Sixteen months after spinning off Grand Canyon University as a standalone, nonprofit institution to which it provides education services, Grand Canyon Education CEO Brian Mueller told analysts on a call Wednesday that the U.S. Department of Education does not consider it to be a nonprofit for the purposes of Title IV funding.
The news was delivered after a question-and-answer session to discuss the company's third-quarter earnings. Mueller, who is also president of the university, said it learned of the department's decision, which he said was its response to Grand Canyon's request for a preacquisition review of the spinoff filed in January 2018, shortly before the call and had "not yet had a full opportunity to review (the) letter and the department's reasoning."
He continued, "we do believe that Grand Canyon University meets all the requirements to be treated as a nonprofit entity for Title IV HEA (Higher Education Act) program purposes, and we would expect that the university will initiate appropriate measures to challenge this decision."
The IRS and the university's accreditor previously approved GCU's conversion from for-profit to nonprofit status, and GCU has been "treated as a nonprofit entity by the state of Arizona, among others." Mueller said those approvals, as well as advice from counsel, encouraged GCU and GCE to go ahead with their move to separate even though the department had not yet replied to the review request.
However, Mueller also said that, according to the department's letter, it approved the transaction and granted GCU a provisional Title IV program participation agreement through June 30, 2022. He said the department did not require a letter of credit or put other restrictions on its approval.
Bob Romantic, a spokesperson for GCU, told Education Dive in an email that the university has no comment beyond what was shared in the earnings call. Education Dive has reached out to the Ed Department for additional information.
Being considered a for-profit entity by the Ed Department opens GCU to heightened scrutiny, including rules on what share of its revenue can come from Title IV funding and that its graduates meet certain loan repayment benchmarks. An earlier bid to become a nonprofit, in 2016, was rejected.
For-profit colleges have in the last decade become the target of increased regulations seeking to prevent institutions that misled students about their post-graduation job prospects from getting Title IV funding. Since then, several for-profit colleges have sought to convert to nonprofit status, a move observers say has given them the chance to explore new models but that critics argue shields them from important consumer protection regulations.
Mueller told analysts that Grand Canyon "did not undergo the transaction for the purpose of avoiding the various regulations," including the 90/10 and gainful employment rules. He said those rules have "limited to no impact at all" on GCU's operations.
Trace Urdan, a managing director with investment bank and consulting firm Tyton Partners, said the department's move was surprising and that it "calls into question" similar conversions by other institutions. "That strategy is now officially in turmoil," he said. "You can no longer count on the expense and the trouble to make this conversion ... to address the issues you are trying to avoid."
Urdan doesn't think GCU was trying to skirt the rules with its conversion and doesn't expect the university would have "a material issue" under them given its sizable on-campus population.
None of GCU's programs failed the gainful employment regulations, GCU's Romantic told Education Dive in an email. He also noted that it "sits at 72% for 90/10 purposes" and that its cohort loan default rate is 5.6%.
Shifts and spinoffs
Grand Canyon isn't the only former for-profit operator to become an education services provider. Zovio, previously known as Bridgepoint Education, is in the process of doing so. That includes separating its predominately online Ashford University as a standalone nonprofit entity or selling it to another institution. It is also converting Ashford from a for-profit college into a nonprofit.
In its requested preacquisition review of Zovio's initial plan to separate Ashford as a nonprofit, the Ed Department said it would require the company to post an irrevocable letter of credit for $103 million — representing about 25% of its 2018 Title IV funding — within 10 days of the transaction.
However, in recent months Zovio's cash position has tightened, raising questions about whether a spinoff would be possible given the department's conditions. The company announced in its third-quarter earnings notice that it plans to cut around 300 jobs, which it says will save $51 million in 2020.
As with GCE, Zovio expects to stay close to Ashford in either outcome as an education technology services provider. And both expect to add additional college and university partners.
Urdan noted that one way in which Grand Canyon is different from other for-profit operators that have made similar transitions is that Mueller leads both the university and the services company. In its review of Zovio's proposal to separate Ashford, its accreditor WASC Senior College and University Commission's (WSCUC) approval came with the condition that its officers and related parties divest their financial and ownership interests in Zovio.
"You can no longer count on the expense and the trouble to make this conversion ... to address the issues you are trying to avoid."
Managing director, Tyton Partners
During Wednesday's analyst call, Mueller dropped more breadcrumbs about GCE's plans to partner with additional institutions. "Most of them have had partners in the past and they have not been successful scaling those programs," he said, adding that GCE has "turned away potential partners in the last six months and may have to walk away from more," suggesting that faculty resistance may be at least in part to blame.
Last quarter Mueller said GCE is looking for three to four colleges to partner with that each want to grow to about 5,000 to 7,000 students in a five-to-seven year period. He said then that GCE expects they will be private colleges in the Northeast or Midwest regions and that it could launch the partnerships as early as the fall of 2020.
For the third quarter, enrollment at GCE's partners — GCU and Orbis Educational Services — rose 10.2% year-over-year to 108,821 students. That includes a 6.2% increase in enrollment at GCU to 104,846 students. GCU enrolled around 20,000 students on its campus in 2018. In April, the 70-year-old university graduated 25,232 students, its largest class yet.
This is a developing story and will be updated.