For Some Colleges, the Road to Growth Is to Go Hybrid

January 19, 2011

Keiser University's announcement last week that it would convert from profit to nonprofit status is a reminder that ownership status doesn't necessarily define a college. Some for-profits operate like nonprofits and "there are nonprofits that look just like for-profits," says Arthur Keiser, the university's co-founder.

Even more than that, the conversion is a reminder of the fluidity of the sector and the variety of new ownership models now popping up on the higher-education landscape. They include models like Ivy Bridge College, an online, associate-degree division of Tiffin University that is majority owned by private investors now operating under Tiffin's accreditation, Middlebury College's new language company created in partnership with a publicly traded technology company called K12, and the TCS Education System, an entrepreneurial consortium of both for-profit and nonprofit divisions that was formed last year by the fast-growing Chicago School of Professional Psychology.

The sector hasn't yet hit the point at which it's hard to tell the for-profit colleges from the nonprofit ones without looking at their tax returns, but that day may not be all that far off.

All of those arrangements are "part of the cutting edge" says Bernard Luskin, a longtime college administrator who is now working with the nonprofit Touro University to rebuild its online-education programs. (Touro sold its online division, TUI, to private-equity investors in 2007.)

Public financing and philanthropic support are getting tighter and tighter, Mr. Luskin notes, and "that makes it pretty hard to grow" without these kinds of alternatives.

In fact, while the kind of for-profit-to-nonprofit conversion Keiser is making is uncommon (the 2004 conversion of Goodwin College, in Connecticut, stands out as a rare example) and a bit complex, once it is completed, Keiser's ownership structure will probably look far more conventional than do many of the ownership models emerging elsewhere.

Keiser's conversion will take place via Everglades College Inc. which runs an institution previously converted from for-profit to nonprofit status by the Keiser family. Mr. Keiser said Everglades is receiving part of the family-owned Keiser University as a "huge donation" from the Keiser family and is acquiring the rest though a purchase financed with a loan from the sellers.

Keiser University had been receiving payments from Everglades in return for services it provides, but in the future, the only payments that will go from Everglades to Keiser will be the payments on the debt from surpluses that Keiser and Everglades generate.

Mr. Keiser declined to provide the value of the deal but said the debt load would be manageable. (The Keisers will of course get a tax deduction for their donation, but he notes that with for-profit colleges now out of favor with the public, the fair-market value of the college company is about half of what it would have been a few years ago.)

Keiser University, which Mr. Keiser founded with his mother, will still offer the same kinds of career-focused programs it has for more than 30 years, still cater to adult students, still pursue growth opportunities, and, unless there is a drastic change, still even be subject to that new proposed federal "gainful employment" regulation that has aroused the fury of the for-profit college industry.

Shifting Landscape

U.S. Education Department officials say the tax status of a college is an issue for the Internal Revenue Service, not them, but they are mindful of the changing terrain, and according to David A. Bergeron, acting deputy assistant secretary for policy, planning, and innovation for the agency's Office of Postsecondary Education the department intends to "monitor how institutions that change status operate in the future."

That could keep the department pretty busy, particularly if the focus extends to hybrid ventures like Ivy Bridge, where the interests of private investors and the nonprofit institution are commingled.

Ivy Bridge, which began enrolling students in August 2008, is backed by a start-up called Altius Education, a company that has raised nearly $27-million in private capital from some of the same venture-capital firms that were early backers of Capella Education Company. Although Ivy Bridge is still small—it had about 1,800 students for the term that began on Monday­—it has articulation agreements, dual-enrollment agreements, or other kinds of affiliations with 75 institutions across the country.

Altius's co-founder and chief executive, Paul Freedman, says Ivy Bridge plans to eventually evolve into a separately accredited institution with a nationwide reach. Although the investors own a majority of Ivy Bridge and it clearly has ambitions to grow, he says the involvement of Tiffin and the other academic affiliates "protect the academic rigor of the program."

The year-old College for Working Families is a similar joint venture, although in its case, the nonprofit, the National Labor College, owns a majority stake. The minority partner is the Princeton Review, which owns Penn Foster College.

Even some organizations that have yet to engage with private investors are taking steps to position themselves for a hybrid future. The Chicago School of Professional Psychology, which has enjoyed the kind of growth a for-profit college would envy—its revenue grew by 55 percent, to more than $41-million, from June 2008 to June 2009—is a notable example.

Founded in 1979 as a breakaway from what is today the for-profit Argosy University, it created TCS Education System in 2009 as a parent organization for a consortium that includes itself, Pacific Oaks College, Santa Barbara Graduate Institute, and the Santa Barbara and Ventura Colleges of Law.

It also includes two for-profit divisions, TCS Online, to manage distance-education operations of the separate institutions of the system, and perhaps someday, those of outside institutions as well, and TCS Global, to manage what it hopes will someday be international ventures.

"We see a lot of not-for-profits forming partnerships," says Michael Horowitz, the former president of the Chicago School who is now president and chief executive of the system. "We wanted to have the structures in place." As of now, he says, both ventures are wholly owned by the nonprofit TCS Education; the investor involvement, he says, is "aspirational."

Mr. Horowitz, whose venture has attracted several veterans from the for-profit sector (the head of TCS Online is the former chief information officer of Career Education Corporation), as well as from nonprofit higher education, says the market-focused model he has helped to create is designed to provide smaller nonprofit colleges the economies of scale for administrative matters and even fund raising. "The nonprofit sector, if it's going to be viable, has to commit to growing," he says. "We're committed to growth because the opposite of growth is death."