What's next for higher ed's for-profit colleges?
More M&A and nonprofit conversions are expected as the troubled sector stares down political uncertainty in 2020 and beyond.
Some of the country's biggest for-profit colleges don't want to be for-profits anymore.
Roughly a dozen deals in the last few years indicate that large institutions that outlasted the sector's downfall are seeking an operational model that will serve them no matter what party controls the White House.
"[I]f we're going to get a deal done, it's going to have to happen now because nobody knows what's going to happen in 2020," said Trace Urdan, a managing director at investment firm Tyton Partners who analyzes the for-profit sector.
The Education Department's "laissez-faire attitude" toward these transactions is giving for-profits space to explore new models, Urdan and others said. But growing uncertainty around the department's ability to achieve its regulatory agenda has those colleges looking for fresh cover in the form of mergers and acquisitions or conversions to nonprofit status.
And they expect the pace at which colleges are doing so to pick up.
The companies that operate for-profit colleges are taking several approaches to shield themselves from Obama-era regulatory oversight that the current Ed Department is struggling to shed.
Mergers such as that between the parent companies of Strayer University and Capella University show an attempt to create strength in scale. Some like Career Education Corp., which operates American InterContinental University, are looking at the possibility of growing through acquisition. And others are pulling back; Adtalem Global Education, for example, is underway with selling off its troubled DeVry University chain to an investment company that has flipped other for-profit colleges.
Others are eyeing such deals to become de facto service providers, particularly in the realm of online education.
Among the most notable is Purdue University's $1 acquisition of Kaplan University, which was finalized in March and turns the for-profit college into the foundation of the online Purdue University Global, a public benefit corporation.
Grand Canyon University's conversion to a nonprofit also was approved earlier this year; it will retain the services of its former parent, the for-profit Grand Canyon Education. Bridgepoint Education, meanwhile, is attempting a similar move with its for-profit Ashford University.
Steve Gunderson, president and CEO of Career and Education Colleges and Universities, doesn't think for-profits are running from regulation. "If this were ... just being done to avoid the regulations of the Obama administration, you would have seen it stop once the current administration began to … modify or even rescind some of those regulations," he said. "You're not seeing that, so I think there are clearly other motives."
Among them, Gunderson said, is a generation not interested in taking over for-profits, many of which are family run. "They've seen the roller coaster, they've seen the attacks and they just go, 'I want to do something else,'" he said.
A 'loophole' at the IRS
More nonprofit conversions are expected, however, and their critics say it's partly due to a weak spot in IRS oversight. A review of IRS activity by The Washington Post last year found that continued and highly politicized budget cuts have sapped the agency's oversight ability. That's making it easier for organizations seeking nonprofit status to get it.
The budget for the IRS's Exempt Organizations division, which oversees these issues, fell nearly 20% from 2011 to $82 million in 2016, and its employee headcount dropped by about 28% during the period to 642 people, The Post reported.
Moves to expedite approvals have further strained resources. Of more than 79,000 applications on which it made a final decision in 2016, the division turned down only 37, according to the report. And they were moving through them quickly, too, with an average of 50 applications approved each business day from early 2014 to late 2016.
The problem, said Bob Shireman, a senior fellow at The Century Foundation, a left-leaning think tank, is that with the bar lowered for obtaining nonprofit status, more for-profit operators will take advantage of the opportunity. And their bottom-line-driven approach runs counter to how nonprofit colleges and universities, especially public ones, are meant to be managed.
"They have found a loophole and they are pouncing to take advantage of it as quickly as possible," said Shireman, who in August published a review of for-profit-to-nonprofit status conversions.
The extent to which for-profit colleges are doing so is disputed. On the one hand, many of the for-profit colleges turning nonprofit enroll thousands of students each. However, they make up a relatively small share of the total number of colleges in the sector that get Title IV funds.
"They have found a loophole and they are pouncing to take advantage of it as quickly as possible."
Senior fellow, The Century Foundation
About a dozen colleges have converted or are in the process of converting to nonprofit status out of some 2,800 for-profit institutions that got Title IV funds for the 2017-18 academic year, according to Gunderson, citing data from the National Center for Education Statistics. "I think we need to put this in perspective," he said. "It's really a problem that doesn't exist."
Yet among the 10 colleges Gunderson listed to Education Dive that have converted or are considering it are Kaplan University (which enrolled about 30,000 students at the time of its acquisition), Grand Canyon University (which enrolls 20,500 on campus and 75,000 online), Keiser University (18,000 students), Ashford University (36,500 students) and Ultimate Medical Academy (18,500 students). He also named the Center for Excellence in Higher Education, which enrolls about 12,500 students across several college chains.
Smaller colleges including Herzing University (6,000 students), Remington College (6,200 students) and Pittsburgh Technical College, which enrolled about 1,800 students in the fall of 2017, also made the list. As did Education Management Corp., which sold several of its properties to the nonprofit Dream Center.
What's in a good conversion?
These partnerships and conversions highlight the tenuous balance between two distinct elements of higher education.
Nonprofit colleges have long paid for-profit entities to handle operations such as food service, laundry, printing and managing the campus bookstore. What's different about these new partnerships is that they cross into academics and even governance.
That's where things can get tricky. Lloyd Mayer, a law professor at the University of Notre Dame, noted some elements of deals that could indicate they're not actually favorable to the resulting or partnering nonprofit.
They include strings such as the nonprofit leasing property from the for-profit entity instead of obtaining the title to the campus or facilities in question; compensation agreements with the original for-profit operators; and the lack of a conflict of interest policy wherein transactions are reviewed by people who don't have a stake in their outcomes and who aren't closely associated with people who do.
"[I]f we're going to get a deal done, it's going to have to happen now because nobody knows what's going to happen in 2020."
Managing director, Tyton Partners
Ongoing relationships can also be cause for concern, he said. And because these arrangements so often involve online education, knowing the entity responsible for developing the academic programs is also important.
In his report, Shireman highlighted several "questionable practices" in the conversion plans of a dozen for-profits that have obtained or are seeking nonprofit status. He added that the presence of tenured faculty and trustees who make decisions but don't benefit financially from them can also be strong checks and balances in such deals.
Clare McCann, deputy director for federal higher education policy at New America, a nonpartisan think tank in Washington, D.C., said colleges pursuing these deals should "proceed with extreme caution." Retaining control over elements such as admissions decisions and ensuring faculty will have a "strong role" in determining and approving curriculum and programs can help ensure "the college stays a college," she said.
Learning through examples
In the case of the Purdue-Kaplan deal, which has a 30-year term, a six-year buyout option and a revenue-sharing agreement, Kaplan will manage several operations of the newly formed online college. Those include financial aid administration, marketing and advertising, technology support and back-office business functions.
After all other costs are accounted for, including a $10 million annual payment to the new university, the deal calls for Kaplan to receive a fee equal to 12.5% of the new entity's annual revenue.
"Kaplan knew in their heart that if we can ditch the for-profitness of our brand and apply all of the things we know how to do well to something that's ostensibly nonprofit, we can turn this thing around and we can grow really attractively,'" Urdan said.
The deal drew swift scrutiny. One of the biggest points of contention upon its announcement was whether the public nonprofit university would take on any of the private for-profit college's preexisting debt and liabilities. Tim Doty, Purdue University's director of public information and issues management, told Education Dive in an email that Kaplan will indemnify Purdue for all pre-closing liabilities, so Purdue University and Purdue Global "would never have to go out of pocket for it."
Although Kaplan is responsible for taking care of those liabilities, Purdue is the sole Title IV entity recognized with the Ed Department.
Grand Canyon University drew a flag for crossover between the leadership of its nonprofit spinoff and for-profit services provider. SEC filings show that Brian Mueller will lead both the nonprofit and for-profit entities and will be the only employee to straddle both.
To be sure, there are deals that draw less scrutiny, Shireman said. He points to the for-profit Northcentral University's acquisition by nonprofit National University System as an example of one in which the "purchase price was determined and financed independently and there is no ongoing contract or relationship between the nonprofit and the former owners," according to his report.
And although many of these deals raise flags, the participating institutions are usually optimistic. Purdue's Doty said 2018 "set the foundation for what we believe will be long term success of the new institution and our students."
All eyes on the OPM market
The conversions might not be so contentious if it weren't for the challenge facing many public colleges and universities: creating a new or enhancing an existing online education platform to handle their graduate and, in particular, undergraduate instruction needs.
Those needs are particularly acute as nonprofit institutions like Western Governors University (WGU) and Southern New Hampshire University (SNHU) stake their claim on online education at a national scale. WGU has eight state-based universities and enrolls more than 100 — in many cases thousands of — students in each U.S. state. SNHU enrolls more than 3,000 students at its Manchester, New Hampshire, campus and 90,000 more online, according to its website.
Several public university systems, including the State University of New York, University of Massachusetts and University of Missouri systems, have put out requests for information or proposals on how to market, manage and grow current and future online programs.
Out of 3,814 public and private institutions, excluding for-profits, around 525 are already partnered with online program managers (OPMs) as of December 2018, according to Tyton Partners research. Of that group, which covers public and private colleges of all sizes, eight in 10 partnerships were with graduate programs. One-third of the 1,460 institutions that have online-only programs work with OPMs.
The OPM market is growing. Tyton estimates the number of OPM programs will be up 10% this year from 2017. That's having a positive impact on enrollment, with programs partnered with OPMs seeing enrollment increase 15% in 2018 as compared to a 1% gain at colleges not partnered with OPMs.
"I keep tracing it back to the Purdue-Kaplan [deal]," Urdan said. "People are looking at that and saying … Should we buy something? Should we build something? Can we still build something? Is it too late? How would we do it? Who could help us?"
Gunderson said his members are seeing interest from public colleges looking to acquire for-profits to help gain access to adult training and retraining markets.
The negotiated rulemaking on accreditors slated for 2019 is expected to address desires to expand the share of an educational program that can be outsourced to another provider. That could spur more for-profits to shift to the OPM model, as it wouldn't require all providers to qualify for Title IV funding.
"There is little doubt that the department-slash-administration wants to find ways to accredit new delivery of career education skills beyond the traditional college," said Gunderson, who noted that unaccredited training programs from tech employers like Google and Microsoft are "a much bigger threat" than traditional higher education to his members.
Yet looser oversight at the IRS and political leadership in support of the sector isn't a panacea for its broader woes. Earlier in December, for-profit operator Education Corporation of America abruptly shut its doors after its accreditation was suspended. And the nonprofit Dream Center is closing more than a dozen Art Institutes colleges it bought in 2017.
With House Democrats pledging to step up their oversight and the 2020 election having the potential to shift the slant of political leadership, the for-profit shakeup is expected to continue.
"As more and more for-profit colleges are converting to nonprofit status it becomes increasingly important to think about for-profits in a broader sense than we usually have," McCann said, adding that tax status is not likely to be the best indicator. "We're going to need a much broader framework for evaluating what a for-profit is."
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