How a regulatory blind spot puts the integrity of nonprofit higher ed at risk
People are skeptical of for-profit schools for good reason: it is like shooting fish in a barrel for a school owner to spend less on education and then pocket the savings.
That'due south why for-profit colleges, especially when they accept been financed by the government, take shown a trend to over-promise and nether-deliver, sometimes to scandalous proportions.
Public and other nonprofit providers do a meliorate job because there is no lure of higher share prices causing management to sacrifice quality to growth and marketing.
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An enterprise organizes itself as "nonprofit" to assure customers and donors that while the arrangement needs money to pursue its mission, the ultimate goal is not fiscal. Anyone who is paid is, ultimately, accountable to someone who is not. Whatever coin beyond what is needed to pay expenses is reinvested in the organization.
But what if a for-profit college could start calling itself nonprofit, while maintaining the problematic financial incentives of a for-profit institution?
A Century Foundation report I authored reveals that a new type of nonprofit college has emerged, operating equally a cash cow for board members who can no longer be trusted to hold the college accountable for its educational, charitable and public purpose. The implications of the ascent of the covert for-profit college threatens the integrity of the nonprofit sector overall.
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Here'southward how iv colleges — Herzing University; Remington Colleges Inc., Everglades College and the Heart for Excellence in College Instruction (known as CEHE) — formerly for-turn a profit, are now claiming to be nonprofit.
The owners found a corporate shell that was already designated by the IRS as tax-exempt, and then the nonprofit entity signed a buy understanding buying the college from the owner.
In essence, the owners turned their future -to-be profits into a loan. Technically, therefore, when the nonprofit they govern equally a board member pays them millions of dollars, it is non turning over profits – which would be illegal – but is instead making a huge loan payment.
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In ane example from the report, former CEHE owner Carl Barney is owed $431 meg by his nonprofit and on superlative of that the nonprofit claims the colleges were actually worth $636 one thousand thousand, allowing Barney to accept a tax deduction of $205 million.
There'due south more to the ruse. The former owners kept the concrete higher campuses, transferring to the nonprofit simply the college names and operations. So in addition to 1000000-dollar payments from the purchase agreements, the erstwhile owners become rent paid by the nonprofit college they assistance run.
Under the deal worked out for old possessor Arthur Keiser, for case, Everglades Higher has non-cancellable long-term lease commitments totaling nearly $300 1000000. To make good on the purchase understanding and lease contracts the college reports that in a single year it paid $34,481,789 to entities owned past Keiser family members — enough to cover the combined salaries of all of the acme 40 highest-paid public university presidents in the U.South.
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Each year, more than half a billion tax exempt dollars have been flowing to just the iv institutions examined for this report. Nearly all of that sum comes from U.South. taxpayers in the grade of Pell grants and student loans.
Four colleges take – at this point – gotten away with these compromised versions of nonprofit governance, leading owners of other for-profit colleges to view them every bit model approaches for escaping regulatory scrutiny and giving imitation reassurance to consumers who are skeptical of for-profit education.
If the models are allowed to stand up they will surely infect traditional nonprofit organizations. Higher trustees, previously prohibited from making money off their roles, will start to look for means they can get a piece of the action, undermining their role representing the public interest in quality education.
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Government action is needed. But this problem has fallen in the blind spot between two agencies. The U.S. Department of Education has always relied on the IRS to determine whether a school has the public-minded governance that justifies a tax exemption. But the IRS does non monitor and approve nonprofits as they change, a loophole that for-profit colleges take at present figured out. And while more vigorous oversight by the IRS would be good, information technology is non realistic, in function because of an unrelated controversy that led Congress to cutting the IRS budget.
Taxpayer funds administered by the Instruction Department are feeding these covert for-profit colleges. The IRS is now fully enlightened of the problem. The IRS cannot be relied upon to act. The burden of protecting the integrity of nonprofit higher educational activity, therefore, rests with the Education Section.
The Instruction Department should begin examining more than closely any nonprofit conversions and monitoring for-turn a profit institutions' relationships with scholarship entities. Longer term, it might consider moving the function of determining a school'south eligibility to enforcement entity, such as the Office of Inspector General, and away from the operations-oriented Federal Pupil Aid office.
We must take non to look likewise much from moving organizational boxes. However, this is one case in which in that location could be real benefits.
Formerly the Obama administration's U.S. deputy under secretary of education, Robert Shireman is a senior boyfriend at The Century Foundation working on education policy with a focus on for-profit college accountability, quality assurance and consumer protections.
Source: https://hechingerreport.org/how-a-regulatory-blind-spot-puts-the-integrity-of-nonprofit-higher-ed-at-risk/