January 27, 2021

GAO: IRS, Education Dept. Failed to See Abuses in For-Profit College Conversions

GAO: IRS, Education Dept. Failed to See Abuses in For-Profit College Conversions

The Government Accountability Office has just released an extensive report concluding that both the Internal Revenue Service and the U.S. Department of Education have failed to address the dangers that conversions of for-profit colleges into non-profit colleges can result in improper financial benefits for the previous owners of those schools.

Republic Report revealed in November 2019 that GAO was undertaking this investigation, at the request of Rep. Bobby Scott (D-VA) and Sen. Patty Murray (D-WA), the top Democrats on committees dealing with education, and senators Dick Durbin (D-IL) and Maggie Hassan (D-NH).  The request came after a series of conversions were approved by the IRS and education department in the past decade despite evidence that the deals were structured to continue making big money for the prior owners even after the schools became non-profit.

As evidence mounted ten years ago that many for-profit colleges were deceiving and abusing students — under-educating them and leaving them buried in debt — industry owners and lawyers seized on the idea of converting to non-profit status as a way to escape the stigma of the for-profit label, as well as to avoid the taxation and additional regulations imposed on for-profits. But non-profit institutions are required by law to operate for the benefit of students, not previous owners, and that is where abuses have been occurring, at schools including Keiser University, Independence University, Purdue Global (formerly Kaplan University), the Art Institutes, Grand Canyon University, and, most recently, Arizona Global Campus (formerly Ashford University). 

The GAO report identified 59 school conversions to non-profit since 2011.  About a third of those conversions left insiders — former owners, board members, or executives of the for-profit — still running the non-profit school, and those insider deals accounted for almost 80 percent – $1.8 billion – of federal student grants and loans going to these converted schools.  And in the case of these insider conversions, colleges had worse financial results right after the sale, as money  flowed to the former owners through inflated loans made from those owners to the school, contracts with those owners for the sale or rental of real estate, executive salaries, and other arrangements.

Unfortunately, GAO somehow has declined to name the colleges it has reviewed and described in detail, forcing analysts to guess which college is which by the clues in the report. My colleagues and I think we know which is which, and congressional investigators will pursue these matters.

But GAO is clear that the IRS has been lax in identifying risks that school insiders may exploit these conversions and subvert the rules governing non-profits, and that the Department of Education has similarly ignored these concerns in many cases. The Department did, in the final year of the Obama administration, reject the conversion of Independence University and other schools sold to the non-profit Center for Excellence in Higher Education, but under Betsy DeVos the Department secretly reversed that decision. In 2019, however, the DeVos Department did reject Grand Canyon’s conversion application, a decision Grand Canyon recently announced it would appeal.

GAO also found that all nine for-profit colleges that had obtained formal or effective IRS approval as non-profits, but were still awaiting separate Department of Education approval to be treated as non-profits for purposes of Department regulations, had gone ahead and advertised themselves to prospective students as non-profits, arguably a deceptive practice.

Given the blatant abuses of non-profit status we have seen in the past ten years, the GAO’s conclusion that the IRS and education department have been asleep at the switch seems pretty obvious, but it’s good to hear official confirmation. It’s a solid basis for Congress to review and the new Biden administration to take prompt corrective action.

UPDATE 01-27-21 12:08 pm: Robert Shireman and Yan Cao of the Century Foundation have posted this commentary on the GAO report. 

UPDATE 02-02-21: Grand Canyon today sued the Department of Education over the rejection of its non-profit status application.