10-Q 1 stra-20220331.htm 10-Q stra-20220331
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2022
or
Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File No. 0-21039
Strategic Education, Inc.
(Exact name of registrant as specified in this charter)
Maryland52-1975978
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2303 Dulles Station Boulevard
Herndon,VA20171
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (703) 561-1600
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueSTRANasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No   
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       No   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐   No  
As of April 15, 2022, there were outstanding 24,956,536 shares of Common Stock, par value $0.01 per share, of the Registrant.
1

STRATEGIC EDUCATION, INC.
INDEX
FORM 10-Q
2

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
STRATEGIC EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, 2021March 31, 2022
ASSETS
Current assets:
Cash and cash equivalents$268,918 $293,419 
Marketable securities6,501 6,785 
Tuition receivable, net51,277 64,798 
Income taxes receivable313  
Other current assets40,777 52,846 
Total current assets367,786 417,848 
Property and equipment, net150,589 152,742 
Right-of-use lease assets149,587 146,508 
Marketable securities, non-current23,377 21,277 
Intangible assets, net276,380 276,267 
Goodwill1,285,864 1,303,175 
Other assets52,297 50,066 
Total assets$2,305,880 $2,367,883 
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses$95,518 $103,934 
Income taxes payable 9,422 
Contract liabilities73,232 115,647 
Lease liabilities27,005 25,833 
Total current liabilities195,755 254,836 
Long-term debt141,630 141,743 
Deferred income tax liabilities44,595 39,974 
Lease liabilities, non-current162,821 158,930 
Other long-term liabilities47,089 48,087 
Total liabilities591,890 643,570 
Commitments and contingencies
Stockholders’ equity:
Common stock, par value $0.0132,000,000 shares authorized; 24,592,098 and 24,963,542 shares issued and outstanding at December 31, 2021 and March 31, 2022, respectively
246 250 
Additional paid-in capital1,529,969 1,528,328 
Accumulated other comprehensive income 9,203 29,185 
Retained earnings174,572 166,550 
Total stockholders’ equity1,713,990 1,724,313 
Total liabilities and stockholders’ equity$2,305,880 $2,367,883 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3

STRATEGIC EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the three months ended March 31,
20212022
Revenues$290,336 $258,855 
Costs and expenses:
Instructional and support costs152,805 144,624 
General and administration86,845 94,784 
Amortization of intangible assets19,407 3,738 
Merger and integration costs1,012 410 
Restructuring costs18,267 1,858 
Total costs and expenses278,336 245,414 
Income from operations12,000 13,441 
Other income (expense)2,167 (1,171)
Income before income taxes14,167 12,270 
Provision for income taxes4,590 5,241 
Net income$9,577 $7,029 
Earnings per share:
Basic$0.40 $0.29 
Diluted$0.40 $0.29 
Weighted average shares outstanding:
Basic23,974 23,948 
Diluted24,153 24,114 
STRATEGIC EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
For the three months ended March 31,
20212022
Net income$9,577 $7,029 
Other comprehensive income:
Foreign currency translation adjustment(8,712)20,499 
Unrealized losses on marketable securities, net of tax(104)(517)
Comprehensive income$761 $27,011 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4

STRATEGIC EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
For the three months ended March 31, 2021
Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
SharesPar Value
Balance at December 31, 202024,418,939 $244 $1,519,549 $179,646 $48,880 $1,748,319 
Stock-based compensation— — 3,868 32 — 3,900 
Exercise of stock options, net799 — 70 — — 70 
Issuance of restricted stock, net231,467 3 (2,342)— — (2,339)
Common stock dividends ($0.60 per share)
— — — (14,786)— (14,786)
Foreign currency translation adjustment— — — — (8,712)(8,712)
Unrealized losses on marketable securities, net of tax— — — — (104)(104)
Net income— — — 9,577 — 9,577 
Balance at March 31, 202124,651,205 $247 $1,521,145 $174,469 $40,064 $1,735,925 

For the three months ended March 31, 2022
Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
SharesPar Value
Balance at December 31, 202124,592,098 $246 $1,529,969 $174,572 $9,203 $1,713,990 
Stock-based compensation— — 5,068  — 5,068 
Issuance of restricted stock, net437,946 5 (2,749)— (2,744)
Repurchase of common stock(66,502)(1)(3,960) — (3,961)
Common stock dividends ($0.60 per share)
— — — (15,051)— (15,051)
Foreign currency translation adjustment— — — — 20,499 20,499 
Unrealized losses on marketable securities, net of tax— — — — (517)(517)
Net income— — — 7,029 — 7,029 
Balance at March 31, 202224,963,542 $250 $1,528,328 $166,550 $29,185 $1,724,313 
The accompanying notes are an integral part of these condensed consolidated financial statements.
5

STRATEGIC EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the three months ended March 31,
20212022
Cash flows from operating activities:
Net income $9,577 $7,029 
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs138 138 
Amortization of investment discount/premium24 15 
Depreciation and amortization34,571 16,272 
Deferred income taxes(8,898)(4,955)
Stock-based compensation3,900 5,068 
Impairment of right-of-use lease assets14,388  
Changes in assets and liabilities:
Tuition receivable, net(13,417)(12,669)
Other assets(9,897)(6,374)
Accounts payable and accrued expenses(10,276)2,972 
Income taxes payable and income taxes receivable12,777 9,660 
Contract liabilities46,872 41,012 
Other liabilities(978)(1,573)
Net cash provided by operating activities78,781 56,595 
Cash flows from investing activities:
Purchases of property and equipment(12,650)(9,686)
Proceeds from marketable securities1,930 1,100 
Other investments (72)(175)
Net cash used in investing activities(10,792)(8,761)
Cash flows from financing activities:
Common dividends paid(14,778)(15,018)
Net payments for stock awards(2,326)(2,849)
Repurchase of common stock (3,961)
Net cash used in financing activities(17,104)(21,828)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash(866)2,097 
Net increase in cash, cash equivalents, and restricted cash50,019 28,103 
Cash, cash equivalents, and restricted cash — beginning of period202,020 279,212 
Cash, cash equivalents, and restricted cash — end of period$252,039 $307,315 
Non-cash transactions:
Non-cash additions to property and equipment$7,526 $5,111 
Right-of-use lease assets obtained in exchange for operating lease liabilities$46,147 $418 
The accompanying notes are an integral part of these condensed consolidated financial statements.
6

STRATEGIC EDUCATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.    Nature of Operations
Strategic Education, Inc. (“Strategic Education” or the “Company”), a Maryland corporation, is an education services company that provides access to high-quality education through campus-based and online post-secondary education offerings, as well as through programs to develop job-ready skills for high-demand markets. 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.
The accompanying condensed consolidated financial statements and footnotes include the results of the Company’s three reportable segments: (1) U.S. 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; (2) Education Technology Services, which is primarily focused on developing and maintaining relationships with employers to build employee education benefits programs; and (3) Australia/New Zealand, which through Torrens University and associated assets, provides certificate and degree programs in Australia and New Zealand. The Company’s reportable segments are discussed further in Note 14.
2.    Significant Accounting Policies
Financial Statement Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.
All information as of March 31, 2021 and 2022, and for the three months ended March 31, 2021 and 2022 is unaudited but, in the opinion of management, contains all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the condensed consolidated financial position, results of operations, and cash flows of the Company. The condensed consolidated balance sheet as of December 31, 2021 has been derived from the audited consolidated financial statements at that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full fiscal year.
Below is a description of the nature of the costs included in the Company’s operating expense categories.
Instructional and support costs generally contain items of expense directly attributable to activities that support students. This expense category includes salaries and benefits of faculty and academic administrators, as well as admissions and administrative personnel who support and serve student interests. Instructional and support costs also include course development costs and costs associated with delivering course content, including educational supplies, facilities, and all other physical plant and occupancy costs, with the exception of costs attributable to the corporate offices. Bad debt expense incurred on delinquent student account balances is also included in instructional and support costs.
General and administration expenses include salaries and benefits of management and employees engaged in finance, human resources, legal, regulatory compliance, marketing and other corporate functions. Also included are the costs of advertising and production of marketing materials. 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 Torrens University and associated assets in Australia and New Zealand (“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 plans. See Note 4 for additional information.
7

Foreign Currency Translation and Transaction Gains and Losses
The United States Dollar (“USD”) is the functional currency of the Company and its subsidiaries operating in the United States. The financial statements of its foreign subsidiaries are maintained in their functional currencies. 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. Assets and liabilities are translated into USD using the period-end spot foreign exchange rates. Income and expenses are translated at the weighted-average exchange rates in effect during the period. Equity accounts are translated at historical exchange rates. The effects of these translation adjustments are reported as a component of accumulated other comprehensive income within shareholders’ 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 unaudited condensed consolidated statements of income.
Restricted Cash
In the United States, a significant portion of the Company’s revenues are funded by various federal and state government programs. The Company generally does not receive funds from these programs prior to the start of the corresponding academic term. The Company may be required to return certain funds for students who withdraw from a U.S. higher education institution during the academic term. The Company had approximately $0.7 million and $0.9 million of these unpaid obligations as of December 31, 2021 and March 31, 2022, respectively. In Australia and New Zealand, advance tuition payments from international students are required to be restricted until that student commences his or her course. In addition, a portion of tuition prepayments from students enrolled in a vocational education and training program are held in trust by a third party law firm to adhere to tuition protection requirements. As of December 31, 2021 and March 31, 2022, the Company had approximately $9.1 million and $12.5 million, respectively, of restricted cash related to these requirements in Australia and New Zealand. These balances are recorded as restricted cash and included in other current assets in the unaudited condensed consolidated balance sheets.
As part of commencing operations in Pennsylvania in 2003, 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.
The following table illustrates the reconciliation of cash, cash equivalents, and restricted cash shown in the unaudited condensed consolidated statements of cash flows as of March 31, 2021 and 2022 (in thousands):
As of March 31,
20212022
Cash and cash equivalents$238,290 $293,419 
Restricted cash included in other current assets13,249 13,396 
Restricted cash included in other assets500 500 
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows$252,039 $307,315 
Tuition Receivable and Allowance for Credit Losses
The Company records tuition receivable and contract liabilities for its students upon the start of the academic term or program. Tuition receivables are not collateralized; however, credit risk is minimized as a result of the diverse nature of the Company's student bases and through the participation of the majority of the students in federally funded financial aid programs. An allowance for credit losses is established based upon historical collection rates by age of receivable and adjusted for reasonable expectations of future collection performance, net of estimated recoveries. These collection rates incorporate historical performance based on a student’s current enrollment status, likelihood of future enrollment, degree mix trends and changes in the overall economic environment. In the event that current collection trends differ from historical trends, an adjustment is made to the allowance for credit losses and bad debt expense.
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The Company’s tuition receivable and allowance for credit losses were as follows as of December 31, 2021 and March 31, 2022 (in thousands):
December 31, 2021March 31, 2022
Tuition receivable$100,060 $109,690 
Allowance for credit losses(48,783)(44,892)
Tuition receivable, net$51,277 $64,798 
Approximately $2.5 million and $2.1 million of tuition receivable are included in other assets as of December 31, 2021 and March 31, 2022, respectively, because these amounts are expected to be collected after 12 months.
The following table illustrates changes in the Company’s allowance for credit losses for the three months ended March 31, 2021 and 2022 (in thousands).
For the three months ended March 31,
20212022
Allowance for credit losses, beginning of period$49,773 $48,783 
Additions charged to expense10,822 7,217 
Write-offs, net of recoveries(11,416)(11,108)
Allowance for credit losses, end of period$49,179 $44,892 
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of an acquired business over the amount assigned to the assets acquired and liabilities assumed in a business combination. Indefinite-lived intangible assets, which include trade names, are recorded at fair value on their acquisition date. An indefinite life was assigned to the trade names because they have the continued ability to generate cash flows indefinitely.
Goodwill and the indefinite-lived intangible assets are assessed at least annually for impairment on the first day of 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 or indefinite-lived intangible asset below its carrying amount. The Company identifies its reporting units by assessing whether the components of its operating segments constitute businesses for which discrete financial information is available, and management regularly reviews the operating results of those components.
Finite-lived intangible assets that are acquired in business combinations are recorded at fair value on their acquisition dates and are amortized on a straight-line basis over the estimated useful life of the asset. Finite-lived intangible assets consist of student relationships.
The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are not recoverable, a potential impairment loss is recognized to the extent the carrying amount of the assets exceeds the fair value of the assets.
Authorized Stock
The Company has authorized 32,000,000 shares of common stock, par value $0.01, of which 24,592,098 and 24,963,542 shares were issued and outstanding as of December 31, 2021 and March 31, 2022, respectively. The Company also has authorized 8,000,000 shares of preferred stock, none of which is issued or outstanding. Before any preferred stock may be issued in the future, the Board of Directors would need to establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, and the terms or conditions of the redemption of the preferred stock.
In February 2022, the Company’s Board of Directors declared a regular, quarterly cash dividend of $0.60 per share of common stock. The dividend was paid on March 14, 2022.
Net Income Per Share
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. The dilutive effect of stock awards
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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: (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 are not included in the computation of diluted earnings per share when the stock option exercise price of an individual grant exceeds the average market price for the period.
Set forth below is a reconciliation of shares used to calculate basic and diluted earnings per share for the three months ended March 31, 2021 and 2022 (in thousands):
For the three months ended March 31,
20212022
Weighted average shares outstanding used to compute basic earnings per share23,974 23,948 
Incremental shares issuable upon the assumed exercise of stock options7 2 
Unvested restricted stock and restricted stock units172 164 
Shares used to compute diluted earnings per share24,153 24,114 
Anti-dilutive shares excluded from the diluted earnings per share calculation118 420 
Comprehensive Income
Comprehensive income 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, 2021 and March 31, 2022, the balance of accumulated other comprehensive income was $9.2 million, net of tax of $0.2 million, and $29.2 million, net of tax of $0.1 million, respectively. There were no reclassifications out of accumulated other comprehensive income to net income for the three months ended March 31, 2021 and 2022.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the period reported. The most significant management estimates include allowances for credit losses, useful lives of property and equipment and intangible assets, incremental borrowing rates, potential sublease income and vacancy periods, accrued expenses, forfeiture rates and the likelihood of achieving performance criteria for stock-based awards, value of free courses earned by students that will be redeemed in the future, valuation of goodwill and intangible assets, and the provision for income taxes. During the three months ended March 31, 2021 and 2022, management estimates also include potential impacts the COVID-19 pandemic will have on student enrollment, tuition pricing, and collections of tuition receivables in future periods. The duration and severity of the COVID-19 pandemic and its impact on the Company’s condensed consolidated financial statements is subject to uncertainty. Actual results could differ from those estimates.
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.
3.    Revenue Recognition
The Company’s revenues primarily consist of tuition revenue arising from educational services provided in the form of classroom instruction and online courses. 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. 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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The following table presents the Company’s revenues from contracts with customers disaggregated by material revenue category for the three months ended March 31, 2021 and 2022 (in thousands):
For the three months ended March 31,
20212022
U.S. Higher Education Segment
Tuition, net of discounts, grants and scholarships$217,477 $187,355 
    Other(1)
9,070 8,411 
Total U.S. Higher Education Segment226,547 195,766 
Australia/New Zealand Segment
Tuition, net of discounts, grants and scholarships50,222 47,536 
    Other(1)
1,043 976 
Total Australia/New Zealand Segment51,265 48,512 
Education Technology Services Segment(2)
12,524 14,577 
Consolidated revenue$290,336 $258,855 
_________________________________________
(1)Other revenue is primarily comprised of academic fees, sales of course materials, placement fees and other non-tuition revenue streams.
(2)Education Technology Services revenue is primarily derived from tuition revenue.
Revenues are recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods and services. The Company applies the five-step revenue model under ASC 606 to determine when revenue is earned and recognized.
Arrangements with students may have multiple performance obligations. For such arrangements, the Company allocates net tuition revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices charged to customers and observable market prices. The standalone selling price of material rights to receive free classes or scholarships in the future is estimated based on class tuition prices or amounts of scholarships, and likelihood of redemption based on historical student attendance and completion behavior.
At the start of each academic term or program, a contract liability is recorded for academic services to be provided, and a tuition receivable is recorded for the portion of the tuition not paid in advance. Any cash received prior to the start of an academic term or program is recorded as a contract liability. Some students may be eligible for scholarship awards, the estimated value of which will be realized in the future and is deducted from revenue when earned, based on historical student attendance and completion behavior. Contract liabilities are recorded as a current or long-term liability in the unaudited condensed consolidated balance sheets based on when the benefit is expected to be realized.
Course materials are available to enable students to access electronically all required materials for courses in which they enroll during the quarter. Revenue derived from course materials is recognized ratably over the duration of the course as the Company provides the student with continuous access to these materials during the term. For sales of certain other course materials, the Company is considered the agent in the transaction, and as such, the Company recognizes revenue net of amounts owed to the vendor at the time of sale. Revenues also include certain academic fees recognized within the quarter of instruction, and certificate revenue and licensing revenue, which are recognized as the services are provided.
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. The Company’s employees and their dependents are not eligible for the Graduation Fund. 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. In response to the COVID-19 pandemic, Strayer University temporarily allowed students to miss three consecutive terms without losing their Graduation Fund credits.
Revenue from students participating in the Graduation Fund is recorded in accordance with ASC 606. The Company defers the value of the related performance obligation associated with the credits estimated to be redeemed in the future based on the underlying revenue transactions that result in progress by the student toward earning the benefit. The Company’s estimate of the
11

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 this program and similar programs. Each quarter, the Company assesses its assumptions underlying these estimates, and to date, any adjustments to the estimates have not been material. The amount estimated to be redeemed in the next 12 months is $20.5 million and is included as a current contract liability in the unaudited condensed consolidated balance sheets. The remainder is expected to be redeemed within two to four years.
The table below presents activity in the contract liability related to the Graduation Fund (in thousands):
For the three months ended March 31,
20212022
Balance at beginning of period$53,314 $52,024 
Revenue deferred6,516 4,368 
Benefit redeemed(5,421)(5,182)
Balance at end of period$54,409 $51,210 
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 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. These costs are deferred and then amortized over the period of benefit which ranges from one year to two years.
4.    Restructuring and Related Charges
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.
In addition, the 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. During the three months ended March 31, 2021, the Company recorded right-of-use lease asset charges of approximately $14.4 million related to facilities consolidated as a result of the restructuring plan. The Company also recorded fixed asset impairment charges of approximately $2.0 million and $0.2 million during the three months ended March 31, 2021 and 2022, respectively. All severance and other employee separation charges and right-of-use lease asset and fixed asset impairment charges related to the 2020 restructuring plan are included in Restructuring costs on the unaudited condensed consolidated statements of income.
The following details the changes in the Company’s severance and other employee separation costs restructuring liabilities during the three months ended March 31, 2021 and 2022 (in thousands):
CEC
Integration Plan(1)
2020
Restructuring Plan
Total
Balance at December 31, 2020$1,835 $1,287 $3,122 
Restructuring and other charges 1,190 1,190 
Payments(733)(2,123)(2,856)
Balance at March 31, 2021$1,102 $354 $1,456 
Balance at December 31, 2021(2)
$ $1,612 $1,612 
Restructuring and other charges 1,462 1,462 
Payments (2,382)(2,382)
Balance at March 31, 2022(2)
$ $692 $692 
_____________________________________
(1)Restructuring plan implemented following the Company's merger with CEC.
(2)Restructuring liabilities are included in accounts payable and accrued expenses.
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5. Marketable Securities
The following is a summary of available-for-sale securities as of March 31, 2022 (in thousands):
Amortized CostGross Unrealized GainGross Unrealized (Losses)Estimated Fair Value
Tax-exempt municipal securities$18,572 $31 $(232)$18,371 
Corporate debt securities9,758 5 (72)9,691 
Total$28,330 $36 $(304)$28,062 
The following is a summary of available-for-sale securities as of December 31, 2021 (in thousands):
Amortized CostGross Unrealized GainGross Unrealized (Losses)Estimated Fair Value
Tax-exempt municipal securities$18,546 $271 $ $18,817 
Corporate debt securities10,898 163  11,061 
Total$29,444 $434 $ $29,878 
The unrealized gains and losses on the Company’s investments in corporate debt and municipal securities as of December 31, 2021 and March 31, 2022 were caused by changes in market values primarily due to interest rate changes. As of March 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. 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 three months ended March 31, 2021 and 2022.
The following table summarizes the maturities of the Company’s marketable securities as of December 31, 2021 and March 31, 2022 (in thousands):
December 31, 2021March 31, 2022
Due within one year$6,501 $6,785 
Due after one year through five years23,377 21,277 
Total$29,878 $28,062 
The following table summarizes the proceeds from the maturities and sales of available-for-sale securities for the three months ended March 31, 2021 and 2022 (in thousands):
For the three months ended March 31,
20212022
Maturities of marketable securities$1,930 $1,100 
Sales of marketable securities  
Total$1,930 $1,100 
The Company did not record any gross realized gains or losses in net income during the three months ended March 31, 2021 and 2022.
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6.    Fair Value Measurement
Assets measured at fair value on a recurring basis consist of the following as of March 31, 2022 (in thousands):
Fair Value Measurements at Reporting Date Using
March 31, 2022Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
Money market funds$5,346 $5,346 $ $ 
Marketable securities:
Tax-exempt municipal securities18,371  18,371  
Corporate debt securities9,691  9,691  
Total assets at fair value on a recurring basis$33,408 $5,346 $28,062 $ 
Assets and liabilities measured at fair value on a recurring basis consist of the following as of December 31, 2021 (in thousands):
Fair Value Measurements at Reporting Date Using
December 31, 2021Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
Money market funds$4,134 $4,134 $ $ 
Marketable securities:
Tax-exempt municipal securities18,817  18,817  
Corporate debt securities11,061  11,061  
Total assets at fair value on a recurring basis$34,012 $4,134 $29,878 $ 
Liabilities:
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 unaudited condensed 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 in stockholders' equity. The Company's cash and cash equivalents held at December 31, 2021 and March 31, 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 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 deferred payments are classified within Level 3 as there is no liquid market for similarly priced instruments and are valued using discounted cash flow models that encompass significant unobservable inputs. The assumptions used to prepare the discounted cash flows include estimates for interest rates, enrollment growth, retention rates, and pricing strategies. These assumptions are subject to change as the underlying data sources evolve and the programs mature. The final payment related to the deferred payment arrangements was made in the first quarter of 2022.
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 three months ended March 31, 2021 and 2022.
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Changes in the fair value of the Company’s Level 3 liabilities during the three months ended March 31, 2021 and 2022 are as follows (in thousands):
As of March 31,
20212022
Balance as of the beginning of period$1,658 $658 
Amounts paid(730)(658)
Other adjustments to fair value418  
Balance at end of period$1,346 $ 
7.    Goodwill and Intangible Assets
Goodwill
The following table presents changes in the carrying value of goodwill by segment for the three months ended March 31, 2022 (in thousands):
 U.S. Higher EducationAustralia /
New Zealand
Education Technology ServicesTotal
Balance as of December 31, 2021$632,075 $553,789 $100,000 $1,285,864 
Additions    
Impairments    
Currency translation adjustments 17,311  17,311 
Adjustments to prior acquisitions    
Balance as of March 31, 2022$632,075 $571,100 $100,000 $1,303,175 
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. No events or circumstances occurred in the three months ended March 31, 2022 to indicate an impairment to goodwill at any of its segments. There were no impairment charges related to goodwill recorded during the three months ended March 31, 2021 and 2022.
Intangible Assets
The following table represents the balance of the Company’s intangible assets as of December 31, 2021 and March 31, 2022 (in thousands):
 December 31, 2021March 31, 2022
 Gross Carrying AmountAccumulated AmortizationNetGross Carrying AmountAccumulated AmortizationNet
Subject to amortization      
Student relationships$201,309 $(180,007)$21,302 $201,875 $(182,903)$18,972 
Not subject to amortization
Trade names255,078 — 255,078 257,295 — 257,295 
Total$456,387 $(180,007)$276,380 $459,170 $(182,903)$276,267 
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. 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 $16.9 million and $2.9 million for the three months ended March 31, 2021 and 2022, respectively.
Indefinite-lived intangible assets not subject to amortization consist of trade names. The Company assigned an indefinite useful life to its trade name intangible assets, as it is believed these assets have the ability to generate cash flows indefinitely. In addition, there are no legal, regulatory, contractual, economic, or other factors to limit the useful life of the trade name intangibles.
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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. No events or circumstances occurred in the three months ended March 31, 2022 to indicate an impairment to indefinite-lived intangible assets. There were no impairment charges related to indefinite-lived intangible assets recorded during the three months ended March 31, 2021 and 2022.
8. Other Assets
Other assets consist of the following as of December 31, 2021 and March 31, 2022 (in thousands):
December 31, 2021March 31, 2022
Prepaid expenses, net of current portion$19,852 $20,011 
Equity method investments15,582 13,887 
Cloud computing arrangements5,957 6,547 
Other investments3,576 3,677 
Tuition receivable, non-current2,466 2,062 
Other4,864 3,882 
Other assets$52,297 $50,066 
Prepaid Expenses
Long-term prepaid expenses primarily relate to payments that have been made for future services to be provided after one year. In the fourth quarter of 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, 2021 and March 31, 2022, $19.2 million and $18.8 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.
Equity Method Investments
The Company holds investments in certain limited partnerships that invest in various innovative companies in the health care and education-related technology fields. The Company has commitments to invest up to an additional $2.9 million across these partnerships through 2031. The Company's investments range from 3%-5% of any partnership’s interest and are accounted for under the equity method.
The following table illustrates changes in the Company’s limited partnership investments for the three months ended March 31, 2021 and 2022 (in thousands):
For the three months ended March 31,
20212022
Limited partnership investments, beginning of period$15,795 $15,582 
Capital contributions72  
Pro-rata share in the net income (loss) of limited partnerships2,714 (313)
Distributions(702)(1,382)
Limited partnership investments, end of period$17,879 $13,887 
Cloud Computing Arrangements
The Company defers implementation costs incurred in cloud computing arrangements and amortizes these costs over the term of the arrangement.
Other Investments
The Company's venture fund, SEI Ventures, makes investments in education tech 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.
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Tuition Receivable
Non-current tuition receivable represents tuition that the Company expects to collect, but not within the next 12 months.
Other
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.
9.    Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following as of December 31, 2021 and March 31, 2022 (in thousands):
December 31, 2021March 31, 2022
Trade payables$45,340 $49,481 
Accrued compensation and benefits27,424 31,565 
Accrued student obligations and other22,754 22,888 
Accounts payable and accrued expenses$95,518 $103,934 
10.    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 million. 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. In addition, the Amended Credit Facility provides for a subfacility for borrowings in certain foreign currencies in an amount equal to the U.S. dollar equivalent of $150 million. The maturity date of the Amended Credit Facility is November 3, 2025. 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. 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.
The Amended Credit Facility is guaranteed by all domestic subsidiaries, subject to certain exceptions, and secured by substantially all of the assets of the Company and its subsidiary guarantors. The Amended Credit Facility contains customary affirmative and negative covenants, representations, warranties, events of default, and remedies upon default, including acceleration and rights to foreclose on the collateral securing the Amended Credit Facility. In addition, the Amended Credit Facility requires that the Company satisfy certain financial maintenance covenants, including:
A leverage ratio of not greater than 2.00 to 1.00. Leverage ratio is defined as the ratio of total debt (net of unrestricted cash in an amount not to exceed $150 million) to trailing four-quarter EBITDA.
A coverage ratio of not less than 1.75 to 1.00. Coverage ratio is defined as the ratio of trailing four-quarter EBITDA and rent expense to trailing four-quarter interest and rent expense.
A U.S. 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 terms of the Amended Credit Facility as of March 31, 2022.
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As of December 31, 2021 and March 31, 2022, the Company had approximately $141.6 million and $141.7 million, respectively, outstanding under the Revolving Credit Facility. Approximately $3.6 million and $3.7 million was denominated in Australian dollars as of December 31, 2021 and March 31, 2022, respectively.
During the three months ended March 31, 2021 and 2022, the Company paid $0.7 million and $0.4 million, respectively, of interest and unused commitment fees related to its Revolving Credit Facility.
11.    Other Long-Term Liabilities
Other long-term liabilities consist of the following as of December 31, 2021 and March 31, 2022 (in thousands):
December 31, 2021March 31, 2022
Contract liabilities, net of current portion$34,704 $35,259 
Asset retirement obligations9,122 9,423 
Other3,263 3,405 
Other long-term liabilities$47,089 $48,087 
Contract Liabilities
As discussed in Note 3, 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). Long-term contract liabilities represent the amount of revenue under these arrangements that the Company expects will be realized after one year.
Asset Retirement Obligations
Certain of the Company's lease agreements require the leased premises to be returned in a predetermined condition.
12.    Equity Awards
The following table sets forth the amount of stock-based compensation expense recorded in each of the expense line items for the three months ended March 31, 2021 and 2022 (in thousands):
For the three months ended March 31,
20212022
Instructional and support costs$1,225 $1,607 
General and administration2,675 3,461 
Stock-based compensation expense included in operating expense3,900 5,068 
Tax benefit1,000 1,334 
Stock-based compensation expense, net of tax$2,900 $3,734 
During the three months ended March 31, 2021 and 2022, the Company recognized a $0.1 million windfall tax benefit and a $1.3 million tax shortfall, respectively, related to share-based payment arrangements, which was recorded as an adjustment to the provision for income taxes.
13.    Income Taxes
During the three months ended March 31, 2021 and 2022, the Company recorded income tax expense of $4.6 million and $5.2 million, reflecting an effective tax rate of 32.4% and 42.7%, respectively.
The Company had $1.0 million of unrecognized tax benefits as of December 31, 2021 and March 31, 2022. Interest and penalties, including those related to uncertain tax positions, are included in the provision for income taxes in the unaudited condensed consolidated statements of income.
The Company paid $0.4 million and $0.5 million in income taxes during the three months ended March 31, 2021 and 2022, respectively.
The tax years since 2018 remain open for federal, state, and local taxing jurisdictions in which the Company is subject to taxation.
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14. Segment Reporting
Strategic Education is an educational services company that provides access to high-quality education through campus-based and online post-secondary education offerings, as well as through programs to develop job-ready skills for high-demand markets. 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. The Company’s organizational structure includes three operating and reportable segments: U.S. 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. 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. 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 lower cost education benefits programs through the use of low-cost online general education courses recommended by the American Council on Education for credit at other colleges and universities.
The Australia/New Zealand segment is comprised of Torrens University, Think Education and Media Design School in Australia and New Zealand, which collectively offer certificate and degree programs in business, design, education, hospitality, healthcare, and technology through campuses in Australia, New Zealand, and online.
Revenue and operating expenses are generally directly attributable to the segments. Inter-segment revenues are not presented separately, as these amounts are immaterial. The Company’s Chief Operating Decision Maker does not evaluate operating segments using asset information.
A summary of financial information by reportable segment for the three months ended March 31, 2021 and 2022 is presented in the following table (in thousands):
For the three months ended March 31,
20212022
Revenues
U.S. Higher Education$226,547 $195,766 
Australia/New Zealand51,265 48,512 
Education Technology Services12,524 14,577 
Consolidated revenues$290,336 $258,855 
Income (loss) from operations
U.S. Higher Education$47,754 $15,483 
Australia/New Zealand(2,949)(749)
Education Technology Services5,881 4,713 
Amortization of intangible assets(19,407)(3,738)
Merger and integration costs(1,012)(410)
Restructuring costs(18,267)(1,858)
Consolidated income from operations$12,000 $13,441 
15.    Litigation
The Company is involved in litigation and other legal proceedings arising out of the ordinary course of its business. Certain of these matters are discussed below. From time to time, certain matters may arise that are other than ordinary and routine. The outcome of such matters is uncertain, and the Company may incur costs in the future to defend, settle, or otherwise resolve them. The Company accrues for estimated costs related to existing lawsuits, claims and proceedings when it is probable that it will incur these costs in the future and the costs are reasonably estimable. The Company currently believes that the ultimate outcome of such
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matters will not, individually or in the aggregate, have a material adverse effect on its consolidated financial position, results of operations or cash flows. 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.
On April 20, 2021, Capella University received a letter from the Department of Education referencing the Wright matter (described below), and indicating that the Department will 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. Capella University has since received approximately 500 applications for borrower defense to repayment and is cooperating with the Department’s fact-finding process. At this time, the Company is unable to predict the outcome of the Department's fact-finding process or the resolution of the borrower defense applications.
Wright, et al. v. Capella Education Co., et al. (now captioned Ornelas, et al. v. Capella, et al.) was filed several years ago in the United States District Court for the District of Minnesota. 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.
16.    Regulation
United States Regulation
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. See “Item 1. Business – Regulation – U.S. Regulatory Environment – The 90/10 Rule” of the Company’s Annual Report on Form 10-K for a description of the 90/10 Rule. Under the legislation, these revisions to the 90/10 Rule would apply to institutional fiscal years beginning on or after January 1, 2023. 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, which may result in a definition of “federal education assistance” that will include tuition assistance programs offered by the U.S. Department of Defense and U.S. Department of Veterans Affairs, in addition to the Title IV programs already covered by the 90/10 Rule.
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, former President Trump signed into law the Consolidated Appropriations Act of 2021. Among other things, this package funded the 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: eliminating the “expected family contribution” from the Free Application for Federal Student Aid (“FAFSA”) and replacing it with a “Student Aid Index;”
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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 is expected to provide, but has not yet provided, 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, former President Trump 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 U.S. Department of Veterans Affairs (“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 1-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. The legislation requires further guidance from the VA.
THRIVE Act
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.
REMOTE Act
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 extends remote learning waivers, simplifies the VA verification process for tuition reimbursement, and fixes a technical error to ensure U.S. institutions of higher education can continue to recruit foreign students without losing GI bill funding for their students.
CARES Act
On March 27, 2020, Congress passed and former President Trump 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, Congress provided institutions of higher education relief from conducting a return to Title IV (R2T4) calculation in cases where the student withdrew because of COVID-19, 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
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Loan associated with a payment period that the student did not complete due to COVID-19. The CARES Act also allows institutions to exclude from satisfactory academic progress calculations any attempted credits that the student did not complete due to COVID-19, without requiring an appeal from the student. Additionally, under the legislation, institutions are permitted to transfer up to 100% of Federal Work Study funds into their Federal Supplemental Educational Opportunity Grant allocation and are granted a waiver of the 2019/2020 and 2020/2021 non-federal share institutional match. Institutions may continue to make Federal Work Study payments to student employees who are unable to meet their employment obligations due to COVID-19. 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 through August 31, 2022.
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 COVID-19. 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 COVID-19, as long as such costs do not include payment to contractors for the provision of pre-enrollment recruitment activities, including marketing and advertising; endowments; 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 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.
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 a $400 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 Federal Supplemental Educational Opportunity Grant (FSEOG) program, an increase of $15 million above the FY 2021 enacted level, and $1.21 billion allocated for Federal Work-Study (FWS), an increase of $20 million above the FY 2021 enacted level.
In addition to the increases in federal student aid funding, the bill provides $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 dictates the 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 makes a number of changes to the FAFSA Simplification Act.
Gainful Employment
Under the Higher Education Act (“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 the additional disclosure requirements that became effective January 1, 2017 and July 1, 2019 (the “2015 Regulations”).
On July 1, 2019, the Department of Education released final gainful employment 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 the Department 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
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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 Higher Education Act of 1965. Negotiated rulemaking committee sessions occurred January-March 2022, and the Institutional and Programmatic Eligibility committee failed to reach consensus