Accreditor Rejects Grand Canyon U.'s Bid to Turn Nonprofit

Grand Canyon Education Inc., which runs a for-profit college based in Arizona, is giving up its 18-month effort to become a nonprofit institution.

The university’s accreditor, the Higher Learning Commission, said in a statement on Friday that it had made its decision because the university had not met the requirements for the transition. The statement noted that the commission’s criteria do not allow “for the separate school-corporation and service-corporation model.”

In filings with the Securities and Exchange Commission, the company said its proposal had been denied because the university would have relied too heavily on a separate for-profit entity to provide academic and student-support services.

“The board concluded that the current eligibility requirements and criteria do not allow for an institution to outsource all or the majority of its basic functions related to academic- and student-support services and curriculum development,” the company said, quoting a letter from the commission.

Brian Mueller, president of Grand Canyon, said that he was disappointed by the decision and that the accreditation reviewers who had visited the campus had given their blessing to the proposal. But he declined to provide a copy of the commission’s full response to the company or the report from the visiting reviewers.

The commission’s explanation of its decision mischaracterized Grand Canyon’s proposal, Mr. Mueller said, because all of the core academic functions of the university would remain under the control of the university’s faculty. In addition, he said, such arrangements are now common between traditional public and private nonprofit universities and companies such as Pearson and 2U.

The Higher Learning Commission did not respond to several requests for comment.

But Robert M. Shireman, a former deputy under secretary of education who has written about other for-profit colleges’ conversion to nonprofit status, said the company had failed to show that the resulting college would primarily serve students over shareholders.

The accreditor made “the right judgment in determining that the transaction did not create a fundamentally educational or philanthropic entity but, instead, was a scheme that would allow too much control by a for-profit company,” said Mr. Shireman, an outspoken critic of proprietary colleges.

Back to the Future

Grand Canyon had portrayed its effort to convert to a nonprofit as a return to its roots.

The university was founded in 1949 as a private, nonprofit Christian institution. But by 2004 it was struggling financially and had become saddled with debt.

That’s when a for-profit company, Significant Education LLC, purchased the college’s controlling assets and accreditation, with plans to increase the enrollment and online offerings.

The move was somewhat novel at the time, but it foreshadowed the rise of institutions like Ashford University. In 2005, Bridgepoint Education purchased a small Roman Catholic college in Iowa and transformed it into Ashford, which is now a major provider of online degrees.

After becoming a publicly traded corporation, in 2008, Grand Canyon decided a year and a half ago to convert part of its operations to a nonprofit entity. That would enable the university to operate “on a level playing field with other traditional universities with regard to tax status, the ability to accept philanthropic contributions, the ability to pursue research-grant opportunities, and participation in NCAA governance,” the company stated on Friday in a news release.

Unlike Ashford, which has closed its Iowa campus, Grand Canyon has expanded its physical campus and its enrollment there, and has an extensive athletics program that has moved into Division I of the NCAA. Tuition has remained frozen at the college for eight years, its president said.

The change to nonprofit status wasn’t all about tradition, however. Alongside the new nonprofit university would be the existing public corporation that would provide services to the college in exchange for a portion of revenues, notes an analysis of the deal by BMO Capital Markets.

Profit and Oversight

Not only could this new arrangement make the public company more profitable, the analysts wrote. It could also cut the company’s tax bill in half.

“In addition, by no longer being a for-profit entity, the taint of being associated with this group — from a publicity and political perspective — would be removed,” BMO analysts wrote in February.

Mr. Shireman said that the “entanglement” between the for-profit company and the nonprofit college may have tainted the deal for accreditors.

“It would be as if the Girl Scouts had a long-term contract with the cookie companies that involved running the troop operations, recruiting the girls, designing the uniforms, deciding how much time they should spend selling cookies and what prizes they get. That would be problematic to say the least,” he wrote in an email.

Mr. Mueller said the planned relationship would have given both the for-profit and the nonprofit entities autonomous governing boards to prevent any conflicts of interest. And he said the criticism of the university had come from those who were unfairly lumping Grand Canyon with other for-profit institutions.

“We have a lot more in common with traditional universities than we do with for-profit colleges such as Corinthian,” he said, referring to the huge for-profit educator that crumbled under pressure from the Education Department and closed last year.

Analysts at Credit-Suisse said the accreditor may have been responding to political pressure by applying more scrutiny to such outsourcing arrangements, especially those involving for-profit colleges.

“A recent agreement by Cincinnati State to outsource all of its student-recruiting and retention functions to Pearson appears to contradict today’s decision,” wrote the analysts, Trace Urdan and Jeffrey Lee.

“Creative efforts to unlock value by separating profit making from regulatory oversight may find that goal increasingly difficult to achieve,” they added.

Eric Kelderman writes about money and accountability in higher education, including such areas as state policy, accreditation, and legal affairs. You can find him on Twitter @etkeld, or email him at eric.kelderman@chronicle.com.