Tuesday, January 6, 2015

For-Profit vs. Non-Profit Universities: Mostly an Accounting Trick?

This news story caught my eye this morning:
Milwaukee for-profit Herzing U makes the jump to non-profit
There has been a wave of regulation aimed at the for-profit higher education sector, much of it in response to perceptions that those institutions are getting rich off the backs of their students (and the government) without delivering much of value. There is certainly plenty of data to back up that assertion, as John Oliver pointed out last fall:

Attempts at regulation at the state level, as in Wisconsin where Herzing is based, have been largely ineffective. The Federal department of education, on the other hand, has drafted and imposed some much more stringent requirements on these institutions to prove that they're doing something worthwhile.

Since many of these requirements are specifically aimed at for-profit institutions, it's not surprising that some of them would decide to abandon that ship and recast themselves as non-profit, tax-exempt institutions, as Herzing has apparently done. I've long said that the primary difference between a for-profit institution and a non-profit one is accounting, so this switch may be easier than it seems.

Certainly Herzing will now be barred from doing some things - like taking advantage of venture and investment capital - that for-profit institutions can do. But I doubt that very much will change otherwise, at least in the near term. Herzing will continue to teach the students it teaches, in the ways it teaches them, without a lot of short-term change in outcomes.

It will be interesting to see, over the longer run, if the removal of the profit motive changes the institution. Will it begin to make decisions differently? Will it behave more like a mission-driven non-profit than a bottom-line seeking for-profit? It may be difficult to tell, given that some non-profit institutions have become pretty bottom-line driven themselves, but there may be signs of change. Or the shift may be purely cosmetic, and Herzing may go on doing everything exactly as it has been - in which case, expect more for-profits to follow them.

This illustrates one of the challenges of trying to regulate: imposing a set of rules that solves a real problem without creating new ones. In this case, the real problem is the almost scandalous nature of some of the profit-seeking institutions that amounted to little more than scams that profited (as so many financial institutions did during the bubble last decade) from ignorance and the willingness to take on often poorly understood debt. In trying to solve that problem, you can create unintended new problems for institutions that really are trying to extend the benefits of education to a broader base of the population. I don't know if Herzing is one of these or not - but they certainly claim to be.

I think the Feds were hoping that the for-profit/non-profit distinction would be a way to save the baby from the bathwater. If Herzing's move is successful, that will pretty much eliminate that strategy and send regulators back to the drawing board. What they'll come up with next, I have no idea - but I hope that, whatever rules get promulgated, they do more good than harm.

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