Over the past several years, The Century Foundation has been monitoring conversions of for-profit colleges to nonprofit or public institutions. In some cases, the school appears to have converted into a legitimate nonprofit institution; that is, the entity that took over the school’s assets—not only the land and buildings, but also the accreditation, the regulatory approvals, and the curriculum, faculty, and current students—is fully under the control of a board without a financial interest in the enterprise, and with the complete freedom to make decisions that it believes are best for the students. In other cases, the school’s claim to be nonprofit is compromised by lengthy, expensive contracts requiring ongoing payments to former owners, or arrangements that allow continued profiteering by decision-makers at the school, or both.
Two prominent but very different for-profit schools are currently in the process of converting to nonprofit status. One, the School of Visual Arts (SVA) is a privately owned art and design school enrolling 4,300 students in New York City. Founded in 1947, SVA has a good reputation and a long list of notable alumni and faculty. The other, Ashford University, is a fully online university with a much shorter history, but with more than 30,000 students—and a more troubled past. Owned by a publicly traded company, Zovio, Ashford has been charged by the California attorney general with predatory student recruitment tactics, and its accreditor has cited the school for inadequately supporting student success.
Will these conversions result in legitimate, mission-focused nonprofits, or in covert for-profit businesses wearing a misleading nonprofit shell?
Many well-regarded nonprofit colleges in the United States began as family-owned institutions and then converted, legitimately, when the owners, preparing to retire, found themselves without heirs interested in running the school. The SVA conversion plan would appear to fit that pattern, according to a summary by New York regulators. Under the plan, all of the school’s assets are to be turned over to the nonprofit SVA alumni organization, with the owners, who are currently the school’s president and executive vice president, continuing in their roles, but as employees of the new nonprofit board. At the moment, it’s not clear whether there will be an uncompromised transfer of ownership; perhaps there will be financial arrangements or contracts that undermine the ability of the new trustees to act in the best interests of students. But, given the role typical of an alumni association—with a board that has no financial connection to the school—there’s a good chance that the conversion will result in a legitimate nonprofit college, answerable to trustees who can make decisions free from the pressure of having to line someone’s pockets.
The picture is a lot less clear for the Ashford University conversion plan, which is expected to be finalized by the end of the year. Unlike the SVA plan, under which the entire college becomes the responsibility of the nonprofit board, the Ashford plan calls for the school to be split into two parts, according to the nonprofit’s application for tax-exemption filed with the IRS. While the nonprofit would employ the faculty, Zovio would be the “exclusive provider” of a long list of services to the nonprofit, including enrollment, financial aid, and instructional design.
Even the school’s budget would not be free from the for-profit company’s interference: the plan calls for Zovio to review budget plans, and requires the nonprofit to “reasonably respond” to any concerns raised by Zovio. That is not normal for an agreement with a service provider; typically, the service provider is not in the driver’s seat. Also unusual is that the board members of the Ashford nonprofit are paid, and up to half of them are allowed to have a financial connection to the college. Most board members of nonprofit colleges and universities are givers, not takers, and have no financial interest in the school where they serve.
Most board members of nonprofit colleges and universities are givers, not takers, and have no financial interest in the school where they serve.
The financial arrangement under which the nonprofit would purchase parts of the school from Zovio is currently being negotiated. However, many of the parameters are already baked into the services agreement, such as calling for Zovio to receive fees “paid by similarly-situated educational institutions for similar serves under similar circumstances.” The only similar situation The Century Foundation has found in its research is Grand Canyon University, another for-profit that recently converted using a similar scheme of splitting the school into two pieces. And, in a call with investors, the Zovio CEO indicated that he expected a similar deal as the one Grand Canyon inked, under which the for-profit would be paid 60 percent to 65 percent of tuition. Last February, the Grand Canyon CEO actually boasted to investors about the 34 percent profit margin produced by claiming to be nonprofit. “Being out there a million times a day saying ‘we’re nonprofit’ has had an impact.”
Maybe the Ashford conversion will not be as compromised as the deals done by Grand Canyon and some other covert for-profits. It is possible that the nonprofit Ashford trustees will reach a more appropriate deal than what was laid out in the materials submitted to the IRS. But we will have to wait and see. Contacted regarding an update on the state of the negotiations, the chair of the nonprofit indicated that, “because Zovio is a publicly traded company, the parties to the conversion transaction are not at liberty to share any non-public information at this time.”