What Is a For-Profit College, Anyway? And Who Decides?

(Bloomberg Opinion) -- Sportswriters seem entranced by the presence of a for-profit school in this year’s NCAA men’s basketball tournament. Given the resistance to allowing such institutions to play major college sports at all, the fact that Grand Canyon University has been invited is impressive.

But here’s the bigger question: How do we know that Grand Canyon is a for-profit university?

I mean this quite seriously. At present, the Internal Revenue Service, the state of Arizona, and the school’s accreditor all consider Grand Canyon to be a not-for-profit. The U.S. Education Department doesn’t. The distinctions leave the school in a peculiar position. Donations to Grand Canyon are apparently tax deductible, but student loans are limited and come with lots of strings.

A bit of background: Grand Canyon was originally founded as a non-profit Christian college. In 2004, having run into serious financial trouble, the school sold itself to a for-profit entity. A decade letter, with things going better, the trustees decided to buy the school back. The details of that transaction are at the heart of the university’s dispute with the Education Department, a disagreement that’s currently in litigation.

Which side you take might depend on whether you’re for or against for-profit education. Lots of critics argue for stricter regulation, and there’s no question that there have been abuses galore, from abysmal graduation rates to high levels of loan default.

Nevertheless, the historian is obliged to note that the controversy is nothing new. For much of American history, apart from the elite colleges, much and perhaps a majority of higher education was “proprietary” — that is, for profit. The proprietary schools tended to serve populations that the wealthier colleges ignored: women, racial minorities, and the working class, for example. They also ignored the “classical” curriculum and prepared their students for such professions as business, medicine, and law.

Then as now, critics complained that the proprietary schools were taking advantage of those who could pay their fees. A 1912 report drafted by the philosopher George Herbert Mead dismissed the for-profits as “a serious evil in the community” that offered poor educations to students “who have no adaptability for commercial training.”

At the same time, the elite schools continued to defend the notion, echoed in the Yale Report of 1828, that higher education should not be aimed at training for a profession but instead should be aimed at training future leaders in “those branches of knowledge, of which no one destined to the higher walks of life ought to be ignorant.” (And if you’re among those wondering how a “not for profit” school can charge $60,000 for tuition alone, that’s a topic for another column.)

Perhaps it made sense to condemn the narrowness of the proprietary schools in a world in which only a chosen few would ever lead, and in which there existed broad elite agreement on what those chosen few needed to know. But in the absence of consensus over either the identity of the future leaders or the “branches of knowledge” to which all should be exposed, the case against the for-profit curriculum is considerably weaker.  Small surprise, then, that Grand Canyon, like most of today’s proprietary institutions, emphasizes professional training.

All of which brings us back to the problem of Grand Canyon’s dual status, considered not-for-profit by the IRS and for-profit by the Education Department. In its lawsuit, the school raises some telling points about the opacity and standardlessness of the department’s decisions on which class an institution of higher learning falls into. But one also senses, on the government’s side, an uneasiness with the structure of the transaction through which Grand Canyon escaped the corporate entity that previously owned it. According to the Century Foundation, it’s common for schools that claim to have switched to nonprofit status to continue operating like the profit-making entities they once were. That’s what the feds seem to think Grand Canyon is doing. 

The outcome matters in large part because of the controversial “90-10 rule,” enacted by Congress in 1992, which essentially provides that for-profit colleges — and only for-profit colleges — must derive 10% of their income from sources other than the federal government. In practice, then, by declaring Grand Canyon still for-profit, the Education Department is restricting the money the school can receive from student loans.

Nobody much likes the 90-10 rule, although the reasons vary. Some critics argue that by excluding funds for educating military veterans, the rule encourages schools to exploit them. Others say that the rule punishes “high risk” students and the colleges that serve them. Nobody disputes that getting rid of the rule would cost billions.

Although it’s certainly true that many for-profits have been guilty of abuses, the evenhanded regulatory response isn’t to subject the entire category to special rules. Instead, we should punish the abuses themselves, in whichever sector they may occur. If they occur more often in the for-profits, then the for-profits will properly absorb most of the costs.

I tend to feel the same way about the 90-10 rule itself. Why not apply it to every institution of higher learning? The libertarian in me remains unpersuaded that we should discriminate at all between for-profits and not-for-profits, except perhaps with regard to tax consequences. So if we think the for-profits should be able to come up with one-tenth of their funding without federal assistance, maybe every school should.

Don’t get me wrong. I’m expressing no opinion on the outcome of the lawsuit. But I do agree with the school this far: If we’re going to treat for-profit colleges differently, the rules should at least be crystal clear, so that schools have unambiguous guidance on what they must do to move from one category to another. Whatever the outcome of the Grand Canyon litigation, let’s hope for at least that much.

Yes, another reason that the federal takeover of the student loan business was a terrible idea.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Stephen L. Carter is a Bloomberg Opinion columnist. He is a professor of law at Yale University and was a clerk to U.S. Supreme Court Justice Thurgood Marshall. His novels include “The Emperor of Ocean Park,” and his latest nonfiction book is “Invisible: The Forgotten Story of the Black Woman Lawyer Who Took Down America's Most Powerful Mobster.”

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