De Vos’s Education Department Quietly Granted For-Profit Mogul's Colleges Non-Profit Status, Reversing Obama Administration’s Decision
In the wake of scandals surrounding the for-profit college model, some institutions—and their executives—have sought to transition to non-profits. These conversions pose the concrete risk that taxpayers will be left subsidizing institutions trying to skirt federal regulations meant to protect students. As a result, the Obama Administration scrutinized them carefully, particularly where the rebranded non-profit remained financially intertwined with its former owners and executives, as is often the case. In these instances, the Department of Education has the power to refuse to recognize the institution as a non-profit organization if it concludes that earnings benefit an individual or private shareholder. A recent report by the Chronicle of Higher Education reveals that the current administration covertly reversed one such rejection by the Obama administration. In a December 2018 settlement agreement, Betsy DeVos’s Education Department recharacterized the Center for Excellence in Higher Education (“CEHE”) as a non-profit despite its ongoing ties to wealthy businessman Carl Barney, former owner of several CEHE colleges and universities.
Profit incentives in higher education have warped the educational goals at these institutions, leading to high acceptance rates coupled with low job placement rates, and leaving students shackled with debt they can’t afford. Instead of using tuition to compensate quality instructors and build curriculum that will attract the brightest students, revenues are often directed to marketing and recruiting as many students as possible, thereby continuing the vicious cycle, not to mention padding owners’ pockets.
Institutions masquerading as non-profits to access federal funding while in fact retaining for-profit incentives are more likely to continue to take unfair advantage of students. To protect against these abuses, the Education Department has the power to call a conversion bogus if it determines the institution is not owned and operated by a non-profit where no part of the net earnings benefit any private shareholder or individual.
To safeguard students, the Department of Education has enacted various measures to make it more difficult for for-profit enterprises to access federal student loan funding. First in 2010 and again in 2015, the Department implemented regulations seeking to clarify when a program “leads to gainful employment in a recognized occupation,” the standard a for-profit program must meet to access federal aid. Regulators also set a cap on the portion of revenue a for-profit institution may receive from the federal grants and loans, requiring for-profits to demonstrate they are not entirely reliant on federal funding. If the Department suspects an institution is attempting to circumvent these requirements, it can decline to recognize the organization as non-profit for purposes of federal financial student aid even if the Internal Revenue Service has granted non-profit tax treatment.
This is precisely what the Department did in 2012, refusing to confer non-profit status on CEHE shortly after it took control of several for-profit institutions. CEHE is a tax-exempt non-profit organization that acquired a Utah-based chain of for-profit colleges and institutions owned by businessman and for-profit mogul Carl Barney. The Education Department first rejected CEHE’s 2012 application, citing concerns that Barney retained significant control of the colleges based on the structure of the transaction through which his colleges were merged with CEHE. Among other red flags, Barney became CEHE’s board chairman following the merger. The Department also found that tuition revenues continued to flow to Barney’s trust to pay off debts CEHE owed from acquiring the colleges, and through rent that Barney’s other companies received as landlords for several of the college campuses.
Again in 2016, the Department denied CEHE’s request to convert to non-profit status. Former Secretary of Education John B. King Jr. did not mince words in the Department’s press release: “This should send a clear message to anyone who thinks converting to non-profit status is a way to avoid oversight while hanging onto the financial benefits: Don’t waste your time.”
Almost immediately, CEHE filed suit in federal court, calling the Department’s actions “arbitrary and capricious.” Fortunately for CEHE, the political winds shifted while the lawsuit was pending: President Trump entered office and appointed Betsy DeVos to Education Secretary. Under DeVos’s leadership, the Department settled with CEHE in December 2018 in a deal that quietly conferred non-profit status on the colleges. The terms of that deal were private until the Chronicle of Higher Education revealed them earlier this month.
The Chronicle reports that a Department spokesman said CEHE made “significant concessions” such as agreeing that Barney would sever financial ties and would not exert control over CEHE. But Barney still sits on CEHE’s board of directors.
As for CEHE’s performance, the organization has recently attracted attention from its accreditor for its consistently low graduation and job placement rates at certain institutions. Unfortunately for students, although CEHE negotiated its way to non-profit legal status, the abuses plaguing for-profit higher education persist at Barney’s old colleges.