Why are some for-profit colleges changing their tax status to become nonprofit institutions? Proponents say it’s in recognition of the importance of mission. Critics say that it’s a hollow ploy to outrun criticism of predatory operating practices.
In 1972, through an amendment to the Higher Education Act of 1965, Congress made for-profit schools and colleges eligible for federal student aid, allowing the schools, via their students, to tap into public coffers worth billions of dollars in loans and grants. In the following decades the for-profit sector exploded, reporting some of the fastest growth rates in all of higher education and pulling down billions of federal student loan dollars in the span of a single year.
Not surprisingly, that kind of publicly subsidized growth attracted greater scrutiny and more oversight, most recently during the administration of President Barack Obama. That additional attention over the years hasn’t been good for the reputations of for-profit schools: Research and investigations into the sector’s overall outcomes have revealed lower graduation rates, high student debt and default rates, and lower earnings among graduates. Headlines and lawsuits about predatory recruiting practices, hefty executive salaries, and abrupt campus closures that leave students with mountains of debt and no diploma don’t help either. In fact, cutting off federal student aid, or Title IV funding, to for-profit colleges is included in the platform of at least one 2020 presidential contender.
Critics—and they are numerous in the traditional not-for-profit higher education community—point to years of documented predatory behaviors in the for-profit sector and say it’s just common sense that the sector needs different guardrails to protect against Title IV abuses and to ensure that students are not shortchanged. But for-profit defenders counter that this paints with too broad a brush, that the faults of the few should not be used to undermine institutions that provide agility in responding to workforce needs, as well as access and opportunity to many people who might otherwise be left out of postsecondary education.
CHANGING COURSE
Under the leadership of Education Secretary Betsy DeVos, some efforts have been made to relax standards imposed on the for-profit industry, with mixed success. In the meantime, some higher education observers are wondering if some for-profit colleges are trying to outrun the negative attention by converting their businesses to nonprofit entities. The Century Foundation, a progressive, nonpartisan think tank that tracks such conversions, reports that since 2017 three large publicly traded higher education companies—Grand Canyon University, Purdue University Global, and Bridgepoint Education, Inc.—have claimed nonprofit status, a practice that had previously been confined to relatively small, regional colleges. On its face, the trend seems like a good one—after all, nonprofit rules are specifically designed to ensure that organizations use any profits to advance their missions, and not for personal enrichment.
But Robert Shireman, who served as the deputy undersecretary of education during the Obama administration and is now the director of higher education excellence and a senior fellow at the Century Foundation, believes that upon closer inspection, some converted institutions may actually be “covert for-profits.” In 2015, Shireman authored a report on the issue, chronicling “troubling behavior” among a handful of converted colleges that he says undermine claims of genuine nonprofit conversion, such as lucrative lease and service contracts between the new nonprofit and old for-profit (which in many cases, essentially serves as the new nonprofit’s management company), as well as opportunities for board members to subordinate their fiduciary duties to self-interest. In short, Shireman writes, “Their strategy? Claiming to be nonprofit, but without adopting nonprofit financial controls.”
Converting to nonprofit also means the new colleges are no longer subject to federal rules created in response to for-profit abuses — namely, the 90/10 rule that requires for-profit colleges to derive at least 10 percent of revenue from non-Title IV sources, as well as the now-abandoned gainful employment rule, which ties a school’s Title IV eligibility to student debt and earnings outcomes. In essence, Shireman argues that “covert for-profits” are operating in a “regulatory blind spot” in which bad actors can undercut both IRS rules on nonprofit governance and Department of Education rules designed to prevent Title IV abuses, “leaving consumers and taxpayers more vulnerable than ever.”
In 2018, Shireman reported that among all colleges claiming nonprofit status for at least five years, the three with the greatest number of fraud complaints filed by student loan borrowers were former for-profits. “These bogus nonprofits completely undermine the consumer and community protections that come from nonprofit governance of an institution, and they threaten reputations that [higher education] has built over the last 100 years,” he said. “I think [this trend] will get worse before it gets better.”
Shireman isn’t the only one who’s voiced concern. Earlier this year state lawmakers in Maryland and California introduced bills to tighten oversight on for-profit college conversions. In 2018, a group of Democratic senators wrote to the Department of Education’s National Advisory Committee on Institutional Quality and Integrity urging it to address the “recent troubling pattern of for-profit institutions converting to, or attempting to convert to, nonprofit entities in order to avoid regulatory scrutiny.” And last summer, legislation introduced in the U.S. House of Representatives proposed additional oversight for newly converted nonprofit colleges.
“What those of us who work on this issue failed to recognize for a long time — including me — is that nonprofit and public governance and the financial restrictions that come with them are demonstrably one of the most powerful consumer protections that we’ve ever seen,” Shireman said. “That’s why we have excellent higher education in this country—because we don’t let profit take over.”
SHOULD WE BE WORRIED ABOUT FOR-PROFIT CONVERSIONS?
Since the mid-1970s, when the National Center for Education Statistics (NCES) first began tracking enrollment at for-profit colleges and shortly after lawmakers expanded for-profit access to federal student aid, for-profits have become some of the fastest-growing postsecondary schools in the country.
Over the years, advocates agree that the sector has played a valuable role in higher education, especially its ability to nimbly respond to labor market needs, serve non-traditional students, and provide occupation-specific training. And many for-profit graduates go on to find employment in their fields of study and increase their earnings. As of 2013, for-profit schools—often referred to as career colleges—accounted for 33 percent of all associate degrees in business, management, and marketing, 51 percent of those in computer science and nearly a quarter in the health professions. But when the data are examined more closely, it’s perhaps not surprising that some of the sector’s overall trends and outcomes—coupled with a structural obligation to generate profits for investors—have attracted increased attention and scrutiny.
For example, between 1990 and 2010, for-profit enrollments rose by a whopping 847 percent. That’s in comparison to a rise of just 40 percent during the same time period at public and nonprofit colleges, boosting the overall share of students at for-profits from less than two percent to nearly 10 percent. After reaching a peak in 2010, shortly after the Great Recession hit, enrollment at for-profits began declining, decreasing 47 percent between 2010 and 2016. As of 2016, the NCES showed total enrollment at Title IV-eligible for-profit colleges at about 1.5 million.
Along with big enrollment numbers come billions in federal student aid. According to the nonprofit College Board, between 1998 and the enrollment peak that followed the Great Recession in the late 2000s, the share of federal student loans going to for-profits nearly tripled and their share of Pell grants almost doubled. In the 2009-10 academic year, for example, for-profits received $32 billion in Title IV dollars, or more than 20 percent of the federal student aid pot. At the same time, for-profit colleges often charge higher tuition and fees than community colleges and public four-year universities—a 2018 NCES report estimated average tuition and fees at four-year public institutions at $8,200, compared to $16,000 at for-profits.
On the outcome side, the NCES reports lower graduation rates at for-profits. In 2018, the center estimated six-year graduation rates of 59 percent at public institutions, 66 percent at private, nonprofit schools, and just 26 percent at for-profits. For-profit students also tend to incur greater debt burdens that lead to higher rates of student loan default. A 2018 study from the National Bureau of Economic Research found that schools with high profit motives—in particular, those with private equity owners—have higher enrollments and higher profits, but also lower education inputs, higher tuition, higher per-student debt, lower graduation and student loan repayment rates, and lower earnings among graduates.
Lawmakers have been trying to prevent opportunities for Title IV abuse in the for-profit sector for years. In the late 1980s, President Reagan’s secretary of education, William Bennett, PhD, an outspoken proponent of stricter oversight for proprietary schools, called on Congress to take action against what he described as a pattern of “exploitative and deceitful practices” in for-profit higher ed. A few years later, in 1992, during reauthorization of the Higher Education Act, Congress adopted the 85/15 rule, which capped the share of revenue that for-profits receive via Title IV at 85 percent. In 1998, Congress raised the cap to 90/10.
In 2014, education officials issued the gainful employment rule, penalizing for-profit schools, as well as nondegree programs at publics and nonprofits, for graduating students with too much debt relative to earnings. Under the rule, a program is considered to lead to gainful employment if a graduate’s yearly loan repayment doesn’t exceed 20 percent of discretionary income or eight percent of total earnings. In 2017, the agency released its first gainful employment assessment, in which more than 800 programs serving hundreds of thousands of students—98 percent of them run by for-profits—failed to meet the new criteria. (Last year, Secretary DeVos announced plans to rescind gainful employment; however, the agency missed a key deadline and so the rule remains on the books.)
It is such rules as 90/10 and gainful employment that for-profit colleges can leave behind when they convert to nonprofits, even if they maintain financial ties with their former for-profit operators. In fact, a Senate investigation in 2012 led by U.S. Sen. Tom Harkin (D-Iowa) then the chair of the Senate Health, Education, Labor, and Pensions Committee, found that some colleges were likely converting to nonprofits precisely to sidestep rules that only apply to for-profit colleges. For observers like Shireman, that’s a red flag.
SINGLED OUT?
Steve Gunderson doesn’t see it that way. Gunderson, the president and chief executive officer of Career Education Colleges & Universities, said that after so many years of being singled out for special oversight, it’s no wonder that some for-profits may be seeking reputational and regulatory relief as nonprofits. “What did you expect,” he asked, noting that only a tiny fraction of for-profit schools—less than one percent—have converted to nonprofit status. “When you look at the last decade of an outright ideological war against these schools, why wouldn’t some look for an avenue where they’re treated like everyone else?”
For Gunderson, the issue of nonprofit conversions conceals a larger question of fairness: Why not judge each school on its merits, he asked, instead of subjecting an entire sector to special oversight?
For example, the association he oversees represents programs that are typically two years long or less and that graduate students with “middle-level” training in a variety of fields, such as health care, IT, accounting, and automotive and aviation mechanics. When those types of programs are judged on their own merit—and not lumped in with for-profits that offer four-year, online liberal arts degrees—Gunderson said quality metrics improve. Recent data from the NCES found that graduation rates at two-year for-profit colleges were on par with two-year programs at private, nonprofits—at 60 percent—and much higher than rates at public two-year programs.
Career colleges also specialize in serving students that more typical four-year universities do not, Gunderson said, such as working adults, people with children, and veterans. “If you want to destroy this sector, you better have an alternative,” he said. “Because our schools can close and nobody will notice, but I want you to think about the 1.8 to 3.5 million students each year who seek an education [toward] a credentialed, recognized career.”
Gunderson acknowledged that for-profit higher ed has its share of bad actors—“and we’ve never defended a bad actor in our sector—never.” But he said nonprofits have had their fair share of misconduct, too, noting the recent admissions scandal at elite universities. “There is this arbitrary focus on bad actors in our sector when there are equally bad performers in every sector of education,” Gunderson said. “If public policy wants to achieve high returns for Title IV dollars, then establish a common set of metrics for everyone. If your program isn’t succeeding, then fix it or end it.”
That idea might indeed warrant further discussion, said Barmak Nassirian, the director of federal policy at the American Association of State Colleges and Universities. But he said that doesn’t mean the for-profit sector’s history of predatory behavior and high reliance on Title IV funds doesn’t justify special guardrails. “I appreciate the philosophical point they’re making,” Nassirian said, “but it’s actually an attempt at evading the force of the law as it’s written and delaying significant progress on program integrity and protecting students.”
Nassirian noted that much has changed since Congress first opened up Title IV funding in 1972 with the idea that for-profits would be providing occupation-specific training that typically leads to gainful employment. As of 2017, for instance, nearly half of the for-profit sector’s 1.3 million students were enrolled exclusively online, which typically produces much lower graduation rates than more traditional models. “That the industry saw [gainful employment] as such an existential threat speaks volumes about the predatory behavior that has become normalized,” Nassirian said of the sector’s opposition to the rule. “These are features, not flaws, of the system.”
The issue of fairness for for-profit colleges has not gone without study. In a January 2019 report from the Brookings Institution researchers asked whether the 90/10 rule unfairly targets proprietary schools. They found that public and private nonprofits (were they subject to the rule) would easily comply, as tuition and fees represent only about a quarter of total revenues at public institutions and 39 percent of revenues at private nonprofits. At for-profit colleges, more than 90 percent of total revenue comes from tuition and fees, most of it via Title IV. When researchers accounted for military benefits—which don’t currently count toward 90/10 compliance—schools serving 24 percent of all for-profit students were taking in 90 percent or more of revenue in federal student aid dollars.
Researchers concluded that “application of the 90/10 rule within the for-profit sec-tor places clear constraints on the ability of for-profit schools with high default rates to expand using taxpayer dollars. The 90/10 rule remains a key form of shared oversight between federal, state, and private educational authorities.”
Similar comparative data aren’t available for gainful employment, so it’s hard to evaluate claims that the rule is unfair to for-profits. But in its proposal to rescind the rule, the Department of Education estimated that its elimination would mean an additional $5.3 billion over 10 years to programs, most of them for-profits, that may have otherwise been cut off from Title IV. Soon, all colleges may be subject to similar requirements anyway: In March, President Trump signed an executive order directing education officials to publish program-level data across higher education on measures like future earnings and student debt and default rates.
“My own bias is that gainful employment should be applied to any program that promises you a job,” said Anthony Carnevale, PhD, the director of the Georgetown University Center on Education and the Workforce. “Bring transparency at the program level to both for-profit and nonprofit institutions, create a level playing field, and then let’s see what happens. In both cases, I think the proof is in the pudding.”
More transparency might make it harder to attract students to certain fields of study, but Carnevale said it’s better than keeping secrets from students. He also thinks because the new transparency efforts focus on value at the program level, not at the institutional level, it could help drive down the cost curve in higher education. “It’s hard to decide who’s a true educator and who isn’t, but what we can figure out are out-comes,” Carnevale said.
Daniel Madzelan, the associate vice president for government relations at the American Council on Education, doesn’t believe for-profits should be excluded from Title IV, pointing to their long history in occupation-specific training. But he said it’s also unfair not to acknowledge the special risks that come with mixing for-profit governance and Title IV eligibility.
On nonprofit conversions, Madzelan, who spent more than 30 years at the U.S. Department of Education, including service as the acting assistant secretary for postsecondary education, doesn’t see them as an urgent concern, but said it’s still in the public’s interest to ensure all parties are playing by the rules. However, that’s a challenging endeavor in and of itself.
A handful of years ago, as part of Obama-era efforts to look more closely at for-profit colleges, he said researchers looked into the financial relationships within recent nonprofit conversions. The challenge, he said, was that while the Department of Education has good data on the characteristics of schools participating in the Title IV program, it defers to IRS on whether a school is abiding by the tax status rules that directly determine how much in Title IV dollars it can draw down.
At the end of the day, Shireman doesn’t think fairness has anything to do with it. After all, he said, nonprofit colleges already have to abide by stringent financial and conflict-of-interest rules as a condition of their IRS tax status. “You can’t refuse to adopt the most effective, most powerful protections for consumers that we have—which is nonprofit and public governance—and at the same time, say that all rules have to be applied to everyone equally,” he said. “They chose to be for-profits, meaning they rejected some of the most powerful regulations we have to protect consumers. It’s disingenuous to now claim that there’s any issue of fairness here.”
AUTHOR: Kim Krisberg is an independent reporter and writer based in Austin, Texas.
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