For-Profit Education

Research Raises Questions About Colleges That Shift From For-Profit to Nonprofit

October 06, 2015

Several for-profit colleges have recently restructured as nonprofit entities. But a new report argues that some of them now act like "covert for-profits" and that their backers profit in ways that are not standard at traditional universities.

The new research was conducted by Robert M. Shireman, a senior fellow at the Century Foundation and former Education Department official, who analyzed four for-profit colleges that had converted to nonprofit status. Through Freedom of Information Act requests, he obtained the documents that led to the creation of the nonprofits and other communication between each organization and the Internal Revenue Service.

"It appears that these particular for-profits wanted to avoid regulations that applied to for-profit colleges," he argued.

He also found that the colleges’ owners are benefiting financially while serving on their governing bodies because they or family members are still being paid by the college. At a typical nonprofit college, board members are not paid, except for the president, he said.

'The IRS may have rushed because of the requester's insistence on an expedited review.'
That could put all colleges on a slippery slope, he warned. More for-profit institutions, such as Grand Canyon University, continue to seek nonprofit status. And trustees at nonprofit institutions could find ways to engage in business with the college in a way that undermines their oversight role.

"This is not just about for-profit colleges," Mr. Shireman said, "but about a serious problem in governance that will in fact be nonprofit colleges if the IRS and the Department of Education do not put a stop to it."

An official at the Association of Private Sector Colleges and Universities criticized the report. "There is no doubt about Mr. Shireman’s ideological opposition to our institutions, so this latest piece of ‘research’ sounds like it carries heavy bias and should invite skepticism," said Noah A. Black, the association’s vice president for public affairs, who responded to a reporter’s summary of Mr. Shireman’s assertions. Most if not all of the colleges in the report are or have been members of the association.

‘A Very Gross Measure’

In one case cited in the report, Mr. Shireman found that the IRS had approved the conversion of Remington Colleges in eight weeks even though Mr. Shireman said the IRS knew that the Board of Trustees included the chief executive of Remington Colleges and its primary creditor, the owner of a chain of colleges, called Education America, that Remington Colleges purchased at the same time it claimed nonprofit status. The other three members of the board are the principal and employees of a financial-services firm that helped with the purchase of Education America.

The report notes that the college said one reason for becoming a nonprofit was to escape regulations.

"The IRS may have rushed because of the requester’s insistence on an expedited review, accompanied with an explanation that created the impression that the U.S. Department of Education needed an answer within a particular time frame, which the lawyers for Remington described as about seven weeks from the date of their application," the report reads.

The report also looks at Herzing University, Everglades University (formerly Keiser University), and the Center for Excellence in Higher Education, which is made up of Stevens-Henager College, California College San Diego, and CollegeAmerica.

Smaller, closely held for-profits typically can be converted more easily into nonprofits than larger ones that are publicly traded, said Kevin Kinser, an associate professor of education at the University at Albany, part of the State University of New York system.

For-profit institutions have different reasons for converting to nonprofit status, Mr. Kinser said. The more cynical one, he said, is to avoid the regulations on for-profit colleges. Another common argument is that the leaders of a for-profit college don’t consider themselves different from a nonprofit college, and so the reputation haunts them.

"This distinction between nonprofit and for-profit is a very gross measure to be able to identify what we’re concerned by in terms of performance, quality, and outcomes in higher education," he said.

‘A Disconnect From Reality’

The lack of oversight of existing nonprofits makes it challenging for the IRS and the Department of Education to audit organizations after they’ve claimed nonprofit status, Mr. Shireman said.

The department is now looking more closely at its authority to determine whether a nonprofit is valid in how it is organized, Mr. Shireman said. He recommends in the report that the department start by looking at the college he’s highlighted, and defer action on additional conversions until there’s a better system to monitor colleges’ claims to nonprofit status.

Mr. Black, of college association, criticized the notion of government action. "The idea that the U.S. Department of Education needs to add more scrutiny and regulation to private-sector education shows a disconnect from reality," he said. "As we have stated from the outset, we need better regulation, not more, and regulations, and review, that apply fairly across all of higher education."

Still, the regulations on for-profit colleges remain questionable to some, said Mark S. Schneider, vice president and institute fellow at the American Institutes for Research. Investigating colleges based on their tax status doesn’t take into account whether an institution is doing a good job for its students.

"For me," he said, "what we should be thinking about is how well any program — regardless of tax status, regardless of parent organization — how well they’re serving their students."