A Recap of the Department of Education’s Proposed Changes to the 90/10 Rule
On July 28, 2022, the Department of Education published its proposed rule changes for the 90/10 regulations. The changes were open for comment until late August, with final regulations expected by November 1, 2022. Once finalized, changes will be effective on July 1, 2023. Keep reading for more details:
Background: Current 90/10 Rules
According to the Department of Education, all for-profit institutions are required to derive at least 10% of their institutional revenue from non-Title IV sources each year. Previously, proprietary institutions that had more than 90% of its revenue from Title IV sources would lose its ability to participate in federal financial aid programs. The Higher Education and Opportunity Act of 2008 adjusted that rule, so that an institution would lose its funding if it failed the 90/10 revenue test two years in a row. Institutions calculate their percentage on a cash basis, reflecting the payments received and applied to tuition, fees or institutional charges.
As noted in 34 CFR Section 668.28(a)4, the application of funds to eligible charges presumes that Title IV payments are applied to these charges first, with exceptions for:
- Grant funds provided by non-Federal public agencies or private sources independent of the institution,
- Funds provided under a contractual arrangement with a Federal, State or local government agency to provide job training to low income individuals. Funds used also by a student from a savings plan for education expenses that qualify for special tax treatment, or
- Institutional scholarships from outside sources.
The institution counts as non-Federal revenue funds generated from:
- Tuition, fees and other institutional charges for students enrolled in eligible programs,
- Activities conducted by the institution necessary for the education and training of its students, and
- Funds paid by a student or on behalf of a student by a party, other than the institution, for an ineligible program, as long as the program meets certain criteria.
Proposed Changes to the 90/10 Rules
Under the new regulations, changes will impact the calculation of the percentage. It will do so by expanding the monies included in the numerator and impact or limit many of the tools previously used by institutions to manage their percentages. Keep in mind that the following changes are not yet finalized and will not impact the calculation until fiscal years commencing on or after January 1, 2023, at the earliest.
90/10 Calculation Defined
The most significant proposed change in the 90/10 calculation is that the required 10% “non-Title IV revenue” would be limited to “non-Federal funds.” The current rule only includes Title IV funds in the numerator – the revision modifies the definition of the calculation to include all Federal revenues in addition to Title IV revenue in the numerator for the calculation. This change effectively stops Veteran Agency monies, among others, from being treated similar to cash in the calculation.
The Department’s goal is to discourage the unethical recruitment of veterans by proprietary institutions to keep the school’s Title IV percentage under 90. However, this change will cause institutions that have historically catered to service members to see a dramatic increase in their percentages.
The rule change would also require the federal portion of any grant funds that apply to eligible charges administered by a non-Federal agency to be included in the numerator. Federal monies not received directly by the institution, but directly given to the student for such costs, will also need to be included in the calculation. This will add significant complexities to institutions’ calculations. The Department expects to provide periodic updates on which Federal funds are required in the numerator.
Other Proposed Changes
The 90/10 calculation will continue to be done on a cash basis. The Department, under the proposed regulations, would create a “disbursement rule” to impose deadlines that prevent institutions from delaying drawing down and awarding Title IV funds to defer the 90/10 impact to later reporting periods. This rule would limit when an institution can request and disburse funds. The Department hopes to reduce the number of institutions timing the award of Title IV funds to avoid failing the 90/10 rule in two consecutive years.
The new rules clarify that activities conducted by the institution necessary for the education and training of its students must be directly related to services performed by students to be included in the calculation. The Department further states that service revenue for cutting hair by a cosmetology student would be eligible, but the sales of beauty products by the student would not be eligible.
To include revenue from ineligible programs in the calculation, they must meet three requirements:
- Not including any courses offered in Title IV eligible programs,
- Be provided by the institution and taught by one of its instructors of an eligible program, and
- Limitations to it being offered at the main campus, an approved additional location, an accrediting agency approved location or an employer facility. Revenues from programs where the institution only “provided facilities or test preparation courses, acted as a proctor or oversaw a course of self-study” would not be eligible for inclusion, per the Department. The Department hopes to minimize the development of ineligible programs with little oversight created just to improve an institution’s 90/10 calculation.
The proceeds from the sale of private loans, Income Share Agreements (ISAs) or other financing agreements owned by an institution would no longer be included as non-Federal revenue.
In situations where an institution failed the 90/10 revenue requirement, it would be required to notify students that the school could possibly lose Title IV eligibility. If an institution failed the requirements for two years, it would be liable to repay any Title IV funds in the third fiscal year.
The proposed changes to the 90/10 rules will tighten the calculation for many institutions. Make sure your educational institution is aware of the impact of these potential changes, and reach out to one of Sikich’s Title IV audit experts to discuss your concerns: