payment to contractors for the provision of pre-enrollment recruitment activities, including marketing and advertising;

or capital outlays associated with facilities related to athletics, sectarian instruction, or religious worship.

Institutions received funds under the Education Stabilization Fund based on a formula that factors in their relative percentage of full-time, Federal Pell Grant-eligible students who were not exclusively enrolled in online education prior to the emergency period.

On April 9, 2020, the Department published guidance and funding levels for the Education Stabilization Fund, indicating that Strayer University was eligible to receive $ 5,792,122 .

Given that Strayer University is predominantly online, and very few students take only on-ground classes, Strayer University declined to accept the funds allocated to it because most students would not have expenses related to the disruption of campus operations.

Instead, Strayer University provided a $ 500 tuition grant for all students who had enrolled in on-ground classes for the Spring term, prior to the classes being converted to online.

Because Capella University’s students are exclusively online, Capella University was ineligible for Education Stabilization funding.

American Rescue Plan Act of 2021

On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021.

Similar to previous stimulus packages, this legislation provided additional funding for the Higher Education Emergency Relief Fund.

A small portion of the $39.6 billion allocated for institutions of higher education was made available for student emergency aid for students at for-profit institutions.

Capella University disbursed $ 184,323 to students of the highest need in June 2021, and Strayer University disbursed $ 2,554,682 to students of the highest need in July 2021.

The legislation also amended the “90/10 Rule” to include “all federal education assistance” in the “90” side of the ratio calculation.

Business – Regulation – U.S.

Regulatory Environment – The 90/10 Rule” for a description of the 90/10 Rule.

The legislation required the Department to conduct a negotiated rulemaking process to modify related Department regulations, which the Department began in January 2022.

In March 2022, the Institutional and Programmatic Eligibility negotiated rulemaking committee reached consensus on changes to the 90/10 Rule.

On October 27, 2022, the Department of Education released final 90/10 regulations, which are consistent with the consensus language.

The final regulations provided for an expanded definition of “federal education assistance” that will be periodically defined by the Secretary.

As institutionally accredited institutions of higher education operating in multiple jurisdictions, Capella University and Strayer University are subject to accreditation rules and varying state licensing and regulatory requirements.

In addition, the Higher Education Act and the regulations promulgated thereunder require all higher education institutions that participate in the various Title IV programs, including Capella University and Strayer University, to comply with detailed substantive and reporting requirements and to undergo periodic regulatory scrutiny.

The Higher Education Act mandates specific regulatory responsibility for each of the following components of the higher education regulatory triad:

(1) the institutional accrediting agencies recognized by the U.S.

Secretary of Education;

(2) state education regulatory bodies;

and (3) the federal government through the Department of Education.

Our business activities are planned and implemented to achieve compliance with the rules and regulations of the state, regional and federal agencies that regulate our activities.

The regulations, standards, and policies of these regulatory agencies are subject to frequent change.

Students finance their education at Capella University and Strayer University in a variety of ways, and historically about 75 % of students participated in one or more Title IV programs.

Title IV Programs

Capella University and Strayer University maintain eligibility for their students to participate in the following Title IV programs:

• Federal Grants.

Grants under the Federal Pell Grant program are available to eligible students based on financial need and other factors.

• Campus-Based Programs.

The campus-based Title IV programs include the Federal Supplemental Educational Opportunity Grant program, the Federal Perkins Loan, and the Federal Work-Study Program.

Neither Capella University nor Strayer University actively participates in the Federal Perkins Loan program, which expired on September 30, 2017.

In addition, Strayer University does not actively participate in the Federal Work-Study Program.

• Federal Direct Student Loans.

Under the William D.

Ford Federal Direct Loan Program, the Department of Education makes loans directly to students and their parents.

Undergraduate students who demonstrate financial need may qualify for a subsidized loan.

The federal government pays the interest on a subsidized loan while the student is in school and during any approved periods of deferment, after which the student’s obligation to repay the loan begins.

Unsubsidized loans are available to students who do not qualify for a subsidized loan or, in some cases, in addition to a subsidized loan.

PLUS loans, including Graduate PLUS loans, are unsubsidized loans available in amounts up to the total cost of attendance less any other financial aid.

Federal Financial Aid Regulation

To be eligible to participate in Title IV programs, Capella University and Strayer University must comply with specific standards and procedures set forth in the Higher Education Act and the regulations issued thereunder by the Department of Education.

As part of those participation standards, the Department of Education determines whether, among other things, the institution meets certain standards of administrative capability and financial responsibility.

The institutions must also follow extensive Department of Education rules regarding the awarding and processing of funds issued under Title IV programs.

Some of the key provisions regarding institutional eligibility and processing federal financial aid are described below.

Financial Responsibility

The Higher Education Act and Department of Education regulations establish extensive standards of financial responsibility that institutions such as Capella University and Strayer University must satisfy in order to participate in Title IV programs.

These standards generally require that an institution provide the services described in its official publications and statements, properly administer Title IV programs in which it participates, and meet all of its financial obligations, including required refunds and any repayments to the Department of Education for debts and liabilities incurred in programs administered by the Department of Education.

Department of Education standards utilize a complex formula to assess financial responsibility.

The standards focus on three financial ratios:

(1) equity ratio (which measures the institution’s capital resources and ability to borrow);

(2) primary reserve ratio (which measures the institution’s financial viability and liquidity);

and (3) net income ratio (which measures the institution’s ability to operate at a profit or within its means).

An institution’s financial ratios must yield a composite score of at least 1.5 for the institution to be deemed financially responsible without alternative measures and further federal oversight.

For Capella University and Strayer University, the Department evaluates financial responsibility at the parent level, based on review of SEI’s financial statements.

The Company has applied the financial responsibility standards to it’s financial statements as of and for the year ended December 31, 2023, and based on it’s calculated composite score and other relevant factors, it believes the Company met the Department of Education’s financial responsibility standards.

On November 1, 2016, the Department of Education released a new regulation, which after a series of delays became effective as of October 16, 2018, under which an institution may no longer be considered financially responsible if one or more of a list of triggering events occurs.

The Department of Education will automatically determine that an institution is not financially responsible if a “mandatory” triggering event occurs, which includes, among other things, the institution receives certain warnings from the SEC, fails to file required reports in a timely manner, or has a cohort default rate of 30% or greater for each of the two most recent official calculations.

The Department of Education will also determine that an institution is not financially responsible if certain triggering events, such as a lawsuit against the institution, an accrediting agency’s requirement that the institution submit a teach-out plan, or potential loss of Title IV eligibility for gainful employment programs, result in the institution’s recalculated composite score to be less than 1.0.

The Department of Education may also invoke certain “discretionary” triggering events, such as citation by a state agency or accrediting agency for failure to satisfy the agency’s standards, to determine that an institution is not financially responsible.

An institution determined not to be financially responsible because of one or more triggering events may be required to issue an irrevocable letter of credit for not less than 10% of the Title IV funds received by the school for the most recently completed fiscal year and/or will be issued a Provisional Program Participation Agreement.

On August 30, 2019, as part of the final BDTR regulations, the Department of Education made changes to the financial responsibility requirements, including establishing a more limited set, as compared to the 2016 rule, of mandatory and discretionary triggering events that have, or could have, a materially adverse impact on the institution’s financial condition and therefore warrant financial protection.

The 2019 rule left intact the consequences of the triggering events under the 2016 rule.

The 2019 rule further updates the definitions of terms used to calculate an institution’s composite score and otherwise amends the composite score methodology to reflect changes in FASB accounting standards pertaining to new leases.

The financial responsibility changes became effective July 1, 2020.

In 2022, the Department of Education considered as part of the Institutional and Programmatic Eligibility negotiated rulemaking new regulations regarding, among other things, financial responsibility.

Negotiated rulemaking committee meetings completed in March 2022 with no consensus reached on the topic.

On October 23, 2023, the Department released final rules on financial responsibility.

Pursuant to new regulations effective July 1, 2024, the Department adopted new mandatory and discretionary triggers and new reporting requirements.

New mandatory triggers include but are not limited to failing the 90/10 Rule;

receiving at least 50% of Title IV funds from programs that fail gainful employment requirements;

certain SEC or exchange actions;

and certain actions that result in an institution’s recalculated composite score to fall below 1.0, including being subject to a Department action to recover losses from approved Borrower Defense to Repayment claims.

All of the mandatory triggers constitute an automatic failure of the financial responsibility requirements and would enable the Department to seek financial protection.

The rules also establish new discretionary triggers that permit the Department to conduct a case-by-case analysis to determine if additional financial protection is needed.

Such discretionary triggers include accrediting agency and government agency actions;

certain defaults or creditor events;

high annual dropout rates;

elimination of programs or locations that enroll more than 25% of the institution’s Title IV students;

and pending Borrower Defense to Repayment claims, among other things.

In general, institutions will be required to report triggering events within 21 days of occurrence.

According to the regulation, such triggering events may result in a financial protection requirement that would most likely take the form of a letter of credit or cash escrow and provisional certification to participate in Title IV.

The amount of financial protection can range from 10% up to 50% of Title IV funds per triggering event, and the Department may “stack” financial protection requirements if more than one mandatory or discretionary trigger is present.

Student Loan Defaults

The Department of Education calculates a rate of student defaults (known as a cohort default rate) for each institution with 30 or more borrowers entering repayment in a given federal fiscal year.

The Department of Education includes in the cohort all student borrowers at the institution who entered repayment on any Direct or Federal Family Education Loan Program loan during that fiscal year.

The cohort default rate is the percentage of those borrowers who become subject to their repayment obligation in the relevant federal fiscal year and default by the end of the second federal fiscal year following that fiscal year, resulting in a three-year cohort default rate.

Because of the need to collect data on defaults, the Department of Education publishes cohort default rates three years in arrears;

for example, in the fall of 2023, the Department of Education issued cohort default rates for federal fiscal year 2020.

The Department of Education may take adverse action against an institution if it has excessive cohort default rates, including without limitation the following:

• If an institution’s cohort default rate is 30% or more in a given fiscal year, the institution will be required to assemble a “default prevention task force” and submit to the Department of Education a default improvement plan.

• If an institution’s cohort default rate exceeds 30% for two consecutive years, the institution will be required to review, revise, and resubmit its default improvement plan.

• If an institution’s cohort default rate exceeds 30% for two out of three consecutive years, the Department of Education may subject the institution to provisional certification.

• If an institution’s cohort default rate is equal to or greater than 30% for each of the three most recent federal fiscal years for which data are available, the institution will be ineligible to participate in the Direct Loan Program and Federal Pell Grant Program.

An institution generally loses eligibility to participate in Title IV programs if its most recent cohort default rate is greater than 40%.

Institutions with a cohort default rate equal to or greater than 15% for any of the three most recent fiscal years for which data are available are subject to a 30-day delayed disbursement period for first-year, first-time undergraduate borrowers.

National and institutional cohort default rates for cohort years 2018, 2019, and 2020 have been impacted by the COVID-19 repayment pause.

Capella University’s and Strayer University’s official three-year cohort default rates for 2018, 2019, and 2020, as well as the average official three-year cohort default rates for proprietary institutions nationally, were as follows:

University Strayer

University National Average

2018 5.2 % 8.6 % 11.2 %

2019 1.1 % 2.2 % 3.1 %

2020 0.0 % 0.0 % 0.0 %

As part of the compliance programs related to the cohort default rate, Capella University and Strayer University provide entrance and exit counseling to their students and engage the services of third parties to counsel students once they are in repayment status regarding their repayment obligations.

On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which included a provision that established a federal student loan administrative forbearance period, pause in interest accrual, and suspension of collections activity.

In June 2023, the Department of Education announced that student loan interest would begin to accrue on September 1, 2023, and student loan repayment resumed in October 2023.

As part of the return to repayment, the Department has also announced a 12 month “on-ramp” during which time delinquent borrowers will not be reported to credit bureaus or be counted as in default for the purpose of cohort default rate calculations.

On January 10, 2023, the Department proposed regulations to create a new income-driven repayment plan to reduce future monthly payments for lower- and middle-income borrowers.

Among other things, the proposed regulation would revise the Revised Pay As You Earn (REPAYE) regulations, eliminate negative amortization, and offer $0 monthly payments for any individual borrower who makes less than roughly $30,600 annually and any borrower in a family of four who makes less than about $62,400.

While it is too early to know the entirety of the impact that COVID and COVID-related repayment flexibility will have on the cohort default rate, the Company expects that the next one or more cohort years will be affected.

The 90/10 Rule

A requirement of the Higher Education Act, commonly referred to as the 90/10 Rule, applies only to proprietary institutions of higher education, which include Capella University and Strayer University.

Under this rule, a proprietary institution is prohibited from deriving more than 90% of its revenues (as revenues are computed under the Department of Education’s methodology) from federal funds on a cash accounting basis (except for certain institutional loans) for any fiscal year.

Historically, by statute, only Title IV funds have been considered within the 90% metric;

however as described below, that will change for fiscal years beginning on or after January 1, 2023.

A proprietary institution of higher education that violates the 90/10 Rule for any fiscal year will be placed on provisional certification for up to two fiscal years.

Proprietary institutions of higher education that violate the 90/10 Rule for two consecutive fiscal years will become ineligible to participate in Title IV programs for at least two fiscal years and will be required to demonstrate compliance with Title IV eligibility and certification requirements for at least two fiscal years prior to resuming Title IV program participation.

In addition, the Department of Education discloses on its website any proprietary institution of higher education that fails to meet the 90/10 requirement, and reports annually to Congress the relevant ratios for each proprietary institution of higher education.

Using the statutory formula under the definition of federal funds included within the 90% metric then in effect, Capella University derived approximately 65.30 % of its cash-basis revenues from Title IV program funds in fiscal year 2022.

Strayer University derived approximately 80.57 % of its cash-basis revenues from Title IV program funds in fiscal year 2022.

Our computation for 2023, which will be the first year under the new 90/10 requirements, has not yet been finalized and audited;

however, we believe we will remain in compliance with the 90/10 Rule requirement.

The key components of non-Title IV revenue for Capella University and Strayer University are individual student payments, employer tuition reimbursement payments, veterans’ education benefits, military tuition assistance, vocational rehabilitation funds, private loans, state grants, and scholarships.

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021, which included a change to the 90/10 methodology to include all federal funding.

The Department of Education promulgated new regulations regarding, among other things, the 90/10 rule as part of the Institutional and Programmatic Eligibility negotiated rulemaking and the committee reached consensus on the topic in March 2022.

The Department released final regulations on October 27, 2022.

The regulatory changes require proprietary institutions to count all “federal education assistance funds” as federal revenue in the 90/10 calculation for fiscal years beginning on or after January 1, 2023.

The preamble to the final rule and subsequent sub-regulatory guidance further prohibit inclusion of non-Title IV eligible programs offered in part or in full through distance education in the 10% calculation.

On December 21, 2022, the Department released a list of federal agencies and federal education assistance programs that must be included as federal revenue in the 90/10 calculation.

Such agencies include the U.S.

Department of Defense (military tuition assistance) and the Department of Veterans Affairs (veterans education benefits), in addition to the Title IV programs already covered by the 90/10 Rule.

The new 90/10 regulations are effective for fiscal years beginning on or after January 1, 2023.

Other legislation has been introduced in both chambers of Congress that seeks to modify the 90/10 Rule further, including proposals to change the ratio requirement to 85/15 (federal to nonfederal revenue), or to eliminate the 90/10 Rule.

We cannot predict whether or how legislative or regulatory changes will affect the 90/10 Rule.

Consolidated Appropriations Act, 2021

On December 27, 2020, the President signed into law the Consolidated Appropriations Act of 2021.

Among other things, this package funded the federal government through September 2021, provided additional COVID-related relief, and made a number of U.S.

higher education changes.

The legislation includes a number of tax provisions, including replacing the tuition deduction with an expanded Lifetime Learning Credit, which now shares the higher income limitations of the American Opportunity Tax Credit.

The legislation also extends until January 1, 2026 expanded employer-provided educational assistance permitting employers to pay up to $5,250 toward an employee’s federal student loans as a tax-free benefit.

In addition, the legislation includes a number of higher education-related provisions, including:

adopting the FAFSA Simplification Act, which includes eliminating the “expected family contribution” from the Free Application for Federal Student Aid (“FAFSA”) and replacing it with a “Student Aid Index;” expanding eligibility for Pell Grants;

restoring Pell Grant eligibility for incarcerated students attending non-profit institutions;

restoring quarters/semesters of Pell eligibility to students who have successfully asserted a borrower defense to repayment;

repealing the limitation on lifetime subsidized loan eligibility (known as “Subsidized Usage Limit Applies,” or SULA);

and significantly simplifying the FAFSA form.

The Department published a FAFSA Simplification Information webpage on October 14, 2022 and is expected to provide institutions with guidance on the higher education provisions included in the Consolidated Appropriations Act of 2021, which take effect on July 1, 2023.

The bill also provided $22.7 billion for higher education institutions and students impacted by COVID-19, including $680.9 million (3 percent of the total) for student emergency aid for students at for-profit institutions.

In January 2021, the Department released a table of institutional allocation of funds which indicated that Capella University was eligible for $ 328,602 and Strayer University was eligible for $ 5,831,606 , all of which was disbursed to students with the highest need in the form of direct grants in spring 2021.

Veterans Health Care and Benefits Improvement Act of 2020

On January 5, 2021, the President signed into law the Veterans Health Care and Benefits Improvement Act of 2020, which expanded student veterans’ protections.

Among other things, the legislation requires a risk-based review of schools if an institution is operating under Heightened Cash Monitoring 2 or provisional approval status by the Department of Education, is subject to any punitive action by a federal or state entity, faces the loss or risk of loss of accreditation, or has converted from for-profit to non-profit status.

The legislation also restores veterans benefits to students whose school closed, as long as the student transferred fewer than 12 credits from the closed school or program;

protects students from debt collection by the VA for overpaid tuition benefits;

and establishes a number of institutional requirements, including:

providing clear disclosures about cost, loan debt, graduation and job placement rates, and acceptance of transfer credit;

ensuring institutions are accommodating short absences due to service;

prohibiting same-day recruitment and registration;

and prohibiting more than three unsolicited recruiting contacts during any one-month period.

Most provisions became effective August 1, 2021.

Institutions were permitted to seek waivers for certain sections of the new law if they were not able to satisfy compliance requirements by August 1, 2021, but neither Strayer University nor Capella University sought a waiver.

On June 8, 2021, President Biden signed into law the Training in High-Demand Roles to Improve Veteran Employment Act (the “THRIVE Act”), which amended provisions of the Veterans Health Care and Benefits Improvement Act and the American Rescue Plan Act.

The law requires the U.S.

Department of Labor and VA to collaborate on a list of high-demand occupations for a rapid retraining assistance program.

Additionally, the law requires the Government Accountability Office to report on the outcomes and effectiveness of retraining programs.

The THRIVE Act amended the Veterans Health Care and Benefits Improvement Act by clarifying that programs pursued solely through distance education on a half-time basis or less are not eligible for the housing stipend that is generally available for retraining programs.

As noted above, the Veterans Health Care and Benefits Improvement Act prohibits certain high-pressure recruiting tactics.

The THRIVE Act requires the VA to take disciplinary action if a person with whom an institution has a recruiting or educational services agreement violates the VA’s incentive compensation bans.

On December 21, 2021, President Biden signed into law the Responsible Education Mitigating Options and Technical Extensions (“REMOTE”) Act, which amended provisions of the Veterans Health Care and Benefits Improvement Act, the American Rescue Plan Act, and the THRIVE Act.

The law includes changes to help institutions satisfy the Veterans Health Care and Benefits Improvement Act’s requirements by using the College Financing Plan template, in addition to extending some COVID-related flexibilities previously granted amid the pandemic.

The law also extended remote learning waivers through June 1, 2022, simplified the VA verification process for tuition reimbursement, and fixed a technical error to ensure U.S.

institutions of higher education can continue to use incentive compensation to recruit foreign students without losing GI Bill funding for their students.

Ensuring the Best Schools for Veterans Act of 2022

On August 26, 2022, President Biden signed into law the Ensuring the Best Schools for Veterans Act of 2022, which amended prior statutory language and made modifications to how the VA operationalizes the 85/15 requirement (that is, the rule that generally forbids use of Department of Veterans Affairs benefits for students enrolling in a program in which more than 85% of students enrolled in the program have any portion of their tuition, fees, or other charges paid to or for them by the institution or by the VA).

Among other things, the law clarifies that reporting associated with the 85/15 requirement does not apply to institutions at which 35% or fewer students receive GI bill benefits.

The law also exempts programs for which fewer than 10 students have any portion of their tuition, fees, or other charges paid to or for them by the institution or by the VA.

Consolidated Appropriations Act, 2022

On March 15, 2022, President Biden signed into law the Consolidated Appropriations Act of 2022.

The bill allocated $76.4 billion to the Department of Education and its programs, including an increase to the maximum Pell Grant award, bringing the total to $6,895 for the 2022-23 award year.

In addition, campus-based aid programs were increased, with $895 million allocated for the FSEOG program, an increase of $15 million above the FY 2021 enacted level, and $1.21 billion allocated for FWS, an increase of $20 million above the FY 2021 enacted level.

In addition to the increases in federal student aid funding, the bill provided $2.1 billion for career, technical, and adult education, $61 million above the FY 2021 enacted level, and an additional $3 billion for higher education programs, $452 million more than the FY 2021 enacted level.

The bill also dictated Department requirements related to federal loan servicing, including appropriations for just over $2 billion for expenses related to the administration of the federal loan program, and made a number of changes to the FAFSA Simplification Act.

Consolidated Appropriations Act, 2023

In December 2022, the President signed the 2023 Consolidated Appropriations Act.

Among other things, the act provides a $500 increase to the maximum Pell Grant, totaling $7,395 for FY 2023-24.

The bill also increases funding to Federal Work Study, FSEOG, Federal TRIO programs, and HBCUs and MSIs.

Additionally, the bill enacted language that would allow companies to make matching contributions to a retirement account for employees making qualified student loan payments.

The bill level funds the Office of Federal Student Aid at $2.03 billion and does not provide new funding for President Biden’s student loan forgiveness plan.

Current Negotiated Rulemaking

On May 26, 2021, the Department first announced its intention to establish negotiated rulemaking committees to prepare proposed regulations for programs authorized under Title IV of the Higher Education Act of 1965, as amended.

As part of the

notice, the Department suggested the following topics for regulation:

change of ownership and change in control of institutions of higher education under 34 CFR § 600.31;

certification procedures for participation in Title IV, HEA programs under 34 CFR § 668.13;

standards of administrative capability under 34 CFR § 668.16;

ability to benefit under 34 CFR § 668.156;

borrower defense to repayment under 34 CFR §§ 682.410, 668.411, 685.206, and 685.222;

discharges for borrowers with a total and permanent disability under 34 CFR §§ 674.61, 682.402, and 685.213;

closed school discharges under 34 CFR §§ 685.214 and 682.402;

discharges for false certification of student eligibility under 34 CFR §§ 685.215(a)(1) and 682.402;

loan repayment plans under 34 CFR §§ 682.209, 682.215, 685.208, and 685.209;

the Public Service Loan Forgiveness program under 34 CFR § 685.219;

mandatory pre-dispute arbitration and prohibition of class action lawsuits provisions in institutions’ enrollment agreements (formerly under 34 CFR § 685.300) and associated counseling about such arrangements under 34 CFR § 685.304;

financial responsibility for participating institutions of higher education under 34 CFR subpart L, such as events that indicate heightened financial risk;

gainful employment (formerly located in 34 CFR subpart Q);

and Pell Grant eligibility for prison education programs under 34 CFR part 690.

Additionally, the Department invited public input on how it could address, through regulations, gaps in post-secondary outcomes such as retention, completion, loan repayment, and student loan default by race, ethnicity, gender, and other key student characteristics.

To support this work, the Department held a series of virtual public hearings in June 2021, as well as accepted written comments.

At the virtual public hearings and via written comments, members of the public discussed proposed changes for all of the issues noted above, as well as comments addressing data transparency, including disclosures of outcomes for veteran students.

The Department indicated its intention to convene multiple committees, including the Affordability and Student Loans committee and the Institutional and Programmatic Eligibility committee, to engage in negotiated rulemaking in late 2021 and early 2022.

See “Affordability and Student Loans Committee” and “Institutional and Programmatic Eligibility Committee” below.

In January 2023, the Department indicated its intention to establish one or more rulemaking committees in 2023 to propose new regulations on distance education, improving the use of deferments and forbearances, third-party servicers and related issues, cash management, return of federal funds, state authorization, accreditation and related issues, and TRIO programs.

Following completion of negotiated rulemaking committee meetings, the Department of Education issues proposed rules for public comment.

If the negotiated rulemaking committee reaches consensus on a topic, the Department of Education is bound to propose a rule consistent with the consensus.

Following public comment, the Department issues final regulations, which, if published by November 1, would generally take effect July 1 of the following year.

Department of Defense (military tuition assistance) and the Department of Veterans Affairs (veterans education benefits).

The Department indicated that it will publish periodic updates to the list as needed.

In addition, certain members of Congress have proposed to revise the 90/10 Rule to reduce the limit on federal funding to 85% of total revenue.

In the context of Higher Education Act reauthorization, defense bills and appropriations bills, other

members of Congress have proposed legislation that would eliminate the 90/10 Rule.

The Company cannot predict whether or how legislative or regulatory changes will affect the 90/10 Rule.

Gainful Employment

Under the Higher Education Act of 1965, as amended (“HEA”), a proprietary institution offering programs of study other than a baccalaureate degree in liberal arts (for which there is a limited statutory exception) must prepare students for gainful employment in a recognized occupation.

The Department of Education published final regulations related to gainful employment that went into effect on July 1, 2015, with additional disclosure requirements that became effective January 1, 2017 and July 1, 2019 (the “2015 Regulations”).

On July 1, 2019, the Department of Education updated gainful employment final regulations, which contained a full repeal of the 2015 Regulations and became effective on July 1, 2020 (the “2019 Regulations”).

Both Strayer University and Capella University implemented the 2019 Regulations early, by means permitted by the Secretary of Education, and accordingly were not required to report gainful employment data for the 2018-2019 award year.

For the period between July 2019 and July 1, 2020, Strayer University and Capella University were not required to comply with gainful employment disclosure and template publication requirements and were not required to comply with the regulation’s certification requirements with respect to programmatic accreditation and program satisfaction of prerequisites for professional licensure/state certification.

On December 8, 2021, the Department announced its intention to establish negotiated rulemaking committees to develop proposed regulations for gainful employment and other topics related to programs authorized under Title IV of the HEA.

Negotiated rulemaking committee sessions occurred January-March 2022, and the Institutional and Programmatic Eligibility committee did not reach consensus on the Gainful Employment topic.

The Department has indicated its intention to publish draft Gainful Employment rules in April 2023, which would be effective no earlier than July 2024.

We cannot predict what a future gainful employment regulation may include.

Under the Higher Education Act, a proprietary institution offering programs of study other than a baccalaureate degree in liberal arts (for which there is a limited statutory exception) must prepare students for gainful employment in a recognized occupation.

On October 31, 2014, the Department of Education published final regulations related to gainful employment.

The regulation went into effect on July 1, 2015 (“2015 Regulations”), with the exception of new disclosure requirements, which generally went into effect January 1, 2017, although some portions of those requirements were delayed until July 1, 2019.

The 2015 Regulations included two debt-to-earnings measures, consisting of an annual income rate and a discretionary income rate.

The annual income rate measured student debt in relation to earnings, and the discretionary income rate measured student debt in relation to discretionary income.

A program passed if the program’s graduates:

• have an annual income rate ratio that does not exceed 8%;

• have a discretionary income rate that does not exceed 20%.

In addition, a program that did not pass either of the debt-to-earnings metrics and had an annual income rate between 8% and 12% or a discretionary income rate between 20% and 30% was considered to be in a warning zone.

A program failed if the program’s graduates had an annual income rate of 12% or greater and a discretionary income rate of 30% or greater.

A program became Title IV-ineligible for three years if it failed both metrics for two out of three consecutive years or failed to pass at least one metric for four consecutive award years.

On January 8, 2017, Capella University and Strayer University received their final 2015 debt-to-earnings measures.

None of their programs failed the debt-to-earnings metrics.

One active Capella University program, the Masters of Science in Marriage and Family Counseling/Therapy, was “in the zone” and two active Strayer University programs, the Associate in Arts in Accounting and Associate in Arts in Business Administration, were “in the zone.” Each of those three programs remained fully eligible.

The Department has not released any subsequent debt-to-earnings measures under the 2015 Regulations.

On July 1, 2019, the Department of Education released final gainful employment regulations, which contain a full repeal of the 2015 Regulations, including all debt measures, reporting, disclosure, and certification requirements, effective July 1, 2020.

On December 8, 2021, the Department of Education announced its intention to establish a negotiated rulemaking committee to prepare proposed regulations for, among other topics, gainful employment, via the Institutional and Programmatic Eligibility rulemaking.

Meetings of the negotiated rulemaking committee occurred in spring 2022 with the committee failing to reach consensus.

On May 17, 2023, the Department released proposed rules on financial value transparency and gainful employment, financial responsibility, administrative capability, certification procedures, and ability to benefit.

On September 27, 2023, the Department released final regulations on financial value transparency and gainful employment, which are largely consistent with the proposed rule.

The gainful employment final rule establishes two independent metrics, both of which must be passed by a gainful employment program subject to the rule in order to maintain Title IV eligibility.

Any gainful employment program that fails either or both metrics in a single year would be required to provide a disclosure to current and prospective students, and any such program that fails the same metric in two out of three consecutive years for which the program’s metrics are calculated would lose its access to federal financial aid.

The two metrics are 1) a debt-to-earnings ratio that compares the median earnings of graduates who received federal financial aid to the median annual payments on loan debt borrowed for the program, which must be less than or equal to 8% of annual earnings or 20% of discretionary earnings, and 2) an earnings premium test that measures whether the typical graduates from a program that received federal financial aid earn more than a typical high school graduate in their state (or, in some cases, nationally) and within a certain age range in the labor force.

A program that fails in two out of three consecutive years, or is voluntarily discontinued by the institution, would not be eligible to have Title IV reinstated for the program or launch and receive Title IV for a “substantially similar program” (generally defined as a program with the same four-digit CIP code) for a minimum of three years.

The final rule describes that the Department will now measure earnings six years after graduation (instead of the proposed rule’s three years after graduation) for certain qualifying graduate programs such as clinical psychology, marriage and family therapy, clinical social work, and clinical counseling.

The final rule also includes the requirement that, beginning July 1, 2026, all schools provide a link to a Department of Education-hosted website that includes information on cost, earnings, and licensure information, and the gainful employment metrics.

The final gainful employment regulations will take effect July 1, 2024.

The Department has indicated that it will release metrics beginning in the 2025 financial aid award year.

Beginning July 1, 2026, if a program fails a metric, an institution must provide warnings to students and prospective students meeting certain minimum requirements to be specified by the Department;

programs that fail the same metric in the first two years the rates are issued will lose eligibility in 2026.

On December 22, 2023, a lawsuit was filed against the Department in the United States District Court

for the Northern District of Texas alleging that the rulemaking process and final rule were based on arbitrary and capricious decisions made by the Department, and that the rule violates constitutional rights related to speech, equal protection, and due process.

Capella University and Strayer University are not parties to the lawsuit.

The Company is unable to predict the ultimate outcome of the litigation.

Misrepresentation

Under the Higher Education Act, the Department of Education may impose various sanctions, including a fine or suspension or termination of an institution’s participation in Title IV programs, if it engages in substantial misrepresentation of the nature of its educational program, its financial charges, or the employability of its graduates.

The Department’s related regulations, which took effect July 1, 2011, set forth the types of activities that constitute misrepresentation and describe the adverse actions that the Department of Education may take if it finds that an institution or a third party that provides educational programs, marketing, advertising, recruiting, or admissions services to the institution engaged in substantial misrepresentation.

The rule specifies the types of statements that can subject the institution to liability for misrepresentation, as well as the nature and form of misleading statements.

As part of the Department’s 2016 promulgation of the Borrower Defenses to Repayment regulation, the Department changed the definition of misrepresentation for Title IV regulations to include any statement that “has the likelihood or tendency to mislead under the circumstances.” The expanded definition included “any statement that omits information in such a way as to make the statement false, erroneous, or misleading.” This regulation was published on November 1, 2016 and, after a series of delays, went into effect as of October 16, 2018.

On August 30, 2019, the Department released final Borrower Defense to Repayment regulations that included a new definition of “misrepresentation,” which became effective July 1, 2020.

The final rule defines a “misrepresentation” as:

a statement, act, or omission by an eligible school to a borrower (a) that is false, misleading, or deceptive, (b) that was made with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth, and (c) that directly and clearly relates to either (1) enrollment or continuing enrollment at the institution, or (2) the provision of educational services for which the loan was made.

On August 10, 2021, the Department of Education announced its intention to establish a rulemaking committee to prepare proposed regulations on, among other things, Borrower Defense to Repayment, including a new definition of misrepresentation.

Negotiated rulemaking committee meetings completed in December 2021 with no consensus reached on the topic.

On October 31, 2022, the Department released final Borrower Defense to Repayment regulations, which include among other defenses to repayment substantial misrepresentation, with a significantly expanded definition of misrepresentation.

The final rule’s definition of misrepresentation includes any false, erroneous or misleading statement made by the institution or its representatives, or its marketing, advertising, recruiting or admissions agents, as well as any omission of fact that a reasonable person would have considered in deciding to enroll in or continue attendance at the institution.

A statement is deemed misleading if it has the likelihood or tendency to mislead under the circumstances.

A misrepresentation includes statements and omissions made in any medium, whether directly or indirectly, to a student, prospective student or any member of the public, or to an accrediting agency, to a State agency, or to the Secretary of Education.

Misrepresentation also includes the dissemination of a student endorsement or testimonial that a student gives either under duress or because the institution required such an endorsement or testimonial to participate in a program.

Borrower Defenses to Repayment

On September 23, 2019, the Department published final Borrower Defense to Repayment regulations (the “2019 BDTR Rule”), which govern borrower defense to repayment (“BDTR”) claims in connection with loans first disbursed on or after July 1, 2020, the date the 2019 BDTR Rule became effective.

of material fact upon which the borrower reasonably relied in deciding to obtain a Direct Loan or a loan repaid by a Direct Consolidation Loan;

Pursuant to the Higher Education Act and following negotiated rulemaking, on November 1, 2016, the Department of Education released a final regulation specifying the acts or omissions of an institution that a borrower may assert as a defense to repayment of a loan made under the Direct Loan Program and the consequences of such borrower defenses for borrowers, institutions, and the Secretary of Education (the “2016 BDTR Rule”).

Under the 2016 BDTR Rule, for Direct Loans disbursed after July 1, 2017, a student borrower may assert a defense to repayment if:

(1) the student borrower obtained a state or federal court judgment against the institution;

(2) the institution failed to perform on a contract with the student;

and/or (3) the institution committed a “substantial misrepresentation” on which the borrower reasonably relied to his or her detriment.

These defenses are asserted through claims submitted to the Department of Education, and the Department has the authority to issue a final decision.

In addition, the regulation permits the Department to grant relief to an individual or group of individuals, including individuals who have not applied to the Department seeking relief.

If a defense is successfully raised, the Department has discretion to initiate action to collect from an institution the amount of losses incurred based on the borrower defense.

The 2016 BDTR Rule also amends the rules concerning discharge of federal student loans when a school or campus closes and prohibits pre-dispute arbitration agreements and class action waivers for borrower defense-type claims.

On January 19, 2017, the Department of Education issued a final rule, updating the hearing procedures for actions to establish liability

against an institution of higher education and establishing procedures for recovery proceedings under the borrower defense regulations.

Several times between June 2017 and February 2018, the Department of Education announced delays until July 1, 2019 of implementation of certain portions of the 2016 BDTR Rule, including those portions of the regulations that establish a new federal standard and a process for determining whether a Direct Loan borrower has a defense to repayment of a Direct Loan based on an act or omission of an institution.

However, in October 2018, a judge denied a request to delay implementation of portions of the regulations, and as a result the 2016 BDTR Rule went into effect as of October 16, 2018.

On September 23, 2019, the Department published final Borrower Defense to Repayment regulations (the “2019 BDTR Rule”), which governs borrower defense to repayment claims in connection with loans first disbursed on or after July 1, 2020.

Under the 2019 BDTR Rule, an individual borrower can assert a defense to repayment and be eligible for relief if she or he establishes, by a preponderance of the evidence, that (1) the institution at which the borrower enrolled made a misrepresentation of material fact upon which the borrower reasonably relied in deciding to obtain a Direct Loan or a loan repaid by a Direct Consolidation Loan;

(2) the misrepresentation directly and clearly related to the borrower’s enrollment or continuing enrollment at the institution or the institution’s provision of education services for which the loan was made;

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The Department will determine financial harm based upon individual earnings and circumstances, which must include consideration of the individual borrower’s career experience subsequent to enrollment and may include, among other factors, evidence of program-level median or mean earnings.

“Financial harm” does not include damages for non-monetary loss, and the act of taking out a Direct Loan, alone, does not constitute evidence of financial harm.

“Financial harm” does not include damages for nonmonetary loss, and the act of taking out a Direct Loan, alone, does not constitute evidence of financial harm.

Financial harm also cannot be predominantly due to intervening local, regional, national economic or labor market conditions, nor can it arise from the borrower’s voluntary change in occupation or decision to pursue less than full-time work or decision not to work.

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Among the most prominent of these restrictions, the regulation contains a three-year limitation period of claims, measured from the student’s separation from the institution, does not permit claims to be filed on behalf of groups, and requires that institutions receive access to any evidence in the Department’s possession to inform its response.

The 2019 BDTR Rule permits the usage of pre-dispute arbitration agreements and class action waivers as conditions of enrollment, so long as the institution provides plain-language disclosures to students and the disclosures are placed on the institution’s website.

The 2019 BDTR Rule permits the usage of pre-dispute arbitration agreements as a condition of enrollment, so long as the institution provides plain-language disclosures to students and the disclosure is placed on the institution’s website.

The regulations also allow for a borrower to choose whether to apply for a closed school loan discharge or accept a teach-out opportunity.

In addition, the closed school discharge window is expanded from 120 days to 180 days prior to the school’s closure, though the final rule does not allow for an automatic closed school loan discharge.

Institutions are required to accept responsibility for the repayment of amounts discharged by the Secretary pursuant to the borrower defense to repayment, closed school discharge, false certification discharge, and unpaid refund discharge regulations.

If the Secretary discharges a loan in whole or in part in compliance with the terms of the regulations, the Department of Education may require the school to repay the amount of the discharged loan.

On December 10, 2019, the Secretary of Education released a formula to calculate the amount of relief a borrower may receive for a successful BDTR application.

This formula analyzed a borrower’s earnings as compared to median earnings of comparable programs to determine the amount of loans that would be discharged.

Under this formula, even successful BDTR applicants may receive only a partial loan discharge.

On March 11, 2020, the 116th Congress passed a joint resolution providing for Congressional disapproval of the 2019 BDTR Rule.

The President vetoed the joint resolution on May 29, 2020, and the House subsequently failed to override the veto during a vote on June 26, 2020.

On March 18, 2021, the Department revised its BDTR review process and repealed the previous administration’s partial relief formula.

Under the updated BDTR procedures, the Department will grant full loan relief to borrowers with approved BDTR applications.

Additionally, the Department has eliminated certain evidentiary requirements for borrowers who have received a loan cancellation due to total or permanent disability.

These borrowers will no longer be required to provide proof of insufficient income for the relief program for the three years after discharge of their loans.

On August 10, 2021, the Department announced its intention to establish a negotiated rulemaking committee to develop proposed regulations for borrower defenses to repayment and other topics related to programs authorized under Title IV of the HEA.

Negotiated rulemaking for the Affordability and Student Loans Committee began in October 2021 and concluded in December 2021, with the committee failing to reach consensus on Borrower Defense to Repayment.

On October 31, 2022, the Department released final BDTR regulations.

Among other things, the final rule sets a single standard and streamlined process for relief that will apply to all future and pending BDTR claims as of July 1, 2023, instead of various standards based on the date of the borrower’s first loan disbursement;

define what kinds of misconduct could lead to borrower defense discharges, including substantial misrepresentations, substantial omissions of fact, breaches of contract, aggressive and deceptive recruitment, and state or federal judgments or final Department of Education actions that could give rise to a BDTR claim;

establish a reconsideration process for borrowers whose claims are not approved for a full discharge;

and create a process for forming groups of borrowers and adjudicating claims based on the common facts of those group claims.

The final rule also sets the expectation that the Department will hold colleges accountable for the cost of discharges, including by establishing a recoupment process separate from the approval of BDTR claims.

Institutions are required to accept responsibility for the repayment of amounts discharged by the Secretary pursuant to the borrower defense to repayment, closed school discharge (associated with closure of a school or an additional location or branch campus), false certification discharge, and unpaid refund discharge regulations.

If the Secretary discharges a loan in whole or in part, the Department of Education may require the school to repay the amount of the discharged loan.

On August 10, 2021, the Department of Education announced its intention to establish a rulemaking committee to develop proposed regulations on, among other things, Borrower Defense to Repayment.

Negotiated rulemaking committee meetings completed in December 2021 with no consensus reached on the topic.

On July 6, 2022, the Department released proposed Borrower Defense to Repayment regulations for public comment and subsequently published a final rule on October 31, 2022.

Among other things, the final rule sets a single standard and streamlined process for relief that will apply to all future and pending Borrower Defense to Repayment claims as of July 1, 2023, regardless of the date of a borrower’s loan disbursement;

defines the types of misconduct that could lead to borrower defense discharges, including substantial misrepresentations, substantial omissions of fact, breaches of contract, aggressive and deceptive recruitment, and state or federal judgments or final Department of Education actions that could give rise to a Borrower Defense to Repayment claim;

establishes a presumption that borrowers reasonably relied upon misrepresentations or omissions;

establishes a reconsideration process for borrowers whose claims are not approved for a full discharge, including based on a state law standard;

and creates a process for the adjudication of group claims based on common facts.

The final rule permits nonprofit legal assistance organizations to request group claims.

The final rule also establishes a recoupment process separate from the approval of Borrower Defense to Repayment claims.

In addition, the final rule prohibits institutions from requiring borrowers to sign mandatory pre-dispute arbitration agreements or class action waivers for claims related to the making of a Federal Direct Loan or the provision of educational services for which the loan was obtained.

On October 31, 2022, the Department published final rules updating the eligibility criteria for and the process by which borrowers can be eligible to receive a closed school loan discharge.

The updated rules allow the Secretary to process automatic closed school discharges and establishes a discharge window of 180 days prior to the school’s closure.

The regulation also

states that eligible borrowers may receive a discharge if the borrower does not complete either a teach-out or the continuation of their program at another location of the school, and gives the Secretary the authority to adjust the closure date in cases where the institution discontinues the programs in which most borrowers were enrolled.

The new regulation is effective July 1, 2023.

Accrediting Agencies and State Authorization

On November 1, 2019, the Department of Education published final rules amending regulations governing the recognition of accrediting agencies, certain student assistance provisions including state authorization rules, and institutional eligibility.

Among other changes, the final rules revise the definition of “state authorization reciprocity agreement” such that member states may enforce their own general-purpose state laws and regulations, but may not impose additional requirements related to state authorization of distance education directed at all or a subgroup of educational institutions.

The regulations also clarify that state authorization requirements related to distance education courses are based on the state where a student is “located,” as determined by the institution, and not the state of the student’s “residence.” In addition, the final rules remove certain disclosure requirements related to programs offered solely through distance education, and they replace those requirements with certain disclosure requirements applicable to all programs that lead to professional licensure or certification, regardless of the delivery modality of those programs.

The Department’s new rules also refine the process for recognition and review of accrediting agencies, the criteria used by the Department to recognize accrediting agencies, and the Department’s requirements for accrediting agencies in terms of their oversight of accredited institutions and programs.

The final regulations became effective on July 1, 2020, excepting certain provisions which were eligible to be implemented early by institutions, and certain provisions relating to recognition of accrediting agencies effective January 1 and July 1, 2021.

In January 2023, the Department indicated its intention to establish one or more negotiated rulemaking committees in 2023 to propose regulations regarding, among other things, accreditation and related issues and state authorization.

On July 29, 2020, the National Advisory Committee on Institutional Quality and Integrity (“NACIQI”) held a meeting to review compliance by the Higher Learning Commission (“HLC”) with Department of Education requirements for recognized accrediting agencies.

HLC is the institutional accreditor for Capella University.

On June 30, 2020, the Department released a staff report that outlined HLC’s alleged noncompliance with its own policies and the Department’s regulations with regard to a change of ownership approval process for the acquisition of the Art Institute of Colorado and the Illinois Institute of Art, by Dream Center Educational Holdings.

The staff report noted noncompliance in the areas of due process, consistency in decision making, and proper appeals procedures.

The staff report proposed a one-year prohibition on HLC accrediting new institutions and a required compliance report on HLC’s remedial actions.

NACIQI voted 9-2 to reject the staff report’s proposed sanctions, but NACIQI’s recommendation was non-binding.

On October 26, 2020, a Senior Department Official (“SDO”) found HLC non-compliant, in part.

While the SDO required that HLC submit periodic reporting for twelve months, the SDO did not restrict HLC’s scope of accreditation or ability to accredit new institutions.

HLC did not appeal the Secretary’s decision.

Both HLC and Middle States Commission on Higher Education (“Middle States”), the institutional accreditor for Strayer University, have applied for renewal of their recognition by the Department.

NACIQI is scheduled to consider their applications in winter 2023 and already has solicited written comments from the public (which were due January 2022).

Distance Education and Innovation

On August 24, 2020, the Department of Education published final rules related to distance education and innovation to amend the sections of the institutional eligibility regulations issued under the HEA regarding establishing eligibility, maintaining eligibility, and losing eligibility.

Among other changes, the final rules established an updated definition of distance education;

amended the existing definition of the credit hour;

created a definition of academic engagement;

and updated eligibility and program design, for programs offered through the direct assessment of learning.

The final rules also made operational changes to several financial aid awarding, disbursing and refunding rules, including how aid can be delivered to students enrolled in subscription period programs, such as Capella University’s FlexPath offerings.

The rule also modified the closed school discharge rule to provide an automatic discharge one year after an institution or location’s closure date for borrowers who were enrolled at the time of closure or left 180 days before closure and who do not accept an approved teach-out agreement or continuation of the program at another location of the school;

those who accept but do not complete a teach-out agreement or program continuation will receive a discharge one year after their last date of attendance.

The final rule became effective July 1, 2023.

In January 2023, the Department indicated its intention to establish a negotiated rulemaking committee in 2023 to consider new proposed regulations on distance education.

On May 6, 2020, the Department of Education published final rules related to implementation of Title IX of the Education Amendments of 1972 (“Title IX”), which prohibits discrimination on the basis of sex in education programs that receive funding from the federal government.

The 2020 final rules define what constitutes sexual harassment for purposes of Title IX in the administrative enforcement context, describe what actions trigger an institution’s obligation to respond to incidents of alleged sexual harassment, and specify how an institution must respond to allegations of sexual harassment.

Among other things, the rules include a requirement for live hearings on Title IX sexual harassment claims, which includes direct and cross-examination of parties, university-provided advisors (in the event a student or party does not obtain its own advisor), rulings on

questions of relevance by decision-makers, and the creation and maintenance of a record of the live hearing proceedings.

The final rule became effective August 14, 2020.

On March 8, 2021, President Biden signed an executive order that requires the Secretary of Education and the Attorney General to review the previous administration’s rulemakings and guidance documents related to Title IX.

In June 2021, the Department of Education held virtual public hearings to gather information for providing enforcement of Title IX, as part of the Office for Civil Rights’ (“OCR”) comprehensive review of the regulation.

On June 16, 2021, OCR issued a notice of interpretation clarifying that the Department interprets Title IX and its enforcement authority under the regulation to include the prohibition of sex discrimination based on sexual orientation and gender identity.

On July 20, 2021, the Department of Education released a Questions and Answers document outlining OCR’s interpretation of the Title IX regulations related to sexual harassment.

On August 24, 2021, OCR, in alignment with recent federal court decisions, issued guidance indicating it would cease enforcement of Title IX’s current prohibition against consideration of statements made by individuals failing to submit to cross-examination.

The June 2021 notice of interpretation is currently under legal challenge in Tennessee et al.

United States Department of Education et al., United States District Court for the Eastern District of Tennessee, Case No.

3:21-cv-00308-CEA-DCP.

A July 15, 2022 court-issued preliminary injunction prohibits the Department of Education from enforcing the challenged guidance in the plaintiff states.

On June 23, 2022, the Department of Education released proposed Title IX regulations for public comment.

Among other changes, the proposed rule would address all forms of sex-based harassment (not only sexual harassment);

clarify that Title IX’s prohibition against sex discrimination includes discrimination on the basis of sex stereotypes, sex characteristics, pregnancy or related conditions, sexual orientation and gender identity;

and eliminate the requirement for live hearings at the post-secondary level.

The public comment period on the proposed rule ended on September 12, 2022.

When the Department publishes a final Title IX rule, it will indicate an effective date.

On October 4, 2022, OCR released a resource document for students and institutions in which it reinforced that current Title IX regulations prohibit discrimination based on pregnancy, childbirth, false pregnancy, termination of pregnancy or recovery therefrom.

The resource document further emphasized that Title IX requires institutions to treat pregnancy, childbirth, false pregnancy, termination of pregnancy and recovery therefrom the same as other temporary disabilities with respect to medical benefits, services, plans, and policies, and detailed requirements for leave and reinstatement for both students and employees.

Affordability and Student Loans Committee

On August 10, 2021, the Department announced its intention to establish the Affordability and Student Loans committee, to prepare proposed regulations to address the following topics:

borrower defense to repayment, closed school discharges, discharges for borrowers with a total and permanent disability, discharges for false certification by a school of a student’s eligibility to receive a loan, loan repayment plans, interest capitalization, mandatory pre-dispute arbitration and prohibition of class action lawsuits provisions in institutions’ enrollment agreements and associated counseling about such arrangements, Pell Grant eligibility for prison education programs, and the Public Service Loan Forgiveness program.

The Department also announced the formation of a Prison Education Program Subcommittee.

The Department selected negotiators in September 2021, with negotiations occurring October-December 2021.

In December 2021, the Affordability and Student Loans committee reached consensus on four of twelve topics:

discharges for false certification of student eligibility, Pell Grant eligibility for prison education programs, discharges for borrowers with total and permanent disability, and interest capitalization.

It did not reach consensus on borrower defenses to repayment and other topics.

If the negotiated rulemaking committee reaches consensus on a topic, the Department of Education is bound to propose a rule consistent with the consensus.

In the absence of consensus, the Department of Education has discretion to propose a rule for public comment.

On July 6, 2022, the Department released proposed rules governing student loan discharges and processes, including borrower defense to repayment.

The proposed rules also addressed closed school discharges, arbitration proceedings, public service loan forgiveness, interest capitalization, total and permanent disability discharges, and false certification.

The public comment period on the proposed rules ended on August 12, 2022.

As discussed above, the Department published final rules on October 31, 2022.

Institutional and Programmatic Eligibility Committee

On December 8, 2021, the Department announced its intention to establish the Institutional and Programmatic Eligibility committee, to prepare proposed regulations to address the following topics:

90/10, ability to benefit, certification procedures for participating in Title IV programs, change of ownership and change in control of institutions of higher education, financial responsibility for participating institutions of higher education, gainful employment, and standards of administrative capability.

Committee meetings occurred January-March 2022.

In March 2022, the committee reached consensus on two of seven topics:

ability to benefit and changes to the 90/10 rule.

On July 26, 2022, the Department released proposed regulations related to the 90/10 rule, and change of ownership and change in control of institutions of higher education.

On October 27, 2022, the Department of Education released final 90/10 regulations, which are consistent with the consensus language.

The 90/10 rule’s final regulations include changes to requirements impacting non-Title IV program revenue, and the treatment of “federal education assistance funds” within the calculation.

The final regulations indicate that the Secretary of Education will identify via Federal Register notice, the federal agencies and educational assistance funds provided by that agency that will count toward the “90” portion of the 90/10 calculation.

On December 21, 2022, the Department released a list of federal agencies and federal education assistance programs that must be included as federal revenue in the 90/10 calculation.

Such agencies include the U.S.

Department of Defense (military tuition assistance) and the Department of Veterans (veterans education benefits), in addition to the Title IV programs already covered by the 90/10 Rule.

The final regulations also include modifications to the criteria for revenue generated from non-Title IV programs, allowing institutions to count funds as non-Federal revenue only for programs that:

(1) do not include any courses offered in an eligible program that is provided by the institution;

(2) are provided by the institution and taught by one of the institution’s instructors;

and (3) are located at the institution’s main campus, one of its approved additional locations, at another school facility approved by the appropriate State agency or accrediting agency, or at an employer facility.

In the preamble to the final 90/10 regulations and in subsequent sub-regulatory guidance, the Department indicated that non-Title IV programs that are offered in part or in whole through distance education are not eligible to be included in the “10” portion of the calculation.

The final regulations establish new disclosure requirements for institutions that fail the 90/10 rule, including a student notification requirement, and clarify reporting requirements and liabilities for institutions that lose access to Title IV because of failing the 90/10 calculation.

The new 90/10 regulations are effective for fiscal years beginning on or after January 1, 2023.

During the negotiated rulemaking process, the Department also proposed a number of changes to financial responsibility regulations, but did not reach consensus on the language.

The proposal included new mandatory and discretionary triggers that would require the posting of financial protections.

Among other things, the Department proposed a discretionary trigger in the event of significant fluctuations in Title IV aid;

a discretionary trigger for pending borrower defense claims;

and a discretionary trigger for when institutions close most or all on-ground locations but maintain an online presence.

The Department also proposed as part of the negotiated rulemaking process the reestablishment of gainful employment regulations, which would apply to all programs (including non-degree programs) at proprietary institutions and non-degree programs at public and private nonprofit institutions.

Among other items, the Department proposed to use the first four digits of the CIP (Classification of Instructional Program) code to identify gainful employment programs;

to remove the “zone” concept pertaining to debt-to-earnings rates;

and to establish that a program would fail the debt-to-earnings rate measure if, among other measures, its debt-to-earnings rate is greater than 8 percent and its discretionary earnings rate is greater than 20 percent.

The Department also proposed including Parent PLUS loans when determining student debt load, and included a new “earnings threshold” measure comparing the median annual earnings for students who completed the program to the median earnings for a working adult aged 25-34 with only a high school diploma in the state in which the institution is located (or nationally based on the percentage of students located in the same state as the institution).

The Department’s proposal would deem a program ineligible for Title IV funding if the program failed either metric (debt-to-earnings or earnings threshold) two out of three consecutive years.

Among other topics, the Department proposed a number of additional changes to regulations regarding administrative capability, change of control and certification issues, none of which reached consensus.

In June 2022, the Department indicated its intention to publish proposed rules regarding gainful employment, ability to benefit, financial responsibility, administrative capability, and certification procedures in April 2023.

We cannot predict the outcome of the negotiated rulemaking process.

Student Loan Relief

On August 24, 2022, the Department announced that it would provide student loan relief to eligible borrowers to address financial hardships in connection with the COVID-19 pandemic.

Under the relief measures, up to $10,000 in student debt will be forgiven for individual borrowers earning less than $125,000 or married couples or heads of household earning less than $250,000, and up to $20,000 will be forgiven for such borrowers who formerly received Pell Grants.

In a memorandum prepared by the Department’s General Counsel, the Department stated that it has interpreted provisions of the Higher Education Relief Opportunities for Students Act of 2003 to authorize the Secretary to exercise broad discretion in granting student loan relief.

Since the Department’s student loan relief announcement, multiple lawsuits have been filed against the Department challenging its authority to grant such relief.

Supreme Court has granted petitions to review injunctions issued by two federal courts that blocked implementation of the Department’s student loan relief program, with oral arguments scheduled for February 28, 2023.

We cannot predict the outcome of these lawsuits.

On November 22, 2022, the Department announced further extension of the pause on student loan repayment and noted that payments will resume 60 days following

implementation of the relief program or resolution of the litigation.

If the Department has not implemented the relief program or the litigation has not resolved by June 30, 2023, the Department has stated that payments would resume 60 days thereafter.

On January 10, 2023, the Department proposed regulations to create a new income-driven repayment plan to reduce future monthly payments for lower- and middle-income borrowers.

The Department accepted public comments on the proposal for 30 days.

Compliance Reviews

Strayer University and Capella University are subject to announced and unannounced compliance reviews and audits by various external agencies, including the Department, its Office of Inspector General, state licensing agencies, guaranty agencies, and accrediting agencies.

In June 2019, the Department conducted an announced, on-site program review at Capella University, focused on Capella University’s FlexPath program.

The review covered the 2017-2018 and 2018-2019 federal student financial aid years.

The Department issued its preliminary report on November 13, 2020, and Capella University responded to the report.

On February 9, 2021, Capella University received the Department’s Final Program Review Determination, which closed the Program Review without further action required on the part of Capella University.

On March 17, 2021, the Department informed Strayer University that it planned to conduct an announced, remote program review.

The review commenced on April 19, 2021 and covered the 2019-2020 and 2020-2021 federal student financial aid years.

On September 21, 2021, Strayer University received the Department’s Final Program Review Determination, which closed the Program Review without further action required on the part of Strayer University.

Program Participation Agreement

Each institution participating in Title IV programs must enter into a Program Participation Agreement with the Department.

Under the agreement, the institution agrees to follow the Department’s rules and regulations governing Title IV programs.

On December 13, 2021, the Department and Strayer University executed a new Program Participation Agreement, approving Strayer University’s continued participation in Title IV programs with full certification through September 30, 2025.

As a result of the August 1, 2018 merger, Capella University experienced a change of ownership, with the Company as its new owner.

On January 18, 2019, consistent with standard procedure upon a Title IV institution’s change of ownership, the Department and Capella University executed a new Provisional Program Participation Agreement, approving Capella’s continued participation in Title IV programs with provisional certification through December 31, 2022.

As is typical, the Provisional Program Participation Agreement subjects Capella University to certain requirements during the period of provisional certification, including that Capella University must apply for and receive approval from the Department in connection with new locations or the addition of new Title IV-eligible educational programs.

Capella University filed its application for recertification in advance of the September 30, 2022 deadline and, consistent with Department of Education practice, continues to offer federal financial aid under a Provisional Program Participation Agreement, until the Department addresses the recertification application.

Office of Enforcement

On October 8, 2021, the Department of Education announced establishment of an Office of Enforcement within the Department’s Office of Federal Student Aid, designed to strengthen oversight over and enforcement against post-secondary schools that participate in federal student loan, grant, and work-study programs.

The Office of Enforcement restores an office first established by the Department in 2016.

The Department announced the Office of Enforcement would comprise four existing divisions:

Administrative Actions and Appeals Services Group, Borrower Defense Group, Investigations Group, and Resolution and Referral Management Group.

The Department intends the Office of Enforcement to coordinate with other state and federal partners, including the Department of Justice, Consumer Financial Protection Bureau, Federal Trade Commission, and state attorneys general.

Federal Trade Commission

On October 6, 2021 the Federal Trade Commission (“FTC”) announced that it is resurrecting Penalty Offense Authority under Section 5(m) of the FTC Act (the “Act”).

Under the Act, the FTC may secure penalties against entities not a party to an original proceeding if the FTC can show that the entity had actual knowledge that the conduct in question was found to be

unfair or deceptive.

Entities that have actual knowledge of acts or practices the FTC has found to be unlawful and that subsequently engage in such unlawful acts or practices may be held liable for civil penalties up to $43,792 per violation.

Also on October 6, 2021, in an effort to establish actual knowledge and create a pathway for penalties in the event of post-notice acts or practices, the FTC issued notice to the 70 largest for-profit schools based on enrollment and revenues.

The notice included a list of acts and practices that the FTC has determined are unfair or deceptive, including but not limited to acts relating to misrepresentation of employment opportunities and other benefits, together with citation to various prior determinations from cases previously litigated by the FTC.

Strayer University and Capella University received the FTC’s notice on October 7, 2021.

The FTC made clear that receipt of the notice itself does not reflect any assessment as to whether Strayer University or Capella University has engaged in deceptive or unfair conduct.

Consumer Financial Protection Bureau

The Consumer Financial Protection Bureau (“CFPB”) is a U.S.

government agency established to protect the interests of consumers in their dealings with banks, lenders and other financial institutions.

On April 4, 2022, the Company received correspondence from the CFPB, in which the CFPB took the position that it has supervisory authority over the Company as a covered person that offers or provides private education loans pursuant to 12 U.S.C.

5514(a)(1)(D) and further indicated the CFPB is considering whether to cite violations based on preliminary findings that the Company may have violated the Dodd-Frank Wall Street Reform and Consumer Protection Act, 12 U.S.C.

5301 et seq., due to alleged student loan servicing and collections practices or policies.

Specifically, the CFPB referred to Capella University and Strayer University’s historical practice of withholding official transcripts from students who were delinquent in paying amounts due, a practice which both universities discontinued prior to receipt of the correspondence.

The CFPB subsequently sent a letter on July 8, 2022, indicating that it believed the withholding of transcripts was a violation, and requiring the Company to cease withholding transcripts for those with an outstanding balance and to take other remedial actions.

The Company had already discontinued its historical practice prior to the CFPB’s notice and informed the CFPB that it completed the remedial actions in the allotted thirty days.

While the Company disagrees with CFPB’s position as to its supervisory authority and disputes any alleged legal or regulatory violations, SEI is cooperating with CFPB’s inquiry and responded to CFPB as requested on April 25, 2022.

On April 26, 2022, the CFPB informed the Company that it intended to conduct an announced education loan exam in June 2022.

The examination started on June 13, 2022.

Fieldwork concluded on August 5, 2022.

On September 12, 2022, the CFPB informed the Company of a preliminary finding related to a product that is no longer utilized, and invited the Company’s response.

The Company timely responded to the CFPB’s letter, disagreeing with the preliminary finding and noting that the product to which it related is no longer utilized.

On November 29, 2022, the CFPB informed the Company that, within 90 days, it should remediate the finding for any impacted students, and it identified areas for the Company to address to ensure regulatory compliance.

The Company has taken remedial action and responded to the CFPB within the 90-day deadline.

Australian Regulation

On August 7, 2023, the U.S.

Court of Appeals for the Fifth Circuit granted a nationwide emergency injunction preventing the Department of Education’s enforcement of the final BDTR

and closed school discharge rules.

The matter was heard by the Fifth Circuit panel on November 6, 2023, and the previous versions of the BDTR and closed school discharge rules remain in effect until further determination.

The Department has stated that it will not adjudicate any borrower defense applications under the latest rule unless and until the effective date is reinstated;

the Department will continue to adjudicate borrower defense applications using an earlier version of the regulations where required under a court settlement (the Sweet case discussed above).

The Company is unable to predict the ultimate outcome of the litigation.

Australian and New Zealand Regulation

The Company operates two post-secondary educational institutions in Australia, Torrens University Australia Limited (“Torrens”) and Think:

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Torrens is one of 43 universities in Australia.

It is a for-profit entity and registered as a university by TEQSA.

As a self-accrediting university, it is not required to have its courses of study accredited by TEQSA.

Torrens is also registered by ASQA as an RTO and is thus entitled to offer vocational and training courses.

It is a private, for-profit entity and is registered with TEQSA.

As a self-accrediting university, it is not required to have its individual courses of study accredited by TEQSA.

Torrens is also registered with ASQA as an RTO and is thus entitled to offer vocational and training courses.

Torrens is currently undergoing an ordinary course re-registration process with TEQSA.

Think is one of approximately 5,000 RTOs in Australia and in that capacity is regulated by ASQA.

It is also registered as a higher education provider by TEQSA.

It is also registered as a higher education provider with TEQSA.

Its higher education courses require, and have received, accreditation by TEQSA.

Australia also maintains a Commonwealth Register of Institutions and Courses for Overseas Students (“CRICOS”) for Australian education providers that recruit, enroll and teach overseas students.

Registration in CRICOS allows providers to offer courses to overseas students studying on Australian student visas.

Registration on CRICOS allows providers to offer courses to overseas students studying on Australian student visas.

Both Torrens and Think are so registered.

The Commonwealth government has established income-contingent loan schemes that assist eligible fee-paying students to pay all or part of their tuition fees (separate schemes exist for higher education and vocational courses).

Under the schemes, the relevant fees are paid directly to the institutions.

A corresponding obligation then exists from the participating student to the Commonwealth government.

The Commonwealth government has established income-contingent loan schemes that assist eligible fee-paying students to pay all or part of their tuition fees (separate but similar schemes exist for higher education and vocational courses).

Under the schemes, the relevant fees are paid directly to the institutions by the Commonwealth government on behalf of the student.

A corresponding obligation then exists from the participating student to the Commonwealth government, which is addressed by adding a levy to that student’s income tax until the loan amount has been repaid.

Neither Torrens nor Think have any responsibility in connection with the repayment of these loans by students and, generally, this assistance is not available to international students.

Both Torrens and Think are registered for the purposes of these plans (a precondition to their students being eligible to receive such loans).

New Zealand Regulation

The Company operates a post-secondary educational institution in New Zealand, Media Design School Limited (“MDS”).

MDS is a Private Training Establishment (“PTE”);

a private organization offering education or training.

MDS is a Private Training Establishment, a private organization offering education or training.

It is a globally renowned and specialist provider of design and creative technology education with qualifications ranging from diplomas to postgraduate degrees.

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What changed 10-K

Item 8. Financial Statements and Supplementary Data