Grand Canyon U. Isn’t Just Becoming a Nonprofit. It’s Also Testing a Model That Could Change Higher Ed.

Grand Canyon U.

Grand Canyon Education Inc.’s spinoff and conversion of Grand Canyon University into a nonprofit institution, which became official on Monday, hasn’t received nearly as much national attention as Purdue University’s purchase of Kaplan University. But there’s a lot about this $875-million deal that could be game-changing for higher education, not just for the institution.

The transaction creates an example of a new business model for managing administrative and marketing operations in a way that could be far more expansive than the outsourcing arrangements many institutions now rely on through companies known as online-program managers.

In the meantime, it has created a windfall for the company’s executives and investors and opened new doors for the institution. The deal all but guarantees that Grand Canyon University will very soon join the ranks of nonprofit institutions that enroll more than 100,000 students online. That’s because the university, which now has 91,000 students, will need enrollment to grow by at least 7 percent annually for the next several years to have enough money on hand to pay down the $875-million debt it is assuming to finance the purchase of its 275-acre Phoenix campus and facilities.

The financial pressure is especially strong because the university will now be giving 60 percent of its revenue from tuition and fees to Grand Canyon Education, the for-profit company, which will manage most of the institution’s nonacademic operations for at least the next seven to 15 years.

Grand Canyon Education has said it plans to expand its on-campus enrollment to 30,000 from 21,000 over the next five to seven years, while building its online enrollment to 100,000 from the current 70,000.

The deal is also noteworthy as a marker of the changing face of investor interest in higher education. Many companies that have owned colleges have been shedding them (as Graham Holdings did with Kaplan University) or selling them for little or no cost (as Adtalem Global Education is doing with DeVry University and Carrington College). But Grand Canyon’s move shows that investors continue to see appeal in companies that sell services to colleges rather than run them. With the election of Donald Trump, it became apparent that Grand Canyon’s chances for getting the spinoff through would be better than in 2014, when the institution made its first try at doing so. Since November 2016, the company’s value on the stock market has doubled to more than $5 billion.

Under the deal finalized Monday, about one-third of the company’s full time employees, along with nearly all of its 6,000 adjunct instructors and student and part-time workers, transferred to the university. The university also assumed ownership of the campus, which it is now responsible for maintaining. The nonprofit university and the company will each be governed by a separate board, but Brian E. Mueller, the company’s chief executive, will continue to also serve as president of the university.

New Outsourcing Model

The spinoff positions the company to become a major new vendor on the higher-education scene. As part of its agreement with Grand Canyon University, the company will be managing services like financial-aid and admissions — processes that involve both online students and those who attend on campus in Phoenix. Once Grand Canyon Education starts to offer those services to outside institutions — which it expects to be doing for a couple of institutions within six months — there’s no reason it couldn’t handle that work for on-campus students at other colleges too.

Grand Canyon University is signing a 15-year contract for Grand Canyon Education to provide those services. The university has the right to cancel after seven years, but Mueller said that was unlikely: “There’s really nobody out there that is capable of absorbing 90,000 students.”

The initial seven-year loan allows the university to pay the interest of 6 percent only, but it could also pay down the principal too. Based on current projections, Mueller said, the university could generate enough revenue to pay down one-third of that loan within the seven years. At that point, the terms will be renegotiated. Last year Grand Canyon generated about $975 million in revenues.

One of the university’s first moves as a nonprofit, said Mueller, would be to build up a fund-raising staff. He said the institution hopes to raise money for its Division I athletics programs and its campus expansion. It also hopes to begin contending for federal research funding.

While the deal has been approved by the university’s accreditor, Arizona state regulators, and the Internal Revenue Service, the U.S. Department of Education has yet to rule on it. Mueller said the company had sought pre-approval from the department months ago, which usually takes 45 days, but “they’re very understaffed.” He said that the university wasn’t seeking the conversion to avoid regulations that affect for-profit colleges. He also said that the institution had not run afoul of any rules, including the debt-to-earnings standards in the federal gainful-employment regulation, because its tuition, which averages about $8,600 a year for undergraduates after scholarships, doesn’t require its students to borrow heavily.

Grand Canyon University, which was founded in 1949, became for-profit in 2004 and publicly traded in 2008. In its press release announcing the conversion back to nonprofit status, the company made a point of noting that the company had been reinvesting all profits in the university and had never paid a dividend to its shareholders. While that’s true, there’s no doubt that the rise in the company’s value as a result of the deal has created sizable financial value for its investors — including Mueller himself. Since January 2017, as the company’s stock price has risen, Mueller’s sale of his shares has brought him at least $15 million.

Correction (7/3/2018, 5:43 p.m.): An earlier version of this article reported that Brian Mueller’s sales of company stock since January 2017 had brought him at least $31 million. In fact, $31 million is the approximate value of his current holdings. He has made roughly $15 million from stock sales during that period. The article has been updated to reflect this correction.

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