CGTalk - SALON: How for-profit schools get rich

taxguy

08-01-2012, 06:04 PM

Here is a post that I posted on these forums about two years ago. It involved a post about important factors for evaluating art and design schools. It is as valid now as it was then:

Schools should be checked as to "non-profit" or "for profit" status
One more criteria that folks might want to check out would be "whether the school is a "for profit" school or a "non-profit school." This makes a lot of differences:

Benefits of Non- Profit: They don't pay tax on earnings. Contributions to them are usually tax deductible. They get much better rates on postage. They don't have an incentive to make a profit and use that money to line the pockets of their investors. Moreover, they are much more inclined to give out scholarships.

Cons of non-profits: Actually there aren't that many cons. They usually are less efficiently run than that of "for profit" institutions. Moreover, because profitability isn't a factor per se, they don 't have the same incentive to provide cutting edge programs or majors as quickly as that of "for profit" schools.

Benefits of "for profit" schools: They tend to be run much more efficiently than non profits and tend to focus on cutting edge training and majors quicker since these areas are most profitable.

Cons: They tend to be more expensive than the non-profits, net of scholarship,but I have seen exceptions of "for profit" schools being more reasonably priced too. A lot depends on the financial efficiency of the school.

The main con, however, is that there is a big incentive to drain the school of money for both income taxes and for distributions to the owners. It takes a REALLY open-minded owner to be willing to plow the profits back into the school in any significant way. This is why there are usually fewer scholarships given at "for-profit" schools than found in non-profits.

You might wonder why a school would be a "for-profit" school with all the "non profit" advantages. The main reason is that schools remain "for profit" usually because the owners want to pay themselves more than they would or could with "non-profit status." Thus, owners of "for-profit" schools usually keep them as "for-profit" specifically because the owners want to take higher distributions to themselves than they would be able to do with a non-profit. The secondary reason for being a "for-profit" school is that they get less scrutiny than that of their non-profit cousins especially by the IRS. IRS is always looking to see if non-profits are meeting the rules and are operating truly as a "non- profit."

Schools like Ringling, Cal Arts, Pratt, USC, RIT, RISD etc. are non-profits .
Schools like Full Sail, Digital Media Arts and most Art Institutes are "for profit" endeavers

Let me make one thing clear though: I don't want to use this as a definitively determinative approach as to what makes a good school from a poor one since "for profit" schools can be fine if the owners are willing to pump a lot of money back into the school, as per SVA and Gnomon, Matt the Mutt et. al.,and run their program as efficiently as some "for profit" schools tend to do. However, I think what I said does serve as a good general rule.