The Law is the Law

Why has Congress so frequently regulated for-profit colleges differently than other colleges and universities? In part, because of the for-profit sector’s long history of abusing federal student aid programs. But it is also because for-profit colleges and nonprofit colleges are, by virtue of their economic models, fundamentally different from each other, and these differences go far deeper than their mere “tax status.”

Laws regulating for-profit colleges are not confined to the U.S. Department of Education. The Federal Trade Commission, the Securities and Exchange Commission, the U.S. Department of Justice, the Internal Revenue Service, and now the Consumer Financial Protection Bureau all have laws and regulatory authority applicable to for-profit educational enterprises that for the most part do not apply to nonprofit institutions of higher education (e.g., statutes outlawing false advertising, requirements to protect competition in interstate markets, anti-fraud provisions of federal securities laws, consumer protection statutes, etc.).

These laws exist because for-profit educational institutions differ sharply from nonprofit educational institutions in their use of revenues, expenditures, and operating incentives. In fact, in several critical respects, federal and state laws allow for-profit colleges to operate under less restrictive investment and accountability requirements than nonprofit colleges.

Unlike for-profit schools, nonprofit colleges, after paying institutional expenses, can only spend their revenues for educational or charitable purposes—i.e., for a public good. The key legal distinction in the Internal Revenue Code between nonprofits and for-profits is that nonprofits operate under a “non-distribution constraint” that prohibits private inurement. As Williams College economist Gordon Winston pointed out more than 20 years ago, at nonprofit colleges there is no “outsider to whom the institution can legally distribute profits as the normal firm distributes profits to its owners.”¹

By contrast, the owner or CEO and the governing boards of for-profit colleges are not only expected to earn and maximize profits, but also, in the case of publicly traded colleges, have a fiduciary duty to do so. Trustees at nonprofit colleges are typically just reimbursed for their expenses but the median board member at a publicly traded for-profit college was paid over $100,000 for their service in 2009.²

For decades, for-profit executives have themselves proudly differentiated their utilitarian job preparation mission from that of traditional liberal arts colleges and research universities. At for-profit schools, tenured faculty are rare, as are externally funded federal research grants for scientific, medical, technological, and social sciences research. Research universities and liberal arts colleges, unlike for-profit colleges, do not provide undergraduates direct vocational training with “real world” applications.

Nonprofit colleges and universities have a very different and broader mission—to teach students to think critically, to write clearly, to develop a capacity for civic participation, and to pursue knowledge and truth, all with the expectation that these analytic and civic skills will help prepare students for successful lives and careers.

In short, the mission and regulatory controls on the use of profits and revenues at for-profit and nonprofit institutions fundamentally diverge—which suggests that the sectors should sometimes be regulated differently. “To say that education for profit is just about ‘tax status,’” writes Robert Shireman of the Century Foundation in the Huffington Post, “is like saying the distinguishing difference between vodka and water is the calories. The effect on self-control is more important, in both cases.”