Dive Brief:
- A federal judge on Thursday rejected Grand Canyon University’s bid to reverse the U.S. Department of Education’s decision to consider the institution a for-profit under Title IV, the law governing federal student aid.
- In 2019, the Education Department determined Grand Canyon University is a for-profit college, citing a contract that gives a sizable portion of the institution’s revenue to its former owner. The university asked U.S. District Judge Susan Bolton to reverse that decision, but she sided with the Education Department, ruling the agency has the power to determine whether a college is a nonprofit or for-profit under Title IV.
- The university’s executive team has not made a decision yet on whether to appeal, Bob Romantic, the institution’s executive director of communications and public relations, said in an email Friday.
Dive Insight:
The ruling means Grand Canyon University must continue to follow a stricter set of regulations than nonprofit colleges do.
The university has maintained the Education Department should consider the institution a nonprofit under Title IV because the Internal Revenue Service approved the institution’s tax-exempt status in 2015. However, Bolton ruled the Education Department’s process for determining whether a college is nonprofit under Title IV is separate from IRS approvals.
The legal battle stems from Grand Canyon University’s split in mid-2018 from its former owner, Grand Canyon Education, or GCE.
Although Grand Canyon University separated from GCE, it entered into an agreement under which it pays 60% of its adjusted gross revenue to the company in exchange for support services, such as marketing. The contract spans 15 years, with automatic five-year renewals, according to court documents.
As part of the separation, Grand Canyon University sought to convert from a for-profit college to a nonprofit under Title IV. The Education Department looks at several criteria to evaluate nonprofit conversions, including whether the IRS has determined the college is tax-exempt and whether shareholders benefit from its net earnings.
The agency rejected Grand Canyon University’s request in late 2019, determining in an 18-page letter that the services contract with GCE was primarily intended to “drive shareholder value” for the company, with the university as “its captive client — potentially in perpetuity.” It also told the university it could not describe itself in advertising materials as a nonprofit institution, saying it might be “confusing to students.”
Grand Canyon University sued the Education Department over the decision in 2021, saying it overstepped its authority by declaring the institution was a for-profit under Title IV and that the agency had violated its First Amendment rights by requiring it to refrain from calling itself a nonprofit to receive federal financial aid.
Bolton rejected both of those arguments.
“The Court finds that reviewing change-in-control nonprofit conversions is clearly within the DOE’s authority,” Bolton wrote in the ruling.
Bolton also pointed to an Education Department analysis that showed the master services agreement, or MSA, between Grand Canyon University and GCE would cause the institution’s operating expenses to increase by $697 million — even though the company wasn’t providing additional services.
“It is undisputed that the MSA caused the cost of operating GCU to increase, though it is unclear whether GCU could have obtained a more favorable service agreement, as there is no record that GCU ever solicited offers from other service providers,” Bolton wrote.
Bolton also noted that Grand Canyon University isn’t barred from calling itself a 501(c)(3) tax-exempt organization and that it is allowed to openly disagree with the Education Department’s decision.
“Defendants’ speech condition only requires that GCU accurately represent the outcome of the Decisions to the public,” Bolton wrote. “As such, the condition is a permissible restriction within the scope of Title IV.”
In a statement, Grand Canyon University said it will consider all options to resolve the matter.
“GCU will continue to operate as a legal nonprofit entity while continuing to produce unprecedented results addressing the major issues affecting higher education — specifically the high cost of education, amount of student debt, lack of relevant industry-oriented programs and declining diversity on college campuses,” it said.
