Backer of Student Loans Pivots in Push to Reshape Higher Education

A $1-billion nonprofit with a familiar name but a new and unusual strategy has begun putting its financial clout into projects and companies that want to reshape higher education.

The organization is USA Funds, once primarily a student-loan guarantee agency but now increasingly a player — to some, still a suspect one — in efforts aimed at helping students make strong connections between their college education and their career.

With its involvement in student loans winding down, USA Funds is re-creating itself into an organization that is part grant maker, part business, using its sizable resources to acquire and invest in companies that can fund its future philanthropy.

“We really don’t see our future in the student-loan world,” says Mark L. Pelesh, who, as executive vice president for corporate and business development at USA Funds, heads the team that is “out hunting” for new businesses.

The latest of those deals was announced on Monday, the purchase of Roadtrip Nation. That company provides career-exploration options, including courses, online materials, and excursions in which participants travel in its trademark green motor homes to interview prominent people about their careers. Roadtrip Nation, which will continue to be run by its co-founders, is one of five companies USA Funds has directly invested in or bought outright.

USA Funds has also allocated $200 million to Sterling Partners, a private-equity fund, which is investing in education-oriented businesses on the organization’s behalf.

The group is also awarding grants to make a splash with state and federal policy makers, becoming what one well-placed observer calls “the loosest purse strings in D.C.” Along with making numerous grants to projects that are also backed by established education funders like the Lumina and the Bill & Melinda Gates Foundations, USA Funds has shown a readiness to put its dollars behind ideas that feature a career-minded orientation.

Both in its expanded grant making and in its heightening investment activity, USA Funds says its goal is to support projects that fit with its new “completion with a purpose” mission, adopted in 2013. The group is particularly interested, says Mr. Pelesh, in for-profit and nonprofit companies that use data to help students and institutions, and in companies that focus on getting students through college and connected to careers. “If we can’t relate it to that mission alignment, we don’t do it,” he says. The same is true for its philanthropy.

But the group’s two-pronged approach, combined with its practice of generously compensating its trustees, has raised questions about whether the organization is betraying its mission as a tax-exempt nonprofit and is using its philanthropy to advance its business interests. A USA Funds spokesman says that such characterizations misrepresent the organization and that the goal of its corporate activities is “to generate revenue to support — and hopefully expand — our philanthropic efforts to improve student success in college and subsequently in their careers.”

Ambitious Efforts

The largest project backed by USA Funds so far is an ambitious partnership with Gallup to create a continuing survey of public attitudes toward education issues to inform higher-education consumers and policy makers.

The first results of the poll, which will survey 500 different adults each night, could become public by early fall, says Carol D’Amico, executive vice president for national engagement and philanthropy at USA Funds. She says the scope and scale of the project — it will eventually have responses from some 360,000 people — will allow for analysis of data based on the demographics of the respondents, as well as the kind of education they received and from where.

Ms. D’Amico says the polling data and Gallup’s planned follow-ups could, for example, help identify what students have found useful, or not, in career advising, an area that she says is “ripe for reinvention.”

Neither Gallup nor USA Funds would disclose the cost of the polling venture. but three sources outside the organizations with knowledge of the project said it was in the neighborhood of $20 million to $23 million. USA Funds considers the arrangement a “contract for services,” not a grant.

USA Funds is also supporting two other projects that involve Gallup. One is in Indiana, where public and private colleges are taking part in a poll of alumni, called the Indiana College Value Index, “to better measure the value of the college degree beyond economic return.” USA Funds agreed to pay nearly half of the $63,000 that Gallup is charging each college to participate over three years. The colleges, which were encouraged to sign up by the Indiana Commission on Higher Education, are paying $24,730 each.

The second is a four-state project that will put together polling data on alumni well-being from Gallup with information on their employment and income status gathered by College Measures, an effort that runs under the auspices of the American Institutes for Research. The U.S. Chamber of Commerce Foundation is also on board, to help promote it.

The projects are two of four that Ms. D’Amico calls the “College Value” portfolio, involving 12 states in total. As early as this summer, she says, USA Funds hopes to develop a smartphone app and other tools based on the data so students and others can use the findings to help them make better college choices.

The group has also shown a readiness to use its grants to support projects with a private-sector focus. It has, for example, backed a $4.5-million multiyear project by the Chamber of Commerce Foundation, called the Talent Pipeline Management initiative, to help reshape educational content at colleges so that more students graduate with the skills employers say they want.

On a smaller scale, the group is also funding a project to generate “thought leadership” research on the merits of income-share agreements, a burgeoning movement in which private investors pay a student’s costs for education in exchange for a percentage of his or her future income.

The group is also working directly with colleges in several states, including Missouri, where it has given $1 million to help create competency-based degree programs at four institutions and another $1 million to expand the University of Central Missouri’s “innovation campus” model to two additional public institutions.

Under the model, students begin taking college-level courses in high school and can receive a bachelor’s degree leading to a job within two years of completing 12th grade. “They’ve been interested in more than just metrics” — also the methodologies and the rationales, says Margaret Onken, executive director of the Hawthorn Foundation, which is helping to coordinate the project. Grant makers at USA Funds approached Missouri about the project initially, she says. “I think they’d like to see the model expand to other places.”

USA Funds now spends about $25 million a year on grant making, up from about $10 million in 2013.

Billion-Dollar Coffers

USA Funds is the legacy operation that remained after Sallie Mae acquired its parent company, the USA Group. The proceeds from that sale, in 2000, financed the eventual creation of Lumina, now an independent foundation that has no involvement with student loans.

Sallie Mae, as a loan originator and loan servicer, was not allowed to purchase the guarantee-agency arm of that company. That left USA Funds as a stand-alone company, although, under an unusual arrangement, a spinoff of Sallie Mae called Navient now conducts most of USA Funds’ loan-guarantee functions under a contract between the two.

That loan-guarantee business, which involves collecting on the defaulted student debt in its portfolio, helped USA Funds amass its current asset base of $1.04 billion. But only student loans that were issued by banks are covered by the loan-guarantee system, and in 2010 the Obama administration and Congress eliminated the role of banks in originating federal student loans.

The 30-plus state and nonprofit guarantee agencies still work with existing loans, but as loans are paid off and portfolios shrink, some guarantee agencies have begun pursuing other lines of business. The guarantee agency ECMC, for example, acquired 56 of the former Corinthian campuses and now operates them under Zenith Education; it also bought a company called College Abacus.

And while some of its investments have come alongside those of traditional venture-capital funds, which invest in companies with the intention of raising their value and then selling the stakes at a profit, Mr. Pelesh says USA Funds is prepared to remain involved with the companies in which it is investing. “We’re not necessarily in it to sell,” he says. “We’re in it for the long term.”

The Gates and Lumina foundations have also invested in companies, as minority shareholders. Gates has invested in Acrobatiq, an adaptive-learning company created by Carnegie Mellon University, while Lumina has recently put money into Credly, a company that maintains a platform for displaying and managing digital credentials; BridgeEdU, which provides a gap-year-like experience for first-generation college students; and New Profit, which helps promote social entrepreneurship.

Lumina has also previously committed to investing 2 percent of its $1-billion-plus endowment in private-equity funds that focus on education companies. But neither foundation is so publicly committed to owning controlling stakes in businesses while also making grants.

Robert Murray, a spokesman for USA Funds, says the organization has an internal “set of firewalls” to ensure that its philanthropic activities don’t serve as a stalking horse for its business ventures.

But at least one prominent critic says the nonprofit, which pays its nonemployee trustees as much as $93,000 a year, is acting in its own interest and not the public’s.

Its assets “come from the borrowers who defaulted on students loans and are being charged collection fees,” says Robert M. Shireman, who’s been researching USA Funds and dozens of other guarantee agencies for a forthcoming report by the Century Foundation, where he is a senior fellow. “The trustees are supposed to be the ones thinking about the public purpose,” he says. But USA Funds trustees “are just thinking of the continuation of the business that keeps paying them and their executives.”

When he worked for the Education Department, early in the Obama administration, Mr. Shireman was the chief architect of the plan to eliminate banks from the federal student-loan system. Mr. Murray says Mr. Shireman is not a credible critic. He “knows little to nothing” about the new direction of USA Funds and “has a more than 20-year history of hostility toward, and misrepresentation of, the activities of student-loan guarantors,” Mr. Murray said in a written statement.

Mr. Murray also said that it was not uncommon for nonprofit organizations to pay their trustees.

In 2014 a Council on Foundations survey found that just over one in five grant makers paid their board members. At foundations with assets of $1 billion to $2 billion, the median aggregate compensation was $290,500. At USA Funds, the aggregate for the year ending in September 2014 was $778,000.

Among guarantee agencies, says Mr. Shireman, that was second only to the aggregate of more than $1 million that ECMC paid. Lumina, with assets of comparable value to those two guarantee agencies, paid an aggregate of $320,000 to its trustees, according to Mr. Shireman. Lumina gives out about $58 million in grants annually.

Officials at several other education-policy organizations have said privately that they would hesitate before seeking out or accepting philanthropy from USA Funds because of its continuing ties to the student-loan industry — at least at this point in the organization’s evolution — but they declined to say so publicly.

Some are also uneasy with the pedigrees of the organization’s key players — “a Bush-administration Education Department in waiting,” as one put it. The new approach at USA Funds is being led by William D. Hansen, who was deputy secretary of education from 2001 to 2003. Ms. D’Amico was an assistant secretary of education during the same period. Mr. Pelesh was for 10 years the head lobbyist for Corinthian Colleges Inc. but left before the company imploded.

The student-loan ties were also a consideration for Roadtrip Nation, but Mike Marriner, one of its three founders, says the new direction at USA Funds overrode any concerns they had about being acquired by it.

USA Funds initially bought 40 percent of the company in late 2015. The deal announced on Monday completes the purchase of the 58-person company.

Roadtrip Nation was created to emulate the experience of the cross-country trip the three founders took right after they graduated, in 2001. As a part of the USA Funds portfolio, Mr. Marriner says, it can help that organization “align with a youth-culture aesthetic” and help to push the higher-education system to be more student-centric.

“What we’ve bought into is where they’re going,” he says, “not where they’ve been.”

Goldie Blumenstyk writes about the intersection of business and higher education. Check out www.goldieblumenstyk.com for information on her new book about the higher-education crisis; follow her on Twitter @GoldieStandard; or email her at goldie@chronicle.com.

Correction (5/11/2016, 12:50 p.m.): This article originally misstated the nature of the arrangement between USA Funds and Gallup for a polling venture. USA Funds considers it a contract for services, not a sponsorship. The article has been updated to reflect this correction.

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