For-profit colleges transform into nonprofits to evade rules, report suggests
Published: Oct 7, 2015 2:46 p.m. ET
U.S. Secretary of Education Arne Duncan (L) with President Barack Obama on March 16, 2015.
For-profit colleges may have found a loophole to evade the Obama administration’s crackdown on the industry: Transform into nonprofit institutions.
Four college chains, which account for a total of about 50 campuses nationwide, converted to nonprofit entities over the last several years, but still act in many ways like profit-seeking enterprises, a new report suggests.
The schools engage in behaviors that aren’t typical of nonprofits, such as paying lease payments on property to the former owners of the for-profit company and allowing the former owners to have a larger say in the governing of the new nonprofit instead of leaving it up to a group of independent trustees not out for financial gain, according to a review of government documents by Robert Shireman, a senior fellow at the Century Foundation, a progressive think tank based in New York that focuses on education and economic issues.
“I didn’t expect to see such a consistent pattern,” said Shireman, who has also served as an undersecretary in the Department of Education.
These choices raise questions as to whether the schools should be allowed the tax-exempt status that comes with being a nonprofit and whether the Internal Revenue Service is looking closely enough at the schools that request it, the report notes. They also raise concerns that the colleges are looking to evade scrutiny as regulators set their sights on the for-profit college industry.
Once one of the largest for-profit college chains in the country, Corinthian Colleges collapsed earlier this year, after the Department of Education delayed dispersing the school’s financial aid funding amid accusations the company was luring students into taking on loans with inflated career and job placement rates. Federal and statelaw-enforcement officials have also filed suits against other for-profit chains.
As part of this push to better regulate for-profit colleges, the Obama administration recently strengthened a rule that requires career colleges to prove they’re preparing students for “gainful employment,” or a job in their field, to receive financial aid funding. For-profit colleges are also required to receive no more than 90% of their funding from federal coffers—an attempt to prevent companies from relying entirely on taxpayer dollars for their profits. Nonprofits are exempt from this regulation, and typically they have little trouble finding funding from a variety of sources, Shireman said.
“But because for-profits basically prey on people who are eligible for the max financial aid—low income adults—they bump up against that rule pretty frequently,” Shireman said. He’s concerned that the four schools named in the report—Herzing University, Remington Colleges, Everglades University and Center for Excellence in Higher Education—converted their formerly for-profit campuses to nonprofits to avoid having to comply with those rules.
The report calls into question the Salt Lake City-based Center for Excellence in Higher Education’s petition to the IRS to be considered a tax-exempt educational institution, instead of a tax-exempt charity after the organization acquired a suite of for-profit college campuses in 2012. But Eric Juhlin, Chief Executive of the Center for Excellence in Higher Education, disputed the report.
“He’s trying to say that this was a scam and it was a sham” and that the Carl B. Barney, the owner of the for-profit campuses sold them to Center for Excellence “to continue to prosper and benefit from the colleges” while using the nonprofit status to avoid regulations targeting for-profit schools, Juhlin said. “In our case that couldn’t be further from the truth. It had absolutely nothing to do with regulatory avoidance, tax avoidance or trying to play some game with respect to the organizational structure.” Rather, he said Barney decided to sell the campuses to the nonprofit institution as part of “an estate planning decision” that would allow the schools to continue “in perpetuity” even in his absence.
Kelli Lane, a spokesperson for Everglades University, also disputed the report’s findings in a statement, noting that the school began its transition to nonprofit status in 1998 “well before” the current regulatory environment.
“An independent Board of Trustees continues to ensure students are receiving a quality and accountable education,” she said.
Renee Herzing, the president of Wisconsin-based Herzing University, which began the process of changing its status in 2009, said the school is in “solid compliance” with federal and state laws. “Herzing University agrees that becoming nonprofit is a serious commitment to the public good, which is why we decided to pursue that status for our 50-year-old, family-founded institution,” she wrote.
(A representative from Heathrow, Florida-based Remington Colleges, which was approved as a nonprofit in 2010, didn’t immediately respond to a request for comment from MarketWatch.)
Shireman said he’s concerned the trend may go beyond these four chains of schools, noting that he’s looked into a couple of other possible cases. “There could well be more,” he said.
The Department of Education is keeping an eye on this phenomenon and as a result hasn’t yet approved requests from other for-profit schools to turn into nonprofit entities, Dorie Nolt, a Department spokeswoman, wrote in a statement. In the meantime, those schools have to abide by the restrictions placed on for-profit colleges, she added. “The Department shares the concern that some for-profit school owners may adopt the trappings of nonprofit status to avoid certain federal regulations while continuing to make money from the schools,” she wrote.