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Undercover For-Profits and Zombie Accreditors Threaten the Quality of American Colleges

The Biden administration is reevaluating federal oversight systems for higher education.

In this April 28, 2015, file photo, students wait outside Everest College in Industry, Calif., hoping to get their transcripts and information on loan forgiveness and transferring credits to other schools. On Thursday, March 24, 2016, a San Francisco Superior Court judge awarded the state a nearly $1.2 billion default judgment against Corinthian Colleges Inc., the bankrupt operator of for-profit colleges. (Associated Press file/Christine Armario)

Editor's Note: On Friday, March 5, The National Advisory Committee on Institutional Quality and Integrity voted in favor of terminating the recognition of the Accrediting Council for Independent Colleges and Schools, ACICS. The recommendation will be handed off to senior officials at the U.S. Department of Education to make the final decision. ACICS’ federal recognition has been under scrutiny since 2016, when the Obama administration pulled its recognition following the collapse of two large for-profit college chains it oversaw.

The government oversight bodies charged with regulating misconduct by for-profit colleges may tighten accountability measures in the Biden era.

In January, a new report from the U.S. Government Accountability Office detailed the failures of the Internal Revenue Service and the U.S. Department of Education to effectively oversee shady for-profit colleges that use a loophole to convert to nonprofit status, rebrand, and dodge taxation and regulation repercussions while still raking in tuition dollars.

The GAO scrutiny comes as the accrediting agency that predatory for-profit colleges turn to for a veneer of legitimacy faces a reckoning of its own. The Accrediting Council for Independent Colleges and Schools, or ACICS, will appear before the body that accredits the accreditors. Experts are saying that the organization — notorious for approving poor-performing institutions that defraud students — could be stripped of its credentials.

Federal law requires institutions to be overseen by the Education Department, states, and accreditors. But despite these three supposed quality control structures, students and taxpayers continue to be victimized. “Are our oversight systems sufficient to guard against predatory behavior?” Kelly McManus, director of higher education at Arnold Ventures, said. “The answer is quite clearly no.”

With new leadership in Washington, that might all be changing. Early appointments by the Biden administration at the Education Department, combined with moves toward more rigorous review of for-profit schools, have made experts hopeful that reforms are within reach.

Undercover For-Profits

A long history of predatory behavior by for-profit colleges — they enroll just 8 percent of all postsecondary students but account for 30 percent of student loan defaults and absorb 12 percent of all federal student aid — has made consumers less likely to attend since their peak enrollment in 2010. To refurbish their reputation, shady chains like Purdue Global, the Art Institutes, and Grand Canyon University have, in recent years, turned to a new strategy: Use the tax code to become nonprofit.

30%

Amount of student loan defaults attributed to for-profit colleges, although they account for only 8% of postsecondary enrollment

“This is a giant scam, and by neither the letter nor the spirit of the law are these new structures actually nonprofits,” McManus said. “The IRS and the Education Department have a joint responsibility to ensure the integrity of nonprofits.”

Yet both agencies have fallen down on the job. The GAO report details 59 conversions of for-profit schools to nonprofit status since 2011. In nearly a third of these cases, an insider like the school’s chancellor continued to run the nonprofit, often while the school owed that person enormous sums of money for loans, real-estate contracts, or executive salaries. Insider arrangements accounted for nearly 80 percent, or $1.8 billion, of federal student loan grants to these schools.

Often, schools employ manipulations that barely pass legal muster. “They enjoy figuring out how they can evade the rules, and doing so in ways that are almost fraud in plain sight by declaring it on their IRS tax form,” said Robert Shireman, director of higher education at the Century Foundation. “What we learned from the GAO report is that the IRS does not read those parts of the tax form.” Shireman said that schools’ methods have become more sophisticated since his 2015 report on covert for-profits. Today, they use byzantine contractual arrangements to avoid glaring conflicts of interest between nonprofit governance and private profiteering.

Are our oversight systems sufficient to guard against predatory behavior? The answer is quite clearly no.
Kelly McManus Director of Higher Education at Arnold Ventures

The GAO found that the IRS and the Education Department have been negligent in protecting students and taxpayers from these deceptions. “If we shift into a mode of higher education that’s distracted by the potential for profit by those who are funding the colleges, it will undermine consumer protections, and the quality of education will decline,” Shireman said.

A Zombie Accreditor

Weak accreditation standards also undermine federal higher education oversight. Accreditors are government-recognized agencies that grant schools eligibility to receive federal financial aid dollars, but their standards are not uniform. ACICS is notoriously lax, making it a haven for low-quality schools.

At its height, the agency accredited roughly 250 institutions, including collapsed corporate giants like Corinthian Colleges and the Education Corporation of America. The Biden administration recently moved to cut ties with the agency, the latest chapter in a long saga. “ACICS is a bit of a zombie accreditor,” said Clare McCann, deputy director for federal higher education policy at New America. “I mean, really, it won't die.”

In 2016, the Education Department under the Obama administration found that ACICS was out of compliance with dozens of federal regulations and could not resolve its issues within the required time frame of one year. It rescinded the agency’s recognition, making its stamp of approval worthless for schools seeking federal aid. ACICS sued, and in 2018 the Trump administration resurrected the agency.

When the agency appears before the National Advisory Committee on Institutional Quality and Integrity, or NACIQI, it will be faced with additional analysis from the Department showing that it remains out of compliance, including with some of the same issues. “Not only could they not resolve the issues within a year, we now know definitively that they did not,” McCann said.

For students, accreditation acts as a seal of approval demonstrating that a school has been reviewed for quality. But ACICS allows accreditation for schools that, in many cases, no other agency would approve. This means low-quality schools maintain access to federal student aid, making it easier for them to recruit low-income students.

“Students are taking on high debt levels for a college that may not do what they hope it will do, which is get them a job with earnings that will allow them to pay off their loans,” said Antoinette Flores, managing director of postsecondary education at the Center for American Progress. “You have tens of thousands of students with debt that they will never be able to repay.”

ACICS is also a drag on taxpayer funds. A CAP analysis from 2016 showed that allowing bad actors to access the federal financial aid system cost taxpayers $5.7 billion over three years, or 52 percent of all federal funding received by ACICS-approved colleges during that period.

Toward Greater Accountability

The GAO recommends that the Biden administration issue an executive order during its first 100 days that increases IRS and Education Department scrutiny of for-profit conversions. The report observes that the oversight process has already begun to improve, with a team under the new administration looking in greater detail at applications for changes in school ownership.

“Rebuilding the capacity of the IRS, getting the agency to prioritize these kinds of reviews, and getting it to work more closely with the Department of Education on these kinds of situations is a priority,” Shireman said.

In the case of ACICS, the NACIQI hearing represents an important test for government oversight capacity. The committee will make a nonbinding recommendation to the Education Department about whether to recognize the agency. Shireman is a new member of the committee. But Arthur Keiser, chancellor and CEO of Keiser University, a school that has repeatedly been sued for misconduct, is also the committee’s House Republican-appointed chair. The fate of ACICS remains uncertain, but if the agency is stripped of recognition, the schools that it has accredited will have 18 months to find a new accreditor.

Experts said that the issue is bigger than ACICS, cutting to the core of what we expect of accreditors. Federal law could require agencies to look at data on educational outcomes, like the percentage of students who complete a school’s programs, Flores said. And some improvements would not require new legislation. The Education Department could increase oversight, including a more intensive process to investigate the actions an agency takes when a school faces financial insolvency, fraud allegations, or low completion rates.

Reforms that undo the lax federal regulation of the past four years will be an uphill battle. “The Trump administration made a concerted effort not just to do favors for ACICS, but also to weaken the accreditation system overall,” McCann said. “I'm hopeful that the Biden administration will have learned lessons, from both the Obama administration and the Trump administration, about what happens when you don't take oversight seriously.”

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