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

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

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

• 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. The committee has since created a task force to examine the situation and propose possible solutions.
• 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 July 26, 2018, Congressman Bobby Scott, ranking member of the House Committee on Education and the Workforce, introduced legislation that would tighten the definition of nonprofit and public institutions of higher education, and improve standards for analyzing the validity of conversions.

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

Table 1 was updated on September 7, 2018.

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.”

Tags: student debt, for-profit colleges