By denying the nonprofit status of the Center for Excellence in Higher Education (CEHE), the U.S. Department of Education today took a big step forward in ensuring that colleges claiming to be nonprofit are actually behaving that way, dedicating their resources to education rather than operating as moneymaking enterprises for college trustees and executives.

TCF exposed the problem of The Covert For-Profit in a report last year, detailing how four for-profit colleges, while claiming to have converted to nonprofit, continued to reap the financial benefits of for-profit ownership. The regulatory blind spot that allowed these schools to exist stemmed from the Department of Education’s over-reliance on outdated or inadequate IRS designations of nonprofit status. Today’s action marks the first time the department is going beyond the IRS designation and deciding, based on additional evidence, that a supposedly nonprofit college is structured in a way that defeats the purpose of nonprofit status.1

Public and nonprofit control of colleges is supposed to promote decisions that are more attuned to public and consumer interests, by muting the baked-in profit motive that drives too many for-profit colleges to provide a low-quality education or engage in predatory practices. Quite simply, eliminating ownership usually results in better behavior by colleges. This is why federal aid to for-profit colleges is already greatly restricted to only certain circumstances. Covert for-profits are attempting to escape those restrictions by claiming to be nonprofit, while also undermining the goals of nonprofit governance by allowing trustees and executives to line their pockets with the college’s money.

The Department of Education, in its action today, is taking a stand against this abuse of nonprofit status by refusing to treat CEHE, one of the companies cited in our report, as nonprofit. CEHE owns a chain of colleges formerly owned by Carl Barney.2

“This should send a clear message to anyone who thinks converting to non-profit status is a way to avoid oversight while hanging onto the financial benefits: Don’t waste your time,” said U.S. Education Secretary John B. King Jr., in a press release. The colleges will continue to be eligible for federal aid as for-profit entities.

A year ago, claiming to be nonprofit while maintaining the flow of money to investors was emerging as the new way to avoid regulatory scrutiny.3 The Department of Education’s action today is important because it tells colleges that becoming nonprofit is not just a change in label, it must come with actual control by trustees without a conflict of interest, people who can reliably focus on what’s best for students and the public interest, not what serves their own financial interests.

Notes

  1. To be considered nonprofit, Department of Education regulations (34 CFR 600.2) require to demonstrate that “no part of the net earnings” of the school “benefits any private shareholder or individual.”
  2. CEHE owns Stevens-Henager College, CollegeAmericaAZ, CollegeAmerica Colorado/Wyoming, and California College San Diego, paying Barney millions every year in rent (he owns the buildings) and installments on the purchase price of $636 million.
  3. As noted in our report, a lawyer who was involved in the Barney conversions was being offered up to other for-profits seeking to follow Barney’s strategy, and nonprofit conversion was being discussed by large publicly traded companies including Career Education Corporation and Grand Canyon University. Grand Canyon actually attempted a conversion and was denied by its accreditor.

Tags: , , ,