Opinion

How a regulatory blind spot puts the integrity of nonprofit higher ed at risk

The implications of the rise of the covert for-profit college

People are skeptical of for-profit schools for good reason: it is easy for a school owner to spend less on education and then pocket the savings.

That’s why for-profit colleges, particularly when they have been financed by the government, have shown a tendency to over-promise and under-deliver, sometimes to scandalous proportions.

Public and other nonprofit providers do a better job because there is no lure of higher share prices causing management to sacrifice quality to growth and marketing.

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An enterprise organizes itself as “nonprofit” to assure customers and donors that while the organization needs money to pursue its mission, the ultimate goal is not financial. Anyone who is paid is, ultimately, answerable to someone who is not. Any money beyond what is needed to pay expenses is reinvested in the organization.

But what if a for-profit college could start calling itself nonprofit, while maintaining the problematic financial incentives of a for-profit institution?

A Century Foundation report I authored reveals that a new type of nonprofit college has emerged, operating as a cash cow for board members who can no longer be trusted to hold the college accountable for its educational, charitable and public purpose. The implications of the rise of the covert for-profit college threatens the integrity of the nonprofit sector overall.

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Here’s how four colleges — Herzing University; Remington Colleges Inc., Everglades College and the Center for Excellence in Higher Education (known as CEHE) — formerly for-profit, are now claiming to be nonprofit.

The owners found a corporate shell that was already designated by the IRS as tax-exempt, and then the nonprofit entity signed a purchase agreement buying the college from the owner.

In essence, the owners turned their future hoped-for profits into a loan. Technically, therefore, when the nonprofit they govern as a board member pays them millions of dollars, it is not turning over profits – which would be illegal – but is instead making a huge loan payment.

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In one example from the report, former CEHE owner Carl Barney is owed $431 million by his nonprofit and on top of that the nonprofit claims the colleges were actually worth $636 million, allowing Barney to take a tax deduction of $205 million.

There’s more to the ruse. The former owners kept the physical college campuses, transferring to the nonprofit only the college names and operations. So in addition to million-dollar payments from the purchase agreements, the former owners get rent paid by the nonprofit college they help run.

Under the deal worked out for former owner Arthur Keiser, for example, Everglades College has non-cancellable long-term lease commitments totaling nearly $300 million. To make good on the purchase agreement and lease contracts the college reports that in a single year it paid $34,481,789 to entities owned by Keiser family members — enough to cover the combined salaries of all of the top forty highest-paid public university presidents in the U.S.

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Each year, more than half a billion tax exempt dollars have been flowing to just the four institutions examined for this report. Nearly all of that sum comes from U.S. taxpayers in the form of Pell grants and student loans.

Four colleges have – at this point – gotten away with these compromised versions of nonprofit governance, leading owners of other for-profit colleges to view them as model approaches for escaping regulatory scrutiny and giving false reassurance to consumers who are skeptical of for-profit education.

If the models are allowed to stand they will surely infect traditional nonprofit organizations. College trustees, previously prohibited from making money off their roles, will start to look for ways they can get a piece of the action, undermining their role representing the public interest in quality education.

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Government action is needed. But this problem has fallen in the blind spot between two agencies. The U.S. Department of Education has always relied on the IRS to determine whether a school has the public-minded governance that justifies a tax exemption. But the IRS does not monitor and approve nonprofits as they change, a loophole that for-profit colleges have now figured out. And while more vigorous oversight by the IRS would be good, it is not realistic, in part because of an unrelated controversy that led Congress to cut the IRS budget.

Taxpayer funds administered by the Education Department are feeding these covert for-profit colleges. The IRS is now fully aware of the problem. The IRS cannot be relied upon to act. The burden of protecting the integrity of nonprofit higher education, therefore, rests with the Education Department.

The Education Department should begin examining more closely any nonprofit conversions and monitoring for-profit institutions’ relationships with scholarship entities. Longer term, it might consider moving the role of determining a school’s eligibility to enforcement entity, such as the Office of Inspector General, and away from the operations-oriented Federal Student Aid office.

We must take not to expect too much from moving organizational boxes. However, this is one case in which there could be real benefits.

Formerly the Obama administration’s U.S. deputy under secretary of education, Robert Shireman is a senior fellow at The Century Foundation working on education policy with a focus on for-profit college accountability, quality assurance and consumer protections.

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Robert Shireman

Formerly the Obama administration’s U.S. deputy under secretary of education, Robert Shireman is a senior fellow at The Century Foundation working on education policy with… See Archive