A Change of Control

In July, the U.S. Department of Education announced a $130 million group loan discharge for 7,400 student borrowers who were victims of the Colorado-based CollegeAmerica, having found that CollegeAmerica’s parent company—the Center for Excellence in Higher Education (CEHE)—misled students into believing their programs of study were putting them on track for high likelihoods of placement in well-paid careers.

This action followed years of legal trouble for the nonprofit CEHE after CollegeAmerica’s owner sold the institution to CEHE—along with other colleges he owned—with money the owner lent to CEHE, only to then charge the colleges millions of dollars in rent.

This kind of self-dealing in higher education sends federal aid into for-profit owners’ pockets and saddles student borrowers with high debt burdens and meager career prospects. That’s why the Education Department has put in place stronger procedures for reviewing changes in institutional control, even if they create higher hurdles for lawyers managing mergers and acquisitions.

Department officials crafted these regulations, described in a recent Inside Higher Ed story, in response to deals that, at best, exploited loopholes in the law. For-profit operators including Kaplan, Bridgepoint/Ashford and Education Management Corporation all sought nonprofit status through acquisition. In gaining the nonprofit label, for-profit operators can skirt the regulations and scrutiny Congress put in place following decades of profit-seeking abuses by the for-profit college sector.

Don’t just take our word for it. Authors of a 2021 Government Accountability Office report found that among 59 instances of for-profits converting to nonprofit institutions over the last decade, “former owners or other officials were insiders to the conversion—for example, by creating the tax-exempt organization that purchased the college or retaining the presidency of the college after its sale” in about a third of the cases. Among the GAO’s recommendations, nonpartisan analysts urged the Education Department to “develop and implement monitoring procedures” to watch out for self-dealing that benefited investors and owners, regardless of the interests of students.

Members of Congress have noticed the disturbing implications of some institutional conversions and the changes of control that can go along with them. Shortly after the publication of the GAO report, Representatives Kathy Manning, a Democrat from North Carolina; Lucy McBath, a Democrat from Georgia; and Sara Jacobs, a Democrat from California, introduced the For-Profit College Conversion Accountability Act to “strengthen accountability measures at the Department of Education during the conversion or sale of a for-profit institution of higher education.”

We think most people would agree that if an institution sells itself to a nonprofit entity for $1, while the parent company or owner profits through a long-term revenue-sharing agreement with the nonprofit institution, the Education Department should serve the public by determining whether the newly formed entity is really a nonprofit.

We also believe it’s reasonable for the Education Department to consider whether an institution is entitled to nonprofit status when a conversion from for-profit status leaves the institution saddled with debts to its insider board members or executives, or when it’s forced into a contractual arrangement benefiting former owners.

The new regulations followed an extensive negotiated rule-making process that included direct input from negotiators representing various sectors of higher education institutions—including public, nonprofit private and for-profit college representatives. One of us (Carolyn) took part in the negotiations as a member of the committee. The general public also had an opportunity to weigh in during the comment period leading up to the release of the rule. We believe this input helped inform Education Department officials in crafting balanced change of ownership and control regulations.

Under the new regulations, which went into effect July 1, the department requires institutions to provide 90 days’ notice of a change in ownership and control. This is a modest and reasonable expectation that will provide adequate time for the department to determine whether the new owner meets the requirements for participation in taxpayer-funded financial aid programs. In addition, under the department’s recent changes, “the department reviews a deal only after an accreditor has signed off.” Accreditors serve a critical quality assurance role; it seems reasonable to expect their approval of proposed deals as a precondition for a change of control.

Among other changes, the new regulations, as summarized in an Education Department fact sheet, also “clarify that a for-profit institution remains for-profit for the purposes of Title IV unless and until the Department approves its application to change to nonprofit status.” The regulations also “state that nonprofit status for an institution undergoing a conversion is unlikely to be approved if the institution owes debts to a former owner or if it holds a revenue-sharing or other agreement with a former owner, current or former employee, or board member that is inconsistent with the market value for the services provided.”

Recent headlines have only made the need for stronger change of control regulations even more apparent. The University of Idaho’s attempt to acquire the scandal-plagued University of Phoenix exposes the public flagship of Idaho to the liabilities of its proposed for-profit partner. This effort follows the failure of a proposed similar arrangement with the University of Arkansas.

The Education Department can’t prevent for-profit colleges from merging and forming new entities, even when these changes are for the purpose of sidestepping regulations. But the Department has a legal and moral responsibility to determine whether institutions have demonstrated their commitment to students, and not just profit making, in evaluating whether newly formed institutions can and should participate in taxpayer-funded federal aid programs.

Financial aid should serve as a hand up for low- and middle-income students pursuing higher education—not as a handout for college operators seeking the cover of a nonprofit label to make money off the government and unsuspecting students. The Education Department’s new change of ownership regulations will play an important and needed role in upholding the integrity of the federal financial aid system.