Editor’s note: This commentary is periodically updated to track schools converting to nonprofit status and related policy developments. The table and text in this commentary were last updated on September 5, 2019.

For-profit colleges have earned themselves a bad reputation. Fueled by taxpayer-backed student loans, owners frequently grow their schools rapidly, while overcharging for the education, using the proceeds for aggressive recruiting and profit. In many cases, the schools mislead prospects about the value of their schools’ programs and the promise of a high-paying job. They commonly use manipulative sales tactics, hire unqualified faculty, enroll unprepared students, and hide their misdeeds through forced arbitration clauses, all while leaving students with crushing student loan debts and school executives and investors with bulging bank accounts.

A study of outcomes of the most highly profit-driven schools—those owned by private equity investing firms—found that private equity control of schools leads to “higher enrollment and profits, but also to lower education inputs, lower graduation rates, higher tuition, higher per-student debt, lower student loan repayment rates, and lower earnings among graduates.”

What makes true nonprofits different? The frequent—but wrong—answer is that “they are mission-driven.” The right answer is that nonprofits are prohibited from distributing profits to individuals, fundamentally changing their approach to decision-making. In other words, it is the incentives. Nonprofit and for-profit entities “respond differently to opportunities to use their advantages over poorly informed consumers,” according to a seminal study by Yale economist Burton A. Weisbrod. At a nonprofit, the “restriction on the right of managers and directors to share in their organization’s profits blunts their incentive to seek profits, which decreases their incentives to take advantage of underinformed consumers.”1

Both for-profits and nonprofits can legitimately claim to be mission-driven, says Ellen Aprill, a nonprofit law expert at Loyola Law School. But, she explains, “A nonprofit raises money to finance its mission. A for-profit has a mission in order to make money.” As a result, the two models respond very differently to government subsidies and to market incentives, with important consequences for students and taxpayers.

The public has gotten smarter as a result of the big scandals at for-profit schools: enrollment at for-profits has dropped substantially from its peak in 2010. But some for-profit executives are plotting a comeback. Their strategy? Claiming to be nonprofit, but without adopting nonprofit financial controls. Schools that take this deceptive approach are getting away with it in growing numbers largely because of dysfunction at the IRS, the agency that has traditionally policed the validity of nonprofit status for corporations.

Because of their financial incentives, these “covert for-profits” are more likely to take unfair advantage of students. For evidence, look at the fraud complaints filed by student loan borrowers. Most public and nonprofit schools have few complaints levied against them, if any. Yet, of all schools claiming nonprofit status for at least five years, the three with the most fraud complaints are covert for-profits—conversions in which power never actual shifted away from owners who have an ongoing financial interest: Keiser University, Wright Career College (now closed), and Remington Colleges.

For-Profit Converting to Nonprofit

Prior to 2017, only relatively small, regional colleges had pursued questionable conversions to nonprofit status, as exposed in the the 2015 TCF report, The Covert For-Profit. Since then, however, three large, publicly traded companies claimed to convert, and a fourth has announced an intention to do so. In many cases, the transactions have involved long-term contracts, real estate arrangements, and other schemes to keep much of the school’s revenue flowing to former owners, who remain in a position to control the institution.

Table 1 lists all of the completed, planned, or rumored conversions that have come to the attention of TCF. The appearance on this list does not mean that the institution’s nonprofit control has been corrupted: some are surely legitimate, meaning that they have adjusted incentives and corporate power to reduce the likelihood that a school will engage in predatory behavior that harms students. However, as the table indicates, some conversions have characteristics that are cause for suspicion.

Table 1
For-Profit Schools Converting to Nonprofit Status
The Schools (alphabetical) Conversion Plan Details (questionable practices in bold) Status
Altierus College

Texas, Florida & Georgia (other campuses closed or closing)

Enrollment (2017): 5,400

After the predatory Corinthian Colleges collapsed in 2014, the U.S. Department of Education arranged for a nonprofit student loan guarantor, ECMC, to purchase Everest and Wyotech campuses, representing about half of the chain, for $24 million. ECMC created a nonprofit subsidiary, Zenith Education Group, and renamed the schools. All but three have since closed or are in the process of closing, though ECMC has plans for expansion. While nonprofit college boards are usually not paid, the board members of ECMC (and its education subsidiary) pay themselves handsomely. Transferred to nonprofit ownership in 2015
Argosy University, Art Institute campuses, South University

Various location and online

Enrollment (2017): about 60,000

From the start, the plan for the Dream Center, a Los Angeles religious nonprofit with no higher education experience, to purchase the national chains owned by for-profit EDMC, was “financially murky . . . and fraught with a potential conflict of interest.” The sale was turned down by the regional accreditor for one set of schools, while another accreditor deferred renewal over apparent conflicts of interest. Some schools closed, and others entered receivership (akin to bankruptcy). The lawyer assigned to oversee what remains of the schools found that they had misled students and inappropriately used the school’s nonprofit status to benefit their for-profit projects. Claimed nonprofit status starting in 2017, the schools closed in scandal in March 2019
Ashford University

Online; company based in San Diego

Enrollment (2016): 36,453

Following a state lawsuit alleging deceptive practices by Ashford University recruiters, the school’s for-profit owner,  announced in March 2018 that it intends to convert Ashford to a nonprofit. In a call with investors, the company CEO said the nonprofit would contract with the for-profit and pay it 60 to 65 percent of tuition revenue. In February 2019 the IRS granted tax-exempt status to the nonprofit slated to buy the university. In July the school’s accreditor conditionally approved the conversion. The owner announced to investors that it expects the change of ownership to be completed by the end of 2019.
Charleston School of Law

South Carolina

Enrollment (2017): 564

School owners told the local newspaper in January 2019 that they were in the process of seeking approval to change to nonprofit status. Seeking approvals
Community Care College, Clary Sage College, and Oklahoma Technical College

Oklahoma

Enrollment (2016): 1,194

In 2015, the owner of the three colleges, Dental Directions, Inc., transferred ownership to the nonprofit Community HigherEd Institute for a $29 million note and ongoing rent payments. The nonprofit’s tax return shows only five board members, two of whom are paid full time and were the owners and president of the for-profit college. Change of ownership in 2015
Florida Coastal School of Law

Florida

Enrollment (2017): 383

The school announced in February 2019 that it was planning to claim nonprofit status and affiliate with another, unnamed, institution. It did not rule out the possibility that its for-profit owner, InfiLaw, which has run several problem law schools, would continue to play a role in running the school. Seeking approval from its accreditor and regulators
Grand Canyon University (GCU)

Online, based in Arizona

Enrollment (2016): 83,284

The executives of Grand Canyon Education (GCE), a publicly traded company, created a nonprofit that acquired GCE’s accredited university in a deal that essentially means the nonprofit will be locked into a service contract that “allows for-profit GCU to suck out the vast majority of nonprofit GCU’s income,” according to nonprofit law expert Brian Galle. The CEO of the nonprofit is also the CEO of the for-profit. Galle says GCU’s claim to be nonprofit “is a trustworthy-looking wrapper around a for-profit business.” The school held a call with shareholders in February 2019 in which the CEO boasted of the marketing “tailwind” that its nonprofit label has provided. Claimed nonprofit status 2018
Herzing University

Wisconsin, Minnesota, Ohio, Alabama, Louisiana, Florida, Nebraska, Ohio, Georgia

Enrollment (2017): 6,000

The for-profit Herzing University was transferred into a nonprofit scholarship foundation its owner had created, with the nonprofit promising to pay the owner $86 million and planning to rent property from family members who remained involved in running the college. The School reports that as of 2017, there are “no longer any loans or leases between the Herzing family and Herzing University.” Change of ownership in 2015
Independence University, Stevens-Henager College, CollegeAmerica, and California College San Diego

Online and Colorado, Arizona, Utah, Idaho, California

Enrollment (2017): 12,083

The owner of a small chain of schools took over a pre-existing nonprofit umbrella corporation, the Center for Excellence in Higher Education (CEHE), which then contracted to buy his college for $431 million and to rent the buildings from him for $5 million a year. The Department of Education denied the schools’ claims to nonprofit status. CEHE sued but dropped the suit in December 2018. Transfer of ownership occurred in 2013; on September 6, 2018, the system was placed on probation by its accreditor
Keiser University and Everglades University

Florida

Enrollment (2017): 20,779

The owner of the for-profit Keiser University arranged for it to be purchased by a nonprofit he had formed previously, Everglades Colleges, Inc. The nonprofit pays him $14.6 million in annual rent, as well as payments on a promissory note set originally at $321 million. Board members include vendors paid by the college. Keiser is the chair of the National Advisory Committee on Institutional Quality and Integrity (NACIQI), which advises the U.S. secretary of education on matters concerning accreditation. Everglades claimed nonprofit status in 2002, and purchased Keiser in 2011
Kendall College

Chicago

Enrollment (2018): 800

The for-profit Kendall College, with culinary and early childhood and other job training programs, was purchased from the Laureate Education chain by nonprofit National Louis University.  The transition was completed in August 2018
Northcentral University

Online, based in San Diego

Enrollment (2016): 10,916

Purchase announced by the nonprofit National University (NU) System, a nonprofit also based in the San Diego area. The purchase price was determined and financed independently and there is no ongoing contract or relationship between the nonprofit and the former owners, according to NU officials. Transfer announced in 2018
Purdue University Global (PUG)

Online, now based in Indiana

Enrollment (2018): approximately 30,000

While claiming to be a public college because of its affiliation with Indiana’s public Purdue University, PUG is actually a limited liability corporation for which the state refuses any financial responsibility, and which is exempt from state public records laws; exempt from state audit requirements; and exempt from state open meeting laws. The school is jointly operated by Purdue and PUG’s former owner, Kaplan Higher Education, under an indefinite contract that grants the for-profit company formal roles in governing the college and the ability to share in the profits. Claimed “public” nonprofit status in 2018
Remington Colleges

Arkansas, Louisiana, Ohio, Texas, South Carolina, Tennessee, Alabama, Tennessee, Hawaii

Enrollment (2017): 6,209

The colleges owned by Warren Stephens explicitly sought the nonprofit label in order to evade U.S. Department of Education regulations that place a 90 percent cap on the revenue that a for-profit school can receive from federal student aid. After the purchase, Stephens became the schools’ landlord and creditor while the schools were controlled by employees of his financial advising firm. Stephens was among those whose financial dealings were exposed in the Paradise Papers. Claimed nonprofit status in 2010
School of Visual Arts

New York City

Enrollment (2016): 4,406

This well-known art and design school in Manhattan is reportedly being purchased by the nonprofit SVA Alumni Society, Inc. No details have been made available regarding the transaction. The school’s 2019–23 strategic plan describes the nonprofit conversion as “forthcoming
Sunstate Academy

Florida

Enrollment (2016): 963

The school is owned by the Compass-Rose Foundation, which claims to be a nonprofit but which is essentially a family business of Joneses (husband, wife, and son), according to tax documents. The foundation also sold a school to Sextant Education, an investment vehicle of Secretary of Education Betsy DeVos’s, who named the Jones son to a federal regulatory panel (as a representative of nonprofit schools). The Foundation purchased the school in 2003
Ultimate Medical Academy

Florida and online

Enrollment (2017): 18,563

This health professions training school, which had switched from nonprofit to for-profit in 2005, converted back in 2015. Managed by a team that has included former Trump University executives, the for-profit college’s CEO served on the board of the nonprofit that purchased his company. Purchased by Denver-based nonprofit shell in 2015
Westminster Choir College

Princeton, NJ

Enrollment: 439

Rider University,  a private nonprofit college in New Jersey, announced in June 2018 that it would sell its Westminster Choir College subsidiary to China-based for-profit investment company, Kaiwen Education, which created a nonprofit to operate the school. The plan became the subject of protests and lawsuits Rider scrapped the planned sale in July 2019

The earliest example TCF has found of a covert for-profit in the federal financial aid program was Wright Career College, which sought nonprofit status in 1994 to avoid new regulations that had been adopted. Wright closed its doors in 2016; in testimony to regulators, lawyers for 264 former students of Wright Career College wrote:

WCC emphasized its not-for-profit status in its marketing and recruitment materials. Clearly this designation is believed to represent an institution with altruistic motives, as opposed to certain profit-driven competitors. . . . [But] the teachers were unqualified, job placement was non-existent and the school’s diplomas and certificates were essentially worthless. . . . [C]onversion to non-profit status is nothing but a masquerade by schools that wish to continue their profit-driven and predatory machines.

A nonprofit does not need to have converted from for-profit in order for it to violate the norms of nonprofit control. The governance of a nonprofit can end up having conflicts from the start or can become corrupted over time. The initial creation of the nonprofit Everglades Colleges, described in detail in TCF’s report, The Covert For-Profit, shows how a clever operator can manipulate the IRS’s approval process.

Other nonprofit colleges that have allowed financial ties to infiltrate governance include Master’s University in California, which was cited by its accreditor for board member conflicts of interest, according to The Chronicle of Higher Education, and Cincinnati Christian University, which reportedly put a lender’s interests ahead of the school’s. Questions have also been raised about Savannah College of Art and Design, which has long paid its CEO exorbitantly and has also exhibited predatory behavior.

Regulators Are Waking Up to the Problem

Consumers have learned to trust nonprofit and public colleges, for good reason: nonprofit schools have been generally devoid of the predatory behavior that has plagued for-profit colleges. But that trust can be violated if colleges purport to be nonprofit but have not actually adopted the requisite financial controls that reduce the incentive to take advantage of poorly informed consumers. Without nonprofit controls, predatory behavior at these schools can arise and flourish because it can so richly reward a school’s decision-makers.

Fortunately, lawmakers and regulators are beginning to take action in response to the surge of covert for-profit colleges.

  • Under a new 2019 Maryland law that TCF helped to design, state regulators will review nonprofit colleges that engage in certain types of financial transactions that can indicate potential contamination of nonprofit governance.
  • California legislation would require a review of nonprofit conversions, and clarify the characteristics of “public” institutions.
  • Bills introduced in both the U.S. Senate and the House of Representatives include provisions that would tighten the definition of nonprofit and public institutions of higher education, and improve standards for analyzing the validity of conversions.
  • On January 11, 2018, five U.S. senators wrote to the National Advisory Committee on Institutional Quality and Integrity (NACIQI)—the federal advisory committee that oversees accreditation, —seeking its help in addressing the problem of bogus nonprofit conversions. In response, NACIQI held a hearing on May 24, 2018, at which nearly every witness—from veterans organizations, consumer groups, and nonprofit law experts—spoke to the need for reforms.
  • On July 1, 2018, the Accrediting Commission on Career Schools and Standards announced that it had adopted revised standards for conversions, designed ”to eliminate any conflict of interest for the new non-profit organization.” The commission had accredited a chain of schools, the Center for Excellence in Higher Education (CEHE), whose nonprofit status was rejected by the U.S. Department of Education in 2016.
  • On July 18, 2018, two additional accreditors pushed back against institutions suspected of being covert for-profits. The accreditor of Argosy University—which had been purchased by the nonprofit Dream Center—announced that it had deferred the school’s reaffirmation of accreditation because of conflicts of interest involving school executives that are inappropriate for a nonprofit institution. Similarly, the accreditor for Art Institutes—also purchased by the Dream Center—demanded that the school divulge details of contracts that could pose conflicts of interest.
  • On September 7, 2018, the Accrediting Commission on Continuing Education and Training proposed revisions to its policy on changes of ownership at colleges, clarifying that those claiming to be nonprofit must eliminate private benefit in their control and commit all revenue to the institution’s educational purpose. TCF submitted a comment supporting the proposal.

As new information emerges about conversions and policy responses, TCF will update this resource.

Notes

  1. Burton A. Weisbrod, The Nonprofit Economy (Cambridge, Mass.: Harvard University Press, 1988). Weisbrod examined nonprofit and for-profit providers in nursing homes, psychiatric care facilities, and facilities for the mentally handicapped. The evidence “provided no support for the view that nonprofits act essentially like private firms.”