Ditching Profit

The Higher Learning Commission's decision on Grand Canyon University's application to convert from a for-profit to a nonprofit is expected within days.

The Arizona-based Christian institution, which enrolls more than 19,000 students at its Phoenix campus and more than 70,000 online, announced in January that it would again attempt to change its tax status. The for-profit failed in a similar bid four years ago, when HLC -- the university's regional accreditor -- denied Grand Canyon's application.

"The company believes that the current proposal addresses any concerns noted by the HLC in its denial and complies with the new 2017 HLC guidelines," Brian Mueller, the university's president and CEO, said last week in a call with investors. "No assurance can be given that HLC will approve this application … However, we are encouraged by the fact that the response to our updated report was very positive, that our proposed transaction and structure is almost identical to many others in the industry and is very similar to the Purdue and Kaplan proposal, which HLC is also reviewing at this time."

GCU is one of several large for-profits that in recent years have sought to make the change. In addition to Purdue University's proposed acquisition of the for-profit Kaplan University, the for-profit Education Management Corp. sold its institutions to the nonprofit Dream Center Foundation last year. One accreditor among a number that oversee EDMC has rejected Dream Center's purchase of two Art Institute locations, while another has backed a portion of the sale.

Even if HLC approves Grand Canyon's bid, the university will also need approval from the Education Department and the Arizona State Board for Private Postsecondary Education.

The proposed conversions have drawn fire from critics of for-profits who are concerned that they could make the nonprofit sector less ethical. After the high-profile collapses of Corinthian Colleges and ITT Technical Institutes, which followed findings by regulators that the companies in some cases deceived and misled students while reeling in big profits, some critics fear the conversions will give new nonprofits -- and the for-profit management companies they would contract with for services -- leeway to mislead students.

"This is not a trend, it is an infection," Robert Shireman, a senior fellow at the Century Foundation and a former Education Department official during the Obama administration, said in an email. "If the infection is allowed to take hold, the effect on existing nonprofits will not be immediate. But over time board members at nonprofit institutions will shift from givers to takers, from oversight that is based on heartfelt devotion to the educational mission, to support that is about the money they personally can make off of the school's operations. That shift will change institutional behavior leading over time to the same type of scandalous abuses we have seen repeatedly in the for-profit sector."

The heart of Shireman's criticism of several of the conversion bids is about how the operations of the resulting institutions will be split between the two sectors.

Grand Canyon's corporate filings explain how the university, including its academic-related assets and real estate holdings, would become a nonprofit institution governed by an independent Board of Trustees. However, the parent company would remain a for-profit entity that operates as a third-party provider of services to the new university. Those services would include recruiting, counseling, human resources and marketing. Mueller said the structure is similar to the one proposed for Purdue-Kaplan, which will be called Purdue University Global.

Paul LeBlanc, the president of the nonprofit Southern New Hampshire University, said he shares some of Shireman's concerns. For example, he said it would be disingenuous for the for-profit side of restructured institutions to charge steep fees of their nonprofit divisions. However, LeBlanc said he has yet to see that sort of problematic behavior.

"The boundary lines are blurring a bit when you look at the growth of for-profit [online program management companies] working with nonprofit institutions," he said, adding that there is and should remain a clear difference between for-profits and nonprofits. "Where does the nonprofit end and where does the for-profit begin is a little cloudy. But I think in that world, the OPMs have had to be pretty respectful of the guardrails nonprofits operate with, and I think they've largely been good actors."

LeBlanc said there isn't any evidence of "bad actors" that contract with OPMs because nonprofits have largely stayed in control of their institutions, unlike for-profits, which are largely driven by shareholder concerns.

"A lot of people, including many in the nonprofit sector, welcome some regulatory relief," he said. "Higher education has a lot of regulatory responsibilities and expenses. But no one wants to see such a relaxation that we have bad behavior again."

Republicans in the U.S. House of Representatives have been considering legislation that would end the separate legal definition of nonprofit and for-profit institutions. That would prevent regulation like the Obama-era gainful-employment rule, which would have led to sanctions that applied mostly to the for-profit sector. The Trump administration hit pause on that rule, announcing plans last year to conduct a regulatory rewrite.

Shireman said public dollars going to for-profits require greater oversight than those that go to nonprofit or state-run institutions. But instead of designing policies to conduct that oversight, he said that the Education Department under Betsy DeVos, the U.S. secretary of education, would rather allow for-profit colleges to incorrectly portray themselves as having the accountability of a nonprofit or public entity.

Steve Gunderson, the president and CEO of Career Education Colleges and Universities, which represents the for-profit sector, said the new administration is showing a willingness to look at proposed conversions and sales on their individual merits and to not base the decisions on political or ideological beliefs.

"Schools are working to position themselves for the future as they navigate economic realities and changes in higher education," Gunderson said. "The previous administration, unfortunately, was not open to school conversions to nonprofit status but targeted all proprietary schools simply because of their tax status."

In describing Grand Canyon's nonprofit strategy, Mueller said it has "nothing to do with current regulations imposed by the Department of Education on for-profit institutions." None of the university's programs, for instance, failed the gainful-employment guidelines. Tuition on the traditional campus has been frozen for 10 years and Grand Canyon's default rate for student loans will be approximately 6.5 percent for the most recently completed cohort of students, he said.

However, the university sees its conversion as a way to "level the playing field with other traditional universities with regards to tax status," in part by allowing it to accept nonprofit contributions and to participate in National Collegiate Athletic Association governance. In GCU's previous attempt to convert to a nonprofit, the company cited the for-profit "stigma" as a reason for seeking the change.

Shireman said he's hopeful that raising red flags about conversion deals will help keep the nonprofit sector honest.

"By pointing out the problems in the Purdue-Kaplan deal and the GCU plans, we are trying to stop the infection early," he said.