US auditors warn of deception in non-profit college conversions

GAO cites 17 cases where former for-profit leaders retained key controls

January 28, 2021

Numerous US for-profit colleges appear to have sidestepped federal rules meant to govern their behaviour by converting to non-profit status while retaining profit-making powers, a federal audit has concluded.

At least 17 for-profit colleges have legally recast themselves as not-for-profit operations in the past decade despite leaving some of their key leaders in place, the US Government Accountability Office (GAO) found.

While that’s not illegal, the GAO determined that those cases – collectively drawing nearly $1.8 billion (£1.3 billion) a year in federal student aid – run risks of corruption and show worse financial performance than more thorough conversions. The GAO did not identify particular institutions by name.

The report was requested by leading congressional Democrats, who promised in a written response to make the GAO findings a focus of their work with the Biden administration to resume Obama-era crackdowns on for-profit colleges.

“This report makes clear that for too many for-profit colleges, making the transition to non-profit status isn’t about what’s in the best interest of students – it’s about lining the pockets of wealthy executives,” said Patty Murray, the incoming chair of the US Senate’s education committee.

Non-profit designations grant a tax-advantaged status to organisations that are understood to be providing a public benefit. In higher education, such conversions also can help institutions avoid operational limits imposed by the government to reflect the generally poorer academic performance of for-profit colleges.

Not-for-profit status also can boost the image of such colleges in the eyes of prospective students. The chief executive of one for-profit institution, Brian Mueller of Grand Canyon University, told investors in 2019 that his company’s planned conversion “definitely was a tailwind” for boosting enrolment.

But students can be harmed by such conversions, the GAO and others pointed out, if the owners burden their new not-for-profit entity with problems such as artificially inflated sales prices and long-term contracts with for-profit vendors.

The GAO report got a warm reception from the main for-profit lobby group, Career Education Colleges and Universities (CECU), which has grown increasingly willing in recent years to call out bad actors in the sector.

“Like the congressional leaders who requested this report,” CECU said in a statement, “we are committed to putting students and educational outcomes first when ownership conversions occur.”

Yet one leading defender of for-profit operations, industry analyst Trace Urdan, rejected such criticism as part an ongoing political campaign “to try to somehow permanently stain these schools”.

“Whatever cosiness may or may not exist initially” between the leaders of converted for-profit colleges and their business partners, Mr Urdan said, the favouritism will decline over time due to market competition.

“There is no real problem here, other than the ire the critics feel that these companies have somehow foiled their true desire, which was always to run them down,” said Mr Urdan, a managing director at Tyton Partners, a consulting firm and investment bank focused on the education industry.

Either way, both sides of the for-profit debate see a failure of government regulatory efforts. Mr Urdan argued that differing regulatory structures “invite this kind of arbitrage” in which for-profit operators may disguise their intent.

Wesley Whistle, a higher education expert at the New America thinktank, said that laws on for-profit operations written by Congress to protect students and taxpayers have led some institutional leaders to try “to avoid that accountability and still pocket the profits”.

There’s also a shared understanding that the courts may ultimately decide the path forward. That’s because the US Education Department during the Trump administration – while generally friendly toward for-profit education – refused in 2019 to approve Grand Canyon's transition.

Trump administration officials, in a move that surprised many higher education experts, suggested that Grand Canyon’s leadership hadn't done enough to protect its students and employees from potential conflicts of interest.

In its decision, the department said that Grand Canyon’s owners had proposed a system in which they would keep an estimated 95 per cent of the revenue generated under the “non-profit” structure.

Grand Canyon – with more than 100,000 students, mostly online – is pursuing a lawsuit against the Education Department over the decision.

Even in the Trump administration, the Education Department improved its oversight of such situations, said Robert Shireman, a former Obama administration education official now serving as a senior fellow at The Century Foundation.

“Enforcement is critical,” Mr Shireman said. But “there is much more to be done”, he said, including better cooperation from the Internal Revenue Service, which enforces tax law compliance.

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