Some Corporate-Owned Colleges Get Certified as Nonprofits to Evade Financial Scrutiny

Some Corporate-Owned Colleges Get Certified as Nonprofits to Evade Financial Scrutiny
Friday, 04 December 2015 08:18
Federal student loans are putting billions of dollars into the piggy bank of for-profit college corporations masquerading as “non-profits.” (Photo: Tax Credits)
For-profit college companies’ first priority is reaping a financial windfall, not providing a quality education. Recently, BuzzFlash reported on the bankruptcy of one such higher-education company, which left students saddled with billions of dollars in federal debt after the investors had made money off of billions of dollars in federal tuition loans.
There has been some renewed White House interest in reining in for-profit colleges – but in the absence of congressional action, little can be done.
Recent analysis by The Century Foundation has found that some inventive college corporations – in an attempt to preempt a crackdown on for-profit college schemes – have found a new way to reap the financial rewards of luring students into substandard colleges: convert themselves into IRS-approved nonprofit organizations. Once they receive nonprofit status, these companies then reconfigure themselves to channel a large chunk of their educational functions to the for-profit providers with whom they are linked:
Unfortunately, the conversion to nonprofit status is susceptible to abuse by covert for-profits—schools that obtain the nonprofit label yet continue operating like for-profit institutions—leaving consumers and taxpayers more vulnerable than ever.
Covert for-profit colleges can exist because while the Department of Education relies on the Internal Revenue Service’s judgment of which institutions are and which are not valid nonprofits, the IRS rests its determination on the declarations and self-regulation by the trustees of these nonprofits, based mostly on an honor system. As with other taxpayers, the IRS relies on the honesty of the individuals and corporations that file tax returns, an honesty that is tested only in case of an audit, which often takes place years afterward.
The report, however, notes that the IRS examines less than a percent of nonprofits annually, therefore leaving a high probability that for-profit colleges seeking to escape scrutiny by becoming officially non-profit – in terms of IRS status – can function without government oversight indefinitely.
Furthermore, the newly minted “nonprofit” colleges can evade the minimal federal requirements that exist in relation to for-profit education companies. Significantly, as “non-profit” entities, the shell colleges (corporations) are not subject to federal income tax.
This is a very similar strategy to that of many charter schools. Charters are the rage of neoliberal “reformers,” but they are generally a blight on public education and an effort to undermine teachers’ unions. In January of this year, AlterNet explored the lofty claims of many charter school proponents and found the real motivation of the movement was not infrequently financial gain for shrewd investors:
Studies show that charter schools don’t typically outperform public schools and they often tend to increase racial and class segregation. So one must wonder, what exactly is motivating these school “reformers”? And why have they pushed for more and more closure — and new charter schools — at such an unprecedented rate in recent years?
Pro-charter supporters will tell you that it’s time for public institutions like our schools to start competing more like for-profit institutions. Test scores and high enrollment, then, define success. Unsuccessful schools, they say, should close just as unsuccessful businesses do. For neoliberal school reformers from today’s Arne Duncan-led Department of Education to scandal-ridden movement leader Michelle Rhee to billionaire Bill Gates, it is taken on faith that market principles are desirable in education.
But since it’s not clear that market principles are benefiting students on a large scale, it seems likely that something else is at stake. And reformers may be more than a little disingenuous in publicly ignoring that other, less high-minded thing: Profit.
The AlterNet article describes the various ways in which money that flows through many charter schools is basically laundered so that investors and companies profit from public funding.
Higher-education companies, meanwhile, don’t tout the pretense of lofty goals of “educational reform.” They often lure students with high-pressure tactics, including false assurances of likely jobs after receiving degrees. In return, the college corporations, whose investors include hedge funds,benefit from student tuition that is predominantly paid for with federally funded student loans.
The study by The Century Foundation of four for-profit colleges that underwent conversions to nonprofit status finds:
Covert for-profit colleges cost the public by misleading consumers, dodging taxes, and evading regulations that apply to Education Department financial aid. Further, their actions, and the failure of the federal government to address the problem, seriously undermine the integrity of the system of oversight of colleges and universities, as well as of charitable organizations as a whole.
In a March 2014 announcement by the Department of Education of new regulations to “protect Americans from predatory, poor-performing career colleges,” the department revealed:
Students at for-profit colleges represent only about 13 percent of the total higher education population, but about 31 percent of all student loans and nearly half of all loan defaults. In the most recent data, about 22 percent of student borrowers at for-profit colleges defaulted on their loans within three years, compared to 13 percent of borrowers at public colleges….
And of the for-profit gainful employment programs the Department could analyze and which could be affected by our action today, the majority—72 percent—produced graduates who on average earned less than high school dropouts.
Only about 25 percent of graduates of for-profit colleges earn more than high school dropouts. That is a stunning statistic, which evidences an insidious greed that exploits both students striving to obtain jobs and the taxpayer financing of their student loans.
The subterfuge of for-profit colleges converting to nonprofit status to stealthily avoid scrutiny – while enhancing their brand attraction as charitable “non-profits” – is a scam that represents the plundering of education across the United States.


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