College Operator Sues Feds Over Non-Profit Status Denial

(Photo: Jason Morrison, FreeImages.com)

(Photo: Jason Morrison, FreeImages.com)

The Center for Excellence in Higher Education has sued the Department of Education only a week after the department denied non-profit status to a chain of for-profit colleges.  According to the lawsuit, the department is following a political agenda in an effort to ensure that career schools go out of business.

Filed in a federal court in Utah, the lawsuit states that the decision made by the department is “arbitrary and capricious.”  The plaintiffs are requesting a court declaration that states the colleges in question are non-profit institutions and should be regulated that way.

“The Department has arbitrarily targeted institutions submitting change in ownership applications in instances in which the new owner is a non-profit corporation by treating those institutions as if they were proprietary institutions during the pendency of their applications. This practice is improper and unjust because it is occurring without forewarning and is contrary to the Department’s historic practice. It is being done solely to subject the institutions to more burdensome compliance requirements,” according to the complaint.

The request made by the Utah-based career education operator had been denied by the department earlier in the month, which stated that doing so would not benefit the public, writes Ashlee Kieler for The Consumerist. The department further explained its decision in a letter addressed to CEHE CEO Eric Juhlin that said the company should “continue to be accountable to taxpayers, students through federal regulations.”

CEHE is in itself a non-profit organization.  However, it purchased a group of for-profit colleges in 2012 from the Carl Barney Living Trust for $400 million, including CollegeAmerica, Stevens-Henager College, and California College San Diego.  After doing so, the organization applied to have its non-profit status extended to these schools.

However, the decision from the department noted that Barney, who had since become chairman of the board for CEHE, still controlled a large portion of the schools.  In addition, they noted the net earnings of a non-profit cannot be used to benefit a private shareholder or individual, and yet Barney was being paid for his role, writes Patricia Cohen for The New York Times.

Meanwhile, Barney claims that he does not make any money from the schools. “I’m out of pocket about $77 million,” he said, of the costs and lost revenue that allegedly resulted from the sale of his colleges. “It was the worst deal I ever made in my life.”

The non-profit status would give the colleges freedom from Gainful Employment regulations which require career schools to show that a certain number of their program graduates go on to earn an adequate living.  The colleges would also not be held under the 90/10 rule, which does not allow career schools to receive more than 90% of their operating revenue from federal student aid funding.

However, CEHE maintains that the decision made by the department has unfairly targeted the schools because they were once for-profit.  The lawsuit continues to argue that the department had asked the organization to provide information since 2012, including four audits and financial statements, but never truly intended to approve the non-profit status it had requested, writes Danielle Douglas-Gabriel for The Washington Post.

The organization goes on to argue that it had been required to guarantee credit of $42.9 million in order to protect taxpayers and students in the event that the schools faced financial failure.  CEHE states that numerous attempts were made to meet with department officials over the last four years, but they were largely ignored, and only learned of the denied status request through a press release earlier in the month.