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The rise of the covert for-profit college

The Internal Revenue Service Building, in Washington. (AP Photo/Andrew Harnik)

As the government steps up its policing of for-profit colleges, a handful of the schools are converting to nonprofits, freeing themselves from regulation aimed at the industry. But a new report questions whether some of these schools are still reaping the financial benefits of operating as a for-profit.

The Century Foundation looked at four schools that recently shed their for-profit status: Herzing University, Remington Colleges, Everglades College and the Center for Excellence in Higher Education. Robert Shireman, author of the report and a senior fellow at the Century Foundation, examined records and communications between the schools and the Internal Revenue Service, which grants nonprofit status.

Becoming a nonprofit school means relinquishing ownership and placing control in the hands of trustees who operate with no financial benefit and in the interest of the public good. Yet Shireman found conflicts of interest with owners of former for-profits still being paid millions of dollars and remaining heavily involved in the governance of the newly minted nonprofits.

“There is some danger that if the IRS allows this behavior to stand, traditional nonprofit colleges will start to see demands from their trustees for ways that they can make money off their positions,” said Shireman, a former official at the Department of Education. “There is a real danger of this approach creeping into traditional higher education and undermining quality.”

Take Everglades College, a newly minted nonprofit formed by Arthur Keiser. He lent the college $321 million to purchase his eponymous university in Florida and has ownership interests in properties the school rents. Everglades, where Keiser serves as president, paid more than $34 million to entities owned by his family. Officials at Everglades did not immediately respond to requests for comment.

Similar questions of owner impropriety came up in the case of the Center for Excellence, which purchased Stevens-Henager College and College America in Utah from Carl Barney for $636 million in 2012. As a part of the transaction, Barney became the sole member of the Center of Excellence’s corporate entity and chairman of the board of trustees.

All but two members of that board are compensated, an unusual arrangement for nonprofits that are typically governed by unpaid trustees to ensure decisions are not skewed by personal financial interests, Shireman said.

Eric Juhlin, chief executive of the Center for Excellence, contends that those board member are reimbursed $12,000 as a token of appreciation for the amount of time and effort they dedicate.

“Our conversion had nothing to do with trying to avoid regulation or trying to get improper benefits to the owner,” Juhlin said, in an interview. “The owner wanted the colleges to go on in perpetuity. It’s his legacy…he didn’t want to sell it to some entity that would take the colleges in a different direction.”

Juhlin called Shireman’s report “biased and intentionally misleading,” and said the author has a “long history and bias against any free market principles in higher education.”

Still, John Colombo, a professor at the University of Illinois College of Law, called the report’s findings “very troubling” because of the “incestuous nature between the selling for-profit and the buying nonprofit.”

There are distinct benefits to being designated a nonprofit school. Beside the millions saved in taxes, nonprofit schools are not subject to the so-called 90/10 rule, which prohibits for-profit colleges from getting more than 90 percent of their operating revenue from federal student aid funding.

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As Remington College ran into trouble with the 90 percent threshold, the Florida school was acquired by Education America, a nonprofit organization, with a loan provided by Remington. The board of trustees not only includes the chief executive of Remington and Educate America, but also employees of a firm that assisted with the acquisition. Officials at Remington did not respond to requests for comment.

“Board members who are making money off a college cannot be honest brokers about whether a college is doing a good job providing an education,” Shireman said. “The boards are profiting and that undermines the core purpose of nonprofit governance, which is accountability.”

Shireman found it particularly troubling that the IRS approved Remington’s conversion in eight weeks despite the glaring conflicts of the board. In the report he said, “the IRS may have rushed because of [Remington’s] insistence on an expedited review, accompanied with an explanation that created the impression that the U.S. Department of Education needed an answer within a particular time frame.”

Still, the agency took more than eight months before granting nonprofit status to Herzing Educational Foundation, an entity that took control of Herzing University. The IRS peppered the foundation with questions about the involvement of the school’s founder Henry Herzing, and was told he would not play a significant role. Yet Henry Herzing remains a board member, while his daughter Renee Herzing serves as chief executive.

“We have followed rigorous conflict-of-interest rules throughout this process,” Renee Herzing said, in an e-mail. “Herzing University agrees that becoming nonprofit is a serious commitment to the public good, which is why we decided to pursue that status for our 50-year-old, family-founded institution.”

Despite what Shireman said are clear conflicts of interests at the four former for-profits, he said the IRS and the Education Department have failed to act. He wants both agencies to do a better job of auditing institutions that claim to be nonprofit schools.

“The IRS has good guidelines, but does not have the firepower to monitor everything that’s going on. And the Education Department needs to recognize that they cannot rely on the IRS,” Shireman said. “If taxpayer dollars are going to be going out the door to these so-called nonprofits, the department needs to step up.”

While the IRS declined to comment, Education Department spokeswoman Dorie Nolt pointed out that the agency has yet to approve many of these conversions. The schools need the department’s blessing to avoid being subject to rules that govern for-profit colleges.

“The department shares the concern that some for-profit school owners may adopt the trappings of nonprofit status in order to avoid certain federal regulations while continuing to make money from the schools,” she said.

For-profit colleges are in turmoil. Government lawsuits, regulatory scrutiny and depressed student enrollment have kneecapped some big names in the sector. Corinthian Colleges filed for bankruptcy, Education Management Corp. is closing 15 Art Institute campuses, and Career Education Corp. said it would shut down all 14 of its Sanford-Brown schools.

Meanwhile, ITT Education Services, its chief executive, Kevin Modany, and chief financial officer, Daniel Fitzpatrick, are all being sued by the Securities and Exchange Commission for fraud. And a group of 37 state attorneys general are investigating the recruiting and marketing practices of several for-profit colleges.

Want to learn more about for-profit colleges, check out these stories:

For-profit colleges lose bid to scuttle government rules

SEC charges executives at for-profit college ITT with fraud

How dozens of failing for-profit schools found an unlikely savior: a debt collector