[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
FOR-PROFIT COLLEGE CONVERSIONS: EXAMINING
WAYS TO IMPROVE ACCOUNTABILITY AND PREVENT FRAUD
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON EDUCATION AND LABOR
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, APRIL 20, 2021
__________
Serial No. 117-7
__________
Printed for the use of the Committee on Education and Labor
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available via: edlabor.house.gov or www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
44-331 PDF WASHINGTON : 2022
COMMITTEE ON EDUCATION AND LABOR
ROBERT C. ``BOBBY'' SCOTT, Virginia, Chairman
RAUL M. GRIJALVA, Arizona VIRGINIA FOXX, North Carolina,
JOE COURTNEY, Connecticut Ranking Member
GREGORIO KILILI CAMACHO SABLAN, JOE WILSON, South Carolina
Northern Mariana Islands GLENN THOMPSON, Pennsylvania
FREDERICA S. WILSON, Florida TIM WALBERG, Michigan
SUZANNE BONAMICI, Oregon GLENN GROTHMAN, Wisconsin
MARK TAKANO, California ELISE M. STEFANIK, New York
ALMA S. ADAMS, North Carolina RICK W. ALLEN, Georgia
MARK De SAULNIER, California JIM BANKS, Indiana
DONALD NORCROSS, New Jersey JAMES COMER, Kentucky
PRAMILA JAYAPAL, Washington RUSS FULCHER, Idaho
JOSEPH D. MORELLE, New York FRED KELLER, Pennsylvania
SUSAN WILD, Pennsylvania GREGORY F. MURPHY, North Carolina
LUCY Mc BATH, Georgia MARIANNETTE MILLER-MEEKS, Iowa
JAHANA HAYES, Connecticut BURGESS OWENS, Utah
ANDY LEVIN, Michigan BOB GOOD, Virginia
ILHAN OMAR, Minnesota LISA C. Mc CLAIN, Michigan
HALEY M. STEVENS, Michigan DIANA HARSHBARGER, Tennessee
TERESA LEGER FERNANDEZ, New Mexico MARY E. MILLER, Illinois
MONDAIRE JONES, New York VICTORIA SPARTZ, Indiana
KATHY E. MANNING, North Carolina SCOTT FITZGERALD, Wisconsin
FRANK J. MRVAN, Indiana MADISON CAWTHORN, North Carolina
JAMAAL BOWMAN, New York, Vice-Chair MICHELLE STEEL, California
MARK POCAN, Wisconsin JULIA LETLOW, Louisiana
JOAQUIN CASTRO, Texas Vacancy
MIKIE SHERRILL, New Jersey
JOHN A. YARMUTH, Kentucky
ADRIANO ESPAILLAT, New York
KWEISI MFUME, Maryland
Veronique Pluviose, Staff Director
Cyrus Artz, Minority Staff Director
------
C O N T E N T S
----------
Page
Hearing held on April 20, 2021................................... 1
Statement of Members:
Scott, Hon. Robert C. ``Bobby'', Chairman, Committee on
Education and Labor........................................ 1
Prepared statement of.................................... 7
Foxx, Hon. Virginia, Ranking Member, Committee on Education
and Labor.................................................. 8
Prepared statement of.................................... 9
Statement of Witnesses:
Cao, Yan, JD, Fellow, The Century Foundation................. 12
Prepared statement of.................................... 14
Emrey-Arras, Melissa, Director, Education, Workforce and
Income
Security Issues, U.S. Government Accountability Office..... 50
Prepared statement of.................................... 52
Galle, Brian , JD, LL.M., Professor of Law, Georgetown
University Law Center...................................... 28
Prepared statement of.................................... 31
Gillen, Andrew, Ph.D.., Senior Policy Analyst, Texas Public
Policy
Foundation................................................. 44
Prepared statement of.................................... 46
Additional Submissions:
Ranking Member Foxx:
Report, ``Cheap for Whom?'', AEI Public Policy Research,
October 2011........................................... 124
Charts, ``Executive Compensation at Public and Private
Colleges''............................................. 134
Table, ``Spending by Function''.......................... 135
Graphics, ``The College Copmpletion Landscape''.......... 137
Chart, ``Federal Student Loan Three-Year Default Rate''.. 141
Article, ``Higher Education Has a Tax Problem and It's
Hurting Local Communities'', Time, April 7, 2021....... 142
Adams, Hon. Alma S., a Representative in Congress from the
State of North Carolina:
Letter submitted by NAICU dated April 16, 2021........... 149
Questions submitted for the record by:
Chairman Scott........................................... 151
Ranking Member Foxx...................................... 158
Fitzgerald, Hon. Scott, a Representative in Congress from
the State of Wisconsin................................. 155
Harshbarger, Hon. Diana, a Representative in Congress
from the State of Tennessee............................ 155
Responses to questions submitted for the record by:
Ms. Cao.................................................. 152
Mr. Gillen............................................... 156
Ms. Emrey-Arras.......................................... 159
FOR-PROFIT COLLEGE CONVERSIONS:
EXAMINING WAYS TO IMPROVE
ACCOUNTABILITY AND PREVENT FRAUD
----------
Tuesday, April 20, 2021
House of Representatives,
Committee on Education and Labor,
Washington, DC.
The committee met, pursuant to notice, at 10:19 a.m., via
Zoom, Hon. Robert C. ``Bobby'' Scott (Chairman) presiding.
Present: Representatives Scott, Grijalva, Courtney, Sablan,
Wilson, Bonamici, Takano, Adams, DeSaulnier, Norcross, Wild,
McBath, Hayes, Levin, Stevens, Jones, Manning, Mrvan, Bowman,
Pocan, Castro, Sherrill, Yarmuth, Foxx, Walberg, Grothman,
Stefanik, Allen, Fulcher, Keller, Murphy, Miller-Meeks, Good,
Harshbarger, Spartz, Cawthorn, Steel, and Letlow.
Staff present: Katie Berger, Professional Staff; Jessica
Bowen, Professional Staff; Ilana Brunner, General Counsel;
Christian Haines, General Counsel; Sheila Havenner, Director of
Information Technology; Eli Hovland, Policy Associate; Ariel
Jona, Policy Associate; Andre Lindsay, Policy Associate; Katie
McClelland, Professional Staff; Max Moore, Staff Assistant;
Mariah Mowbray, Clerk/Special Assistant to the Staff Director;
Kayla Pennebecker, Staff Assistant; Veronique Pluviose, Staff
Director; Benjamin Sinoff, Director of Education Oversight;
Theresa Thompson, Professional Staff; Banyon Vassar, Deputy
Director of Information Technology; Claire Viall, Professional
Staff; Joshua Weisz, Minority Communications Director; Cyrus
Artz, Minority Staff Director; Kelsey Avino, Minority
Professional Staff Member; Courtney Butcher, Minority Director
of Member Services and Coalitions; Amy Raaf Jones, Minority
Director of Education and Human Resources Policy; Dean Johnson,
Minority Legislative Assistant; Hannah Matesic, Minority
Director of Operations; Audra McGeorge, Minority Communications
Director; Carlton Norwood, Minority Press Secretary; Alex
Ricci, Minority Professional Staff Member; Chance Russell,
Minority Legislative Assistant; and Mandy Schaumburg, Minority
Chief Counsel and Deputy Director of Education Policy.
Chairman Scott. OK we're ready to begin and I'll count down
from five and then we'll start. Five, four, three, two, one.
Good morning. The Committee on Education and Labor will now
come to order. Our first order of business this morning is to
conduct committee business to approve new committee
assignments.
At this time, I'd like to welcome the Gentlelady from
Louisiana's 5th Congressional District to the committee, Ms.
Letlow. And we'd just like to begin by extending our
condolences to you and your family on the passing of your
husband, but I'm pleased that you've now joined the committee
and we look forward to working with you on the committee.
Does the Ranking Member wish to be recognized?
Mrs. Foxx. I do Mr. Chairman.
Chairman Scott. Gentlelady is recognized.
Mrs. Foxx. Thank you, Mr. Chairman. I join all my
colleagues in welcoming Representative Julia Letlow to the
halls of Congress and to the Education and Labor Committee
Republican team. It's been a difficult journey for Julia and
her family as they continue to mourn the loss of Luke who
tragically passed just days before he was to be sworn into
office.
But he's certainly looking down with pride today. As the
first female Republican elected in Louisiana, Dr. Letlow joins
a strong freshman class of Republican women and mothers. And I
have no doubt she'll serve her constituents and her State with
distinction.
Dr. Letlow is a dedicated public servant who's worked in
higher education for years, and we're overjoyed to welcome her
with open arms to this committee. I'm eager to work alongside
her in the days to come on behalf of America's students,
workers, and job creators.
I ask unanimous consent that Dr. Letlow of Louisiana be
appointed to the Subcommittees on Higher Education and
Workforce Investment and Early Childhood Elementary and
Secondary Education.
Chairman Scott. Is there any objection? Without objection
so ordered. And if there's no further business before the
committee the business portion of today's proceeding is
concluded. And now we'll turn to today's committee hearing.
Once again, the, The Committee on Education and Labor will
come to order. Welcome everyone. The committee is meeting today
to hear testimony on For-Profit College Conversations:
Examining Ways to Improve Accountability and Prevent Fraud.
This is an entirely remote hearing. All microphones will be
kept muted as a general rule to avoid unnecessary background
noise. Members and witnesses will be responsible for unmuting
themselves when they are recognized to speak, or when they seek
recognition.
I have also asked Members to identify themselves before
they speak. Members should keep their cameras on while in the
proceeding. The Members shall be considered present in the
proceeding when they are on camera and are visible on camera.
They shall be considered as not present when they are not
visible on camera.
The only exception to this is if they're experiencing
technical difficulty and inform committee staff of such
difficulty. If any member experiences technical difficulties
during the hearing, you should stay connected on the platform,
make sure you are muted, and use your phone immediately to
contact the committee's IT direct whose number was provided in
advance.
Should the Chair experience any technical difficulty or
need to step away from the floor, he'll designate another
majority member to assume the gavel in my absence. This is an
entirely remote hearing and as such the committee hearing room
is technically closed.
Members who choose to sit with their individual devices in
the hearing room must wear headphones to avoid feedback,
echoes, and distortion for more than one person on the software
platform sitting in the same room.
Members are also expected to adhere to social distancing
and safe healthcare guidelines, including the use of wearing
masks, hand sanitizers, wiping down their areas both before and
after their presence in the hearing room.
In order to ensure that the committee's five-minute rule is
adhered to, staff will be keeping track of time using the
committee's field timer. The field timer will appear on its own
thumbnail picture and will be named 001_timer. This time
provides no one-minute remaining warning.
The field timer will signal an audio when time is up.
Members and witnesses are asked to wrap up promptly when their
time has expired. A roll call is not necessary to establish a
quorum in official proceedings conducted remotely or with
remote participation.
The committee has made it a practice whenever there is an
official proceeding with remote participation, for the Clerk to
call the roll to help make clear who is present at the start of
the proceeding. Members should state their name before
announcing that they are present.
This helps the Clerk and also helps us watching the
platform and the livestream who may be experiencing a few
seconds delay. At this time, I ask the Clerk to call the roll.
The Clerk. Chairman Scott?
Chairman Scott. Chairman Scott is present.
The Clerk. Mr. Grijalva?
Mr. Grijalva. Raul Grijalva present.
The Clerk. Mr. Courtney?
Mr. Courtney. Courtney present.
The Clerk. Mr. Sablan?
[No response.]
The Clerk. Ms. Wilson?
Ms. Wilson. Ms. Wilson is present.
The Clerk. Ms. Bonamici?
Ms. Bonamici. Suzanne Bonamici is present.
The Clerk. Mr. Takano?
Mr. Takano. Takano is present.
The Clerk. Ms. Adams?
Ms. Adams. Alma Adams is present.
The Clerk. Mr. DeSaulnier?
[No response.]
The Clerk. Mr. Norcross?
[No response.]
The Clerk. Ms. Jayapal?
[No response.]
The Clerk. Mr. Morelle?
[No response.]
The Clerk. Ms. Wild?
Ms. Wild. Wild is present.
The Clerk. Mrs. McBath?
[No response.]
The Clerk. Mrs. Hayes?
[No response.]
The Clerk. Mr. Levin?
[No response.]
The Clerk. Ms. Omar?
[No response.]
The Clerk. Ms. Stevens?
Ms. Stevens. Stevens present.
The Clerk. Ms. Leger Fernandez?
[No response.]
The Clerk. Mr. Jones?
Mr. Jones. Jones is present.
The Clerk. Ms. Manning?
Ms. Manning. Manning is present.
The Clerk. Mr. Mrvan?
Mr. Mrvan. Mrvan is present.
The Clerk. Mr. Bowman?
[No response.]
The Clerk. Mrs. McBath, I believe you're unmuted.
Mrs. McBath. McBath is present, thank you.
The Clerk. Mr. Pocan?
Mr. Pocan. Mr. Pocan is here.
The Clerk. Mr. Castro?
[No response.]
The Clerk. Ms. Sherrill?
Ms. Sherrill. Sherrill's present.
The Clerk. Mr. Yarmuth?
Mr. Yarmuth. Yarmuth present.
The Clerk. Mr. Espaillat?
[No response.]
The Clerk. Mr. Mfume?
[No response.]
The Clerk. Ranking Member Foxx? Mrs. Foxx you're unmuted,
or you're muted, I'm sorry.
Mrs. Foxx. Foxx is present.
The Clerk. Thank you. Mr. Wilson?
[No response.]
The Clerk. Mr. Thompson?
[No response.]
The Clerk. Mr. Walberg?
Mr. Walberg. Walberg is present.
The Clerk. Mr. Grothman?
Mr. Grothman. I'm present.
The Clerk. Ms. Stefanik?
[No response.]
The Clerk. Mr. Allen?
Mr. Allen. Allen present.
The Clerk. Mr. Banks?
[No response.]
The Clerk. Mr. Comer?
[No response.]
The Clerk. Mr. Fulcher?
Mr. Fulcher. Fulcher's present.
The Clerk. Mr. Keller?
[No response.]
The Clerk. Mr. Murphy?
[No response.]
The Clerk. Mrs. Miller-Meeks?
[No response.]
The Clerk. Mr. Owens?
[No response.]
The Clerk. Mr. Good?
Mr. Good. Good present.
The Clerk. Mrs. McClain?
[No response.]
The Clerk. Mrs. Harshbarger?
Mrs. Harshbarger. Harshbarger is present.
The Clerk. Mrs. Miller?
[No response.]
The Clerk. Mrs. Spartz?
[No response.]
The Clerk. Mr. Fitzgerald?
[No response.]
The Clerk. Mr. Cawthorn?
Mr. Cawthorn. Cawthorn is present.
The Clerk. Mrs. Steel?
Mrs. Steel. Steel present.
The Clerk. Ms. Letlow?
Ms. Letlow. Letlow is present.
The Clerk. Thank you. Chairman Scott that concludes the
roll call.
Chairman Scott. Thank you, did anyone appear after the roll
call that wants to be recorded as present?
Mrs. Hayes. Mrs. Hayes Mr. Chair, I'm present.
Chairman Scott. Thank you. Anyone else? Thank you. Pursuant
to Committee Rule 8(c) opening statements are limited to the
Chair and Ranking Member. This allows us to hear from our
witnesses sooner and provides all Members with adequate time to
ask questions.
I recognize myself now for the purpose of making an opening
statement.
Today we're gathered to discuss the need for strong
oversight to protect students and taxpayers from those for-
profit colleges that transition to non-profit institutions to
trick students and regulators. Over the last 4 years this
committee has had extensive discussions over the role of for-
profit colleges and our higher education system.
This work continues to be guided by the clear evidence that
some unscrupulous for-profit colleges frequently charge their
students too much in tuition on delivering too little in
education and opportunity.
After a series of high-profile cases in which for-profit
colleges cheated students and taxpayers out of billions of
dollars, regulators and potential students have become more
aware of the deceptive practices employed by bad actors in the
for-profit sector.
But rather than changing their behavior to comply with the
accountability standards and repair the industry's reputation,
some schools are opting to simply evade the for-profit
accountability standards and are re-branding themselves as non-
profits.
Three months ago, the Government Accountability Office, or
the GAO, released a report identifying 59 for-profit colleges
that converted to non-profit status over the past decade. A
report found several examples of for-profit schools that sought
to become non-profit in name only.
In roughly a third of the conversions identified by the
GAO, the for-profit colleges owners or officials, held
leadership roles in the non-profit buyer. As a result of poor
oversight by both the Department of Education and the Internal
Revenue Service, these conversions sometimes took place without
the necessary oversight to prevent self-dealing.
In two instances the IRS approved the sale among for-profit
insiders without essential information such as the planned
purchase price, or the appraisal of the college's value. This
has left the IRS staff with no way of knowing whether the price
was improperly inflated.
Emergence of covert for-profits has real consequences for
students and taxpayers. For example, an independent analysis
found that in 2011 Florida-based Keiser University attained
non-profit status after the owner sold it to its own non-profit
entity, Everglades College, in what appeared to be a
significantly inflated price.
To finance the sale the owner lent more than 300 million
dollars to Everglades College in addition to claiming a massive
tax-deductible donation. The resulting conversion allowed the
owner to profit from the sale of his business and keep millions
of dollars in tax breaks.
During the same period, the university settled multiple
investigations with law enforcement agencies for violating
State and Federal consumer protection laws. We cannot allow
these kinds of things to continue.
As GAO found both the Department of Education and the IRS
must do more to prevent fraud by properly vetting for profit to
non-profit conversions. They must ensure that after the
conversion the for-profit institutions uphold their obligations
to put students first and not profits.
The College Affordability Act, which the committee
considered last year offers a clear foundation for legislative
solutions to achieve these goals. A comprehensive bill included
several provisions that established requirements an institution
must meet to convert to non-profit status.
These requirements include demonstrating that the asset it
acquires from the former owners are not acquired at a value
greater than its actual worth; and demonstrating that no member
of its governing board receives any substantial economic
benefit.
Today we are grateful to be joined by expert witnesses who
will help us discuss these solutions and other proposals that
will ensure that for-profit college executives cannot take
advantage of converting to non-profit institutions.
This is a critical moment to take action as students
recover from the pandemic and start or continue their pursuit
of post-secondary education. We must ensure that students and
taxpayers are protected from deceptive schemes that undermine
the integrity of our higher education system.
At this point, I am pleased to recognize the distinguished
Ranking Member for the purpose of making her opening statement.
Dr. Foxx.
[The statement of Chairman Scott follows:]
Statement of Hon. Robert C. ``Bobby'' Scott, Chairman,
Committee on Education and Labor
Today, we are gathered to discuss the need for stronger oversight
to protect students and taxpayers from those for-profit colleges that
transition to non-profit institutions to trick students and regulators.
Over the last four years, this Committee has had extensive
discussions over the role of for-profit colleges in our higher
education system. This work continues to be guided by the clear
evidence that some unscrupulous for-profit colleges frequently charge
their students too much in tuition while delivering too little in
education and opportunity.
After a series of high-profile cases in which for-profit colleges
cheated students and taxpayers out of billions of dollars, regulators
and potential students have become more aware of the deceptive
practices employed by bad actors in the for-profit sector.
But rather than changing their behavior to comply with
accountability standards and repair the industry's reputation, some
schools are opting to simply evade for-profit accountability standards
by rebranding themselves as non-profits.
Three months ago, the Government Accountability Office, or GAO,
released a report identifying 59 for-profit colleges that converted to
non-profit status over the past decade.
The report found several examples of for-profit schools that sought
to become non-profit in name only. In roughly a third of conversions
identified by GAO, the for-profit colleges? owners or officials held
leadership roles in the non-profit buyer.
As a result of poor oversight by both the Department of Education
and the Internal Revenue Service, these conversions sometimes took
place without the necessary oversight to prevent self-dealing.
In two instances, the IRS approved a sale among for-profit insiders
without essential information, such as the planned purchase price or
appraisal of the college's value. This left IRS staff with no way of
knowing whether the price was improperly inflated.
The emergence of `covert for-profits' has real consequences for
students and taxpayers.
For example, an independent analysis found that, in 2011, Florida-
based Keiser University attained non-profit status after the owner sold
it to his own non-profit entity, Everglades College, at what appeared
to be a significantly inflated price. To finance this sale, the owner
lent more than $300 million dollars to Everglades College in addition
to claiming a massive tax-deductible donation. The resulting conversion
allowed the owner to profit from the sale of his business and keep
millions of dollars in tax breaks.
During this same period, the university settled multiple
investigations with law enforcement agencies for violating State and
Federal consumer protection laws.
We cannot allow these kinds of things to continue. As GAO found,
both the Department of Education 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-- profits.
The College Affordability Act, which the Committee considered last
year, offers a clear foundation for legislative solutions to achieve
these goals. The comprehensive bill included several provisions that
established requirements an institution must meet to convert to
nonprofit status. These requirements include demonstrating that the
assets it acquires from former owners are not acquired at a value
greater than its actual worth; and demonstrating that no member of its
governing board receives any substantial economic benefit.
Today, we are grateful to be joined by expert witnesses who will
help us discuss these solutions and other proposals that will ensure
that for-profit college executives cannot take advantage of converting
to non-profit institutions.
This is a critical moment to take action as students recover from
the pandemic and start or continue their pursuit of post-secondary
education. We must ensure students and taxpayers are protected from
deceptive schemes that undermine the integrity of our higher education
system.
At this point, I am pleased to recognize the distinguished Ranking
Member for the purpose of making her opening statement.
______
Mrs. Foxx. Thank you, Mr. Chairman. Our education system is
in crisis. High school graduation rates are declining, the
Nation's skill gap is growing, COVID-19 pandemic policies have
led to years-worth of learning loss, Federal student debt tops
1.5 trillion dollars, college costs continue to skyrocket,
campus free speech is under attack and China is infiltrating
U.S. Campuses.
All these issues are deserving of Congress's time and
attention. So, you could imagine my surprise when I learned we
were ignoring these important pressing topics to examine
colleges transitioning from for-profit to non-profit status,
which impacts roughly 0.1 percent of for-profit colleges per
year, or approximately three schools a year.
Three schools a year. In the past decade, only 35 such
colleges transitioned to non-profit status. Whoopie. So, the
millions of students wondering why Congress hasn't acted on
campus free speech zones, Chinese Communist party censorship,
and exorbitantly high tuition rates, I say look no further than
this hearing today, and see where the democrat's priorities
are.
Democrats want to discuss the possibility of a narrow type
of fraud in higher education. Specifically, the potential for
some stakeholders to receive improper benefits when non-profit
organization acquire for-profit colleges.
Committee Republicans are against all fraud and abuse, no
matter the tax status of the institution. That bears repeating.
Committee Republicans are against all fraud and abuse no matter
the tax status of the institution. Sadly, Democrats are more
interested in chasing phantoms than they are working with
republicans on issues that are actually important to students.
Republicans will continue our work to improve the odds that
students succeed after attending post-secondary education. But
let's return to why democrats called this hearing. I'd like to
make several important points about the Government
Accountability Office (GAO) report Democrats will highlight,
which investigated when for-profit colleges became non-profit
entities.
First, transitioning from for-profit to non-profit is
completely legal. Second, if any of my Democrat colleagues read
past the report's title, they would know two of the three GAO
recommendations are outside the committee's jurisdiction.
Additionally, the GAO report flagged that one-third of the 35
proprietary institutions that became non-profits had insider
involvement.
While that term may sound nefarious, it's a far cry from
real harm inflicted upon students which is where we should be
focusing our efforts and attention. So, the obverse of one-
third of the institutions having insider involvement means two-
thirds did not.
Today's hearing is just another example of Democrats trying
to manufacture headlines to advance their partisan objectives,
even if those policies limit student choice and freedom. As I
repeatedly said oversight is a critical function of Congress,
and we must protect use of taxpayer funds, a responsibility I
take very seriously.
But this hearing fails to address substantively the ways
higher education fails students. President Obama presided over
several of these transitions, but Democrats remained
suspiciously quiet. Now we're coming off 4 years of President
Trump whose Department of Education strengthened the
bureaucratic review of this non-profit conversion process.
We're fabricating a crisis to rally support for a socialist
overhaul of our education system. It wasn't a pressing problem
8 years ago, and with the GAO determining there's been no
fraud, it is a pressing problem now. The Federal Government
should not be in the business of picking winners and losers,
yet Democrats are actively working to eliminate proprietary
institutions.
For a party that loves to talk about diversity in higher
education, it is ironic they are attacking institutions that
educate hundreds of thousands of minority students, veterans,
older Americans, and single parents. The Higher Education Act
is in desperate need of reform, so all colleges--not just those
the democrats demonize, are held accountable and better serve
students.
When it comes to post-secondary education the question we
should be asking is whether students are getting the education
they need to be successful. Unfortunately, even before the
pandemic disrupted schools, jobs, and families, polling
suggested that 53 percent of recent college graduates are
unemployed or underemployed. At the same time millions of jobs
sit unfilled due to the skills gap, demanding more students
obtain a skills-based education, which many proprietary
institutions offer.
Those are the issues facing students in higher education,
not whether the president of a for-profit university kept his
job while the university's tax status changed. While the
purpose of today's hearing is questionable, I look forward to
hearing from our witnesses and engaging in positive
conversation.
[The statement of Ranking Member Foxx follows:]
Statement of Hon. Virginia Foxx, Ranking Member,
Committee on Education and Labor
Our education system is in crisis.
High school graduation rates are declining, the Nation's skills gap
is growing, COVID-19 pandemic polices have led to years' worth of
learning loss, Federal student debt tops 1.5 trillion dollars, college
costs continue to skyrocket, campus free speech is under attack, and
China is infiltrating U.S. campuses.
All these issues are deserving of Congress' time and attention, so
you can imagine my surprise when I learned we were ignoring these
important, pressing topics to examine colleges transitioning from for-
profit to non-profit status, which impacts roughly zero-point one
percent of for-profit colleges per year, or approximately three schools
a year. In the past decade only 35 such colleges transitioned to non-
profit status.
So, to the millions of students wondering why Congress hasn't acted
on campus free speech zones, Chinese Communist party censorship, and
exorbitantly high tuition rates--I say look no further than this
hearing today.
Democrats want to discuss the possibility of a narrow type of fraud
in higher education, specifically the potential for some stakeholders
to receive improper benefits when non-profit organizations acquire for-
profit colleges. Committee Republicans are against all fraud and abuse
no matter the tax status of the institution. Sadly, Democrats are more
interested in chasing phantoms than they are working with Republicans
on issues that are actually important to students. Republicans will
continue our work to improve the odds that students succeed after
attending postsecondary education.
But let's return to why Democrats called this hearing. I'd like to
make several important points about the Government Accountability
Office (GAO) report Democrats will highlight, which investigated when
for-profit colleges became non-profit entities.
First, transitioning from for-profit to non-profit is completely
legal. Second, if any of my Democrat colleagues read past the report's
title, they would know two of the three GAO recommendations are outside
this Committee's jurisdiction.
Additionally, the GAO report flagged that one-third of the 35
proprietary institutions that became non-profits had insider
involvement. While that term may sound nefarious, it is a far cry from
real harm inflicted upon students, which is where we should be focusing
our efforts and attention.
Today's hearing is just another example of Democrats trying to
manufacture headlines to advance their partisan objectives, even if
those policies limit student choice and freedom.
As I have repeatedly said, oversight is a critical function of
Congress, and we must protect the use of taxpayer funds--a
responsibility I take very seriously. But this hearing fails to address
substantively the ways higher education has failed students. President
Obama presided over several of these transitions, but Democrats
remained suspiciously quiet. Now that we are coming off four years of
President Trump, whose Department of Education strengthened the
bureaucratic review of this non-profit conversion process, we are
fabricating a crisis to rally support for a socialist overhaul of our
education system. It wasn't a pressing problem eight years ago and with
the GAO determining there's been no fraud, it isn't a pressing problem
now.
The Federal Government should not be in the business of picking
winners and losers. Yet Democrats are actively working to eliminate
proprietary institutions. For a party that loves to talk about
diversity in higher education, it is ironic they are attacking
institutions that educate hundreds of thousands of minority students,
veterans, older Americans, and single parents.
The Higher Education Act is in desperate need of reform, so all
colleges ? not just those Democrats demonize ? are held accountable and
better serve students.
When it comes to postsecondary education, the question we should be
asking is whether students are getting the education they need to be
successful.
Unfortunately, even before the pandemic disrupted schools, jobs,
and families, polling suggested 53 percent of recent college graduates
are unemployed or underemployed. At the same time, millions of jobs sit
unfilled due to the skills-gap, demanding more students obtain a
skills-based education which many proprietary institutions offer.
Those are the issues facing students and higher education, not
whether the president of a for-profit university kept his job when the
university's tax status changed.
While the purpose of today's hearing is questionable, I look
forward to hearing from our witnesses and engaging in productive
conversation. I yield back.
______
And Mr. Chairman before I yield back, I'd like to yield to
Dr. Letlow for a very brief opening statement.
Chairman Scott. The Gentlelady from Louisiana is
recognized.
Ms. Letlow. Good morning, Chairman Scott, Ranking Member
Foxx, Members of the committee and witnesses. I'm honored to
join this distinguished committee, and to have the opportunity
to represent the teachers, professors, principals,
administrators, and students of the 5th District of Louisiana.
As a former higher education administrator, this committee
holds a special place in my heart. I am pleased to be able to
be on a committee that will help shape education and workforce
policies for years to come. I firmly believe education is the
key to success. We must do all we can to ensure our students
have the opportunity to learn, grow, and find career
opportunities that best suit their talents.
We must pave the way for our children to be able to choose
any route of education they wish to pursue, whether trade
schools, community colleges, or universities. Utilizing public-
private partnerships for workforce education is paramount.
Additionally, there are a unique set of challenges that our
rural schools face, including access to broadband and teacher
recruitment and retention.
I look forward to working together to tackle these pressing
issues. I'm excited to begin working with you all to better
educational programs, and workforce opportunities for my
constituents and individuals across the country. Thank you and
I yield back my time.
Ms. Foxx. Thank you for your indulgence, Mr. Chairman. I
yield back.
Chairman Scott. No problem. Thank you. Without objection
all other Members who wish to insert a written statement into
the record may do so by submitting them to the Committee Clerk
electronically, in Microsoft Word format by 5 p.m. on May 4,
2021.
I will now introduce the witnesses. Yan Cao is a Senior
Fellow at the Century Foundation where she works on higher
education policy with a focus on expanding opportunity,
reducing inequality, and ensuring fair outcomes for students.
She previously worked as a Skadden Fellow at the Project on
Predatory Student Lending at the Legal Services Center at
Harvard Law School, representing students defrauded by for-
profit colleges, and as an attorney at South Brooklyn Legal
Services, representing low-income families with predatory
student loan debt. She received her bachelor's degree from
Stanford, and a J.D. from New York University.
Brian Galle is a Professor of Education at Georgetown
University. His research and teaching interests include
taxation, non-profit organizations, behavioral law and
economics, federalism, and public finance economics. He
practiced for 3 years as an attorney in the criminal appeals
and tax enforcement policy section of the tax division at the
U.S. Department of Justice.
He's a graduate of Harvard College, received a J.D. from
Columbia and an LL.M. from Georgetown.
Andrew Gillen is the Senior Policy Analyst for the Texas
Public Policy Foundation and an adjunct professor in economics
at John Hopkins University. He's spent over a decade of non-
profit and philanthropic organizations researching ways to
improve post-secondary education.
Previous places of employment include the Charles Koch
Foundation, the American Institutes for Research, American
Council of Trustees and Alumni, the Center for College
Affordability and Productivity. He also served on the U.S.
Department of Education's Advisory Committee on Student
Financial Assistance.
He has a Ph.D. in economics from Florida State and a BA in
business from Ohio University.
Melissa Emrey-Arras is the Director of GAO's Education
Workforce and Income Security Issues team. She oversees the
GAO's higher education reports, has led studies examining
issues ranging from for-profit college conversions to student
loans.
Before joining GAO in 2001 she worked in the private sector
consulting company and conducted program evaluations for State
and local governments. She has received a master's degree of
public policy from Harvard's Kennedy School where she was
awarded the Manuel C. Carballo prize for graduate research, and
she also has a bachelor's degree from Swarthmore College.
I appreciate all of the witnesses participating today and
look forward to your testimony. Let me remind the witnesses
that we've read your written statements and they will appear in
full in the hearing record.
Pursuant to Committee Rule 8(d) and the committee practice,
each of you is asked to limit your oral presentation to a five-
minute summary of your written statement. Before you begin your
testimony, please remember to unmute your microphone. During
your testimony staff will be keeping track of time and the
timer will sound when time is up.
Please be attentive to the time and wrap up when your time
is over and then re-mute your microphone. If you experience
technical difficulties during your testimony, or later in the
hearing, you should stay connected, make sure that you're
muted, and use your telephone to immediately call the
committee's IT director whose number was provided to you in
advance.
We will let the witnesses make their presentations before
we move to member's questions. When answering a question please
remember to unmute your microphone. Witnesses are aware of
their responsibility to provide accurate information to the
committee, and therefore we will proceed now with their
testimony.
We will first recognize Ms. Cao. Ms. Cao?
STATEMENT OF YAN CAO, JD, FELLOW, THE CENTURY FOUNDATION
Ms. Cao. Thank you, Chairman Scott, for the opportunity to
testify today, and to Mr. Vassar for assistance with slides
today. Before we dive into the complex conversations the GAO
has described in its report, I want to start with the basics.
How do you close the skills gap, expand opportunity, and
provide a fighting chance to students who have suffered from
chronic underinvestment in their prior education?
Ask any high school principal and she'll tell you, ``Invest
resources in students.'' With the Higher Education Act,
Congress has made an enduring investment in student's higher
education, but not all of those resources reach the students
who need them the most. In the for-profit sector, taxpayer
dollars earmarked for higher education can be extracted by
insiders for personal gain.
To understand why this matters, focus on the gap between
the tuition dollars that students pay in, and the educational
investments that students get out of institutions. Now at
traditional non-profit schools, 100 percent of that difference
must be reinvested toward education.
At for-profit schools, the gap between high tuition and low
educational spending can be extracted by insiders. This
distinction between revenue extracting schools, and revenue
reinvesting schools makes a huge impact on incentives,
behaviors, and student outcomes.
There are two paths for maximizing revenue--high tuition,
and high-pressure recruitment. High tuition translates to more
debt. At Keiser University a conversion described in the GAO
report, every program has a median debt of $30,000.00 or
higher. This is true for less than 5 percent of public college
programs.
High pressure recruitments leads to fraudulent tactics.
Together, revenue extracting schools account for 99.7 percent
of borrower defense claims that that have been identified by an
institution. Once revenue extracting schools max out revenue,
the other side of the equation is minimizing investment in
students.
For every one dollar of student tuition, for-profits
average just 29 cents of student instruction. Some for-profit
conversions are even worse. Grand Canyon University reports to
spending 18 cents on instruction for every student tuition
dollar. The same high-price, low-value formula that produces
big profits for owners leads to drop-outs, loan defaults, and
worthless degrees for students.
In some cases, for-profit conversions produce outcomes that
are even worse for students than those at traditional for-
profit schools. Congress and the Department of Education have
taken steps to protect students from the heightened risks
associated with revenue extracting institutions.
For-profit colleges sometimes describe these sector-
specific regulations as an unfair additional burden, but this
is disingenuous. Let's take an example. When for profit owners
have withdrawn investments to the point of near collapse,
regulations then limit further withdrawals of capital.
This rule singles out for-profits for a simple reason, non-
profit owners can never withdraw capital. As the example
illustrates, for-profit regulations are not added burden on
revenue extracting institutions. Instead, they are guardrails
for institutions that lack the non-profit sector's absolutely
barrier against enrichment.
Private institutions have two choices--either give up the
revenue extraction power and reinvest 100 percent of resources
in student education, or retain the revenue extraction power,
but abide by student protection guardrails.
For-profit conversations want to have their cake and eat it
too. They want revenue extraction power without the guardrails.
This combination presents the greatest risk to students and
taxpayers. Students intuitively believe that non-profits will
be safer than for-profit schools, but the revenue extracting
for-profit conversions are in fact even more dangerous than
for-profit schools that are subject to appropriate regulations
like 90/10 or the Gainful Employment Rule.
For-profit conversions are not just wolves in sheep's
clothing, they are wolves that have sharpened their teeth and
honed their claws while the shepherd is off minding other
wolves. The good news is that the Department of Education
already has the tools that it needs.
To protect students the department must engage in its own
review to root out schools with hidden revenue extraction
plans. As we continue this discussion, I ask that you keep
three students in mind.
First, a student at school suddenly collapses because
owners have withdrawn too much equity for the school to remain
viable. Second, a student who owes more loan debt that she can
ever repay because her school took her tuition, but grossly
underinvested in her education.
Third, a veteran who has learned not to trust the predatory
school that recruits on base but does not know that the global
campus with the public name is operated by the same company.
These are the victims of for-profit conversions, and I urge you
to ensure that they receive the full benefit of the investment
and protections secured by the Higher Education Act. Thank you,
and I look forward to answering your questions.
[The prepared statement of Ms. Yan Cao follows:]
Prepared Statement of Yan Cao
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Scott. Thank you. Now we'll hear from Mr. Galle.
STATEMENT OF BRIAN GALLE, JD, LL.M., PROFESSOR OF LAW,
GEORGETOWN UNIVERSITY LAW CENTER
Mr. Galle. Thank you, Chairman Scott, and Members of the
committee. My name is Brian Galle. I'm a Professor of Law at
Georgetown. I'm here to discuss the efforts of a number of
colleges which are operated for-profit, to get recognition from
the education department as non-profit.
I'm going to call these efforts conversion transactions.
I'll tell you why I think these conversions are so concerning
for students and taxpayers. The IRS and ED both have
jurisdiction over schools that claim to be non-profits, so I'll
explain why I think IRS hasn't been able to address my
concerns, and I'll tell you what I think ED should do.
First a little background. As you know, the Higher
Education Act and ED's regulations treats schools differently
if the school is operated for profit. The 90/10 Rule and
gainful employment rules both regulate for-profits more
carefully than other schools.
So, what's the difference between a for-profit and non-
profit school? The answer is incentives. For-profits want to
make money for their owners, non-profits can't. Legally being a
non-profit means that an organization can't share its profits
with anyone.
A for-profit school is like a car salesman who works on
commission. When you walk in, they want to sell you all the
expensive options you don't really need, like the fake wood
trim. There's evidence this difference in incentive matters.
Researchers find that for-profit colleges are actually a worse
deal than dropping out of school for some students.
On average students at for-profits earn 11 percent less
than similar students at non-profits or public schools, and
they have more debt besides. Insured genuine non-profit status
offers key protections for students. A traditional non-profit
behaves differently than a school that's incentive to maximize
revenue.
Now what's troubling about conversion transactions? You
have a school saying it's a non-profit, but it isn't acting
like one. We'd all agree a cancer charity that spends 80
percent of its revenues on fund-raising is not really a charity
at all.
Some of these converted for-profit colleges are like that.
Their non-profit status is a disguise. Here's your typical
transaction. Mr. Investor sells the school that Charity Z which
he also founded, in exchange for an 800-million-dollar IOU.
Every year Charity Z has to pay him 50 million dollars or so in
interest.
It's important to realize what that massive payment back to
Mr. Investor means for the new non-profit school. Before the
conversion School A has 50 million in net revenues, all of
which it was paying to Mr. Investor. After the conversion,
Charity Z still needs 50 million dollars in net revenue just to
pay to Mr. Investor.
In short, Charity Z is a prisoner of its debts. To be able
to pay it has to be continuing to operate the school exactly
the way it was run before, to maximize net revenue. It's like
if you wanted to retire but you have a big mortgage, so you're
stuck working until you can pay it off.
The new non-profit's rule is in the exact same position.
It's calling itself a non-profit, but it still has to act like
a for-profit, maximizing its income, not student outcomes. By
the way I didn't make up that transaction, it's the actual deal
that Grand Canyon University made.
Other schools have also added huge debts to their for-
profit partners too, 134 million, 321 million, 636 million.
Look at, so what should education do about this? Title IV
allows ED to decide when a school is a non-profit for purposes
of the statute. As you probably know, that's also a
determination IRS makes, based on similar language for purposes
of figuring out whether an organization can be tax exempt.
As the GAO report tells us, the IRS hasn't closely examined
a lot of these conversions, some of them it hasn't even known
about. IRS hasn't actually flunked any of these organizations,
but that doesn't mean everything is fine. Instead, it should
signal that education needs to conduct its own independent
review.
Right now, education and IRS have what I call a centerfield
problem. I was a youth baseball coach. Every time there's a
flyball to centerfield, two of my kids would both yell, ``I got
it,'' and then the ball would fall right to the ground.
Education should be fielding the problem of for-profit
conversions. IRS doesn't have the resources. Even if that
agency got another billion dollars a year, there's still one
and a half million charities for them to monitor every year.
IRS also doesn't have student protection as its primary
mission. The law it enforces isn't aimed at telling which
charities are really non-profit and which aren't. To be clear
in my view a lot of the conversion transactions I examined fail
ed basic and important tax law requirements.
But figuring out which schools prioritize money over
student outcomes is not IRS's job. So that brings me to my
conclusion. Education is the right agency to monitor for-profit
conversions. Title IV is intended to impose tougher standards
on schools that have a financial incentive to favor revenues
over student outcomes.
Education can and should implement Title IV to make sure
that that is true no matter whether some organizations might
slip past IRS scrutiny. Thank you again for inviting me to
testify. I'm happy to answer any questions you might have. I
hope my comments are helpful to the committee.
[The prepared statement of Mr. Brian Galle follows:]
Prepared Statement of Brian Galle
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Scott. Thank you. Mr. Gillen?
STATEMENT OF ANDREW GILLEN, Ph.D., SENIOR POLICY ANALYST, TEXAS
PUBLIC POLICY FOUNDATION
Mr. Gillen. Thank you. And thank you to all the Members of
the committee for inviting us to talk on this important topic.
I first want to comment the Government Accountability Office
for putting together a very useful and insightful report. I
think it's done a great job on a sound basis for their
discussion.
Having said that I do want to raise a couple issues that I
think can benefit from further conversation and investigation.
So, the first concerns the GAO's recommendation that the IRS
add more questions about recent for-profit college conversions
to non-profit to their annual filings.
This may be a good idea, it may not, but I think it really
needs to be conducted and subjected to a cost benefit test. And
I'm skeptical that it would pass such a cost benefit test,
because the benefits are very small. The numbers of conversions
per year are very, very small. The number of conversions that
involve insiders are even smaller, so we're talking about one
or two colleges per year where this would even be relevant.
And moreover, this information is already collected by the
Department of Education, so this would be just a duplicative
kind of data collection by the IRS. But the cost wouldn't
necessarily be as negligible, and that's because the IRS would
be required to collect this information from all sorts of
universities, and maybe other charities as well.
And see you could potentially be asking 300,000 others non-
profits about a question that only applies to one, maybe two of
them. And so, this committee has a lot of experience with the
FAFSA form, how over the years it accumulated into you know
just a massive amount of questions.
And it took us a decade to figure out how to simplify it.
And so, I'd like us to keep that in mind when we are
encouraging the IRS to add other requirements that are only
relevant to a very, very small fraction of schools.
A second point that I'd like to bring up is it would be
very useful for us to distinguish between the different types
of insider benefit and proper insider benefit. The lumping them
all together is not necessarily appropriate because some of
them can be assessed at the time of transaction, and some of
them need to be assessed at an ongoing basis and making that
distinction would be very valuable.
Another issue I'd like to flag is the issue of regulatory
arbitrage, and so there's a number of different policies and
regulations that apply to for-profits, or that don't apply to
non-profits that can raise kind of a wedge between the value of
a school as a for-profit and the value of the school as a non-
profit.
And so, we just need to be careful when we're kind of
assessing whether a transaction is fair. The value can
actually--the value of the school can actually change quite a
bit, whether it's for-profit or non-profit. Some states are
kind of increasing regulations of for-profits.
There are a set of regulations at the Federal level that
only apply to for-profits as well. And so, this regulatory
arbitrage could kind of skew some of the assessments if we
aren't careful.
And then, the last point I want to make is really that the
accountability system that we have for higher education, if we
were able to improve that accountability system, that would
really do a lot to take much of the improper benefit problem
that we could see with some of these entire conversions off the
table.
So, with a better--and there's really two reasons for this.
So, the first is that if we have a better accountability
system, it's easier to value an account. Right now, it's very
difficult to value a college, and so it's relatively easier for
a nefarious insider to arrange for an inflated estimate.
That would be much harder if the accountability system we
had made it much more objective way to value the account. The
second way that a better accountability system would improve
higher education, and kind of limit any insider involvement
problems is that it would really allow for us to escape what's
going forward in Bowen's laws.
And we don't have time to go all the way into those laws,
but one of the implications of Bowen's laws is that essentially
higher education is going to see increase in expenditure over
time. And if you're in that environment, insiders at non-
profits even, can find it very easy to arrange for improper
benefit.
And so, the for-profit versus non-profit conversion, that's
not even the real issue. The real issue is non-profits
themselves can find a very easy way to arrange for an improper
benefit when we are stuck in this Bowen's Law world where we've
got increasing spending over time.
Thank you for allowing me to testify and I'll pass on the
time.
[The prepared statement of Mr. Andrew Gillen follows:]
Prepared Statement of Andrew Gillen
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Scott. Thank you. Ms. Emrey-Arras.
STATEMENT OF MELISSA EMREY-ARRAS, DIRECTOR,
EDUCATION, WORKFORCE AND INCOME SECURITY ISSUES,
U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Ms. Emrey-Arras. Good morning, Chairman Scott, Republican
Leader Foxx, and Members of the committee. I am pleased to be
here today to discuss GAO's report on for-profit college
conversions. I will focus my remarks on three issues. One, what
is known about insider involvement in college conversions.
Two, IRS's oversight of college conversions. And three,
the Department of Education's oversight of college
conversions. Beginning with a look at insider involvement, we
found that about a third of the 59 for-profit college
conversions we identified involved insiders.
Collectively, colleges with insider conversions received
nearly 1.8 billion in Federal student aid funds in the 2018-19
award year. Insiders may be the for-profit colleges former
owners, or their family Members, executives, or board Members
who continue to play a leadership role in the new non-profit
college.
While leadership continuity can benefit a college, insider
involvement poses a risk that insiders may improperly benefit
financially. For example, insiders could influence the non-
profit to pay more for the for-profit college than it is worth,
or insiders could steer college contracts toward businesses the
insiders' control through an inflated price.
Doing so would be prohibited under the Internal Revenue
Code and the Higher Education Act, which do not allow a non-
profit's earnings to improperly benefit private individuals. In
addition, in examining the financial health of colleges
converting, we found that colleges with insider conversions
generally had stronger financial performance before their
conversions.
For example, all of the colleges with insider conversions
had a passing education financial responsibility score the year
before their sale, however, almost all of them had a failing
financial score the year of their sale.
Turning now to how the IRS oversees college conversions we
found that IRS guidance directs staff to closely scrutinize
whether insider transactions exceed fair market value and
improperly benefit insiders. If an application contains
insufficient information to make that assessment, guidance says
the staff may need to request additional information.
However, we found that for two of the planned or final
conversions involving insiders, IRS approved the application
without certain information. For example, IRS approved college
conversions without information on the college's planned
purchase price, or the appraisal report estimating the
college's value.
Without such information IRS staff could not assess whether
the price was inflated to improperly benefit insiders which
would be grounds to deny the application. Accordingly, we
recommended the IRS assess and improve its application review
process.
Now turning to education. We found that education had
strengthened its reviews of for-profit college conversion
applications. As of August 2020, education had approved 35 of
the 59 colleges for non-profit status and denied two. The
remaining applications were under review or no longer required
action because the colleges had closed.
However, in terms of monitoring colleges after approving
them as non-profits, we found that education does not monitor
the newly converted colleges to assess ongoing risk of improper
benefit. In two of the three cases we reviewed in-depth, we
found college financial statements disclosed transactions with
insiders that could indicate the risk of improper benefit.
Consequently, we recommended that education develop
procedures to review financial statements to monitor newly
converted colleges. In conclusion, for-profit college
conversions involving insiders can pose risks to students and
taxpayers.
If a non-profit college's revenues are diverted to
improperly benefit insiders, funds available to support the
college's educational mission can be reduce, potentially
harming the college and its students, and violating Federal
requirements.
We believe that GAO's recommendations will help IRS and
education address these risks. This completes my statement, and
I will be pleased to answer any questions you may have.
[The prepared statement of Ms. Melissa Emrey-Arras
follows:]
Prepared Statement of Melissa Emrey-Arras
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Scott. Thank you. Thank you. Now we'll have
questions from Members.
Under Committee Rule 9(a), questions will be by the five-
minute rule. I'll be recognizing committee Members in seniority
order. Again, to ensure the five-minute rule is adhered to,
staff will be keeping time in the timer 001--timer. I will now
recognize Mr. Grijalva first for questions. Mr. Grijalva.
Mr. Grijalva. Thank you very much Mr. Chairman and thank
the witnesses and thank you for the hearing. Ms. Cao, the
Century Foundation and specific to an issue here in Arizona,
but I think indicative and representative of issues across this
country.
The Foundation has recently written about the University of
Arizona's plans to purchase Ashford University following that
college, Ashford's failed non-profit conversion attempt. Can
you walk us through your key concerns about that deal?
Ms. Cao. Sure. I think this is a great example and thanks
for the opportunity to discuss Ashford's conversion into a non-
profit entity called University of Arizona global campus. So,
this is a particular dangerous form of a conversion where you
have a for profit entity that has been under investigation and
is currently approaching a trial from the California Attorney
General's Office for misleading and predatory tactics used to
recruit students.
Ashford University is also a school that spends very little
of student's tuition dollars that come from Federal loans,
student loan debt and military benefits on its student's
instruction. It's something about 18 cents per dollar received
in student tuition dollars. This is a conversion that would
help Ashford's shareholders, but not necessarily the students
who would be brought into the new University of Arizona global
campus.
And part of the reason here is that the conversion keeps in
place Zovio's shareholder's ability to extract profits from
student's tuition dollars. In particular, we have conducted an
analysis that shows over 70 percent of revenues coming in from
student's tuition dollars will be going to Zovio shareholders
after the conversion.
So, every dollar of debt that a student takes on, 70 cents
going to Zovio shareholders. And that would occur through a
contract that is a long-term service contract that keeps in
place the aspect of Zovio's practices that is the most
predatory, and that is the way that it advertises, markets,
recruits, and takes out student loans for students.
And I think that is a huge concern. I also want to look at
the other side of the equation in this conversion which is the
University of Arizona itself.
Mr. Grijalva. Yes, I was going to ask about that.
Ms. Cao. Yes, so going from a situation where there is one
revenue extracting entity, Zovio, to a situation where you now
have two revenue extracting entities--Zovio on the one hand and
University of Arizona on the other hand which yes, needs more
resources as a public university.
But I argue the way for the University of Arizona to
balance its budget is not off the backs of low-income students.
With these for-profit conversions that involve public
institutions, I fear that we are veering toward a system of
separate and unequal units or affiliates within public
institutions.
And not only is the University of Arizona and the
University of Arizona global campus separate and unequal, but
you have a situation where the low-income, minority, and non-
family supported students at the University of Global Canvas
are in fact subsidizing their much more privileged peers, who
are already receiving a greater benefit from the education at
University of Arizona, which because it is subject to genuine
non-profit oversight, it's returning far greater value to
students already.
Mr. Grijalva. Yes, which begs the question about the light
touch review that the Department of Education gives on these
conversion partnerships between a public entity non-profit,
Grand College at the University of Arizona, and a former for-
profit college, Ashford.
Any safeguards that you see and that light touch review
process so that we don't end up with both the student burden
that you said very rightfully, issues of equity and higher
education, and the taxpayer projects that are required for a
tax supported institution like the University of Arizona.
Ms. Cao. Yes, so the GAO mentioned the Department of
Education has started to improve its review of this conversion,
and arguably it needs to continue the purpose. You know a tax-
exempt status according to IRS is just one part of a three-
pronged review the Department of Education will probably need
to do.
And at the heart of that review is checking for the revenue
extraction power that prior owners and other entities might
retain.
Mr. Grijalva. Thank you very much. Thank you Mr. Chairman I
yield back.
Chairman Scott. Thank you. Next is the Ranking Member of
the Full committee Dr. Foxx.
Mrs. Foxx. Thank you, Mr. Chairman. And thank our
witnesses. Ms. Emrey-Arras. To make sure it is clear could you
please answer the following questions regarding the GAO report.
Did your report find that Department of Education engaged in
any illegal activity?
Ms. Emrey-Arras. No.
Ms. Foxx. Did your report make any determination or
judgments about a particular school's conversion?
Ms. Emrey-Arras. We did not do an audit of any particular
school.
Ms. Foxx. What was the Department of Education feedback to
GAO regarding the project, and how did you address those
comments in the report?
Ms. Emrey-Arras. The Department of Education agreed with
our recommendation to it and said they will be implementing a
recommendation.
Ms. Foxx. Is there anything illegal, generally speaking,
about any for-profit company converting to a non-profit
organization? Is there anything again, general speaking, about
a for-profit college transitioning into a non-profit entity?
Ms. Emrey-Arras. No. For-profits are allowed legally to
convert into non-profits.
Ms. Foxx. Right. Both in the education field and elsewhere?
Ms. Emrey-Arras. Correct.
Ms. Foxx. Thank you. Doctor Gillen one of the greatest
benefits that college education provides students is better job
prospects. Most students go to college to get a job.
Unfortunately, many institutions are inadequately preparing
students for post-college success.
Is this problem concentrated in any one sector, or is this
an issue that is found in all sectors of post-secondary
education?
Mr. Gillen. So, our research has shown that this is a
problem across higher education. Most of higher education of
course performs very well, but there are many, many programs
out there where student outcomes are not very good. And so,
your question is you know is this concentrated among a
particular sector and it's not.
So, we have a report coming out soon that looks at the debt
to earnings ratio at all programs in the country. And there's
about 4,500 of these where students graduate with more debt
that they have expected earnings.
Ms. Foxx. And those are in public and not for profit
schools?
Mr. Gillen. Yes, so that's across the whole country, so
about 4,500. And only between 4 and 500 of those are for-
profits. So about 1 in 10 of problematic programs are located
at for-profits, the other 90 percent are located at either
public or private non-profits.
Ms. Foxx. Right. So, we're looking at 10 percent today when
we ought to be looking at the 90 percent, really skewed. What
other student outcomes should Congress consider attaching
accountability metrics to, and should these accountability
metrics evaluate entire institutions, or calculate outcomes on
a program-by-program basis?
Now I know you've already mentioned some, but would you
respond to those?
Mr. Gillen. Yes absolutely. So, I think higher education
can really benefit from explaining accountability metrics in
two particular areas. So, the first is learning outcomes. So,
for particular fields if we can figure out how to measure how
much students have learned that would be a great accountability
metric, as that is the entire purpose of these programs is to
attach with their students.
That admittedly is difficult, but when it can be done, you
should definitely try to. But the second one is earnings
outcomes. And so, as you mentioned most students go to college
to get a better job. And so, we can look at labor market
outcomes to assess how well programs are preparing their
students for that.
And so, I would really love to see learning and earning
outcomes. And you mentioned what is to be applied at the
institution level as for the entire university or at the
program level and applying it at the program level is
definitely the way to go and the reason for that is because you
can have a badly performing program at a relatively good
institution that escapes all accountability.
And you can also have the Congress. You can have a really
good program at a relatively poorly performing university that
if you do university level accountability, you're going to be
punishing that good program. And so, if you can do program
accountability you avoid both of those problems and you
actually reward the programs that should be rewarded, and you
punish the ones that should be punished.
Ms. Foxx. Well, I tell you I had that experience when I was
the president of the community college. I eliminated a program
that had been poorly performing for 10 years and put in a
program that was desperately needed by the community. So, I've
been through that, and I understand how that works.
Ms. Emrey-Arras does the department monitor either non-
profits or publics for improper benefits--because you talk
about improper benefits for those that have been converted, but
I don't know anybody. I mean we're paying football coaches
millions of dollars. We're paying presidents and provosts
millions of dollars. Who is to say what is a benefit? And is
anything happening with non-profits or publics?
Ms. Emrey-Arras. All right. So, for our work we did not
look at executive compensation at schools. We did focus
specifically on conversions of for-profit schools and did find
concerns about the lack of monitoring of those schools. Those
schools are subject to additional monitoring. After being
approved they're in a provisional status.
Ms. Foxx. We understand that. So, Mr. Chairman I'd like to
put into the record information on abysmal graduation rates for
not-for-profit schools and public schools, specifically Thomas
University, graduation rate of 14 percent after 8 years, a
private institution. Harris Stowe State University 16 percent
graduation rate after 8 years.
University of New Mexico Taos campus 13 percent graduation
rates. There are some other items to put into the record report
from AEI and higher education has a tax problem and it's
hurting local communities. We'll be putting these into the
record. Thank you Mr. Chairman I yield back.
Chairman Scott. Next is Representative Wilson from Florida.
Ms. Wilson: Thank you Chairman Scott and Ranking Member
Foxx for holding this very important meeting. And I'd like to
thank all of the witnesses for participating in the meeting
today. Increasingly we have seen predatory for-profit
institutions mislead the public and abuse their trust by
illegitimately converting to tax exempt non-profit status.
These dubious conversions often seriously harm students and
taxpayers and enrich the for-profit former owner and other
private individuals. Congress must do more to hold bad actors
to account and ensure that students can make informed decisions
about their post-secondary careers.
Under existing law non-profit institutions are prohibited
from improperly steering profits toward private figures.
Unfortunately, in the case for profit converts this happens all
too often. The Government Accountability Office found that
conversions that involved the former owner or other executives
accounted for 75 percent of all Federal aid that went to for-
profit converts.
Clearly, too many bad actors are slipping through the
cracks and this must stop. With that in mind I have a few
questions for our witnesses. Ms. Cao what is the harm of
students mistakenly believing that a school they're considering
attending is mission driven, when actually it is still
operating on a quasi-for-profit model?
And based on your experience surveying various for-profit
conversions, would you say that the improper and harmful way
they did this committee has been examining today is limited to
only a few bad actors?
Ms. Cao. Thanks for the question. In terms of harm to
students I think we need to start with all the risks for harm
that already exist and are concentrated within for-profit
schools. We're talking about high loan rates, high default
rates, low earnings and a debt to earnings ratio that result in
a life-long debt sentence for students.
Start with those results. Now strip away protections like
the gainful employment tests, and the 90/10 rule, which help to
provide some guardrails and protections for students, and some
requirement for for-profits to demonstrate their value. Take
those protections away. Now add in the opportunity for
predatory institutions to mislead the students by touting their
non-profit status.
These are institutions that are leveraging the charitable
status of non-profits that are reinvesting their resources in
order to benefit shareholders that will be extracting those
resources. And that's the equation you have with these
conversions. All of the risk of for-profit schools, none of the
protections, and the added risk of being able to mislead
students.
Ms. Wilson. Thank you. Director Emrey-Arras, the GAO issued
two recommendations to the IRS. What, if any steps, has the IRS
taken to implement those recommendations?
Ms. Emrey-Arras. Thank you. The IRS said that it is
reviewing its process for approving applications for tax exempt
status to decide whether or not any changes need to be made,
and it is considering our second recommendation on gathering
information in a way that it can be used to help with its
monitoring.
Ms. Wilson. Can you explain to us why it is important for
the IRS to collect information and to help identify tax exempt
colleges with a for-profit history? Why is that so important?
Ms. Emrey-Arras. Well, the IRS itself has identified these
organizations as at-risk for improper benefit. So, it has just
said that organizations with the for-profit history are at an
elevated risk of improper benefit. Given that it has created a
compliance strategy to do monitoring of these schools, and the
compliance strategy actually originated in concern over for-
profit school conversions and then broadened beyond higher
education.
However, ironically, they couldn't like even identify the
schools in our study when they tried to do this compliance
effort because they lacked the information in a searchable
form. And to respond to an earlier witness statement about cost
benefit issues I would say that the IRS has said that they're
often collecting this information in narrative fields already.
So, the information is already being gathered. It's just
not being gathered in a searchable way. So, there wouldn't be
much of a cost in terms of changing the field from a narrative
field to a data field that could be searched which would then
give the IRS the information it needs to actually be strategic
in its monitoring and monitor this risk that it's very
concerned about.
Ms. Wilson. Thank you. I yield back Mr. Chair.
Chairman Scott. Thank you. Mr. Walberg.
Mr. Walberg. Thank you, Mr. Chairman, and thank you to the
panel for being with us today. Dr. Gillen I think we all agree
that the top priority for higher education institutions should
be serving students, and that those failing to do so should be
held accountable.
I guess what I'd ask is what can the department do to
improve accountability for all institutions and what can they
not do because it is not within their authority?
Mr. Gillen. That's a great question. So, the department
right now has a lot of capability of providing more information
in transparency. So, there are a number of data collection
tools that are already used, and so the department can add
information to IPEDS, the integrated post-secondary education
data system.
It could add College Navigator which is a Department of
Education website. It could add it to its College Scorecard
which is another Department of Education website. And so simply
providing more information to students, parents, policymakers,
that is kind of the foundation of making wise decisions for
everybody.
In terms of kind of actually enhancing accountability with
carrots and sticks, at that point you would need you know this
committee and Congress more broadly to pass legislation to
authorize new accountability metrics. And as I mentioned
earlier it would be great to see accountability metrics on
learning outcomes, on earning outcomes and labor market
outcomes more broadly.
Mr. Walberg. I guess expanding on that what should Congress
consider when we next reauthorize the HEA to protect students
and taxpayers from fraud or abuse?
Mr. Gillen. So, I think we should start with the date we
already have which is the new college scorecard data, and so
right now it's producing data on college earnings and debt by
student. So, we can create, and we should definitely start with
creating some accountability metrics that essentially look at
earnings relative to debt.
So, are students able to afford to be able to repay their
loans? Are programs consistently graduating students that are
going to struggle with their student loans? And so,
accountability metrics devoted to that would be great. I would
also love to see different kinds of types of accountability.
So, you know the first level is this program achieving this
level? And we can do that with the existing data. We can say
OK, if you have you know twice as much debt as your students
earn, we're going to cut you off on the total financial
burdens. But I'd also like to see growth measures as well.
So, if you're taking students that are you know otherwise
going to be really struggling in the labor market, and even if
they aren't achieving at the top levels of the labor market
after attending your program, if you've improved their kind of
career trajectory by enough, that would be another great
accountability metric.
So, I would love to see a plethora of these accountability
metrics. You know we shouldn't just think in terms of this is
you know the one and only accountability metric. There should
be you know a dozen of these, and institutions can meet, you
know, 8 to 10 of them and to maintain their eligibility for
financial aid program.
Mr. Walberg. A real education in the process. OK.
Appreciate that. Ms. Emrey-Arras what factors does the IRS
examine when determining whether any entity may convert from a
for-profit status to non-profit status?
Ms. Emrey-Arras. It looks at a variety of materials that
the tax-exempt organization submits, however we have concerns
that it doesn't always look at the materials it needs to make
that call. As noted earlier, we found instances in which the
IRS approved applications for tax exempt status involving
college conversions without the purchase price of the college,
without an independent appraisal of the college.
So, there was no known information about the value of the
college. Instead, there was just a promise. The applicant
promised that in the future you know the market, the price
would be a fair one. It would be a market value price, and they
would get an independent appraisal in the future. And with that
promise the IRS approved the applications.
Mr. Walberg. Can you point to a statute or code, or
regulatory language that guides this process?
Ms. Emrey-Arras. I can point to IRS guidance that says that
relationships between tax exempt applicants and for-profit
entities may be vulnerable to abuse and need scrutiny to ensure
fair market value, and organization earnings cannot improperly
benefit private individuals over its charitable mission.
And that's what happens. If a college is sold above its
fair market value, you have money improperly benefiting
individuals in that case. And that is against the Internal
Revenue Code.
Mr. Walberg. Thank you. My time has expired. I yield back.
Chairman Scott. Thank you. The Gentlelady from Oregon Ms.
Bonamici.
Ms. Bonamici. Thank you to the Chair and Ranking Member and
thank you to all of our witnesses for being here today. First,
I want to object to the suggestion that was made by Mr. Gillen
to use income of an institution's graduates to measure
accountability.
If someone is doing meaningful work at social services and
earning low wages for example, that does not mean that they did
get a good education, it likely means that their work is
undervalued. As someone with a consumer protection background,
I am very glad we're having this hearing today.
For-profit colleges have preying on students, families,
often by making unsubstantiated claims of the value of
educational opportunities they offer, and too many students
have found out themselves, with tens of thousands of dollars in
debt and no closer to the career they were working toward.
A few years ago, I had the opportunity and the honor of
meeting with several military veterans in northwest Oregon who
told me about how they were defrauded by for-profit colleges
that had misrepresented accreditation, tuition, and services.
They were targeted, these veterans, because they were eligible
for GI benefits, which is a common practice among profit
institutions.
And now unfortunately, as more students are coming to
understand the predatory practices of so many for-profit
institutions now as we've heard, some of these same schools are
converting to non-profits, but too often is continuing to
employ the same harmful practices that take advantage of
students.
So, Ms. Cao it is clear that the Federal Government has not
been conducting the necessary oversight to prevent these
conversions, in addition to the problems from the conversions,
and in addition to increased Federal oversight and
accountability measures, what role can and should states and
accreditors play in scrutinizing these conversions?
Ms. Cao. Thank you for that question. And I'm glad that you
pointed out the impact that these conversions can have on
veterans in particular. I want to recognize the progress that
this committee and Congress has made in improving the
protections in the 90/10 rule.
To Mr. Gillen's point about measuring both earnings and
learning of students, we actually have that in the form of the
Gainful Employment Protection, which measures earnings as a
ratio against debt, and we have that in the form of the 90/10
protections, which measure learning by leaving it to the market
to determine whether the learning that happens within an
institution is worth the cost.
And so, we actually have both learnings and earnings
measured within the for-profit sector, but what we have seen
time and again is that instead of doing the hard work to
demonstrate learning and earning of value in their
institutions, the most predatory schools choose to cheat by
seeking disingenuous conversions to non-profit status.
And yes, there are states that are stepping up to address
the problem. Both Maryland and the State of California have
enacted legislation that authorizes the states to engage in a
closer look of insider benefits in the same way that the GAO
has pointed out that the IRS and the Department of Education
should do.
I am worried about the problem that Professor Galle talked
about earlier where you have too many kids running toward the
ball and it falling through the cracks in the process.
Ms. Bonamici. Thank you. In fact, I'm going to ask
Professor Galle. I've worked for years on collaboration between
the IRS and the Department of Education on the issue of
verifying income for income-driven repayment plans. And when
you used your analogy, I'm not going to be able to get that out
of my head now.
I'm thinking about you know trying to coordinate between
the two agencies. Should it be that the coordination between
the IRS and the Department of Education on for-profit
conversions and if so what kind, or is that kind of
coordination really achievable based on how you understand the
agencies to operate?
Mr. Galle. Thank you for that question. I think that some
more coordination would certainly be helpful. And there's some
small legal obstacle to a full coordination in the sense the
IRS is very limited in what kinds of taxpayer information it's
allowed to share.
And although it is allowed to share taxpayer information
for purposes of verifying income driven repayment eligibility,
it's not clear that the IRS can share information about whether
it's audited a for-profit institution with the Department of
Education.
But I think more generally the real story here is that ED
needs to take the lead and in protecting student interests.
It's not the IRS's primary mission. It's not their primary
interest, and the statutory authority that IRS is working under
doesn't really lend itself to identifying schools that are
protecting their own bottom line over the student interest.
Ms. Bonamici. I appreciate that. We are policymakers
though, and if the policy doesn't exist that's what we want to
hear about. That's one of the purposes of having a hearing like
this, so I thank you Mr. Chairman, and I yield back the balance
of my time.
Chairman Scott. Thank you. gentleman from Wisconsin Mr.
Grothman.
Mr. Grothman. Thank you. I have a few comments here not
directly at anybody in particular because I know there are
obviously people out there who are hostile to the idea of a
conversion, but of course I know some people or some
conversions I think were done for the best of reasons. And I
think the idea of making this in essence against the law is a
huge, a huge mistake.
Do you all agree that there are for-profits converting to
non-profits and that it's working out well and there aren't
abuses?
Ms. Cao. I just want to point out I don't think that any of
the witnesses are saying that a for-profit college converting
to a non-profit status is against the law. Having pointed out
the risks associated with for-profits that engage in revenue
extraction, I would love for for-profit colleges to convert to
true non-profit status with a commitment to reinvesting 100
percent of revenue in educational and charitable purposes.
The concern is not for-profits converting to non-profit
status, it is for-profits claiming that they are non-profits
without doing the hard work of actually reinvesting resources
in students.
Mr. Grothman. I guess the question is because I don't know
if it's a minority or majority, but there's certainly many,
probably a majority when they convert for the best of reasons
OK. You may convert for succession reasons OK. You like your
college. Your children or whatever are not going to continue
down the path, so you switch to make it a non-profit.
You may have a situation in which you have a nursing
degree, and we have a real shortage of nurses in this country,
and in order to establish a coalition with local medical
facilities, you're required to go a non-profit, so for the
benefit of your nursing students you go a non-profit.
You can do fundraising, obviously if you become a 501(c)(3)
you can fundraise just like public universities can. And I
guess I want to get you folks on the record that these are all
three good reasons to convert, and you do not want to prevent
these conversions with some legislative bill.
Can you see the reasons all these three reasons why they
are good reasons why you want to convert?
Ms. Cao. Those are excellent reasons for conversion, and if
any for-profit school pursues conversion for those reasons, and
prohibits insiders from extracting benefit for private gain,
then I absolutely support those, and I'll turn to the rest of
the witnesses.
Mr. Grothman. OK. Could everybody else be on record as
saying that there are good conversions, these are good reasons
to convert and there are ways in which we keep capped light
successful currently for-profit colleges going?
Mr. Galle. I would describe those scenarios Congressman as
hypotheticals. I didn't see any of the--
Mr. Grothman. They are not hypotheticals, why do you
believe--I could think of an example where they do this right
now. Why do you feel it's a hypothetical?
Mr. Galle. Well, based on my reading of the GAO report in
which the vast majority of for example, the government
subsidized money going to converted organizations, is going to
organizations where the former owner is still keeping the
supposedly converted organization a prisoner of their
obligations to the original owner.
There's no way for these organizations to operate in the
way that other non-profits genuinely operate. And if you wanted
to really transition and the organization to operate the way
that non-profits do, you would free it financially to maximize
student outcomes instead of student revenues, and that's just
not what this contract said.
Mr. Grothman. OK. Any other comments?
Mr. Gillen. Yes. So, all those kind of reasons to convert
are completely valid. There's tons of conversions out there
that I don't think anybody would object to. The other thing I'd
like to point out is that all the concerns that have been
raised here about improper benefit, that's already forbidden by
both the IRS and the Department of Education.
And so, this whole issue is whether the Department of
Education and the IRS procedures are adequately detecting any
sort of hypothetical improper benefit. But improper benefit has
not been shown in any of the approved cases, and the Department
of Education has denied some of these conversions. So, I feel
like some of the comments have been taking place assuming that
there's this huge problem, when it's more of a hypothetical
problem at this point, or a yet to be proven.
Mr. Grothman. I agree. I think there's just some people who
are instinctually hateful of an educational institution that
isn't part of the government, and as the result they risk
throwing out some very good former for-profits. Now if I have
any time left, I guess Representative Foxx wants to ask a
question.
Ms. Foxx. Thank you, Mr. Grothman. I would point out that
OK. Never mind, I believe Mr. Grothman's time is up.
Chairman Scott. The Gentleman's time has expired. The
Gentleman from the North Mariana Islands Mr. Sablan.
Mr. Sablan. Yes, thank you very much Mr. Chairman, and
thank you to our witnesses. I apologize I'm jumping between two
committees, two committee hearings. So, I am going to just go
out and ask a question for Ms. Cao. Ms. Cao please.
Ms. Cao your organization wrote about two conversion
transactions--The Non-profit Center for Excellence in Higher
Education's purchase of four for-profit colleges owned by Carl
Barney and the non-profit Everglades College's purchase of the
for-profit Keiser University, which involved the college's
former owner donating part of the college price to the non-
profit purchaser, enabling them to take hundreds of millions in
tax deductions.
GAO also mentioned the phenomenon of former owners donating
part of their college sale price back to the college. How do
you interpret these potential charitable donations from the
goodness of their heart? Are they truly charitable? Are they
truly from the goodness of their heart?
Ms. Cao. Thank you for your question. I want to take a good
close look at some of these charitable donations when for-
profit schools convert to non-profit status because the schools
that you identified come with some real concerns.
CEHE, the Center for Excellence in Higher Education, the
individuals for the insiders who benefited the most from those
conversions were recently found personally liable for operating
years of systemic fraud against both students and the Title IV
system, drawing down student revenue while misrepresenting to
them the benefits that they would get from it.
Misrepresenting the amount of tuition, the likelihood of
success, and whether or not the programs would ever lead to
gainful employment in their fields of study. That type of
behavior is indicative of the predatory nature of those
institutions, as is the way that those conversions were
structured.
So, I want to take a look at the way that those conversions
were structured because it was a very similar situation in both
the CEHE and Keiser instances. You had a conversion that
allowed the insider to continue extracting resources through
two primary mechanisms--ongoing rent payments, and ongoing loan
payments. So, you have an institution that remains in debt to
its former boss who continues to hold the reins on the
institution by being able to guide decisionmaking through these
two contracts that puts the non-profit at a huge disadvantage.
As for the reported donations, they are donations of
intangible benefits. So, to take one of the examples, the
Keiser University example. The original purchase price was 90
percent intangible assets, which the Department of Education
does not permit institutions to report on their audited
financial statements.
So, you have about 60 million dollars of real tangible
assets, and you have a non-profit promising to pay 600 million
for it. Of course, some of that 600 million gets donated for a
tax credit, but you still have a non-profit being obligated to
pay through an ongoing debt obligation, significantly more than
the value of the real assets that they are obtaining.
Mr. Sablan. So, after they cheated the parties, they have
to just might as well make it three then. That's shortchanged
the American taxpayer from avoiding taxes. Ms. Director Emrey-
Arras.
Ms. Emrey-Arras. Yes.
Mr. Sablan. Director can you tell me about how the value of
the for-profit college was determined in the cases the GAO
reviewed, where the transaction involved insiders? Was it based
mostly on tangible assets like cash, investment, and property?
And how does this compare to some of the conversions you
looked at that didn't involve insiders? Half a minute.
Ms. Emrey-Arras. So, for our case studies we found that
those with insiders purchased mostly intangible assets, so
goodwill, brand name, accreditation--things you can't touch.
It's not money in the bank. It's not property. And in contrast
when we looked at five randomly selected conversions without
insiders, they mostly purchased tangibles, things that you
could touch, cash, investments, property, so there's a real
difference there.
Mr. Sablan. Thank you. I again thank the witnesses today.
Mr. Chairman I yield back.
Chairman Scott. Thank you. The Gentleman from Idaho Mr.
Fulcher.
Mr. Fulcher. Thank you, Mr. Chairman. And I'm intrigued by
this conversation on the valuation and Mr. Gillen you've
touched on this, but I'd like to get a little bit of further
thought on that. How does the HEA assess financial well-being
of these institutions? And talk about that just for a minute,
and do the measurements they use reflect accuracy and
comprehensiveness of these institutions? Mr. Gillen please.
Mr. Gillen. So, the Department of Education has a number of
financial tests that institutions are subject to. The report
itself talks about the financial composite score. There's a few
others, the asset test, and so these are you know existing
tests, financial tests that institutions have to pass.
These are mostly looking at the kind of cash-flow health of
the organization. They aren't really looking at the long-term
sustainability. And so, one of the issues this raises is things
like these intangibles are not included in those because those
don't show up on you know a cash-flow statement.
And so, you can have a lot of situations as the GAO report
pointed out where you're using debt to purchase these
intangibles. On paper that's going to make your financial
evaluation deteriorate because the debt is showing up, is
affecting your cash, but the intangibles don't. And so, there's
a lot of kind of questions about that.
Mr. Fulcher. So, there is kind of a composite score it
sounds like that is partly formulated. So, in that sense do you
feel like that that's a reasonable predictor of whether or not
a college might close for example? The way it's gauged right
now by the AGA?
Mr. Gillen. So, my understanding just based on the number
of colleges who have closed for primarily financial reasons is
that these tests that the Department of Education subjects them
to will catch most of the schools that are just going to run
out of money. And so, it will kind of catch schools that are
essentially already bankrupt.
But it's not very predictive of schools that are going to
become bankrupt. And so, these are tests that will catch, and
are designed to catch kind of the kind of worst financial shape
schools, but there's a bunch of other schools that are
struggling financially. Maybe they're not going to go bankrupt
this year or next year, but their long-term sustainability is
just really in question.
And these tests aren't going to catch that, and they're not
really designed to.
Mr. Fulcher. Thank you, Mr. Gillen. So just one more
follow-up. I think I still have another minute. Let's talk
places you know mainly familiar, if you were on this committee
and you were going to reshape how the current law is in order
to better assess or improve the calculation of the value, what
would you recommend?
Mr. Gillen. The value of--
Mr. Fulcher. Of the institutions, the assessment structure.
Mr. Gillen. So, I would really try to tailor accountability
mechanisms to the specific program at hand. And so, for things
like the student loan programs, where the government is
providing this loan money to students, and so we should really
be tailoring the accountability metrics for that program to
loan outcomes.
So, our students are able to be repay their loans would be
kind of top of mind on that. But that isn't necessarily the
same accountability program we'd want to use for say, Pell
grants. Pell grants are designed to increase social mobility
and equality of opportunity, and so we may not necessarily want
to use those same labor market outcomes to evaluate Pell
grants.
Mr. Fulcher. Got it.
Mr. Gillen. We would want to focus more on graduation rates
for Pell grant recipients. And so really just I would encourage
the committee to think about what would be the most appropriate
accountability metric, or metrics for any given program that
we're looking at.
Mr. Fulcher. Good. Thank you. Mr. Chairman if I have any
remaining time, I will yield that to Dr. Foxx.
Ms. Foxx. Thank you. I want to thank the Gentleman. You
know there are lies, damn lies, and statistics. So, an
interpretation of numbers means something. In the 2017-2018
school year private for-profit colleges spent an average of 27
percent of their finances on instruction.
Compare that to public schools which spent 29 percent of
their money on instruction, private non-profits 31 percent. But
the real kicker is in academic support. Private for-profits
spent 63 percent of their money on academic support for
students, and for public's and private non-profit only lower
than 30 percent went to academic support.
And we know that the for-profit schools are taking in
students that the public's and the not for-profit don't want.
They are the toughest students to teach, and yet they're giving
them the kind of support that they need. So, the interpretation
of numbers is very, very important here, and we will be
submitting this for the record Mr. Chairman.
I think it's very important that we get these things in the
record. Thank you I yield back.
Chairman Scott. Thank you. And before I recognize Mr.
Takano, I'm going to ask for Mr. Sablan to assume the Chair for
several minutes. I have another commitment, so I'll be back in
a few minutes. The Gentleman from California Mr. Takano.
Mr. Takano. Thank you, Mr. Chairman. I would dispute those
statistics. I know in California the public institutions of
higher education actually are required by law to spend at least
half of their revenue on instruction and cannot spend it on
administration.
And furthermore, I think it's quite often the case that
for-profit institutions do not have really admission standards.
And you can reinterpret that to mean that they're taking
students that other institutions don't want, but I would
dispute the idea that they're taking students that have
developmental educational needs and are really delivering on
that.
Ms. Cao can you clarify something for me and the public? Is
it true that borrower defense and the 90/10 rule do not apply
to non-profit institutions? They're only for for-profit
institutions?
Ms. Cao. No. That's borrower defense and the gainful
employment rule apply to all institutions. It is just the case
that 99.7 percent of borrower defense claims that have been
submitted because students feel that they've been defrauded,
reflect behaviors at for-profit and covert for-profit
institutions.
Mr. Takano. What about 90/10? Does 90/10 apply to non-
profit institutions? The studies that apply to non-profit
institutions the 90/10 rule
Ms. Cao. The 90/10 rule applies to for-profit institutions
and sometimes to recent conversions.
Mr. Takano. OK. I'm seeing Ms. Emrey-Arras shaking her
head. 90/10 does not apply to non-profit institutions.
Ms. Emrey-Arras. Correct. With the only exception being the
reference just made previously that for the year after
conversion is approved from a for-profit to a non-profit, they
are still subject for that 1-year period to 90/10. But other
than that, non-profits are not subject to 90/10.
Mr. Takano. But Ms. Cao do we know of non-profit
institutions that receive 90 percent or more of their revenue
from the Federal Government?
Ms. Cao. So, I can think of two conversions within the last
20 years that might present this scenario. So, one is the case
of Wright Career College which back in the 90's when the 85/15
precursor to the 90/10 rule was enacted, they told the IRS
we're going to go ahead and convert to non-profit status
because we want to avoid the accountability of the 85/15 rule.
The other one is a recent example.
The Dream Center Schools told an accreditor that they
wanted to obtain non-profit status for their revenue extracting
schools so that they could avoid the 90/10 rule and avoid
gainful employment programs. And they said avoiding these
regulations will help us operate more efficiently, and of
course that efficiency ran those institutions right into the
ground.
Mr. Takano. Well, thank you. Thank you, Ms. Cao. Mr. Galle
would you give Department of ED the ability to audit non-profit
educational institutions that receive Federal money, or lots of
Federal money? Would that be part of the solution given enough
authority to add to be able to properly oversee non-profits?
Mr. Galle. Thank you, Congressman. I think ED already has
that authority. The statute obliges Ed to decide whether an
organization is a non-profit or public, or proprietary, which
means for-profit school.
And regulations explain how ED does that. You know it looks
at whether IRS has treated the organization as a charity, but
then independently ED regulations say ED has to decide whether
the organization is providing a nexus of benefit to any private
party, which usually means it's giving too much money to its
insiders, or it's a prisoner of its debts, or if it's a risk
contract.
And so, it's already ED's obligation under existing
regulations in my view to make sure that organizations are
really protecting students and not their bottom line.
Mr. Takano. Would you give ED some role in the vetting
process of conversions? In other words, IRS establishes that
they can become a non-profit, would you insert ED into that
process and give them some sort of role in the vetting?
Mr. Galle. So, I think it's appropriate for IRS to decide
which organization face which tax consequences. It's mostly not
IRS's view of their job to decide which organizations are fully
charitable or not. Back in the 90's Congress found that IRS
wasn't really willing to do that job. They weren't willing to
impose the death sentence on organizations, then take away
their charitable status, or refuse it in the first place.
So, IRS only imposes this thing called an intermediate
sanction, which is kind of a penalty tax on people who extract
money from their organization. So, IRS is really just not in
the business of figuring out who has the incentives to protect
students and who doesn't.
And so, I think it makes more sense for Ed to fulfill that
test, because that's their statutory and regulatory mission.
Mr. Takano. And that's how you would change the law.
Mr. Sablan. Thank you.
Mr. Takano. Thank you, Mr. Chair.
Mr. Sablan. Thank you. Now I would like to recognize Mr.
Allen of Georgia please, 5 minutes.
Mr. Allen. Thank you, Mr. Chairman, and obviously this is a
very partisan issue that you know our Democrat friends make
clear that they want to dismount profit education. I think
probably the reason that profit institutions exist is because
of what is being taught at public institutions, and the
American people want a choice.
The fact is that many students, including non-traditional
students and veterans, choose their schools because those
schools fulfill what they are looking for out of college. Dr.
Gillen what are some of the distinguishing features of for-
profits schools as compared to their peers in the non-profit
and public space? And I'm referring to schools like Prager U
and other schools like that teach you know civics and you know
amongst the country and those kinds of things. And do they
offer different programs or more flexibility?
Mr. Gillen. Yes, great question. The for-profit sector
historically has been rather innovative. And so, we've seen a
number of practices that may have been you know, tried to
scatter shot here and there, but they really became standard
practice in the for-profit sector.
So, helping students fill out the FAFSA was kind of an
innovation that really scaled up within the for-profit sector.
Allowing nighttime classes for students who are working full-
time, they didn't quit their job to go to school during the
day, and so offering nighttime and weekend classes was really a
specialty of the for-profit sector.
And it's spread to some other institutions as well. And
really the main advantage of the for-profit sector I think is
this kind of experimental lab of how can we improve kind of the
educational offerings?
Mr. Allen. Right.
Mr. Gillen. And I'll throw online education in there. For-
profits embraced online education very early, and as we just
saw with COVID everybody had begun.
And so, before the for-profits have sort of kind of
experimented with the process a lot more, it wasn't as rough as
a transition for everybody else because we had seen what online
education does and how they do it.
Mr. Allen. And so, this flexibility is critical. Students
assume risk when they take out loans and the Federal Government
taxpayer assumes risk by lending that money, but the
institution, the one arguably benefiting the most from this
arrangement, does not have any direct risk in the Federal
student loan program.
And in your opinion should colleges and universities have
more skin in the game? If so, what are some of the ways we can
incorporate institutions in the Federal student loan program?
Mr. Gillen. Yes, I think skin in the game ideas make a lot
of sense as long as we're restricting ourselves to the current
loan system where the government is the lender. So, if we were
not in the situation where the government was the lender, where
we had private lenders, there would be no reason for skin in
the game because the lenders themselves would be doing their
due diligence on whether this is a wise one to be making.
But both the government and the institutions under the
current system our government is under don't have any desire to
do their due diligence on these loans, and so you can--we do
have a lot of programs that are consistently allowing students
to over borrow.
And so, one solution to that is skin in the game proposal.
And there's a lot of different ways those can be structured,
and so one kind of proposal that was tried in Chile was to hold
universities responsible for the debt of dropouts. Now we need
to be very careful though just replicating that, because one of
the things they found in Chile was that this resulted in lower
quality of their schools because the schools, knowing that they
would be responsible for the debt of dropouts, lowered their
standards so more students would graduate, they would have less
dropouts.
So, we need to be very, very careful in designing the skin
in the game proposal, or a risk sharing proposal, but as long
as we're in kind of the current status where the government's
lending, and they're lending pretty indiscriminately, then some
sort of skin in the game or risk sharing proposal I think
within proprietors.
Mr. Allen. Well, most of the young people that I've talked
to about their student loan debt have admitted to me that they
had no idea of what they were getting into. And they had no
idea how they were going to pay it back. And that's why I had
an amendment on the Higher Education Act to make sure they got
proper financial counseling. I thank you and I yield back.
Mr. Sablan. Thank you very much Mr. Allen. I now recognize
Ms. Adams of North Carolina for 5 minutes.
Ms. Adams. Thank you, Mr. Chair, and I appreciate the
opportunity to participate in this hearing today. Director
Emrey-Arras, do most conversions involving existing non-profit
college with long-standing experience in running a school,
taking over for-profit college. And let me repeat that.
Do most conversions involve an existing non-profit college
with long-standing experience in running a school, taking over
the for-profit college?
Ms. Emrey-Arras. The answer is no. Of the 59 conversions
that we saw there were only five involving an existing non-
profit college.
Ms. Adams. OK. So, what kinds of non-profit organizations
are purchasing these for-profit colleges?
Ms. Emrey-Arras. They can be an array of organizations that
don't necessarily have experience educating students. We found
a scholarship fund, a professional association, a private
foundation, and others. So, you have an assortment of non-
profits and as we've stated these are not existing non-profit
colleges assuming the for-profits.
Ms. Adams. OK. So, they may be newly created non-profits
being used to engineer these conversions?
Ms. Emrey-Arras. Certainly. Of the 59 conversions we found
that nine involved completely new non-profits that had no
activities prior to the purchase of the for-profit school, and
they were more likely to be involved in the insider
conversions. So, the conversions without insiders involved
almost always existing non-profits that had been established
previously, while about half of the insider conversions
involved completely new non-profits that had no prior track
records.
Ms. Adams. OK. So, what does it mean for protecting the
best interests of students then?
Ms. Emrey-Arras. Well, I think there's a difference when
you have an existing non-profit college take over a school
versus a foundation or a scholarship fund take over a school.
So, I think there's a difference in terms of the educational
experience that is brought to bear.
Ms. Adams. Right. Thank you. Professor Galle what does a
traditional non-profit college board look like?
Mr. Galle. Usually a non-profit college board is a group of
experts and community Members who volunteer their time. Many of
them are large supports of the institution. They might be alums
or other donors. They're not typically paid for their time.
They have no financial interest in the ability of the
organization to pay profits to its service provider, or the
former for-profit that it owes a huge IOU to.
That is not true of several of the boards that I examined
after reading the GAO report. For example, there's one board
where the board Members receive about $300.00 an hour for their
time as a board member, which is far outside the norm, and
certainly you can imagine affects their incentives to go along
with the financial interests of the people who they participate
with.
Ms. Adams. OK. So, when an insider is retaining some or all
of the same leadership roles post-conversion, how does it
affect the ability of a college to function as a true non-
profit?
Mr. Galle. I mean it's impossible. First of all, just talk
about legally you have a so-called fiduciary duty, you have a
legal obligation to look out for the interests of an
organization that you're the head of. It's impossible for
someone like Brian Miller, who runs both GCU and it's for-
profit parent to follow the law in both cases, right because
you owe a duty to the non-profit to pay as you know, to get as
good as a price as you can from your contracting partner, but
you also have a duty on behalf of the contracting partner that
you're running to get as much money as you can out of the non-
profit, there's just no way to do both.
Ms. Adams. OK. Mr. Chairman I wish to submit for the record
a letter from the National Association of Independent Colleges
and Universities in support of Federal oversight for non-profit
conversions to ensure integrity in these processes and with
that Mr. Chairman I'll have to yield back.
Mr. Sablan. All right. Without objections it is so ordered.
Mr. Sablan. Now I recognize Mr. Keller of Pennsylvania. Sir
you have 5 minutes.
Mr. Keller. Thank you, Mr. Chairman. I believe we can all
agree that the government should hold all post-secondary
institutions accountable for the benefit of students and
taxpayers alike. At the end of the day higher education is as
diverse because students are diverse, think differently and
learn differently.
Pennsylvania has colleges, universities, technical schools,
vocational programs, and other types of schools, all designed
to get their students ready for the workforce. I hear firsthand
how important a qualified workforce is for Pennsylvania's 12th
congressional District.
No matter what industry we talk about, employers are
struggling to find qualified workers. Regardless of what
industry or type of college we're talk about, it's clear to me
that educational programs should be evaluated based on outcomes
achieved by and for students.
So, my question is that for Dr. Gillen, thank you for your
testimony and for being here today. What can the Department of
Education do to improve accountability for each institution
under its purview, and what does Congress need to do to give
them proper authority in the interest of maximizing
accountability?
Mr. Gillen. That is a great question, and we can spend you
know many, many hearings, specifically on that topic. One of
the big obstacles I think to seem kind of impermanent in higher
education is actually the accreditation system. And so, one of
the problems with the way accreditation which is all
universities are required to have accreditation in order to
participate in the Federal financial programs.
And the accreditation rules typically kind of mandate the
inputs and the processes that universities need to follow. And
so, if you're mandating the inputs on the processes, you're
essentially sort of already you're basically saying you can
bake whatever cake you like, but you have to use this chocolate
cake recipe right.
So, it's no surprise that we end up getting you know a lot
of chocolate cakes. Or maybe we need vanilla cakes. Maybe we
need you know Korean tacos. Like there's a lot of innovation
that should be happening in education right now that we aren't
seeing because the accreditation system is a barrier to that
innovation.
So, I would really like to see what I call escape hatches,
introduced them into accreditation. So, accreditation is really
kind of a one size fits all solution, and so instead of
mandating accreditation for everybody, we can introduce escape
hatches.
So, for more vocational programs we could have a labor
market outcome serve as an alternative to accreditation. So, if
enough of your graduates are graduating and getting you know
really, really well-paying jobs, that can serve as a form of
accreditation for financial aid purposes.
We can also do this with learning outcomes. So, for law
schools you know if 95 percent of your students are passing the
bar exam, you don't really need accreditation. We know you're
doing a good job. And so, introducing these escape hatches
would allow programs and institutions to innovate on the inputs
in the processes, because we're more directly measuring the
outputs and the outcomes.
So, accountability should 100 percent be focused on outputs
and outcomes. Right now, the accreditation system is not
focused on that, and it's really limiting I think, the
innovation that we could see in higher education.
Mr. Keller. Thank you. I was also interested to see that
the chart you included in your written testimony which shows
which fields have been most successful broken down by academic
field, can you speak to the metrics for coming up with the data
reflected in the chart, and if there are any notable trends you
found?
Mr. Gillen. Yes absolutely. So, in the written testimony
there's a chart in there that we look at. I think it's the 27
largest academic fields, and so this is using the 2019 college
score accreditation. And so, what we did was we recreated the
gainful employment regulations.
So, at that point the gainful employment regulations had
been set aside. And so, what we did was we recreated them, but
we applied them to everybody, not just for-profits. And so,
when you do that, you can then classify each program as
passing, probation or fail. Technically the probation was a
public zone in the gainful employment regulations.
The probation is the essence of it. And so, when you do
that, you saw some fields that you know virtually every program
was passing gainful employment, and so fields like mechanical
engineering, vehicle repair and maintenance, I think was above
90 percent of graduates were attending these programs that had
these excellent outcomes.
But then there were a bunch of fields that weren't doing so
well, so social work is now around a third of graduates were
attending programs that would not have passed gainful
employment if it had been applied to them.
And then the field that really stuck out as having the
worst outcomes was actually law. And so, we did a followup
report where we--
Mr. Sablan. I'm sorry, but we need to get on to the next
member. Thank you very much sir for your--
Mr. Keller. Thank you.
Mr. Sablan. Let's stay in Pennsylvania. Ms. Wild you have 5
minutes please.
Ms. Wild. Thank you so much Mr. Chairman. I'd like to
direct my first question to Ms. Cao. I hope I got that correct
and thank you all for being here on this very important
subject. Ms. Cao whenever I am engaging in conversations about
higher education, I want students to be central to the
discussion.
And just by way of background, I want you to know that in
my district, which is the Lehigh Valley, I actually have six
colleges and universities that are non-profits as well as a
couple of for-profit schools, so this is an area of great,
great interest to me.
I believe it's vital that students who are pursuing higher
education are able to do so with the peace of mind that the
college they attend has their best interests in mind and will
invest its resources to provide the highest quality education
and the best outcome. I think we all feel that way about it.
So, what I'd like to do with that as a backdrop, I'd like
to discuss the effects on students when for-profit colleges
convert to non-profit colleges. When that happens is the
college required to improve the quality of its academics or
better support student's learning?
And all as the second part of my question at the same time.
After undergoing a conversion, does the college have to improve
the outcomes of students, like increasing job placement rates
after graduation, or lowering default rates on student loans?
And I'll be quiet now and let you answer. Thank you.
Ms. Cao. Sure, thank you. So, in order to be recognized by
the Department of Education as a non-profit, a college does not
have to improve the quality of the learning within the school
or improve the quality of the outcome that the students
experience.
However, to kind of return to the core distinction between
non-profit and for-profit status, genuine non-profits make that
commitment to reinvest 100 percent of resources in student
learning. And to go to Professor Galle's point about fiduciary
status, genuine non-profits owe a fiduciary responsibility for
the educational mission of their school, and no fiduciary
responsibility to investors or shareholders.
And what that means is that with all of those Title IV
resources, going to support student education, you end up with
better outcomes, and you end up with better investment in
student's education. I want to go back to provide a
clarification on the numbers regarding instructional spending
that Ranking Member Foxx referenced earlier on, because this is
something that I described in my written testimony.
So, when you look at the share of student's tuition
dollars, the share of HEA dollars that is going to instruction,
the numbers are pretty clear about what the difference is
between sectors are. So, to take 4-year schools at a for-profit
school students are getting 26 cents on the dollar.
At a non-profit they're getting on average 79 cents. And at
a public institution they're actually getting more than a
dollar's worth of instructional spending, $1.13. So that's the
best bang for your buck.
And the reason this is different from the numbers that
Ranking Member Foxx was describing, is because she's
incorporating at the denominator all of the revenue which
includes revenue for Hadron collector generators for the
research farm, or the revenue produced by the non-profit
hospital that is attached to the institution.
So, when you're really looking at what students are
getting, and I'm so glad you understood the conversation, it's
a really different deal at for-profit institutions versus non-
profit and public counterparts.
Ms. Wild. Can I just ask you in the time that I have left,
are there particular types of students that are more likely to
attend a college that recently converted to non-profit?
Ms. Cao. Yes. So, the for-profit schools who are engaging
in these conversions are among the most predatory. We know that
the target low-income students, Black and Hispanic students,
working parents and students who don't have family support, but
are rather supporting their families.
And returning to the case of the Ashford conversion to
University of Arizona's global campus, you have the leadership
there expressly saying, ``We are pursuing this conversion in
order to better target low-income students and minority
students.''
Ms. Wild. How does the quality of their academic
instruction while they're in college and their outcomes after
compare for students who attended a recently converted non-
profit college from students that attended a non-profit that
never operated as a for-profit?
Ms. Cao. The problematic conversions behave just like for-
profit schools with the difference of a for-profit schools have
to live by the Gainful Employment and 90/10 rules. So, the
outcomes are going to be significantly worse at converted
schools that are genuine non-profits.
Ms. Wild. Thank you so much. I appreciate it. I yield back.
Mr. Sablan. All right. Thank you very much Ms. Wild. I am
told that Ms. Miller-Meeks is next. Ms. Miller-Meeks? All right
we're going to try Mr. Owens? Mr. Good? Mrs. McClain.
Mr. Good. Bob Good's here.
Mr. Sablan. Oh, Mr. Good. All right sir welcome, you have 5
minutes sir thank you.
Mr. Good. Thank you very much and thank you to all of our
guests here today. And my questions will be directed to Dr.
Gillen please. In your testimony you discussed how making
available important data related to post-graduation outcomes
for specific colleges and specific degrees can help students
and families make good investments in their higher education,
and that this trend could lower the overall cost of education.
That said, do you have a recommendation regarding how
Congress can help promote and facilitate this data transparency
without also expanding the size and scope of government?
Mr. Gillen. Yes absolutely. So, the way the current college
score card data is collected is it's focused just on students
who are receiving Federal financial aid. And so, I think that's
a completely appropriate approach because these Pell grants and
students' loans are being provided to these students, just as
kind of congressional and governmental due diligence, we need
to be able to assess the overall outcomes of those programs,
and so we need to be able to track the outcomes for students
who receive these.
So, I think that's a very appropriate approach, kind of
figuring out what information we need to determine how
effective financial aid programs are and then collecting it.
Mr. Good. Thank you. You also had noted, and I'm
paraphrasing a little bit, that you know since colleges are
locked in a never-ending academic arms race, to spend as much
as possible in the pursuit of prestige, and this has a very
negative consequences regarding college affordability, and it
can make it easy for insiders to hide excessive spending.
Do you feel that accountability regarding degrees and the
labor market outcomes is enough to lower the costs of higher
ed, or what else might you recommend?
Mr. Gillen. Yes, so this is in reference to the Bowen's
laws portion of my written testimony, and just very brief
background. So, with Bowen's laws the basic is that when you
can observe quality, you're competing based on reputation or
perceived quality.
Mr. Good. Right.
Mr. Gillen. And one of the ways you can increase reputation
or prestige, or perceived quality is to spend more money on
kind of flashy items. So, you know Nobel Prize winning faculty,
high-achieving students you know big shiny new ads, that kind
of stuff.
And so, you know that's all great, but that all costs
money, and so schools are locked in this never-ending cycle of
needing more revenue. And so as soon as they get more revenue,
they use it to increase spending, and so if you look at the
kind of overall trend of what happens to higher education in
this Bowen's Law world, is we're going to see a never-ending
trend of increases in spending.
So, one of the ways we can escape that is by having better
metrics on outcomes and outputs. And so, these accountability
mechanisms that basically publicize, and try to encourage
schools to have better outputs and outcomes would do a lot to
fix that because right now there's a handful of law schools in
the country that do a great job in terms of labor market
outcomes relative to student debt.
There's also a ton of them that don't, where their students
are really struggling with their student debt. And so right now
the question hey, should I go to law school doesn't make any
sense because it really depends on which law school we're
talking about. Some of them have great outcomes, some of them
don't.
And so, in providing students with enough information that
they can make that distinction between those two types of
programs is absolutely critical. And then once students are
competing--sorry, once universities are competing based on the
outcomes, we've basically escaped the Bowen's Law world and
then we move into more of kind of a standard competitive
environment where schools are competing to increase quality and
lower cost.
And that's a very healthy environment to be in because any
innovation that does either one of those will be adopted
widespread by universities across the country.
Mr. Good. At the risk of offending my many friends who are
lawyers here in Congress, it was interesting to see that one of
the worst returns in your data provided was that for the law
degrees, in light of we've got such a growth in that area in
the country.
Just speaking though generally with regard to the cost of
higher education, what role do you think that the overall
Federal spending on education might be impacting the overall
increasing costs of higher education?
Mr. Gillen. So, there's a big debate among scholars about
the extent to which Bowen's hypothesis is--I'm sorry the
Bennett hypothesis is indicative. And so, essentially there's
an argument that some scholars make that increases in
government funds will encourage schools to raise tuition to
essentially harvest those funds without actually lowering the
cost to the students.
Now there's been you know multi-decade debate about how big
of a problem this is, and so unfortunately, we can't go into
too much detail. But right now, if I see a study that says it's
less than 20 cents on the dollar, or a study that says it's
more than 80 cents on the dollar, I'm skeptical.
Anything in between there is pretty consistent with the
evidence that I've seen, so it's not that schools raise tuition
by a dollar for every dollar that the government provides, and
it's not that they don't raise it at all. It's somewhere in the
middle.
Mr. Good. Thank you, sir. I see my time has expired. I
appreciate your answers.
Mr. Sablan. Yes, Chairman Scott is back in the room and so
Mr. Chairman you have the gavel please.
Chairman Scott. Thank you. Can you--is Mr. Levin next?
Mr. Sablan. No. I think it's Ms. McBath, well she was here,
all right. Mr. Chairman McBath, Ms. Hayes was here, yes, you're
right Mr. Levin is he here?
Mr. Levin. I am.
Chairman Scott. The Gentleman from Michigan Mr. Levin.
Mr. Sablan. Mr. Levin you have 10 minutes.
Mr. Levin. Ooh.
Mr. Sablan. 5 minutes, 5 sorry.
Mr. Levin. I'll take the first offer. Thanks to you both.
All right. Well, this is I thank the chairman for this hearing.
It's super educational I think for the American people. Over
the last decade for-profit institutions have converted to non-
profit institutions at an accelerated rate, and we've seen an
alarming amount of these conversions happening at ethically
dubious for-profit colleges, converting to non-profit
institutions to circumvent accountability, or repair their
reputations, line the pockets of owners and executives, and
evade tax liabilities to the American people.
Take for example Dream Center, a non-profit holding company
that pushed for the purchase of three for-profit college chains
with the intent to convert these schools to non-profit
institutions even as the Higher Learning Commission revoked
accreditation for some Dream Center owned schools over concern
that the intent of the conversion was to and I'm quoting,
``Cloak predatory practices.''
This led Dream Center to misrepresent and defraud millions
of students into believing they were attending a fully
accredited institution when they were not. Within 18 months of
the transaction Dream Center closed or sold every school.
So, I want to ask Ms. Cao about this. We've seen a lot of
these abrupt and expensive closures of schools that are
converted from for-profit to non-profit. For instance, the
committee found that the Dream Center conversion and subsequent
collapse, will cost taxpayers at least 600 million dollars.
Is there something particular about these conversions that
makes them likely to close abruptly like this?
Ms. Cao. Yes. Thank you so much for that question. And the
Department of Education did find that the collapse cost
taxpayers 600 million dollars.
Mr. Levin. It's incredible.
Ms. Cao. One of the executives at Dream Center, who was
extracting revenues for his family's foundation, actually
estimated the overall cost of the closure would be 1 billion
dollars, and that's part of the committee's report as well. But
I think of the increased risk of closure that the GAO found in
highlighting that 15 of 16 insider driven conversions went from
being financially responsible, to financially irresponsible
within the span of 1 year, is one of the real risks to both
students and taxpayers of allowing these for-profit conversions
to go forward.
I talked about how non-profits can never extract revenue
for owners, and how for-profits have a restriction where when
they are already financially unstable, owners cannot extract
revenue for private benefit, or at least there are some
restrictions in their ability to continue to withdraw equity.
But when you have a for-profit college that continues
revenue extraction, but as a non-profit, they are free to
extract dollar after dollar to the point where they are running
their institution into bankruptcy.
And in the case of Argosy, you saw owners extracting
revenue to the point where the institution had used up all the
Title IV funds, and then go after student's stipends in order
to be able to balance their budgets. And then run out of all
funds entirely.
And so, I think there is a real--
Mr. Levin. And milk it until it doesn't exist anymore
basically. I mean since time is limited, let me just ask you to
kind of zoom out because I mean in a way these stories about
the particular institutions are so compelling and disgusting
you know.
What I want to ask you is how can we understand the impact
of these particular stories, these conversions and these
subsequent closures on higher education and students as a
whole? How are the for-profit conversions impacting other
schools in both the for-profit and non-profit sectors, and how
does that you know, end up impacting college students all
across the country?
Ms. Cao. Thanks. So, when for-profit conversions happen
among the most predatory schools, that impacts the rest of the
for-profit field because any school that wants to remain with
for-profit regulations when it has this option of a giant
loophole, is going to be either too small, too unsophisticated,
or too scrupulous to lawyer up and take advantage of the for-
profit conversions that allow them to operate in an even more
predatory manner.
When it comes to the non-profit status, there is also I
think a corrupting impact of for-profit conversions on non-
profits. And so, Mr. Gillen mentioned an arms race, and I think
that the aggressive and predatory recruitment of for-profit
conversions is going to, and already has created an arms race
for the non-profits to try to distinguish themselves from the
covert non-profits, and that's going to draw resources away
from student instruction in order to be able to educate
students through recruitment and marketing practices.
Mr. Levin. All right well thanks. Mr. Chairman my time's
expired, but I just have to say that when I ran the State
workforce system in Michigan and created the No Worker Left
Behind Program when we put 162,000 Michiganders back to school,
we proudly worked with State institutions, community colleges,
non-profits and for-profits, and we've got to fix this problem
so that students can still have the full panoply of options.
With that I yield back.
Chairman Scott. Thank you. Next the Gentlelady from Iowa
Ms. Miller-Meeks.
Ms. Miller-Meeks. Thank you so much Chairman Scott. And Ms.
Cao you actually inspired this question. You said, ``Higher
tuition equals higher debt.'' As the first person in my family
of 10 to not only go to college, the only one to ever go to
medical school, I am extremely concerned about the rising cost
of tuition.
At the State level, as a State Senator I worked on these
issues, especially for the health professions. However, student
loans, loan forgiveness for locating to rural areas, J-1 Visas,
and scholarships don't address my most pressing concern, and
that's the skyrocketing cost of colleges.
Mr. Gillen you've done a lot of work investigating why
college prices are rising, and one reason you mentioned earlier
was the Bennett Hypothesis. Could you describe this a little
bit more in detail, and also other drivers of rising tuition
and suggest ways Congress could address the fundamental drivers
of college cost when we reform the HGA because that in turn is
what creates more college debt is the rising costs. Thank you.
Mr. Gillen. Yes absolutely. So, one of the main
contributors to rising college costs is this Bowen's Law world
that I described previously where there's essentially never-
ending need for any non-profit, but in this particular case,
colleges to have more revenue.
There's always going to be some other program, or some more
students, or some initiative that the University wants to take
and that they think will improve their college. So, there's
never going to be enough money for colleges.
There's a couple of amusing kind of descriptions of this
process by scholars of higher education. So, Derek Bach, former
President of Harvard, he wrote a book where he described
colleges as just like compulsive gamblers in the sense that
there's never going to be enough money to their needs.
There's a scholar at Cornell, Ronald Ehrenberg who
described the college's need for money as analogous to the
cookie monster, just whatever cookies are available, cookies
being revenue in this case will be devoured.
A co-author of mine, Robert Martin, described higher
education finance as a black hole, and it will just suck up any
revenue that's around. And so, the question is OK, what happens
when we institute a financial aid program in this environment?
And that's where the Bennett Hypothesis comes in.
And so, Secretary Bennett, he was Secretary of Education
back in the 80's. He said that the Federal Government providing
financial aid will actually encourage these schools to raise
their tuition--to harvest that aid money. And that's really the
combination of these two. So, the Bennett Hypothesis is a
danger because we live in this Bowen's Law world.
And so, the question is OK well how big of a problem is it?
And scholars, as I've mentioned, have been debating this. There
was a real turning point around 2012 where almost all the
scholarship that has come out since then, because it's using
better data, and better school techniques, is finding some
evidence in support of the Bennett Hypothesis, regardless of
sector.
So, it's you know an issue at the for-profit sector. It's
an issue at public's, it's an issue at private non-profits. And
but there are some things that could be done to sort of attain
the Bennett Hypothesis. And so, some of the things you can do
is make sure that it is need based.
So, programs like the Pell grant are much less likely to
suffer from kind of tuition inflation as a result of the
program, than kind of a universally available program that is
not subject.
Ms. Miller-Meeks. Thank you so much for that, and it's the
same thing that plagues our healthcare with third party
payment, and I'm going to yield the balance of my time to
Representative Foxx. Thank you so much. And thank all the
panelists.
Ms. Foxx. Thank you very much for yielding. I want to point
out that one of our witnesses has said non-profits can never
extract revenues for individual benefit. Well, I'd like to
point out that private colleges and universities, some are
paying exorbitant fees to their presidents. University of
Southern California, 7 million dollars. University of Chicago,
6 million dollars. Thomas Jefferson University, 5 and a half,
Columbia, 4 and a half million. Harvard, 3 and a half million.
University of Pennsylvania, 3 million.
Wesleyan University, 3 million. University of Rochester, 3
million. Texas Christian, 2 and a half and the Savannah College
of Arts and Design, almost 2 and a half million. I would say
that students going to those schools would say that that is
extracting revenue for individual benefit.
And then Mr. Chairman, we'll enter that into the record.
This has come I believe from it's a Chronicle of Higher
Education, and also the top 10 salaries of public schools.
Georgia State, 3 million, Auburn, almost 2 million, Texas A and
M over 1 and a half, Ohio State, 1 and a half. Texas A and M,
system office 1.3. University of Pittsburgh, 1.2. University of
Virginia 1.2.
University of Nebraska a little over one million.
University of Houston 1 million, a little over, and Arizona
State University incidentally, over 1 million. I would say
those publics and those privates are certain extracting revenue
for personal gain.
And I think the record needs to be straightened out. Thank
you very much Mr. Chairman.
Chairman Scott. Thank you. Those documents will be entered
into the record without objection. The Gentleman from Indiana,
Mr. Mrvan.
Mr. Mrvan. Ms. Cao you have written about Perdue
University's joint venture with Kaplan University. Based on
your knowledge of this conversion, do you see any unique risks
posed by public college contracts with for-profit colleges
compared to a for-profit college's conversion to non-profit
status?
Ms. Cao. Could you repeat the second half of your question,
I'm sorry I didn't hear it.
Mr. Mrvan. That's OK. The second half of it is do you see
any unique risks posed by public college contracts with for-
profit colleges compared to a for-profit college's conversion
to non-profit status.
Ms. Cao. Got it. Thank you for clarifying. Yes, so I think
of the risks of for-profit colleges converting in a way where
they appear to have public college status, or a public college
affiliation is even more pronounced because of the public trust
that students have in a school like Purdue University, or the
University of Arizona.
That is why shareholders at Graham Holdings or the
shareholders at Zovio are so excited when they can find a
public institution that will lend its good name to one of these
for-profit college conversions.
And I think the students have really spoken for themselves.
Purdue University Global is the only public college that has
garnered more than 100 student complaints through the borrower
defense program. And I also want to add that there are two
additional risks with these for-profit public conversions
occur.
One is the double revenue extraction. So, you have funds
from student tuition dollars going to both Graham Holding and
to support Purdue. And the third harm is that equity harm that
I mentioned at the beginning.
You have separate unequal institutions where poor students
are subsidizing wealthier students.
Mr. Mrvan. Well, thank you very much and I yield back my
time.
Chairman Scott. Let's see. Good, McClain, the Gentlelady
from Tennessee Ms. Harshbarger.
Ms. Harshbarger. Thank you, Mr. Chairman. I appreciate the
time. This is directed to Dr. Gillen. I have constituents in
East Tennessee that a traditional 4-year degree is really it's
not the most practical steps for those high school students,
and really for a lot of the adults looking for a post-secondary
degree. And I absolutely agree that we need to have
accountability measures put in place for any institution, like
the learning versus earning, versus growth.
And there's no way to measure out if we don't have those
measures. And Dr. Gillen for-profit colleges don't just take
public money and in the form of those Title IV student aids
programs, but because they do pay taxes to State and Federal
Governments, really, they're taxpaying institutions basically.
In addition to paying taxes, these schools employ thousands of
people. They contribute a lot of other ways to a local economy
or community.
And my question is this. Are you aware of any analysis
that's done to assess the real value-added institutions have on
their communities? What is it that they do to these
communities? How do they give back? And have you assessed
anything that would show us what these measures do and those
employees, in hiring all those employees, what kinds of value
does that have on the community?
Mr. Gillen. Yes, sorry about that. So, the first part of
the question you know what is the overall social impact of--
these higher education, and does it distinguish between for-
profit, non-profit and public. And so, whenever you have either
a subsidy or a tax, that's going to introduce a wedge between
the social return to any particular activity and the private
return.
And so, when you look at higher education if you compare
say the public university to a for-profit university. So, the
public universities are generally heavily subsidized by the
State that the reside in, and they do not pay taxes.
And so, you've got sort of two wedges that are kind of
present for public universities. The for-profit universities,
not only do they not get subsidized, but they do pay taxes. And
so that's going to introduce a big wedge between the social
rate of return relative to the private rate of return.
So, if you just for simplicity just assume the equivalent
private rate of return for students at those, you can see very,
very different social rates of return because of the
subsidization and the different tax laws.
As for what higher education does for the communities, it
really depends on the particular community, and on the
universities within it. And so, a lot of states actually import
college graduates, and so a particular State may really
generously fund its colleges to try and increase the
educational attainment level at the population, and then it
sees a lot of those students just move next door because they
want to live in New York City or something like that.
And so, it's an open question how much at the local
community level the universities are going to benefit, because
it really depends on how many of those students remain within
the community, and how many go to some other community.
At the national level that's not as much of an issue. You
still have students going internationally after they graduate,
moving overseas. But at the community level that's much
broader.
Ms. Harshbarger. You know our goal should be to get, it
doesn't matter which university if it's public, for-profit, not
for-profit, you know the goal is to get these students
educated, or to give these adults post-secondary degree.
As Dr. Miller-Meeks said, I was the first one in my family
to ever go to college and get a Doctorate degree in pharmacy.
And nobody encouraged me, that's just something that I wanted
to do along the way. And I went to a private institution, and
it cost a lot of money. And I paid every penny of that back.
You know we look at these endowments at some of these bigger
not-for-profit universities.
They could bankroll every student that came through their
doors if they wanted to. So, I guess just having those measures
in place to see how successful these for-profit, not for-profit
universities are, it's how you do it in the business world.
You've got to make sure. And my part of the State, in East
Tennessee we need skills training. We need things to where they
can get out and get a good job. And I'm now knocking higher
education, but I'm looking for you know, my emphasis is on
workforce development per se in my district.
But I appreciate your answers. I think that we need to look
and assess what these for-profit universities do and do some
kind of a study to show what they do to imply. They employ all
these people in their communities. Let's find out what kind of
benefit that has been and measure it that way as an outcome.
But I appreciate your answers, and everybody being here,
and I yield the remainder of my time to Dr. Foxx.
Chairman Scott. Actually, there's not any time left.
Ms. Harshbarger. Well, I'm so sorry.
Chairman Scott. The Gentlelady's time has expired. Next the
Gentleman from New York Mr. Jones.
Mr. Jones. Well, thank you Mr. Chairman and to the Ranking
Member. Thank you to our witnesses for all appearing before us
today. Your testimony has placed a spotlight on the failings of
the Federal Government to adequately protect our students. Make
no mistake about that.
Over the last 30 years for-profit colleges have offered
minimal educational value, but have collected millions of
dollars in tax breaks, all while saddling thousands of students
with crushing debt. In recent years as skepticism of for-profit
schools has continued to grow, these same predatory
institutions have taken it upon themselves to restructure and
convert to non-profits.
They have done so not because they have seen the error of
their ways, but because they seek to subvert the regulatory
burdens placed on for-profit colleges, while continuing to
defraud students and benefit financially.
Ms. Cao how do for-profit colleges in disguise, or as you
refer to them covert non-profits harm students?
Ms. Cao. Thank you for your question. And first I just want
to take a point of personal pride to say that we overlapped at
Stanford University, and you graduated with many of my friends
from Harvard Law School and I was so excited to see you
elected.
And I'm excited as well for your focus on the harm that
students experience as a result of the activities of covert
for-profit schools. And to return to the student harm, again I
think the students have really spoken for themselves.
When you look at the borrower defense claims that students
submit, when they feel that they've been defrauded by
institutions of higher learner, when they feel that their
tuition dollars and debt dollars have been taken from them by
deceptive and abusive practices you see crystal clear that it
is for-profit and covert for-profit schools that are deceiving
students.
You can look at over 300,000 borrower defense claims the
Department of Education has identified by institution, about 25
percent are from covert for-profit colleges, about 75 percent
are from for-profit colleges. Less than 1 percent come from the
non-profit sector, and there are no public institutions on that
list except for the affiliation of Purdue University Global.
So, I think that it's really clear that the student harm is
coming from the for-profit and covert for-profit sector, and if
we don't do something about it, those types of harms are going
to expand to corrupt the influences that are in place even
further.
Mr. Jones. Thank you for that. And what are the risks
covert non-profits pose to taxpayers in particular?
Ms. Cao. Yes. So, when it comes to stewardship of taxpayer
money, there is a particular risk when covert for-profit owners
can draw down revenue with one hand and then pass it on to
insiders for personal enrichment on the other hand.
Representative Foxx talked about the salaries of non-profit
presidents. But you have the president of Harvard making 3
million dollars a year, and the president of Keiser University,
one of these covert for-profits, drawing down 34 million
dollars a year through rents and loans paid by the non-profit
that he owns. And I think that is a huge problem for taxpayers,
especially if Congress takes a look now to double down on the
investment and low-income students for things like Pell grants.
You have to protect that investment from being handed right
into the pockets of insiders with little benefit for students.
Mr. Jones. I so appreciate that illuminating testimony. And
with the approximate minute and 20 seconds I have left, I
wanted to delve into the demographics of the impacted students.
We've touched a little bit on how these for-profit colleges in
disguise arm students.
But we know that certain communities really bear the brunt
of the adverse impacts, and so can you talk a little bit about
who these students are in terms of the demographics, and you
know what's the profile of these students who enrolled in these
covert non-profit colleges?
Ms. Cao. It is low-income students, Black and Hispanic
students, working students, working mothers in particular, and
students who are supporting their families instead of being
supported by their families.
In the world of research, we talk about reverse redlining
or predatory inclusion, and I have a background representing
low-income borrowers in the sub-prime mortgage crisis. There
you talk about how banks have excluded minority borrowers, and
what that leaves space for is predatory institutions to come in
and offer a sub-prime product, saying that they're providing
access, when in fact they are extracting wealth from those
communities that need it most.
And that's what we had in in higher education as well. We
have predatory inclusion so that individuals who have been
pushed out of valuable resources in the higher education field
are being steered toward predatory actors.
Mr. Jones. Thank you so much Ms. Cao. Go Stanford and I
yield back Mr. Chairman.
Chairman Scott. Thank you. The Gentleman from North
Carolina Dr. Murphy.
Mr. Murphy. Thank you, Mr. Chairman. And I want to say
thank you to all of the Members who have come to the committee.
I appreciate your perspective. I want to say specifically Mr.
Galle you made one point that you thought that it was
education's duty here, not the IRS to police these
institutions, and I think that's correct.
I think a lot of the comments here may have been misguided
a little bit, and they obviously have a different reason for
saying this. I do want to point out one thing though. I mean
it's very interesting that we're just attacking the private
institutions--I mean the profit not for-profit status.
And if you look at our--I don't know if any of the other
panelists have actually been on a college campus recently and
looked at where money is actually spent on college campuses.
Yes, there surely are aberrations and abuses in salaries, but
if you look at what the taxpayers are paying for, and you look
at what's happened with administrative bloat, I would submit
that that is infinitely more of a problem to the American
taxpayer, to the American student, than any of these problems
that are heretofore this committee has brought up.
This is the main reason that students are in debt these
days is because administrative bloat has far outweighed
payments on anything academic-wise, and to say otherwise is
really just ignoring the issue and just attacking the for-
profit institutions. So that said, Dr. Gillen let me just ask
one brief question, because I'm going to cede a lot of my time
to Dr. Foxx who's smarter than I am on these things.
The premise behind this hearing seems to be that for-profit
conversions are a big, huge public policy issue. They're
happening often, and they're not being handled appropriately,
and that legislation is needed to fix this problem. Is that
premise correct?
Is it true, or are we dealing with such a huge, massive
problem that several of the committee people have said, of the
more than 5,000 institutions of higher education, how many of
these are actually impacted by conversions?
Dr. Gillen I'll let you answer those questions please.
Mr. Gillen. So very few former formerly for-profits seek to
undergo conversion, and even fewer of those involve insiders.
So, this is a relatively small problem. And to the extent it's
a problem, it's already forbidden, so the IRS doesn't allow an
improper benefit and the Department of Education doesn't allow
an improper benefit. So, the real question is does this--do the
existing procedures used by IRS detect improper benefit?
And so, if not, then that's an argument to improve those
procedures. But the idea that all for-profits who undergo
conversion are bad, I don't think is valid. And it's not even
really internally consistent right, because we've been hearing
about oh for-profit's bad, non-profit's good.
Well, we're converting for-profits into non-profits, but
they're still not good. So, it's kind of a strange approach.
Mr. Murphy. Well, I thank you because it's you know without
a doubt obviously our job as Members of Congress are to hold
institutions accountable, but this is a chasing, in my opinion
like we say in medicine, a wild herring. It's not really, it's
more of a problem in search of a solution, and or rather a
solution in search of a problem.
I'm sorry for the mix-up. But I mean if you really look
back, and I'll get on my rant of administrative bloat, and if
we're actually caring about what's going on for students,
that's the whole premise of this, if we're caring about what's
going on for students, then look and see what colleges, public
colleges, universities, private colleges and universities, how
they are spending their money these days.
And it may not be on massive salaries, but it is on
administrative bloat, and that's been the death knell of higher
education these days. With that I'll yield back the balance of
my time to Dr. Foxx thank you.
Ms. Foxx. I thank the Gentleman for yielding. And I would
like to--
Mr. Gillen. You got muted there Representative Foxx.
Ms. Foxx. Oh, OK. Well, the Federal student loan 3-year
default rates by sector and separation cohort, borrowers, and
repayment in 2009 to Fiscal Year 202017 by the college board it
shows public 2-year schools have a 14.4 percent default rate.
The for-profit schools have a 12 percent default rate. And
so, we see that 2-year colleges have a worse default rate. And
I would like to ask a quick question of Ms. Emrey-Arras. From
Dr. Adams, she asked you which conversions were better. And I
want to know were you expressing a personal opinion, or one
based on research in your official capacity?
Ms. Emrey-Arras. I'm not sure that I answered on that
front. Can you remind me?
Ms. Foxx. Well, she asked you whether it was better for
schools to go to for-profits, but I can get you the exact
question and submit it to you for the record. But it sounded as
though in your official capacity you are expressing an opinion,
and I was just clarifying that.
Ms. Emrey-Arras. I don't recall that, but I'm happy to
answer any questions that you may have for the record.
Ms. Foxx. OK thank you.
Ms. Emrey-Arras. Sure.
Ms. Foxx. I yield back.
Chairman Scott. Thank you. The Gentlelady from North
Carolina Ms. Manning?
Ms. Manning. Thank you, Mr. Chairman. I'm going to address
my first question to Ms. Cao, and I don't believe this is
something that any of my colleagues from North Carolina have
raised, but it's of great interest to constituents in my State.
Reporters are raising questions about a non-profit that is
a covert for-profit that's taking place in my State, and you're
nodding your head. You probably already know about this. The
Century Foundation reported on documents obtained from IRS and
the Department of Education showing that Dr. Arthur Keiser who
I believe has been discussed today, converted his for-profit
college into the non-profit Keiser University to use it as a
cash cow.
And new reports indicate that Dr. Keiser has funneled
donations from Keiser University to a traditional financially
struggling, non-profit, St. Andrews University in North
Carolina to assert control of that institution, and potentially
leverage that control to benefit Southeastern College, a for-
profit school which Dr. Keiser owns.
We are extremely concerned about this. Of course, I'll be
following up with Andrews University for more information, but
I am getting calls from very concerned constituents. Can you
expand on these findings, and do they raise wider concerns both
for St. Andrews, but also for other conversions?
Ms. Cao. Thank you. Yes. And so, we have taken a look at
St. Andrews and the relationship with Keiser University. You
know you've heard of corporate takeovers within the private
industry. Here we have a hostile takeover of a non-profit
school that was experiencing financial strain.
And coming out of this pandemic, and of economic hardship,
we're going to have a lot of small, community-serving non-
profits that are experiencing financial strain.
So, I think watching the pattern of this instance, and
watching the patterns with these for-profit college conversions
more broadly, is not responding to a hypothetical question, but
it is responding to the early signs of a trend that is about to
become much more dangerous and could be more widespread if
action isn't taken now to reverse the trend.
Getting back to the example of St. Andrews, we have a
pattern that we've seen before where the Keiser family has
leveraged the wealth that it obtained by extracting resources
from other for-profit college conversions and used that wealth
to buy control of the board of St. Andrews.
With that control the Keiser family is operating St.
Andrews is a way where it's starting to operate similar to a
vassal State, which is to say it is not operating in the best
interest of students, but rather helping to extract resources
and deliver them to the for-profit school that is currently
held by the Keiser family, Southeastern.
And what we've seen is this example where they've opened up
a new campus, called the new campus an extension of St.
Andrews, but it's actually listed at the same address as one of
the campuses for the for-profit school that the Keiser family
also operates.
I think it is possible that we'll see an application for a
conversion in the near future, but even if not this
relationship of a non-profit being taken over and its good name
used to support insiders is a perfect example of the concerns
this hearing addresses.
Ms. Manning. Thank you so much. We have several non-
profits, small non-profits in my community that as a result of
this pandemic are really struggling. I would hate to see this
happen to any of our other good schools, so I'm going to switch
the next question to Administrator Emrey-Arras. If you could
help me understand what are the tools of the Department of
Education, the IRS, and Congress can use to make sure this
doesn't happen?
Ms. Emrey-Arras. Thank you for the question. So, the IRS
can review proposed conversions when new non-profits are
applying for tax-exempt status. So, they can actually ask for
the purchase price of a college. They can look at independent
appraisals, versus getting a promise that a price will be fair
market value.
So, they could actually request materials to help make that
decision, and if they decide that a sale is not going to be a
fair market value one, they can deny the application for tax-
exempt status. After that, they have the ability to monitor
tax-exempt organizations at a future date and our
recommendation will help them do that more.
On the education side, you know the department has done a
lot in recent years to step up its oversight for those initial
applications right? It's looking at more documents. It's
looking at key bids, it's looking at contracts, it's really
getting into the nitty-gritty to figure out is there improper
benefit going on. So that's a good thing.
But at this point it's not looking at what happens after it
grants its approval, so those schools are in provisional status
for one to 3 years, they're supposed to be closely monitored.
Education already has their financial statements. It's using
them for other stuff, but it's not actually looking at them to
see if any improper benefit is happening at that point, and we
think it should.
Because you can find information in the statements about
ongoing leases and other kinds of vendor arrangements that
could raise questions about improper payment. So, we made a
recommendation that the department use the information it
already has to do a better job of monitoring, and the
department agreed with us.
Ms. Manning. Thank you and I yield back.
Chairman Scott. Thank you. Gentleman from North Carolina,
Mr. Cawthorn.
Mr. Cawthorn. Thank you, Mr. Chairman. I sincerely
appreciate all of the witnesses to have come on to be able to
testify before us. I am disappointed that we are using our time
with all the brilliant minds on this committee to be working on
examining colleges converting from for-profit to non-profit
status which impacts roughly 0.1 percent of for-profit
colleges, and just in layman's terms that is 3 colleges a
single year.
I feel like the brilliant minds that are at use here and on
this committee as our witnesses could be used for something
more tangible, but I will take some time to ask you a question
Dr. Gillen. The Higher Education Act makes all institutions,
regardless of their tax status, ineligible to operate with
Title IV student aid programs if too many of its students
default on their loans within 3 years of leaving the college.
Could you comment on whether this cohort default rate
metric is effective, or also how can we as Congress, how can we
improve upon it?
Mr. Gillen. Yes. So, the cohort default rate is I think a
perfectly fine accountability metric. The problem is that it's
used as the accountability. And so, this is really the only way
that schools can lose Federal financial aid for any sort of
outcome that they have.
And so, the cohort default rate could certainly be
improved, so right now it looks at just the first 3 years after
the loans, and so I think we could benefit from extending that.
So, whether we want to look at you know 5, 10 or all of the
above, maybe we have 3 different cohort default rates that we
examine.
I think that would be real useful. Another potential issue,
particular for the 3-year rate is that a lot of students can be
in deferment or forbearance which won't show up as defaults on
our loans. But these are so indicative of the students who are
struggling with their student loans.
So, I think to really addressing kind of those flaws
within--not flaws, but improvements in the cohort default rate.
In terms of kind of the longevity of the cohort default rate,
as more and more students are entering income driven repayment
programs, that's actually going to turn the cohort default rate
into an obsolete metric, because now students who can't afford
their loans are defaulting on them.
But once they're in an income driven or payment program,
they're no longer defaulting on their loans, their student loan
payment has just been set to zero. And so pretty soon as more
and more students are entering the income driven or payment
programs, the cohort default rate is really going to be an
obsolete metric.
So, one thing that we could do is replace it or supplement
it with a repayment rate, and so that would be probably the
wisest course of action I think where we look at what
percentage of a university programs students are actually
paying down the principal on their loans.
Mr. Cawthorn. Well Dr. Gillen thank you very much for your
time, and to all the witnesses thank you and with that Chairman
Scott, Mr. Chairman I would yield the rest of my time to
Ranking Member Foxx if she would so like to use it.
Ms. Foxx. I thank the Gentleman for yielding. Since we're
on the gainful employment and cohort default rate, I want to
point out that there's an article in the Chronicle of Higher
Education that pointed out that there were failing programs in
the theater arts program at Harvard University, a music
performance program at Johns Hopkins, and a music technology
program at the University of Southern California.
I think it's important that we point that out. Ms. Emrey-
Arras. First to clarify, just because an insider was involved
in the transaction does not mean that they are illegal when a
for-profit converts to a not for profit, isn't that correct?
Ms. Emrey-Arras. That is correct.
Ms. Foxx. OK. So, when the GAO noted that the Department
had strengthened its review of the process, that came about
during the Trump administration is that correct?
Ms. Emrey-Arras. The department took several steps over
time beginning in September 2016, though in 2018 the department
did create a centralized team where they brought in experts
with contracting knowledge, and finance knowledge to really
look at these together, and that was in 2018.
Mrs. Foxx. Right. So, they strengthened it during the Trump
administration beginning in September 2016 as you said, right?
Just before the election.
Ms. Emrey-Arras. Right.
Mrs. Foxx. So, I think it's important that we ascertain
that when that strengthening came in was under a republican
administration. Again, I think Republicans--the point we want
to make over and over again, is that Republicans want
accountability from all institutions, all institutions for
students.
Thank you Mr. Chairman I yield back.
Chairman Scott. Thank you. The Gentlelady from Georgia, Ms.
McBath.
Ms. McBath. Thank you, Mr. Chairman, I'm really excited to
be here today and thank you to all of our witnesses for their
great testimony. And I would just say in my own district we saw
first-hand what happens when an institution of higher education
attempts to evade accountability.
In 2019 Argosy University in my district closed its doors
after months of misleading students on its accreditation status
in an attempt to convert to non-profit status through its sale
to Dream Center Holdings. In the end Argosy University ripped
off thousands of students at campuses across the country,
including one in my district, leaving them with untransferable
credits, huge amounts of student debt, and degrees that just
really aren't worth anything.
And it's our duty as legislators to protect the success of
our students as they pursue higher education and hold all
institutions accountable, and that's why I am very proud to be
introducing the For-Profit College Conversion Accountability
Act, or we'll call it the FCCAA with my colleague
representatives, Sara Jacobs and Kathy Manning.
FCCAA would establish explicit criteria requiring the
conversion to be made public, with proper advance notice and
prohibit the institution from marketing itself as a nonprofit
until the conversion has actually been given the final approval
by the department.
Additionally, the bill would establish an office within the
Department of Education to determine the eligibility of for-
profit IHE's and monitor the conversion process. You know our
students deserve better, and it's our duty as legislators to
ensure that institutions are adhering to high standards.
Ms. Cao my questions are you for today. In a recent piece
you wrote that and I'm quoting, ``To increase rigor of the
Department of Education's review, reviews of college
conversions needs to continue in the Biden administration and
should be applied to conversions that were approved earlier.''
What opportunities are there for the department and this
committee to revisit conversions that were previously approved?
Ms. Cao. Thank you for the question and for recognizing the
painful experience of Argosy students. And so, I want to talk
about three opportunities that the Biden Administration has to
revisit some of the errors that were made in the past, and that
we're played out in the GAO report.
The first is that in the case of the Dream Center the
Department of Education made an effort to retroactively grant
non-profit status to Argosy and the other Dream Center schools.
And I would say the Department of Education can retroactively
grant non-profit status in order to help institutions cheat
students, then they sure should be able to retroactively remove
non-profit status to stop that cheating.
And I think that that is an important authority to explore.
Second, this has come up previously, but any time an
institution of higher education seeks a conversion in a non-
profit status, or a change in control, they go through a review
that leaves them in a status known as provisional
certification.
When you change status, you change control. Your
eligibility to receive Title IV ends at that moment at the
change of control, and you have to prove that you deserve Title
IV funding all over again.
That gives the Department of Education a unique opportunity
to continue to monitor and oversee whether these conversions
are truly serving students.
And finally, I want to just go back. We've been talking
about conversions between non-profit and for-profit status, but
really there are a series of requirements that Congress has
imposed that all institutions must meet in order to be eligible
for Title IV revenues. And some of the behaviors in these
conversions, things like paying recruiters or recruitment
entities a bounty for each student that they enroll, would
violate the basic requirements for Title IV eligibility for all
institutions, and the department has to address that as well.
Ms. McBath. Well, thank you so much. And you previously
wrote that our institution chain of for-profit schools had been
sold to Dream Center Education Holding, a non-profit
organization. It cooked the books and diverted stipends
intended to cover student's groceries and living expenses.
And I'm aware that the Department of Education sat on the
Art Institute's application, and that of Argosy International,
Argosy University for non-profit status until it was too late.
Do you have views about whether the Department's slow-moving
response constituted a failure in oversight, and what do you
think has been done differently, or could be done differently?
Ms. Cao. The department failed students by not acting to
protect them. And they failed taxpayers by allowing millions to
go out the door to an unscrupulous and irresponsible
institution that did not meet basic statutory requirements to
receive Title IV dollars.
Ms. McBath. OK. And thank you so much. I yield back the
balance of my time.
Chairman Scott. Thank you. The Gentlelady from Illinois,
Ms. Steel.
Ms. Steel. Thank you, Chairman. I came from California, not
Illinois.
Chairman Scott. I'm sorry.
Ms. Steel. Thank you, thank you Chairman and thank you
Ranking Member--
Chairman Scott. I'm sorry the Gentlelady from California
Ms. Steel, I'm sorry.
Ms. Steel. And thank you for all the witnesses today. I
really appreciate it. I think we can all agree that we must
protect the use of taxpayer funds. We also agree the cost of
college has grown out of control. We need to make sure the
students who attend any college will graduate, and graduate
with the skills they need to get a job.
I believe we must have accountability, but also encourage
flexibility to help all Americans find the higher education
option that fits them the best. Colleges and universities have
many reasons to choose whether they form as for-profit or non-
profit organizations.
One of the reasons for conversion is the heavy, and
sometimes unfair, burden places on for-profit institutions.
Having said that, Dr. Gillen in your opinion if you run a for-
profit college, wouldn't you want to change from a for-profit
to non-profit to level the playing field since there are many
burdens on for-profit colleges?
Mr. Gillen. Yes. So, I think that's a completely valid
point. There are a number of reasons that universities would
want to convert from for-profit to non-profit. And so, some of
them that were highlighted in the GAO report were there was a
State financial aid program that provided grants to students.
The students at for-profit colleges were not eligible for this
grant.
And so, by converting to a non-profit that college's
students would now be eligible for this financial aid program.
And so, there's all sorts of issues like that where for-profits
might benefit from converting into a non-profit.
Ms. Steel. And testing's done too.
Mr. Gillen. Yes, yes.
Ms. Steel. For those schools. So, students across the board
seem to be left with excessive student debt these days. Can you
highlight some of the ways a successful for-profit college can
help students who want and demand jobs?
Mr. Gillen. Yes absolutely. So excessive student debt is a
huge issue, and it's gotten a lot of national attention,
appropriately so. The contribution I would like to see is the
conversation less focused on the tax status of the degree
granting institution, and more focused on the students
themselves.
And so last year we actually ran an analysis that basically
subjected all programs to gainful employment. So, under the
initial gainful employment regulations no degree program at a
public or a private non-profit was subject to gainful
employment, so only certificate programs were.
And so, which is nonsensical right, like the MBA program at
Wharton was not considered a vocational program, but a nursing
program at the University of Phoenix was. It was just a bizarre
way to define which programs are vocational and which aren't.
But so, we went back, and we analyzed, OK what if you
applied gainful employment to everybody? And so, we used the
new college scorecard data to do that.
What we found were that of the total students who are
attending programs that would have failed gainful employment,
28 percent of them attended for-profit universities, which
means that 72 percent of them were attending private non-profit
or public universities.
And so, the notion that excessive student loan debt is a
problem that's restricted to the for-profit sector, I think is
completely false because the vast majority of students who had
excessive student loan debt, as determined by a test like
gainful employment, are going to be at public and private non-
profit universities, if for no other reason than for the fact
that so many more students are at those institutions.
Ms. Steel. Thank you very much Dr. Gillen. I yield my
remaining time to Ranking Member Dr. Foxx.
Ms. Foxx. I thank you Ms. Steel. Mr. Gillen we've talked a
great deal again about what we want to see and the bias that
exists against for-profits. As we've talked about this you've
talked about program accountability, and I'd like you to
mention that a little bit more because I am very concerned
about the possibility of our going to individual students, and
if you wouldn't mind mention how much information we can get
from program accountability.
Mr. Gillen. Yes absolutely. So, the most exciting kind of
accountability potential that I've seen in my entire career has
been the college scorecard data on program level earnings.
So, they define the program as a university, a degree
level, you know, associates, bachelor's, master's, and a field
of studies. So, an academic field. And so, this is completely
revolutionary to what we can do with accountability in higher
education.
Because up until now we've only really applied
accountability at the entire university. And so, we've looked
at things like the cohort default rate, which are calculated at
the entire university level. With this program level
accountability, we can really analyze specific programs, and
you mentioned earlier in the comment there was a program at
Harvard, it was a certificate program, so it was actually
subject to the--that actually failed.
Nobody knew. Nobody knew that this program was leaving its
students with excessive student loan debt because nobody had
bothered to look at the program level outcomes. And so, there's
going to be a million examples like that. Where now that we
have this program data, we can do a much better job of saying
OK, you know the institution is doing great, but these four
programs at this institution aren't.
Or you know, this university is really struggling, but
these handful of programs are having really good outcomes for
the students. And so, this program level of protecting is--
Ms. Foxx. I think Mr. Gillen my time is up. I need to stop
you thank you.
Chairman Scott. Thank you. Next is the Gentlelady from
Connecticut Ms. Hayes.
Ms. Hayes. Thank you, Mr. Chair, for holding this hearing
today. When predatory for-profit schools don't follow the
rules, the victims are often our most vulnerable students,
first generation students, students of color, low-income
students, working parents.
When for-profits shutter their doors, students are left
with tremendous debt and no credentials. Last Congress I
introduced a bill that would restore Pell grant eligibility to
students deceived by Corinthian College and ITT Technical
Institute. I'm so proud that that legislation was signed into
law in December.
But we still have a long way to go. Ms. Cao my questions
are for you, and I would ask you just I want to follow the
rules to be mindful of the time on the clock. What role should
transparency and consumer awareness play in addressing the risk
posed by for-profit college conversions, and should more
information be given to students about those conversions?
Ms. Cao. Thanks. I would say transparency is necessary but
not sufficient. And one aspect of transparency in the context
of these conversions is making sure that institutions are not
pulling the wool over students' eyes by claiming non-profit
status when they're actually operating as for-profit
institutions. I would also say that while choice is wonderful,
and I support students having options of the type of college
they go to, nobody wants students to be steered toward a choice
that is going to harm them more than it will help them.
And you know, you can look at the grocery store. You can
look at the auto dealership, all of these contexts where we
have consumer choice, there is a regulator making sure that you
don't buy spoiled milk. There is a regulatory making sure that
you don't buy a car that's going to explode when you drive it
off the lot.
Ms. Hayes. Thank you. That leads me to my next question for
Director Emrey-Arras. Are colleges allowed to advertise as non-
profit colleges while they're awaiting the Department of
Education to approve their conversion applications?
And what did you find when you looked at the advertisements
of colleges in pending status?
Ms. Emrey-Arras. That's a great question. When we started
our study education didn't have any formal rules on this issue
and during the course of our work, they did decide to formally
prohibit this practice, and they have developed instructions to
schools letting them know that this is not allowable, and they
have begun to distribute those instructions.
And this is particularly important because we found that
schools were doing that kind of advertising, so they were
waiting for approval, did not have it yet, but yet were putting
out in advertisements that they were non-profit institutions
suggesting that they had been approved by the Department of
Education to be non-profit colleges.
That was not true. We saw that for all nine schools that
were pending, and we also looked retroactively at some of the
schools that had been denied. So, the two schools that were
denied, we found had also previously advertised as non-profits.
So, we think it's great that the department has formally said
that this is not acceptable, and we think it's really important
that they're getting the word out.
Ms. Hayes. You've actually answered my next three
questions. I'll wrap it up by saying you know what steps the
U.S. Department of Education is taking to stop these deceptive
advertisements.
Ms. Emrey-Arras. Yes. So, they're actually putting it in
their letters to schools that are awaiting decisions. They
haven't notified each and every school yet, but they are in the
process of doing so, so they're going to organizing their
communications to make sure that they consistently message
along those lines, and we think that's great.
Because again, at the beginning of this study it was really
quiet on this front, and a lot was going on that was against
education's wishes. Education officials have expressed concerns
about this, but there is nothing formally prohibiting it.
Now the department has formally prohibited it and is
telling schools that they're not allowed to do that.
Ms. Hayes. Thank you. I really appreciate that and for your
expertise on this issue at today's hearing because as
legislators we are tasked with making sure that we are
protecting the rights of all of our constituents no matter how
big or small the problem is, and it doesn't matter--one student
affected is one too many, so I'm very happy that you've taken
the time to come before this committee to share your concerns
so that we can make sure that we are protecting every student
that seeks a higher education in this country,.
With that Mr. Chair I yield back with 10 seconds to spare.
Chairman Scott. Well, thank you very much. And next the
Gentleman from New York Mr. Bowman.
Mr. Bowman. Thank you, Mr. Chairman, and thank you to our
witnesses for being here. My first question is to Director
Emrey-Arras. You note in your testimony that the IRS did not
systematically collect the information that can help identify
insiders involved in conversion transactions.
When the IRS is evaluating an application for tax-exempt
status involving insider transactions, what is it supposed to
be looking for?
Ms. Emrey-Arras. It's supposed to be making sure that those
transactions are a fair market value, so that no one is
pocketing anything extra above what the price should be. So
that's what they need to be doing, and they don't always have
the information that they need to make that decision.
Mr. Bowman. How is fair market value determined?
Ms. Emrey-Arras. It's determined by looking at what the
price would be for people who have how would I say this, if you
have unrelated people who are looking at a good, it's their
interest in what they think a fair price should be. It's a
price that would be comparable with other prices on the market.
It's not a price that's inflated to benefit an insider.
Mr. Bowman. Got it. And what would be the grounds for the
IRS denying an application?
Ms. Emrey-Arras. If they did find improper benefits. So,
for example if they found that the price of the college was
inflated beyond market value to benefit an insider, they could
deny the application for tax exempt status.
Similarly, if they're finding other kinds of arrangements
that look like there's improper benefit, so if you have service
contracts, or leases, or what have you where it looks like
individuals are improperly benefiting, and they're being paid
above market rates to the detriment of the tax-exempt
institution, that could be cause for denying the application.
Mr. Bowman. I thought so. Thank you so much. My next
question is to Ms. Cao. You've written about the Department of
Education's process for approving for-profit conversions. Why
can't the Department of Education just rely on the IRS
determination?
Ms. Cao. Thanks for the question. So, we've heard for-
profit schools complain that they're being unfairly regulated
based on tax status, and I just want to clear up the record.
The Department of Education does not regulate entities based on
tax status. They regulate entities based on the risks that are
posed to students and taxpayers based on whether an institution
is a revenue extracting institution, or a revenue reinvesting
institution.
So, the department looks at tax status because if the IRS
has already determined that an institution is extracting
revenue for insiders, that means the Department of Education
doesn't need to retread that ground. That institution has
disqualified itself.
However, the Department of Education's review goes one step
beyond that. I had mentioned that it has a three-part test, an
IRS review is just one prong of that three-part test. The
Department of Education really owes a greater duty to students
to protect them from institutions that are going to extract the
revenue instead of investing it in their education.
And you know I think one of the reasons for that is if the
IRS messes up it can go back and collect back taxes with
interest. But if the Department of Education messes up,
students don't have that chance to take back those years of
their lives, or in most cases take back the Pell grants, the
loan debt, and the military benefits they've used in an
institution that lied to them.
Mr. Bowman. Thank you. And what resources would the
Department of Education need to reliably make these
determinations moving forward?
Ms. Cao. I think that the resources are a part of the
problem, and the GAO report identified some of the ways in
which the Department of Education is starting to organize its
resources to better address the issue of these conversions.
But I think the department as well needs to use all the
tools in its toolbox, including things like personal liability
when there are insiders that are extracting profit to the point
where they're ripping off students and driving institutions
into bankruptcy.
I think the department also needs to focus a little bit on
the fiduciary duty that institutions owe to the Department of
Education, and to taxpayers. When they sign that agreement to
take Title IV dollars from taxpayers, they're agreeing to be
fiduciaries to the Department of Education, and that aligns
well when non-profit board of directors are already fiduciaries
to educational purposes.
But for-profit directors are fiduciaries to their
investors, and there's a misalignment there.
Mr. Bowman. Thank you so much and I yield back.
Chairman Scott. Thank you. The Gentlemen from Wisconsin Mr.
Pocan.
Mr. Pocan. Thank you, Mr. Chairman. I appreciate it. Thanks
to the witnesses. You know I think I've been on this committee
when I first got to Congress and I'm glad to be back on the
committee, but you know there's plenty of bad behavior by many
of the for-profit entities. I think that's pretty undeniable,
but I also think we have to recognize that some of these
entities, especially the ones converting to non-profits, some
are doing the right thing, and some are very much not doing the
right thing.
Grand Canyon, Purdue, Kaplan, there's a couple great
examples of companies that I think aren't primarily educational
institutions, they're profit-making entities period. I think
it's hard to argue. Other than that, and I guess I'm personally
less concerned about leadership in a conversion because I think
many times some of the folks in leadership have the expertise.
I would expect that they would be there for continuity,
especially in a family held business. You're going to expect to
see that. But what I am concerned about is where the abuses
occur, where we see this split of having a non-profit and a
profit entity especially, seems to be really problematic.
Concerned on also performance. And let me ask a few
questions if I could of Ms. Emrey-Arras, since you did the
report to the GAO. Did you look at all the performance as you
looked at this? So, what the completion rates are for students?
Ms. Emrey-Arras. We did not.
Mr. Pocan. Are you intending to do an additional study on
that?
Ms. Emrey-Arras. We're open to new requests from the
committee if the committee is interested in that.
Mr. Pocan. Yes, I think it would be interesting right,
because that's a real key metric for us to know how things are
performing. How about this question that I've learned of the
profit, so an entity has a profit in a non-profit entity
operating? I don't quite fully understand how that's not also
known as a scam, and then there's other entities again who are
truly non-profit, and now they're all getting painted with one
brush.
And I worry about we're hurting those that are trying their
very best to do the right thing in the conversion, versus the
ones that are clearly trying to get around the system. Did you
look specifically at some of the abuses between the profit and
non-profit dual entities moving forward?
Ms. Emrey-Arras. We looked at some of the financial
statements and found issues that raised red flags for us. So,
if you're looking at situations where you know a president of a
non-profit college is also engaging in lots of service
contracts with the for-profit college which the president also
owns, that can raise issues.
Leasing arrangements, other situations like that can raise
red flags about whether or not those are really you know good
arrangements in the best interest of the non-profit college, or
whether they're there to improperly benefit insiders.
Mr. Pocan. So does anyone look at that for example, the
fair market value. If someone is leasing, I fully understand if
a family had it and they had property and now they're leasing
it back. There's fair market value or there's not. Does anyone
actually look at that through the process, either education or
IRS?
Ms. Emrey-Arras. Well, the IRS is supposed to scrutinize
transactions involving insiders for just that reason, to
determine if there is improper benefit. And if there is, that
can be grounds for denying an application for tax exempt
status. Similarly, the Department of Education is looking at
that issue now.
Previously they didn't, as Dr. Fox had raised the issue
about you know previous years, we found that the Department of
Education has not always done this. We looked at some cases
prior to 2016 and found red flags, but officials there weren't
looking for them.
So yes, it's something that they are looking at now, and we
think that that's a good thing.
Mr. Pocan. And the IRS doesn't do that aggressively, would
that be fair to say?
Ms. Emrey-Arras. That was our interpretation when they
didn't have the sales price and approved the transactions,
nonetheless.
Mr. Pocan. So, it sounds like from the conversation, and I
hope I'm paraphrasing this correctly, that it sounds like more
power should really go to the Department of Education who
actually understands educational outcomes rather than the IRS
because this is not really about a financial transaction per se
in the long-run, it's about educating students.
Were there specific recommendations that you've made on how
we can beef up what Department of Education does versus IRS?
Ms. Emrey-Arras. So, we made recommendations to both
Federal agencies. Our focus was really on a Federal oversight,
so we made recommendations to the IRS on what the IRS could do
better to shore up that oversight, and then we also made a
recommendation to the Department of Education on what it could
do better.
And we thought that the area of growth for the Department
of Education was really in that monitoring after school is
approved to make sure that they're really operating as a non-
profit and that there's no improper benefit going on.
Mr. Pocan. Great. I yield back Mr. Chairman thank you.
Chairman Scott. Thank you. Let's see, the Gentleman from
Kentucky Mr. Yarmouth.
Mr. Yarmouth. Thank you, Mr. Chairman. I also want to thank
all the witnesses. We've been going on 4 hours now, and I
appreciate all of your responses. I know at the beginning the
Ranking Member questioned whether we should be having this
hearing, and I will say that it seems to me this has been a
very useful and thoughtful discussion with a lot of good
questions from all sides.
And I've learned a lot myself, and had some questions
raised as well. But it seems to me for instance, I think it was
the GAO report that had said in 2018 and in 2019 the for-profit
conversions received almost 2 billion dollars-worth of Federal
aid. So, there's a significant amount of money at stake here,
taxpayer money, so I think this is a very important discussion.
Thinking about I want to go back to what Mr. Grothman
discussed, and clearly, I think there are good reasons for a
for-profit to merge to a non-profit. I don't think there's any
debate about that. But there are also some pretty nefarious
ones, so it seems to me that in certain situations yes, we
might have a principle who's built a for-profit institution,
and then his kids or friends don't want to carry it on, so he
or she would want to convert it for a perfect legitimate
reason.
But it also seems there could be situations where he's just
trying to cash out, and essentially lay off the risk, get rid
of the risk and put it all in non-profit and cash out when you
can. And whether or not they're improper benefits, which in
these situations seem more like self-dealing, at least some of
the examples we have.
Improper benefits seems like a euphemism for self-dealing
here. But I want to turn to Professor Galle. In your testimony
you talked about how private foundations actually prohibit many
of these insider transactions because the assumption is that
any insider transaction is going to be inherently unfair to the
non-profit and that it would be very difficult to police.
It seems to me there has been some confusion, at least in
my mind, during some of the testimony as to what is prohibited
now, what is not prohibited now. So, my question to you
Professor Galle is all right, are those restrictions on private
foundations, would some of those be useful when we're talking
about other non-profits, especially non-profit educational
institutions?
Mr. Galle. Thank you, Congressman. I do think they would be
useful, or something like them. So private foundations are
charities that get their support from just a few people, and
they're not schools typically. And so, the assumption is there
aren't a lot of eyes on those transactions.
And so, it's difficult to be sure that they're fair to the
charity. And the situations that we've heard about, and we read
about in the GAO report, are situations where it's hard to
believe that these transactions could possibly be fair to the
charity or to the students who believed that they're getting an
education at a real non-profit school.
And so, I think that both Ed and the IRS should approach a
deal between a charity that was founded by the same person
who's lending it money with some real suspicion. And as I
discussed before, this is an excellent way for the seller to
make the school a prisoner of their debts, or as you said, to
cash out and eliminate their risk.
So, I think being skeptical at least of these transactions
is appropriate here.
Mr. Yarmouth. Well, I have no other questions. I want to
thank the witnesses again, and again Mr. Chairman thank you for
holding the hearing. I've learned a lot and I think it's been
very useful. I yield back.
Chairman Scott. Thank you. I don't see anyone else seeking
recognition, so I'll recognize myself for 5 minutes. Professor
Galle in your research you said the Grand Canyon University
pays 95 percent of its revenues to its former owner through
loan payments and servicing contracts, and therefore should not
have been granted IRS tax exempt status.
Is there reason for there to be a different standard, or is
there a different standard between the IRS non-profit status,
and Department of Education non-profit status?
Mr. Galle. Thank you, Mr. Chairman. That 95 percent finding
was from GAO, and I relied on their findings. So, the IRS
applies a different standard because their mission is not to
protect students. The IRS was very reluctant to say that an
organization wasn't charitable and didn't get tax exemption.
Because if they said that the charity would close its
doors. And Congress responded to that by creating a new regime
in the late 90's called the Intermediate Sanctions Regime. And
that regime tells the IRS don't try to revoke organization's
tax-exempt status. Don't decide whether they're really
charitable or not.
Your main job is just to assign penalty taxes on people who
extract extra benefits. And so, the IRS isn't looking at these
transactions to determine whether the organization is really
non-profit and really has an incentive to maximize students
over revenues. And so those fundamentally are different
standards.
There are doctrines that IRS could conceivably employ if it
were to look very closely at these transactions, and I think
you know, a transaction like Grand Canyon is so blatant that it
should fail even in the scrutiny of the IRS.
Chairman Scott. Doesn't the Department of Education have a
different standard?
Mr. Galle. It should. And the Department of Education 90/10
and gainful employment are there to make sure that
organizations with incentives to line their own pockets are
subject to higher standards and more accountability. And that's
not something that IRS does.
So, IRS isn't looking out for those interests. Ed needs to
establish its own standards, identify which schools are the
ones that should be subject to closer scrutiny and make sure
those schools get the scrutiny.
Chairman Scott. Thank you. Dr. Emrey-Arras we've talked
about inflated purchase prices. What are some of the other ways
you can benefit from an ongoing transaction--ongoing insiders
can benefit from the actual transaction, and how can they
benefit in getting money after the transaction?
Ms. Emrey-Arras. Right. So, there are two opportunities for
abuse. So, there's an initial opportunity with the purchase
price of the college where insiders could intervene and rig it
so that they get more money than the fair value of the college,
and then they pocket the difference.
The other opportunity is subsequent to the purchase of the
college. They could engage in extensive service contracts with
the college, or lease agreements. You might have the former
for-profit owners like leasing you know land or facilities to
the now non-profit college.
And the terms of those leases or contracts may not be
favorable to the non-profit college, and they may not be fair
market value. They may also improperly benefit the insiders.
Chairman Scott. Thank you. Ms. Cao we've heard about these
high salaries. What's the difference between a high salary for
a college president and insiders taking money out of the
operation?
Ms. Cao. Sure. So, one difference is whether the college
has gone through an independent review and hiring process, or
whether an insider is extracting revenue for his personal
benefit from non-profit that he essentially controls. And I
think the later situation is what we've seen at some of these
for-profit conversions.
You have shareholders who are benefiting from a conversion
to non-profit status, and any time that shareholders are
promised a pay day, from non-profit status, I think that tells
you all you need to know.
Chairman Scott. Well in the case of those high salaries, if
the president essentially because he's an insider is setting
his own salary rather than an independent board, is that a
different situation?
Ms. Cao. Yes. The president is not just setting his own
salary. He's guiding the administration of the school to
maximize the revenue that he's taking out and paying himself
with or keeping his equity. And that means steering the school
toward higher tuition prices and lower investments in a
student's education.
Chairman Scott. Well, thank you. And I want to thank all of
the witnesses for being with us today. I want to remind my
colleagues that pursuant to committee practice, materials for
submission for the hearing record must be submitted to the
Committee Clerk within 14 days following the last day of the
hearing.
So that's by close of business May 4, preferable in
Microsoft Word format. The material submitted must address the
subject matter of the hearing. Only a Member of Congress, or
excuse me, a Member of the committee, or the invited witnesses
may submit materials for inclusion in the record.
Documents are limited to 50 pages each. Documents longer
than 50 pages can be incorporated into the record by way of an
internet link which you can provide to the Committee Clerk
within the required timeframe, but please recognize that in the
future that link may no longer work.
Pursuant to House rules and regulations, items for the
record should be submitted to the clerk electronically by
emailing submissions to [email protected].
Member's offices are encouraged to submit materials to the
inbox before the hearing or during the hearing at the time the
member makes such a request.
Again, I want to thank the witnesses for your
participation. Members of the committee may have some
additional questions for you, and we would ask you to respond
to those in writing. The hearing record will be held open for
14 days in order to receive the responses.
I remind my colleagues that pursuant to committee practice,
witness questions for the hearing must be submitted to the
Majority Committee Staff within 7 days and questions must be
related to the subject matter of the hearing.
I now recognize the distinguished Ranking Member for any
closing statement that she might want to make, Dr. Foxx.
Ms. Foxx. Thank you, Mr. Chairman. Mr. Chairman I want to
thank the witnesses for their testimony. We covered a lot of
ground today and there's several things worth noting.
Republicans oppose all fraud and abuse no matter the tax status
of the perpetrator.
Republicans care about all students no matter what
institution they attend. Republicans support reforming the HEA
to make sure all students attending institutions of post-
secondary education give them the chance to succeed in the
workforce. In contrast, democrats want to talk about a
college's legal and financial structure, not about students.
Democrats are obsessed with a perfectly legal financial
arrangement that 0.1 percent of for-profit colleges pursued per
year in the past 10 years. Democrats want to shut down small
business in the middle of the pandemic to serve students.
Democrats are uncomfortable with the notion that not all
public and non-profit colleges act in their student's or their
communities' best interest, and here Mr. Chairman I'd like to
insert a Time article related to this issue.
There are real issues American students and families are
grappling with. Outstanding student loan debt has never been
higher because college tuition rates are skyrocketing. Students
are struggling to find a good job after graduation because
their college is not preparing them for career success.
On-time college completion rates are abysmal. Colleges are
trampling on students first amendment rights. China is stealing
intellectual property and infiltrating college campuses.
Families don't care about who runs a college, they do care
about their ability to succeed.
We could have had a hearing today on what actually matters
to our constituents, and I'm disappointed on their behalf that
my democrat colleagues don't seem to care about them. I call
upon my colleagues to pursue a bi-partisan path forward to
reforming the Higher Education Act. I yield back.
Chairman Scott. Thank you. I want to thank our witnesses
again for being with us today and both your testimony and our
discussion have shed light on the urgent need to prevent for-
profit institutions for converting to non-profit institutions
at the expense of students and taxpayers.
As it's been pointed out, all are not guilty of fraud, but
many are. And we've heard that the impact not just on the
students but on the Federal Government could be intense. The
estimate of 600 million dollars to a billion dollars in just
one institution should not be ignored.
We've heard that these conversions deceive the students,
decrease funding for student learning. We've also heard that
virtually all the fraud in the higher education sector in the
borrowed defense claims occurs in the for-profits and the
covert for-profits.
The simple fact is that many of the most concerning
conversions occur when there are insiders at both the non-
profit and the for-profit institution. Common sense tells us
these institutions are unable to engage in transactions with
one another, instead the for-profit institution ends up
profiting for the non-profit institution at the expense of
students with fewer funds invested in their education.
These schools cannot compete on equal terms, the true non-
profits, and public institutions, and as a result they often
turn to fraud like we saw in the Dream Center case, that costs
the Federal Government hundreds of millions of dollars. I also
want to respond to some of my colleagues decided researched
which relies on data from the college scoreboard which shows
the publicly available consumer information is sufficient to
protect students and taxpayers.
However, we know this data is not sufficient to determine a
debt to earnings ratio comparable to the one used in the
gainful employment rule. More importantly, we should not treat
better consumer information as a replacement for strong
accountability measures.
It actually should go hand in hand. And finally, I want to
thank my republican colleagues for raising the need to improve
the cohort default rate, the CDR, the College Affordability
Act, which committee approved last Congress, would have closed
the CDR forbearance loophole, measured CDR's using longer
timeframes, and created a loan repayment rate to supplement the
CDR.
Based on Mr. Gillen's testimony today this seems to be an
area of bipartisan agreement, and I look forward to working
with my republican colleagues to advance these important
reforms. Moving forward I hope my colleagues on both sides of
the aisle will come together to stand up for our Nation's
children and our students and enact meaningful solutions that
protect students and taxpayers against deceptive for-profit
schools.
If there is no further business to come before the
committee without objection the committee stands adjourned.
Thank you.
[Additional submissions by Ranking Member Foxx follow:]
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[Additional submission by Ms. Adams follow:]
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[Questions submitted for the record and the responses by
Ms. Cao follow:]
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[Questions submitted for the record and the responses by
Mr. Gillen follow:]
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[Questions submitted for the record and the responses by
Ms. Emrey-Arras follow:]
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[Whereupon, at 1:56 p.m., the committee was adjourned.]
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