Grand Canyon University must follow for-profit rules despite its return to nonprofit status, feds say

Rachel Leingang | The Republic | azcentral.com

Grand Canyon University will still be treated as a for-profit university by the U.S. Department of Education despite its recent change to nonprofit status, the department told the school.

The university was given clearance by its accrediting body and the Internal Revenue Service last year to return to nonprofit status. At the time, GCU President Brian Mueller, who is also the CEO of the for-profit Grand Canyon Education, said the school wanted to be a nonprofit again to benefit its students and ensure the long-term legacy of the institution.

The university has been operating as a nonprofit since July 2018. A separate, for-profit company called Grand Canyon Education provide services such as marketing, accounting and human resources to GCU and other universities.

Grand Canyon Education, the for-profit, shared the information about the Department of Education's decision during an earnings call on Wednesday.

For-profit institutions are subject to more stringent regulations. For example, a 90/10 rule requires for-profit institutions to get no more than 90% of their revenue from federal financial aid programs. Gainful-employment regulations require certain postgraduation outcomes for students.

The regulations were necessary, some policymakers and advocates argued, to protect students from exploitation by bad actors in the for-profit sector, some of whom graduated students with massive debt and minimal job prospects.

Under Betsy Devos, U.S. secretary of Education in the Trump administration, the department has sought to repeal some rules enacted during President Barack Obama's administration. The gainful-employment regulation was repealed this summer.

GCU has repeatedly said it didn’t return to nonprofit status in order to avoid for-profit regulations. Mueller repeated this point on the call.

Mueller said GCU expects little to no impact on its operations because of the change. A GCU spokesman said the university already "fully exceeds" the for-profit regulations set by the federal government.

Mueller also said that, while GCU was still reviewing the letter, the university believes it does meet requirements for a nonprofit school and likely would challenge the decision.

The Department of Education did not respond to a request for information on its decision.

GCU would not share the full correspondence from the department with The Arizona Republic.

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GCU sought review from department

GCU voluntarily requested “pre-acquisition review” from the Education Department in January 2018 to see if the department had any input about potential regulatory limitations, like requiring a letter of credit or restricting growth, Mueller said.

The department didn’t respond to the request, Mueller said.

But GCU and GCE decided to go ahead with the transaction, which entailed GCE selling academic assets to GCU.

The parent company transferred property and improvements on the west Phoenix campus to GCU, along with other academic assets. The purchase price was about $875 million. GCU will pay using a seven-year loan.

GCE’s board of directors and GCU’s board of trustees concluded that “the benefits of consummating the transaction at that time were numerous and any regulatory limitations imposed by the department could be managed,” Mueller said.

GCU has nonprofit status from the IRS and the state of Arizona, and the change to nonprofit was approved by GCU’s regional accreditor, the Higher Learning Commission, and by state regulators.

GCE now operates as a services provider to 20 other university partners, Mueller said in the call.

Grand Canyon Education posted service revenue of $193.3 million, or $1.24 per share, for the third quarter that ended Sept. 30. This compares with third quarter 2018 revenues of $155.5 million.

The company attributed the 24.3% increase primarily to its January acquisition of Orbis Education, a company that supports health-care education programs, and the increase in GCU enrollment.

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Education Department notifies GCU

On Wednesday, GCU received notice from the department that the GCE-GCU transaction was approved, allowing GCU to participate in federal financial aid programs through June 30, 2022.

The agreement for GCU to participate in these programs was granted on a provisional basis, though Mueller said there were no requirements for a letter of credit or growth restrictions added. Mueller said the provisional status was automatic because the transaction was a change in control of the university.

He said the company and university were pleased the department had “finally acted after these many months.”

In addition to approving the transaction, the department told GCU that it “does not satisfy the department’s definition of a nonprofit entity,” Mueller said.

Because of this, the university will continue to be treated as a for-profit entity for the purposes of its participation in federal financial aid programs.

Mueller said the university believes it meets all requirements to be treated as a nonprofit and expects the university to take “appropriate measures to challenge this decision.”

Still, GCU expects “limited to no impact at all” on the university’s operations by having to follow for-profit rules, Mueller said.

“At this time, we remain unclear as to the basis upon which the department is purporting to act to reach this conclusion,” he said.

GCU spokesman Bob Romantic said the university is in the process of reviewing the department's decision and had no further comment beyond what was shared in GCE's earnings call.

Romantic said GCU "fully exceeds" the for-profit regulations already. GCU's 90/10 percentage is at 73%. None of its programs failed gainful employment regulations. And its cohort loan default rate is 5.6%.

Reach reporter Rachel Leingang by email at rachel.leingang@gannett.com or by phone at 602-444-8157, or find her on Twitter and Facebook.

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