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By Owen Daugherty, NASFAA Staff Reporter
The House Education and Labor Committee on Tuesday held a hearing to detail the run of for-profit institutions converting to nonprofit, examining the impact those conversions have on students and taxpayers, honing in on a recent Government Accountability Office (GAO) report that found 59 for-profits have transitioned to nonprofits in the last decade.
Committee Chairman Bobby Scott (R-Va.) in his opening remarks argued the report’s findings show a need for increased oversight and accountability from Congress, the Department of Education (ED), and the Internal Revenue Service (IRS) over how these institutions transition and who benefits from such maneuvers.
“As a result of poor oversight by both [ED and the IRS], these conversions sometimes took place without the necessary oversight to prevent self-dealings,” Scott said. “We cannot allow these kinds of things to continue. As GAO found, both [ED] and IRS must do far more to prevent fraud by properly vetting for-profit to non-profit conversions. And they must ensure that, after the conversion, for-profit institutions uphold their obligations to put students first — not profits.”
Both the report, released late last year, and the hearing Tuesday sought to highlight the, at times, shady practices at play when a for-profit college converts into a nonprofit college when it's sold to a tax-exempt organization. In roughly one-third of cases identified in the report, college owners or officials held leadership roles in the college's tax-exempt buyer, such as through creating the tax-exempt organization that purchased the college or holding the presidency of the college after the completion of the sale, a practice known as insider involvement.
“Collectively, colleges with insider conversions received nearly $1.8 billion in federal student aid funds in the 2018-19 award year,” said Melissa Emrey-Arras, a director in GAO’s Education, Workforce and Income Security team who oversaw the report and testified at the hearing as a witness.
She added that insider involvement in a converted non-profit college poses risks of financial abuses and improper private benefits in addition to being difficult to track and monitor.
Pointing to the litany of issues plaguing higher education and in many cases exacerbated by the ongoing coronavirus pandemic, ranking member Virginia Foxx (R-NC) decried the hearing, saying there are more pressing topics to focus on.
“You can imagine my surprise when I learned we were ignoring these important, pressing topics to examine colleges transitioning from for-profit to nonprofit status, which impacts roughly zero point one percent of for-profit colleges per year, or approximately three schools a year,” Foxx said.
While attention was given to the lack of oversight from the IRS when an institution converts to a nonprofit, Brian Galle, a professor at Georgetown University Law Center, said ED should be responsible for overseeing the conversions, noting that IRS doesn't have the resources due to the fact that it is tasked with monitoring more than a million nonprofit charities.
The IRS “doesn't have student protection as its primary mission. The law it enforces isn't aimed at telling which charities are really nonprofit and which aren’t,” he said. “A lot of the conversion transactions I examined fail basic and important tax law requirements, but figuring out which schools prioritize money over student outcomes is not the IRS’s job.”
Republicans throughout the hearing, however, bemoaned the use of ED’s time and energy being directed to what they said amounted to essentially a non-issue seeing as how it was such a small amount of conversions each year, asserting that not all of them are fraudulent in nature.
Andrew Gillen, a senior policy analyst at the Texas Public Policy Foundation, pointed out that these conversions are a relatively small problem, and to the extent it's a problem, it's already forbidden by law.
“The real question is: do the existing procedures used by IRS and ED to detect improper benefit work? And if not, then there’s an argument to improve those procedures,” he said.
To that point, Emrey-Arras outlined the tools currently at ED and the IRS’s disposal, noting that ED has done more in recent years to increase oversight, though more can still be done.
ED is “looking at more documents, looking at contracts,” she said. “It's really getting into the nitty gritty to figure out if there is improper benefit going on.”
While schools that get approved to undergo a conversion to a nonprofit are in a provisional period for three years where they are supposed to be closely monitored, many of the witnesses expressed the need for the provisional period to be extended and for additional oversight of financial statements to be applied.
Emrey-Arras lamented that in the provisional period, ED and the IRS are not actually looking at the converted institutions to see if any improper benefit is taking place at that point, something she suggested should change.
Notably, ED agreed with the recommendations identified in the report; one of which being that ED officials could assess risk of potential improper benefit through its audited financial statement review process during the provisional period, as Emrey-Arras suggested.
While several high-profile examples of conversions that were approved in the past decade despite evidence that the deals were structured to continue making money for the prior owners even after the schools converted to nonprofits were raised throughout the hearing, Scott closed by acknowledging that not all are guilty of fraud.
“The impact not just on the students, but also on the federal government, can be intense,” Scott said. “I hope my colleagues on both sides of the aisle will come together to stand up for our nation’s students and enact meaningful solutions that protect students and taxpayers against deceptive for-profit schools.”
Publication Date: 4/21/2021