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A GAO Report Prompts Scrutiny of For-profit College Conversions

On Sept. 28, the nonprofit Veterans Education Success sent a petition to the Federal Trade Commission asking them to investigate Ashford University, a for-profit college. For-profit colleges, like Ashford, often pursue GI Bill funds because of the 90/10 rule, a regulation that requires them to get 10% of their funds from sources outside of federal financial aid, and because of a loophole, GI Bill money doesn’t count.

The memo pointed to accounts from faculty who described poor-quality educational practices – like passing students who hadn’t mastered the material or assigning professors to courses outside their expertise – and enrollment officers who reported pressures to falsely advertise to students. It quotes one employee, Eric Dean, who told NBC News that he was instructed to enroll veterans for at least three weeks so they wouldn’t be eligible for a refund.

Two months later, the University of Arizona formally bought the for-profit college for $1, converting it into a nonprofit. That meant it was no longer under the jurisdiction of the Federal Trade Commission and unlikely to be investigated for possible violations of consumer protections.

Yan CaoYan Cao

“This was really personal for us,” said Aniela Szymanski, senior director for legal affairs and military policy at Veterans Education Success. The incentive for schools like Ashford to convert is to avoid regulations – like the 90/10 rule which prevents them from getting all of their revenue from federal funding like financial aid – or “they’ve gotten such a bad reputation from the abuses that they’ve engaged in in the industry that they want to rebrand themselves.”

The trend of for-profit colleges converting to nonprofits has been in the spotlight recently after a January report from the Government Accountability Office (GAO). It examined 59 schools that underwent this change since 2011, most of which involved a sale to a nonprofit organization. It points to warning signs that that schools may be dodging regulations but not necessarily operating with a less predatory model when they shed their nonprofit status.

When a school starts with a for-profit mindset – which incentivizes upping tuition costs and lowering expenses for education – “it shapes the behavior of the school after the conversion,” said Yan Cao, a fellow at the Century Foundation, a progressive thinktank. She co-authored an explanatory piece on the GAO report.

The report particularly explores insider-driven conversions, which made up a third of cases, where the leader of a forprofit college also leads the nonprofit that buys the school, a different scenario than what happened with Ashford, but similarly concerning to higher education policy experts.

The report describes situations in which “the same person is financing the institution and is the buyer and is the seller,” Cao said, and the Internal Revenue Service rarely flags these transactions. That means the new nonprofit college “starts from a position deeply in debt to the owner” and is less likely to invest much in education. It might also not have the resources to stay open. The report notes that 13 of the for-profit schools seeking nonprofit status closed before the education department officially approved the change.

These kinds of arrangements where the owner is extracting revenue from the school are like “a parasite and it’s sucking the nutrients out from a tree or an organism or whatever it is,” Cao said.

Meanwhile, the report notes that schools undergoing conversion advertise themselves as nonprofits, sometimes even before their status has actually changed, misleading students into thinking they’re getting a better service.

“It’s confusing to them,” said Szymanski. In her experience, a veteran who does some internet research in their college search will know to avoid for-profit colleges. But they don’t necessarily know to avoid nonprofits that continue to operate like for-profits. Some of these schools “still aggressively market to military and veteran students even after changing to a quote-on-quote nonprofit. They’re still chasing military and veteran students’ money just doing it under the guise of a nonprofit now to, in my opinion, deceive [them] into thinking they’re getting a quality education.”

To Cao, what happened with University of Arizona and Ashford University – a public university lending its name to a for-profit college – is the new conversion trend to watch, even if it’s not the focus of the GAO report.

Amid a growing need for online programs, Szymanski said that nonprofit colleges want a leg up in the “non-traditional online student market,” and it’s less of an “undertaking” for them to subsume for-profits who already have the infrastructure to serve those students, albeit poorly, than to create it from scratch. And in exchange, former for-profits get paid for services and get to wear a trustworthy “brand name.”

She wants to see public universities develop their own online programs, and she wants to see a return to the gainful employment rule, a policy which penalized for-profit schools with high percentages of graduates with unaffordable debts under President Barack Obama.

Cao saw “glimmers of hope” in the report that the education department is keeping a closer eye on these conversions. For example, the department warned for-profits that they can’t advertise as nonprofits until their review is complete. But she thinks the department needs to stay ahead of this newer trend.

It was “coming into fashion” as the GAO report was in its final stages, she said, “and that I think we’re going to see with more prevalence unless regulators start to be a little smarter about that pattern.”

Sara Weissman can be reached at [email protected].

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