Friday, May 15, 2009

College Board...nonprofit?

It should come as no surprise that there are organizations that claim "nonprofit" status and can bypass or manipulate the laws to make money. College Board is a unique situation where they have created the need and benefit from the profits. And guess what, government watchdog agencies do little.

"Taking the $ATs"

A TBM investigation into the gobstopping amounts of money made by nonprofit testing services.


Chadwick Matlin

May 13th, 2009


Before the financial crisis hit, eighth-graders across the country were scheduled to take a new test this fall*, their first to get into college. The exam is called ReadiStep, and it's a new standardized test that simultaneously says it's "low-stakes" while also being a "vital step" toward getting ready to get a bachelor's degree. It's all multiple-choice, and it's split into three parts: reading, writing, and math. The test will offer teachers "insight into students' academic progress and early feedback that enables them to help students create a road map for success." Plus, administering the exam "helps create a college-going culture"—don't we have one already?—and the results are "predictive" of PSAT scores. PSAT scores, of course, are predictive of SAT scores, which are predictive of where one gets into college. ReadiStep is poised to become a new rite of passage for American youths.

But the test is not provided by the federal government. Nor is it a brainchild of state and local school boards or mandated by No Child Left Behind. It's provided by the College Board, the same organization that administers the PSAT and the SAT. It was originally supposed to launch this fall, but was postponed due to economic circumstances.* If the test does make its way into schools, teachers can use the ReadiStep results as part of the College Board's trademarked "College Readiness SystemTM, an integrated set of services, programs, tools, and resources," all of which presumably help prepare one for the PSAT and SAT. For students, ReadiStep is the gateway to a life of bubble-sheets and No. 2 pencils. (*The previous two paragraphs have been corrected; see the correction at the end of this article.)

For the College Board, it's another way to make tons of money.

ReadiStep will cost 10 bucks a pop, which will likely be paid by school districts. That money goes straight to the College Board, just like all of the revenue generated by its other standardized tests. I ask for your patience as we run through the stunning amount of money the College Board makes, as it demands that I throw a bunch of big numbers at you, but they're numbers that are too surprising not to throw.

Last year, the SAT cost $45 for the basic test, which 1.5 million U.S. students took. The College Board does not comment on how much revenue each test brings in, but once you factor in the nearly 222,000 students who received fee waivers from the College Board, you can roughly estimate that SAT revenue was at least $58,360,365. I say at least because many students take the test over and over again, trying to refine their scores to get into better colleges. That's not to mention the litany of extra fees the College Board charges if you get your scores by phone ($12.50), rush the results ($36.50), or ask for a refund ($7). The real revenue is likely to be millions more than $58,360,365, and that's before you factor in the foreigners who want a piece of an American education ($26 international processing fee; $23 more if you're taking it in India or Pakistan).

That's only the beginning. Many colleges also demand that students take SAT Subject Tests, which are more focused than the broad-ranging SAT. The majority of students who take Subject Tests, which are at least $29 each, sit for three or more. In all, 752,854 Subject Tests were taken, leading to at least $21.8 million in revenue but certainly far more because of the flexible pricing structure.

The PSAT, which serves little purpose besides being a warm-up act for the SAT? $13 per test. In 2006, 2.7 million students took the PSAT for an estimated $35.3 million in revenue, less whatever costs the College Board waived for low-income students.

Then there are the AP exams, which assess whether students have college-level mastery of a subject, usually after taking a corresponding honors course in high school. Having an AP course on your transcript is highly attractive for your college application, just as scoring well on an AP test is highly beneficial once you get to college. So for the elite students in the country, the AP test is a necessary evil, one that costs them $86. In 2008, more than 2.7 million AP tests were taken worldwide. That's more than $232 million of revenue.

In 2006—the most recent year for which the College Board's tax returns are available—the College Board brought in a total of $582.9 million of revenue. Meanwhile, it spent only $527.8 million. That leaves it with a $55.1 million surplus.

In most cases we'd call that $55.1 million a pretty good profit margin. But here's the thing: It's not profit; it's "excess." The College Board is a nonprofit, so by law that $55.1 million has to be rolled over to the next year's budget. In exchange, the College Board gets a host of tax breaks and the cultural benefit of seeming like a cuddly, crunchy organization meant to promote educational ideals. But it's not; it's just as money-hungry and market-share-driven as any other organization. It needs to be to survive an increasingly crowded marketplace. But at what cost?

Some history for context: The College Board was started back in 1900 to help streamline the college-application process. A bunch of colleges had a confab and realized it would be easier if there were a general entrance exam that would qualify you for all the schools at once. Thus, the SAT. These days, the College Board is still a member organization, and it costs a paltry $325 a year to be in the ranks. Those dues grant you a small voice in an unwieldy representative democracy. There are more than 5,000 members, and the real decisions are made by the employees and trustees of the board.

Over the last decade, in particular, the College Board has developed a mean revenue streak. First, there was the 1999 appointment of Gaston Caperton, a former Democratic governor of West Virginia who was more hand-shaker than educator. Immediately upon arriving, Caperton said he wanted to focus more on preparing students for college than testing to see just how well they perform once they get there. With the SAT's position in American society already solidified, that meant diverting more resources toward the revenue-rich prep courses, books, and curricula.

As part of that effort, the nonprofit College Board launched a for-profit spinoff. It created a new company, called, a transparent attempt to cash in on the dot-com bonanza. The site was to be a portal for students as they compared colleges and investigated how to finance their four years. Caperton spun the for-profit status as a way to compete with other capitalistic marauders like the Princeton Review and (TBM's distant corporate cousin) Kaplan, which were out to spoiling education in this country. The College Board needed to defend Horace Mann's vision of an educational system free from the spoiling influence of capital. "We're not willing to give up our not-for-profit expertise to somebody who's just in it for the money," Caperton told the New York Times. As a result, needed stock options to attract the best talent, and you can't have stock options without being a for-profit. Surely, it had nothing to do with all the advertising and data-collection money the site could bring in. (Thirty million dollars and four years later, after the dot-com bubble had burst, was transformed into a nonprofit.)

The College Board also pays its management like a corporation. Caperton made $673,757 in 2006, an 88 percent increase from his initial starting salary. The College Board has 10 senior vice presidents and 28 vice presidents; senior staff members make an average of $239,374 in compensation. These numbers are presumed to have gone higher since 2006.

A few other pieces of yarn: Facing a crowded market for its services—more on that in a bit—the College Board has decided to further its effort into curriculum development. Every time it sells one of those curricula to a school district, it brings in new revenue and furthers corporate synergy—the kids who have a College Board curriculum in their classes are more likely to take the SAT and AP tests. It's a feeder program. "I was not brought in here to be the caretaker of the SAT and the AP," Caperton told the New York Times in 2006. He added that his goal was "to make the College Board play a bigger role in American education, to be a force to make American education better."

Not everyone agrees that the College Board is a consistent force for improving education. At the end of 2008, the College Board was forced to settle with two state attorneys general after ethically questionable activity. The College Board promised colleges a reduced rate on its services if the colleges would label the College Board as a "preferred lender" for its student loans. (The College Board is no longer in the student-loan business.) The AGs' investigation found that the College Board loans were often no better than any other loan, raising ethical questions about why colleges would promote its loans. In one instance the College Board rewarded the compliant colleges with a $70,000 harbor cruise. Educationally, the College Board obviously has many critics, ranging from folks who say the SATs are ineffective to those who say its capitalist tendencies are eroding educational ideals.

Of course, the College Board is not alone in its drive for revenue. Its main rival, ACT Inc., is a nonprofit out of Iowa City, Iowa, that administers the ACT test, the SAT's main competition. It had a $36 million surplus in 2007, which it says it reinvests in its programs and services, just as the College Board says it does. ACT charges 31 cents each time a college pulls a student's home address from its database, which allows the college to send a promotional brochure to a student's home. Those kind of micropayments add up. (Asked via e-mail whether the College Board had a similar fee, the College Board's spokeswoman offered no response. Test watchdogs suggest that it does, though the fee is unknown. The Big Money was not granted any interviews with the College Board or ACT officials for this story.) The Educational Testing Service, the organization that the College Board uses to actually design, score, and transport the SATs (and to a lesser degree the AP tests), had a $94 million surplus and paid its president $931,605 in 2007.

Is all of this kosher? Nonprofits in this country are generally broken down into two categories: private foundations and public charities. Private foundations are organizations that give money out. Clearly, the College Board and its brethren do not fall under that lot. Most everybody else is classified as a public charity. It's a clumsy label for a whole host of outfits that we don't think of as charities—hospitals, colleges, advocacy groups. Usually, we associate contributions to these nonprofits as being tax-deductible; it's an incentive to give money to charity that makes the nonprofit status so tempting to companies with a social mission. But checks written for the SAT and all the other standardized tests aren't tax-deductible because a service is being offered in exchange for the money. Hence, it's a transaction. A transaction that, according to the tax code, isn't nonprofit in its nature. Yet it counts toward all that revenue for the College Board, which filled out a nonprofit tax return, reaping all the benefits that go along with that. (Again, this all applies to ACT as well.)

To keep its nonprofit status, an organization must pass an IRS review every five years, which means it needs to execute its charitable mission appropriately. The College Board's charitable mission was summed up by its president in 2006: "to connect students to access and opportunity, to prepare more and more students to be ready to go to college and succeed." The quote's logic is circular. In order "to go to college and succeed," you have to get into college. And to do that, you have to prepare for and take the SAT. Certainly, the College Board can help you do that. But if the College Board didn't exist, there would be no need for it to happen in the first place.

There's some precedent to a nonprofit industry being reined in by the Feds if it stops serving its purpose. Back in 2005, the Government Accountability Office investigated nonprofit hospitals and found that they were doing less pro-bono work than could be expected of them. The College Board, for the record, made $0 worth of grant contributions in 2006 (while receiving $4.5 million in government grants). Certainly it offers fee waivers for low-income students, which is ostensibly charitable. But there are two problems with that: First, what's the amount of exemptions we should expect from them? There's no telling whether they're doing an adequate job because their job doesn't have a fixed expectation by which it's judged. Second, we're back to the chicken-and-the-egg problem: There wouldn't be a test for which the fees were waived if the College Board didn't exist in the first place. It's not like hospitals—a person still gets sick whether or not the hospital exists. The College Board is both creating the market for a product and then excusing some from paying for that product. That's not charity; it's effective business.

The nonprofit hospital report led to heat from Republican Sen. Chuck Grassley, a big shot on the Senate finance committee who has made a habit of going after nonprofits that aren't really nonprofits. Most recently, Grassley has made rumblings about reducing the $500,000 average compensation for nonprofit hospital presidents. A reminder: The College Board president's salary was $673,757 in 2006. Grassley's office told TBM there aren't any plans to look at the nonprofit testing industry. Perhaps there should be.

What certainly isn't out of the ordinary is the College Board's large surplus. A specialist in nonprofit accounting, Alan Strand, told TBM that it's common for nonprofits to carry an emergency surplus in case their funding dries up. Sure, but the College Board's revenue isn't donation-based. As we've seen, the College Board's revenue arrives from all these services it provides. So the only way that its funding will dry up is if the market for its tests does.

And, crazy as this sounds, there's a chance of that happening. The ACT is gaining market share in the entrance-exam market. One-third of four-year universities, according to testing watchdog FairTest, have now ended the requirement that applicants take an entrance exam like the SAT. The financial crisis has, of course, limited student funds, which may mean they're more likely not to take the test or to take it fewer times. Students may also start to take AP courses but not the tests, figuring they'll just take the intro courses once they get to college instead of spending $86 on each exam. The costs of the tests may also need to come down. ETS lowered the cost of the GRE, the standard graduate-school entrance exam, from $150 to $75 for the unemployed.

The potential for a downturn has forced the College Board to push its revenue-generation efforts even further. It has started a program that allows students to hide certain SAT scores from colleges, which critics say incentivizes students to take the SATs many times in order to mix and match the best scores. It recently announced it's in favor of granting illegal immigrants in-state tuition rates at their local universities. Should that legislation come to pass, it would help an entirely new demographic afford college, which means a new market of test-takers. And ReadiStep, that middle-school test that started this opus, is, of course, all about bringing in new revenue. It's no different than when a for-profit company tries to find new ways to make money in a downturn.

So the College Board's future looks to be turbulent. If these new tests and efforts don't take hold, the educational community may continue to turn its back to its tests. That would drive down its revenue, which would drive down its surplus, which would impinge its plans to further infiltrate the American education system. I'd tell you to short its stock, but it doesn't have any. It is, after all, a nonprofit.

*Correction (May 13, 2009): This piece originally stated that ReadiStep was due to launch this fall. That is incorrect. Its launch was postponed due to the financial crisis.

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