University of Phoenix Settles $78.5 Million False Claims Act Lawsuit for Illegal Recruiter Incentive Compensation

The University of Phoenix and its parent company Apollo Group agreed to pay $78.5 million on December 14, 2009, to resolve allegations that the nation’s largest for-profit university violated the False Claims Act by illegally paying recruiters based on the number of students they enrolled, then fraudulently certifying compliance with federal student aid requirements to obtain over $1.5 billion in federal grants and loans. The settlement—the largest ever at the time in a higher education False Claims Act case—resolved a 2003 whistleblower lawsuit filed by two former enrollment counselors who charged that Phoenix created a “boiler room” sales culture that rewarded recruiters with cash bonuses, gifts, extra vacation time, and other compensation tied exclusively to enrollment numbers, in direct violation of the Higher Education Act’s “incentive compensation ban” designed to prevent predatory recruitment of unqualified students likely to default on federal loans.

The case originated when Mary Hendow and Julie Albertson, former enrollment counselors at the University of Phoenix, filed a qui tam lawsuit under the federal False Claims Act in 2003, alleging that Phoenix systematically violated the Higher Education Act’s prohibition on paying recruiters based solely on the number of students enrolled. The incentive compensation ban, enacted by Congress in 1992, was designed to prevent for-profit colleges from using high-pressure sales tactics to enroll unqualified students who would take out federal student loans to pay inflated tuition, then drop out or fail to gain employment, leaving taxpayers to absorb defaults while the colleges pocketed tuition revenue upfront. By prohibiting enrollment-based compensation, Congress sought to ensure that college recruiters focused on student qualifications and fit rather than on maximizing enrollment numbers to earn bonuses.

Despite this clear statutory prohibition, Hendow and Albertson alleged that Phoenix operated an aggressive enrollment system where recruiters were evaluated and compensated based almost exclusively on how many students they could sign up, with top performers receiving substantial cash bonuses, President’s Club trips, additional paid time off, and public recognition, while those who failed to meet enrollment quotas faced termination. The whistleblowers alleged that Phoenix trained recruiters to use high-pressure tactics, to exploit prospective students’ financial vulnerabilities and career anxieties, and to enroll students regardless of whether the programs were appropriate for their educational backgrounds or career goals. This enrollment-focused system generated massive student volume that translated directly into federal student aid revenue, since approximately 90 percent of Phoenix’s revenue came from federal Title IV student aid programs including Pell Grants and federal student loans.

The Department of Justice investigation substantiated the whistleblowers’ allegations, finding that Phoenix had indeed violated the incentive compensation ban by paying recruiters based on enrollment numbers despite having previously agreed to cease this practice. In 2004, the Department of Education conducted an administrative investigation that reached identical conclusions, finding that Phoenix paid improper incentive compensation to recruiters in violation of federal law. Phoenix paid $9.8 million to the Education Department in 2004 to resolve those administrative claims and agreed to reform its compensation practices. However, rather than genuinely reforming its recruitment system, Phoenix apparently continued paying enrollment-based compensation while adopting superficial compliance measures designed to obscure the violations from regulators.

The Bush Administration’s Department of Education had introduced a dozen exceptions to the incentive compensation ban under political pressure from the for-profit college industry, creating loopholes that allowed schools to continue paying enrollment-based compensation while claiming technical compliance with regulations. Phoenix exploited these loopholes by structuring recruiter compensation to include enrollment numbers as “one of several factors” rather than the sole factor, even though enrollment remained the overwhelmingly dominant determinant of compensation in practice. This regulatory arbitrage allowed Phoenix to maintain its aggressive enrollment-driven culture while arguing that it complied with the letter of weakened regulations, even as it violated the statute’s clear purpose of preventing predatory recruitment.

The whistleblowers charged that by fraudulently certifying compliance with the incentive compensation ban when applying for federal student aid program eligibility, Phoenix made false claims to the federal government that triggered the release of over $1.5 billion in federal grants and loans to Phoenix students between 2003 and 2009. Under the False Claims Act, companies that knowingly make false claims to obtain federal funds face liability for triple damages plus penalties. The $78.5 million settlement represented a fraction of the potential liability Phoenix faced if the case proceeded to trial and the government proved knowing fraud. The settlement included $67.5 million to the federal government and $11 million in attorney’s fees and costs for the plaintiffs.

Under the qui tam provisions of the False Claims Act, private whistleblowers who file lawsuits exposing fraud against the government are entitled to receive a percentage of recovered funds as a reward for bringing the fraud to light. Hendow and Albertson received approximately $19 million from the $78.5 million settlement—a substantial reward that reflects both the massive scale of fraud they exposed and the personal risks they took in challenging their former employer. Whistleblowers in False Claims Act cases often face retaliation, blacklisting in their industries, and years of uncertain litigation before seeing any recovery. The $19 million award represented both compensation for their courage in exposing wrongdoing and an incentive for other industry insiders to report similar fraud.

Notably, the settlement allowed Apollo Group and the University of Phoenix to avoid any admission of liability, wrongdoing, noncompliance, or violation of federal law. This standard settlement language allowed Phoenix to continue operating and recruiting students without having to acknowledge that its business model was based on systematic fraud against taxpayers. Without admitting wrongdoing, Phoenix could continue marketing itself to prospective students and investors as a reputable educational institution facing routine regulatory settlement rather than as a company that had systematically defrauded the federal government out of more than $1 billion in student aid by operating an illegal predatory recruitment scheme.

The case highlighted the fundamental business model problem at the heart of the for-profit higher education industry: schools that derive 90 percent of revenue from federal student aid have overwhelming financial incentives to maximize enrollment regardless of student qualifications, outcomes, or likelihood of loan repayment. Enrollment-based recruiter compensation converts these institutional incentives into individual recruiter incentives, creating a system where recruiters earn more money by signing up more students and lose their jobs if they fail to meet enrollment targets, regardless of whether the students they enroll are actually served well by the programs. This misalignment of incentives between institutional revenue goals and student educational interests creates systematic pressure toward predatory recruitment and enrollment of students who are unlikely to benefit from the programs but whose federal student aid eligibility makes them valuable to the institution’s bottom line.

At the time of the settlement, the University of Phoenix was the largest higher education institution in the United States by enrollment, with approximately 470,000 students attending classes at over 200 campuses and online. The vast scale of Phoenix’s operations meant that even modest levels of fraud in recruitment and federal aid certification translated into hundreds of millions of dollars in improper federal payments. The settlement also revealed that regulatory enforcement during the Bush Administration was inadequate to deter ongoing violations: Phoenix had paid $9.8 million in 2004 for the same violations, yet continued the illegal practices for at least five more years until the False Claims Act lawsuit forced a larger settlement in 2009. This pattern suggested that administrative penalties were viewed by Phoenix as a cost of doing business rather than as a deterrent to illegal conduct, and that only the threat of False Claims Act triple damages and exclusion from federal student aid programs created sufficient financial pressure to change behavior.

The settlement came at a time of growing scrutiny of the for-profit higher education industry, with Government Accountability Office investigations uncovering widespread deceptive recruiting practices, concerns about low graduation rates and high student loan default rates, and questions about whether for-profit colleges delivered educational value commensurate with their costs. A 2010 GAO undercover investigation would later find that 15 out of 15 for-profit colleges tested used deceptive or questionable recruiting tactics, including making misleading statements about costs, program requirements, and job placement prospects. The University of Phoenix settlement provided an early indication that systematic fraud rather than isolated bad actors characterized significant portions of the for-profit sector.

For students who attended Phoenix during the period of fraudulent recruitment, the settlement provided no direct relief. Students who had been enrolled through illegal high-pressure tactics, who had taken out federal loans to pay Phoenix’s tuition, and who dropped out or failed to gain employment that would allow them to repay loans received no loan forgiveness or compensation from the $78.5 million settlement. The settlement funds went to the federal government as recovery for fraudulent claims, and to the whistleblowers as their reward, but not to the students who were the actual victims of the predatory recruitment practices. This gap between legal recovery from corporate fraud and remediation for fraud victims would remain a persistent problem in for-profit education fraud cases, with subsequent settlements similarly recovering funds for the government while leaving defrauded students saddled with debt from worthless credentials.

The Phoenix settlement established important precedents for using the False Claims Act to combat for-profit education fraud. Prior to this case, the federal government had relied primarily on administrative enforcement through the Department of Education to address violations of student aid program requirements. The False Claims Act provided a more powerful enforcement mechanism with the potential for triple damages, civil penalties up to $11,000 per false claim, and qui tam provisions that incentivized industry insiders to report fraud. The success of the Phoenix case encouraged subsequent whistleblower lawsuits against other for-profit colleges including Education Management Corporation (EDMC), Corinthian Colleges, and ITT Technical Institute, all of which resulted in large settlements or judgments exposing systematic fraud across the industry.

However, the settlement’s effectiveness in actually reforming Phoenix’s practices or protecting students from future fraud was limited. Phoenix continued to face investigations and lawsuits in subsequent years, including a 2015 Federal Trade Commission investigation that resulted in a $191 million settlement over deceptive advertising claims about job placement assistance and employment partnerships. In 2022, the Biden Administration cancelled $37 million in federal student loans for more than 1,200 borrowers who attended Phoenix between 2012 and 2014, finding that the university had engaged in substantial misconduct warranting borrower defense to repayment relief. These subsequent enforcement actions suggested that the 2009 settlement did not fundamentally reform Phoenix’s business model or eliminate fraudulent practices, but merely imposed a financial penalty that Phoenix absorbed as a cost of continuing to operate a business model based on aggressive enrollment growth fueled by federal student aid.

The case also revealed the inadequacy of regulatory oversight during the Bush Administration, when the Department of Education weakened the incentive compensation ban by introducing numerous exceptions that allowed for-profit colleges to continue enrollment-based pay while claiming technical compliance. This regulatory capture—where the agency responsible for enforcing student protection laws instead weakened those protections under industry pressure—enabled widespread fraud that cost taxpayers billions in defaulted student loans and left hundreds of thousands of students with debt from dubious credentials. The Obama Administration would later attempt to strengthen oversight of the for-profit sector through the gainful employment rule and tougher borrower defense regulations, but the Trump Administration would repeal most of these protections, illustrating the cyclical pattern of reform and deregulation that has characterized for-profit higher education policy.

For the two whistleblowers who filed the lawsuit, the $19 million recovery represented vindication for their decision to challenge a massive corporation and expose fraud that their employer had worked to conceal. Whistleblower cases often take years to resolve, subject the whistleblowers to intense legal scrutiny and pressure, and offer no guarantee of recovery or even of government support for the case (the government declines to intervene in the majority of qui tam cases). The fact that Hendow and Albertson prevailed despite the government initially declining to intervene in their case demonstrated both the strength of their evidence and the value of the qui tam mechanism in allowing private citizens to enforce fraud laws when government enforcement is inadequate or captured.

The University of Phoenix settlement marked the beginning of a wave of major fraud settlements and judgments against for-profit colleges over the following decade, exposing systematic exploitation of federal student aid programs and predatory targeting of low-income students, veterans, and other vulnerable populations. The case established that the for-profit education industry’s explosive growth during the 2000s was built substantially on fraudulent practices that violated federal law, exploited students, and stuck taxpayers with billions in defaulted loan costs while enriching corporate executives and shareholders at Apollo Group and other for-profit education companies.