Law School’s Nonprofit Conversion Stumbles

The American Bar Association rejected a bid by Florida Coastal School of Law to go nonprofit, but law school leaders are committed to the change in tax status.

October 21, 2019
 
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Florida Coastal School of Law, a Jacksonville-based for-profit institution, suffered a setback last month in its bid to reclassify as a nonprofit.

The law school’s application was rejected by its accreditor, the American Bar Association, last month in a confidential decision. But Florida Coastal, which has posted improved bar-passage rates after years of dismal numbers, says it’s full steam ahead on the push to go nonprofit.

“We’re focused on moving forward with this application,” said Peter Goplerud, Florida Coastal’s president.

The law school submitted a second application to the ABA last week and still hopes to reclassify as a nonprofit institution by next year.

The plans at the law school are indicative of the kinds of changes sweeping the for-profit legal education sector more broadly, some observers said.

The sector was already small to begin with. But in recent years, law schools operated by InfiLaw, Florida Coastal’s parent company, have closed or are in the process of shutting down. Charlotte School of Law shut down in 2017, and Arizona Summit Law School made plans last year to eventually close its doors. Other law schools, including Charleston School of Law in South Carolina and John Marshall in Atlanta, have made plans to convert to nonprofit status as well. A change in tax status means colleges are subject to fewer federal regulations. Those colleges also hope it would help enrollment.

While the number of new students entering law school has declined over all in recent years, the for-profit sector in particular has taken a big hit, said Kyle McEntee, executive director and co-founder of Law School Transparency, a consumer advocacy group that focuses on legal education.

“Schools didn’t have good outcomes, and the ABA was breathing down their necks with enforcement of standards. Students started voting with their feet,” he said. “For a for-profit enterprise, there are different expectations now.”

The law schools operated by the InfiLaw chain appeared to grow without regard to student success, McEntee said.

Those schools had some of the worst bar-passage rates in their respective states in recent years, although they were comparable to some poor-performing nonprofit institutions. Those outcomes led the Obama administration to cut off Title IV federal aid to Charlotte School of Law, an InfiLaw program in North Carolina that shut down in 2017.

But Florida Coastal, after seeing its bar-passage rates fall below 50 percent two years ago, made a 15-point jump to 62 percent earlier this year. In July bar-passage results, the law school topped 70 percent. Florida International University College of Law had the best results in the state, with a 95.7 percent bar-passage rate.

Scott DeVito, the law school’s then dean, announced in February that Florida Coastal would try to convert to nonprofit status. That process would begin with clearance from the ABA, the school’s accreditor, and will require the approval of the Department of Education, the IRS and Florida state regulators as well. Going nonprofit would allow Florida Coastal to fundraise and help it to recruit new students, Goplerud said.

“Our market research indicates that students are still much more interested in nonprofit entities, particularly in legal education,” he said.

Some legal education observers are skeptical of those arguments.

“In the for-profit college context, these deals have protected the financial interests of investors,” said Brian Galle, a professor at Georgetown University Law Center.

In recent years, going the nonprofit route has become increasingly popular among the for-profit sector writ large, not just law schools. Among the high-profile nonprofit conversions, Grand Canyon University, one of the most successful for-profit colleges, announced last year it had cleared regulatory hurdles to become a nonprofit. Grand Canyon sold its campus and academic operations to a new nonprofit entity that contracted with the remaining corporation to provide a range of support services.

Florida Coastal leaders envision a different relationship with potential servicers providers.

“There would be a greater level of independence and much more of an arm's-length relationship between the school and the services provider than in the Grand Canyon situation,” Goplerud said.

(Note: this article originally misstated plans to contract with InfiLaw as a servicers provider.)

Bob Shireman, director of higher education excellence and senior fellow at the Century Foundation, said it’s incumbent on accreditors like the ABA to scrutinize whether such proposals to go nonprofit seriously change the structure of a college or university so it doesn’t continue to answer to outside investors.

“If a contract puts a straitjacket on the nonprofit’s ability to decide what’s best for students, then it’s not really operating as a nonprofit. It’s operating as a for-profit in a nonprofit shell,” he said.

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