The Department of Education on Thursday denied a request from the Center for Excellence in Higher Education, a Utah-based chain of career colleges, to switch its status to nonprofit for federal financial aid, leaving the chain unable to shake loose regulations aimed at for-profit schools.

There are distinct benefits to being designated a nonprofit school. Beside the millions of dollars saved in taxes, nonprofit schools are not subject to what’s called the 90/10 rule, which bars for-profit colleges from getting more than 90 percent of their operating revenue from federal student aid funding. And very few nonprofits have to contend with rules that limit how much debt students amass in career-training programs and require them to ensure graduates of those programs attain “gainful employment.”

Against that backdrop, a handful of for-profit schools have been trying to change their structure, which requires the approval of the department and the IRS. Without the department’s blessing, the Center for Excellence, which runs Stevens-Henager College and College America, must continue adhering to all of the regulations aimed at for-profit colleges.

“This should send a clear message to anyone who thinks converting to nonprofit status is a way to avoid oversight while hanging onto the financial benefits: Don’t waste your time,” Education Secretary John B. King Jr. said in a statement.

The Center for Excellence applied for nonprofit status shortly after purchasing Stevens-Henager College and College America from Carl Barney for $636 million in 2012. As a part of the sale, Barney became the chairman of the board of trustees and retained primary control of the colleges, according to the department.

The thing is, becoming a nonprofit school is supposed to mean 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 tuition revenue from the center’s four campuses continues to flow to Barney, who is still owed money from the acquisition and collects rent on some of the campuses.

“Schools that want to convert to nonprofit status need to benefit the public,” said Undersecretary of Education Ted Mitchell. “If the primary beneficiary of the conversion is the owner of the for-profit school, that doesn’t meet the bar. It’s not even close.”

Eric Juhlin, chief executive of the Center for Excellence, said the company will contest the department’s decision, calling the agency’s analysis “wrong and derived solely from this administration’s political agenda against private colleges.” He said the law does not support the department’s decision. 

“Unfortunately, with the support of the current administration, the department feels it can set policy and establish precedent with no legal basis to support their positions,” Juhlin said. “That’s not the way it is supposed to work in the country.”

Barney called the department’s announcement “scandalous, false and misleading. What I did was completely honorable, lawful and to the benefit of the colleges and our students. This scurrilous attack is shameful.”

A year ago, Century Foundation senior fellow Robert Shireman began raising questions about the structure of the Center for Excellence’s deal with Barney in a report on what’s called covert for-profits. He noted that all but two members of the company’s 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.

At the time, Juhlin said those board members were reimbursed $12,000 as a token of appreciation for the amount of time and effort they dedicate. He insisted that the conversion had nothing to with the company trying to avoid regulation and that Barney remained involved because the schools are his legacy. Juhlin derided Shireman’s report as misleading and said the author had a “long history and bias against any free market principles in higher education.”

On Thursday, Shireman called the department’s action against the center “a very important step forward, telling colleges that they can’t fake nonprofit status and get away with it.”

He added: “It means that for-profit colleges that are considering converting to become nonprofit must do so in a way that is real, not a regulatory dodge.”

During its review process, the department forced the center to put up 30 percent of its annual federal student aid funding, roughly $43 million, to offset risk factors, such a lawsuit filed by the Colorado attorney general accusing the company of misleading student about the quality of its programs. The Center for Excellence has tried unsuccessfully to have that case dismissed.

Steve Gunderson, president of the Association of Private Sector Colleges and Universities said it is “beyond disappointing” that the department and Obama administration suggests that “for-profit is somehow a dirty word.” He said the schools his organization represents provide vital skills to students.

“If the department is really concerned about uniform oversight to ensure the appropriate use of federal funds, there is a simple solution: impose the same set of standards for outcomes on all sectors of higher education,” Gunderson said. “There is no standard we will oppose if it is fairly and uniformly applied to all institutions.”

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