Report: Taking For-Profit Colleges Nonprofit Can Generate Hefty Profits For Owners

Earlier this year Education Credit Management Corporation bought 56 campuses from embattled for-profit chain Corinthian Colleges Inc. and took the schools to the nonprofit sector. While that conversion was initiated because of the ongoing collapse and financial problems facing CCI, other college chains have dropped the for-profit status seemingly to pick up hefty profits.

A new report from the New York Times found that several college chains have made the switch to running a traditional higher education institution a profitable enterprise in its own.

While transferring to nonprofit status means schools must follow stricter restrictions on moneymaking ventures, some former owners aren’t having trouble with finances.

In some cases, owners have been able to finance the purchase of their for-profit colleges by offering loans and tax-deductible donations to an affiliated nonprofit. The new nonprofit then rents the buildings used for the school from the original owner and more often than not, the management team for the institution remains relatively unchanged.

The Times reports that was the case for a Florida for-profit in which the owner continues to rake in millions of dollars after he sold his chain of schools to a nonprofit entity that he also owns.

Back in 2011, Arthur Keiser sold Keiser University to a smaller nonprofit college, Everglades College, where he now serves as president. According to documents viewed by the Times, Keiser lent the smaller nonprofit $321 million for the sale and donated other funds.

Now, the Times reports, Arthur Keiser makes millions of dollars through his position and other payments from the private university.

Keiser has an ownership interest in properties that generate $14.6 million in rent from the school, as well as a stake in a charter airplane used by the school’s representatives and in a hotel where employees stay, the Times reports.

Such profits have raised concerns for consumer advocates and legal experts about the reasons why for-profit chains may want to shift to a nonprofit status.

“There is a concern that the now-nonprofit colleges may be providing an impermissible private benefit to their former owners,” Lloyd Mayer, an associate dean and law professor at Notre Dame Law School, tells the Times. “These sorts of arrangements raise yellow flags.”

Back in November, an Internal Revenue Service complaint filed against Keiser and several board members accused them of violating tax regulations and using the college for personal gain.

The Times reports that one of the company’s board members owns a business that provided the school with a paperless filling system, while a family member of a another board member owns the recruiting system employed at the school. Additionally, a third board member received income from the aquatic engineering program at the school.

For his part, Keiser tells the Times that his family discloses all financial conflicts of interest related to their investment in the higher education institutions and that becoming a nonprofit was a “natural transition.

“My goal has been to build a family legacy,” he says.

Although the Times reports that the Education Department has yet to reject a school’s shift to nonprofit status, other government departments have filed lawsuits after the fact.

The Justice Department joined a lawsuit last year that charged the sale of several for-profit colleges to Denver-based nonprofit, the Center for Excellence in Higher Education.

According to the Times, the sale was financed by Carl Barney, the original owner of the for-profits and the sole board member of the nonprofit.

The Justice Department and Colorado Attorney General’s office charged in the lawsuit that the sale was initiated in part to “evade certain regulatory requirements that apply to for-profit schools.”

Some attorneys defend the shift from for-profit to non profit as simply a necessity for schools struggling to remain afloat.

“Some are truly not doing this to evade regulations,” Neil Lefkowitz, a Washington lawyer who specializes in transactions involving education companies, tells the Times. “They are really having trouble recruiting students.”

Some Owners of Private Colleges Turn a Tidy Profit by Going Nonprofit [The New York Times]