Grand Canyon's Ground Game

A private Christian university has tapped its lucrative online program to offer generous financial aid packages to students at a bustling traditional campus in Phoenix. The university just acquired a new campus in Massachusetts, is converting adjunct slots to full-time positions and is gunning for a Division I athletics program. Oh yeah, and Grand Canyon University is a for-profit.

Both students and investors have taken a shine to Grand Canyon’s business model, which appears to have hit the right balance between online and on-ground – at least in this more competitive, post-recession market, which has been rough on enrollments at most for-profits. And the university’s relatively low-key Christian identity hasn’t hurt, either.

“It’s a marketing niche for them that no other for-profit targeted,” said Kevin Kinser, an associate professor of education at the State University of New York at Albany who studies for-profits. “That was a very smart move.”

The university enrolls 6,500 students at its physical campus. The sticker price there is $16,500. But Grand Canyon has a discount rate of 53 percent, meaning that after institutional financial aid, students pay an average of $7,800. The scholarships are by far the most substantial offered by a major, publicly traded for-profit. The company spent 15 percent of its total revenue on scholarships in the most recent fiscal quarter, and anticipates shelling out $100 million on financial aid this year.

Last month the university landed a 217-acre former high school campus in Northfield, Massachusetts. The owners of the Hobby Lobby craft store chain owned the property and wanted to give it to a Christian university. The university has said it plans to invest $150 million in the campus over the next five years, with a goal of growing it to 5,000 students.

Grand Canyon can afford an expensive new campus, big scholarships and the $200 million it spent on facilities for the Phoenix campus over the last three years because of its growing online programs.

The 42,000 students who attend the university online essentially subsidize the physical campus and its students. (Roughly 43 percent of Grand Canyon’s online students are graduate students, and 70 percent are enrolled in education or nursing programs.) In that sense, Grand Canyon is similar to nonprofit colleges that reel in big bucks for their online arms, including university systems in Massachusetts and Maryland, as well as private upstarts like Southern New Hampshire University and Liberty University, which is also Christian.

But there’s one big difference, as a for-profit, Grand Canyon is in a 40 percent tax bracket.

“We’ve come up with a model that makes tuition very, very low,” said Brian Mueller, Grand Canyon’s CEO, “at little expense to the taxpayer.”

The university has a statement of faith, and requires students to take a course on the Christian "world view." But Grand Canyon is not as overtly Christian as some other religious institutions.

"Everything else we do on campus is voluntary," Mueller said. "We're not a church."

For-Profit with Full-Time Faculty

Critics, however, would point out that roughly 80 percent of the company’s revenue comes from federal financial aid. But the university’s online tuition pricing is middle-of-the pack or even on the low side for a for-profit. Most of its online undergraduate and graduate programs range from about $350 to $500 per credit. For example, a bachelor’s degree in education works out to about $52,000 for the equivalent of four years of instruction. The university is also keeping online tuition increases small – about 3.5 percent in recent years – and plans to lower some rates.

But those degree programs are cash cows even when tuition stays flat. That’s because online education lacks the overhead of a physical campus. Classes can be offered to large numbers of students without expensive buildings and, in many cases, without full-time professors. Adjuncts are the norm online.

Grand Canyon, however, is using online revenue to bring in full-time professors. The traditional campus is a 50/50 split of full-time and adjunct, with a goal of 70 percent full-time, and the university has even begun hiring full-time faculty for its online programs. The first three introductory courses of most online degree tracks at Grand Canyon are now taught by full-time faculty, who have more job security but not tenure.

Not everybody is over-the-moon about Grand Canyon’s business model. Take Sen. Tom Harkin, the Iowa Democrat who has led congressional investigations of for-profits and who recently issued a voluminous and scathing tome on the sector. His report criticized Grand Canyon in a section of in-depth profiles of 30 companies.

Harkin’s main beef with Grand Canyon is that it offers relatively few student services and even less career planning assistance to online students. The report also criticized the university’s large marketing expenditures and its 59 percent dropout rate for students who enrolled in 2008.

Grand Canyon responded with a rebuttal, arguing that a change in policies and a new emphasis in recruiting more academically-qualified students are driving up retention and completion rates. Company officials also said the university provides adequate career services to traditional aged students, and that its large number of adult students, who are typically employed, require less hand-holding on their career paths.

The company’s current management team took over in 2009, and officials said Harkin’s report does not reflect some of the changes made in the last few years.

“He doesn’t have the full story,” Mueller said, calling the review by Harkin’s staff “cursory.” But that doesn’t mean Mueller is bitter.

“We invited him personally to campus,” said Mueller, a former president of the Apollo Group and CEO of the University of Phoenix Online. “We want him to come down here.”

Buying Accreditation?

Grand Canyon’s history might be its biggest negative to Harkin and other critics of for-profits. The university is a former nonprofit religious college, which fell on hard times and was purchased in 2004 by what later became Grand Canyon’s holding company. Michael Clifford, a controversial for-profit pioneer, had a role in the university’s creation.

The purchase of the struggling college came with regional accreditation. Other for-profits made similar acquisitions, most notably the 2005 purchase by Bridgepoint Education of what would become Ashford University. That practice has fallen out of favor with accreditors, however, and has been compared to the sale of a taxi medallion.

But Grand Canyon differs from Ashford in many ways. For one thing, traditional-age student demand is heavy around Phoenix. Not so much near Clinton, Iowa, which is where Ashford’s campus is located. And red state Arizona is friendlier to for-profit education than Harkin’s home state, said Trace Urdan, an industry analyst with Wells Fargo Securities.

Grand Canyon also has a lot more “bricks and mortar” energy than Ashford, which enrolled 973 on-ground students last fall and has been called a shell campus.

Kinser praised Grand Canyon for building a genuine traditional college with money from online programs. “They actually did take that revenue and invest on campus.”

Investors have flocked to Grand Canyon of late, and industry analysts have called it a “favorite” stock pick among for-profits. One surprising factor has contributed to the company’s success on Wall Street – relatively prudent profit margins.

“They’ve had to reinvest in physical assets that other schools don’t have to,” Urdan said. “It’s a small price to pay, given the strength of the model.”

Because Grand Canyon pumped revenue into a campus, it has had less to give back to shareholders. That’s not to say that the company has provided bad returns, but they were smaller than those of high-fliers during the salad days a few years ago, when for-profits generated huge payouts. During tighter times, however, slow-ish and steady growth looks good. Grand Canyon had an after-tax profit margin of 13 percent in the most recent quarter, according to a corporate filing.

‘Lopes vs. Sun Devils

Grand Canyon sees Arizona State University as a primary competitor for students on its traditional campus. About 70 percent of those students come from Arizona. Company officials say the university stacks up well on price, with net tuition of $7,800. Arizona State has a sticker price for in-state students of $10,000, but that doesn’t include institutional grant aid.

The university has also squared off against its much bigger neighbor in college hoops. Last year, the men’s basketball team played Arizona State in an exhibition game. The ‘Lopes lost 89-69 in their brand new, 4,700-seat arena, which was sold out.

Grand Canyon’s 22 sports teams currently play in NCAA Division II. But the university is pushing hard to get to the big leagues. Some observers have said that Grand Canyon and its deep coffers could be a good addition for the struggling Western Athletic Conference, which is Division I.

Beyond athletics, the university is poised to branch into new territory with the acquisition last month of the property in western Massachusetts – a big jump for a Christian university with roots in the Southwest. But university officials are optimistic that both their online and on-ground offerings will be regional draws.

The company is currently in discussions about the new campus with the Higher Learning Commission of North Central Association of Colleges and Schools, its regional accreditor. Nothing will happen at the site for a year, however. The current plan, officials said, is to call the campus Grand Canyon University with a branch name attached. That name is still in the works.

Over the next year both investors and regulators will be watching to see if Grand Canyon’s brand and ground game can work in New England.