These Colleges Say They’re Nonprofit—But Are They?

Editor’s note: This commentary, which was originally published August 6, 2018, is periodically updated to track schools converting to nonprofit status and related policy developments. See also the October 2020 report, How For-Profits Masquerade as Nonprofit Colleges.

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 2015 TCF report, “The Covert For-Profit”. Since then, however, four large, publicly traded companies have claimed to convert. 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 mostof 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 concern.

Table 1

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. More recently, the president of Liberty University, who has since been fired, was accused of self-dealing.

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.

• The U.S. Department of Education issued a decision in November 2019 refusing to treat Grand Canyon University as a nonprofit for purposes of the federal financial aid programs. The eighteen-page letter details the ways in which the for-profit former owner of the college effectively controls the school, negating the nonprofit claim.
• The department has recently been warning colleges that using a “nonprofit” claim in advertising is misleading to consumers if the agency has not approved the status. The admonition was included in the Grand Canyon letter and in a communication with Ashford University as it was converting to University of Arizona Global Campus.
• The U.S. Government Accountability Office is reportedly examining nonprofit conversions of 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.
• In 2020, California enacted a new law requiring regulator review of all nonprofit conversions and clarifying what it takes for an institution to be considered public.
• Bills introduced in both the U.S. Senate and the House of Representatives included 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 of Career Schools and Colleges 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.

Tags: student debt, for-profit colleges