Memorandum

To: U.S. Department of Education

From: Carolyn Fast, Jaylon Herbin, Adam Welle, and Yael Shavit

Date: February 4, 2022 

Re: Issue Paper 5: Changes of Ownership and Changes of Control - Proposed 

Language

The above-listed negotiators submit this proposed language for your review: 

Change of Ownership and Change in Control 

600.2 Definitions

***

Nonprofit institution: An institution that -

(1) 

(i) Is owned and operated by one or more nonprofit corporations or associations and the Secretary 

has determined that, no part of the net earnings of which benefits any private shareholder or 

individual; 

(ii) Is legally authorized to operate as a nonprofit organization by each State in which it is 

physically located;

(iii) Complies with all state and federal transparency and accountability requirements applicable 

to nonprofit institutions; and 

(iiiv) Is determined by the U.S. Internal Revenue Service to be an organization to which 

contributions are tax-deductible in accordance with section 501(c)(3) of the Internal Revenue 

Code (26 U.S.C. 501(c)(3)); except that 

(ivvi) For purposes of participating in the federal student aid programs, a nonprofit institution is 

generally not an institution that has entered into an arrangement to benefit the institution’s former 

owner, a natural person or entity related to or affiliated with the former owner, or another entity 

or natural person where such arrangement is inconsistent with nonprofit status, including but not 

limited to an institution that: 

:

Commented [1]: The Department's comments in the Issue 

Paper indicate that the list of arrangements in this section is a 

"non-exhaustive" list. However, the Department's proposed 

language does not make it clear that the list is nonexhaustive. This change is proposed to make it explicit that 

the list is non-exhaustive.

Commented [2]: Added this in an attempt to broaden the 

provision to address not only improper arrangements with 

former owners, but improper arrangements with any for-profit 

entity/person.
(A) Is an obligor (either directly or through any entity in its ownership chain) on a debt 

owed to a former owner of the institution or a natural person or entity related to or 

affiliated with the former owner of the institution; or 

(B) Either directly or through any entity in its ownership chain, enters into, or maintains, 

an revenue-based servicing agreement with a former owner of the institution or a natural 

person or entity related to or affiliated with the former owner of the institution in which

payments are based on the gross or net revenues of the institution or otherwise comprise a 

substantial portion of the net revenues of the institution;

(C) Either directly or indirectly enters into, or maintains, agreements with for-profit 

entities in which payments to the for-profit are based on the gross or net revenues of the 

institution or programs of that institution, where such revenues comprise more than 50% 

of the tuition revenues of the institution;

(D) Either directly or indirectly, enters into, or maintains, an agreement with a for-profit 

entity in which the institution outsources a substantial number of core services to a forprofit entity; 

(D) Enters into a contract, lease, or other agreement that provides that the institution 

must, under conditions specified in the agreement, make payments to a former owner of 

the institution or a natural person or entity related to or affiliated with the former owner 

of the institution where the obligation extends beyond 12months after transfer of control; 

(D) Is a membership corporation in which one or more of the members does not meet the 

Department’s definition of a nonprofit institution;,

 

(E) Has a former owner of the institution or a natural person or entity related to or 

affiliated with the former owner of the institution as a member of the board of trustees or

in a similar position of authority, or in a position to directly or indirectly name, remove, 

or replace members of the board of trustees of the institution; or

Commented [3]: Alternatively, this could read "a substantial 

portion" of the tuition revenues of the institution.

Commented [4]: This language is intended to address 

situations where long-term contracts with former owners are 

part of the transaction in which the for-profit entity transfers 

ownership to a non-profit entity. These may include leases of 

real estate from the former owners, for example.

Commented [5]: This language is proposed to address the 

inappropriate use of “membership” nonprofit corporations. 

Most nonprofit colleges have boards of trustees (or boards of 

directors) who have full control. Some for-profit owners have 

established nonprofit corporations with members (generally a 

sole member) who can overrule and/or replace board 

members. This type of arrangement is problematic, unless the 

sole member is a valid nonprofit.