For-profits can reap a profit by switching to nonprofit

Critics say the conversions are an abuse of nonprofit status

As for-profit colleges draw increased scrutiny from regulators, many schools are converting to nonprofit status in ways that still provide significant financial benefits to their owners, Patricia Cohen writes for the New York Times.

An industry under fire

For-profit schools are facing increased scrutiny from regulators who question whether the sector misleads students about the value of a for-profit degree and saddles graduates with excessive debt. The Obama administration's gainful employment rules, which disqualify schools from receiving federal financial aid if they cannot show their graduates make enough money to avoid default, have further increased pressure on the sector.

For-profit graduates 22% less likely to be contacted by employers

As a result, some for-profit colleges are converting to nonprofit. However, the Times reports that such conversions often provide significant financial benefits to for-profit owners, raising concerns that nonprofit status is being abused.

Nonprofit in name only?

In a typical example, nonprofit Everglades College (Everglades) in 2011 bought for-profit Keiser University in Florida, which has 15 campuses and about 20,000 students.

Everglades was founded by Arthur Keiser—owner of Keiser University—and the sale was largely funded by a $321 million loan Keiser made to Everglades.

Now, as president of Everglades, Keiser makes $856,000 per year more than the president of Harvard, according to Cohen, and earns interest on the loan he made to Everglades. In addition, Keiser makes $14.6 million in rent from properties that he owns which are rented by the school.

Critics say the arrangement is an example of for-profit owners gaming the system to avoid regulatory scrutiny while still reaping large financial rewards.

David Halperin, a Washington-based lawyer and author of a book critical of the for-profit education sector, argues the Keiser sale is an abuse of nonprofit status. "I don't think anyone with any rudimentary knowledge with how nonprofits are supposed to operate... could fail to conclude that the transaction is structured to benefit insiders and that the former owners are making a lot of money off the nonprofit," he says.

Robert Shireman, a former Education Department official and for-profit critic, has also filed a complaint with the Internal Revenue Service (IRS) alleging Keiser and three board members at Everglades are using the school "for personal gain."

Keiser counters that the conversion of his eponymous university to a nonprofit was a "natural transition," and that the goal of the sale was to "build a family legacy." Moreover, a spokesperson for Everglades says the school follows "generally accepted auditing and accounting principles," and financial arrangements "are at fair market value terms and conditions."

An industry trend

Lloyd Mayer, an associate dean and law professor at Notre Dame Law School, says deals like the Keiser sale are part of a broader trend. "There is a concern that the now-nonprofit colleges may be providing an impermissible private benefit to their former owners. These sorts of arrangements raise yellow flags," he says.

Related: For-profit Corinthian students to receive $480 million in debt forgiveness

In 2012, a man named Carl Barney drew critics' attention again when he sold several for-profit colleges, in a move that largely mirrored the Keiser sale in structure. In that instance, the Department of Justice filed a lawsuit claiming the sales were an effort to avoid regulation and "the schools continue to operate more or less as they did prior to the merger."

Some observers say the sector is being unfairly targeted and the sales are merely a sign of the tough times for-profits are facing.

"The concept of for-profit education has been quite demonized, and so many institutions are really feeling the pinch," says Neil Lefkowitz, a lawyer who advises for-profit colleges. "They are really having trouble recruiting students,” he says (Cohen, New York Times, 3/2).

The takeaway: A number of for-profit colleges are converting to nonprofit in a way the that financially benefits their owners and raises concerns that nonprofit status is being abused. However, for-profit advocates say the sales are a reaction to the challenges facing the sector.

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