Is the era of college nonprofit conversions over?

Higher Ed Dive

Natalie Schwartz

December 19, 2022

Earlier this month, Grand Canyon University, a Christian institution headquartered in Arizona with a large online footprint, lost a legal battle it was waging against the U.S. Department of Education.

A few years earlier, the Education Department determined that it would consider the university a for-profit college for federal financial aid purposes — even though it had nonprofit standing with the IRS. In its decision, the agency cited a Grand Canyon University services contract that gave a sizable portion of the institution’s revenue to its former owner.

Education Department regulations say that no part of a college’s net earnings may benefit any private shareholder or individual if it is to be considered a nonprofit. Grand Canyon University didn’t fit the bill, the agency decided

Because of the department’s move, Grand Canyon University must follow a stricter set of regulations than nonprofits do.

Grand Canyon University asked the courts to reverse the Education Department’s decision, but a judge ruled that the agency has the power to determine whether a college is a nonprofit or for-profit. The case has major implications for the higher education sector, as Grand Canyon University is one of many for-profit colleges that have sought to convert to nonprofit status in recent years.

“It’s a really important ruling,” said Beth Stein, senior adviser at The Institute for College Access and Success, a group promoting accountability and equity in higher education. “It so clearly upholds ED’s authority to look closely at these transactions and to make determinations.”

For years, lawmakers and policy advocates have flagged some of these nonprofit conversions, pointing out deals they say allow for-profit colleges to evade the stricter regulations governing their sector even though their operations still financially benefit insiders.

A 2021 report from the U.S. Government Accountability Office, an auditing agency for Congress, backed up their concerns. It analyzed nearly five dozen nonprofit college conversions between January 2011 and August 2020. In about one-third of the deals, the nonprofit colleges still had relationships with their former for-profit owners or other officials who could influence their financial decisions.

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