Deep Dive Into Proposed 90/10 Rule and Changes of Ownership Regulations

By Jill Desjean, NASFAA Policy & Federal Relations Staff

Last month, the Department of Education (ED) issued a Notice of Proposed Rulemaking (NPRM) requesting public comments on draft regulations to implement statutory changes to the 90/10 rule and to update the rules on changes of ownership.

The 90/10 rule and changes of ownership were covered in the Institutional Programmatic Eligibility committee in early 2022. Other topics covered in that session included gainful employment, certification procedures, and financial responsibility. ED has indicated that it does not plan to release draft language on any of the remaining topics from the institutional and programmatic eligibility negotiations until spring of 2023, meaning that the earliest those rules could become effective would be July 1, 2024.

90/10 Rule

The American Rescue Plan (ARP) amended the Higher Education Act (HEA) of 1965 requirement that proprietary institutions of higher education derive at least 10% of their revenue from non-Title IV student aid (allowing up to 90% of revenue to come from Title IV aid), known as the “90/10 rule.” The law now requires that the 90% federal revenue cap include all sources of federal funding, not just Title IV student aid funds.

ED was charged with implementing this statutory change, including defining what would be considered federal funding for these purposes.

ED proposes that institutions must count as federal funding all Title IV, HEA program funds, as well as any other education assistance funds provided by a federal agency directly to an institution or a student during that fiscal year, including the federal portion of any grant funds provided or administered by a non-federal agency, to cover tuition, fees, and other institutional charges. 

ED would specify annually in the Federal Register a list of the federal funds that would need to be counted as revenue from federal sources. ED indicates in the preamble to the regulations that it believes institutions would be able to determine which portion of funds represented the federal share, in most cases due to the fact that non-federal agencies must follow strict procedures for tracking spending of federal funds. ED does, however, allow for the possibility that this information would not be available, in which case it would prevent the institution from counting the entirety of those funds from being included in the 90/10 calculation in order to avoid federal funds being treated as non-federal funds.  

In response to negotiator concerns that institutions might not be aware of federal funds that were provided directly to a student, ED indicates that it expects institutions to make a good-faith effort to determine whether such funds were received in instances where the institution was not notified directly by the federal agency that distributed such funds to students. 

The proposed rules would exclude from the federal revenue cap any non-Title IV federal funds that go directly to a student and are specifically designated by the federal agency providing those funds to cover expenses other than tuition, fees, and other institutional charges.

ED adds a new disbursement rule in the proposed regulations to end a practice they have observed where some institutions delay disbursements to students to the next fiscal year in order to pass the 90/10 threshold in the year in which the student could have received a disbursement. 

The regulations propose to add guardrails as to which institutional revenues can be counted as non-federal revenue. They add to the current rules about non-federal revenue that funds generated from activities conducted by the institution that are necessary for the education and training of its students must be related directly to services performed by students. As an example of what practices ED is attempting to curb, they cite hairdressing services provided by cosmetology students as appropriately counting as non-federal revenue, while the sales of hair care products does not. 

As a safeguard against institutions creating ineligible programs as a means to meet the 10% non-federal revenue threshold, ED also modifies current rules about counting revenue from non-Title IV eligible programs, requiring now that those funds be paid only by a student or on behalf of a student by a party unrelated to the institution, an institution's owners, or affiliates. Further, to be able to count revenue from non-Title IV eligible programs toward the 10% non federal revenue requirement, those programs could not include any courses offered by a Title IV eligible program at the school, but must be provided by the institution and taught by one of its instructors of an eligible program, and be located at its main campus, an additional location, a location approved by the appropriate State agency or accrediting agency, or an employer facility. 

ED adds proposed limitations on how institutions treat income-share agreements (ISAs) in the 90/10 calculation. Similar to ED’s treatment of private loans in the 90/10 calculation, institutions would only be permitted to treat as non-federal revenue those payments made on an ISA by the recipient and not the entire value of the ISA at the time it is applied to the student’s account. ED also makes clear that this treatment would apply not just to ISAs offered directly by the institution, but also by other related parties including those with common ownership with the institution or with contractual or financial relationships with the institution. ED would also require that, to count as non-federal revenue, ISAs could not have an implied or imputed interest rate that is higher than the Direct Loan interest rate, to avoid incentives for institutions to offer those products given the lack of consumer protection as compared to federal loans. Proceeds from the sale of ISAs, alternative financing agreements, and private loans would be excluded from the non federal revenue calculation under the proposed rules as well.

As is currently the case, institutions would lose eligibility to participate in the Title IV student aid programs if they failed the 90/10 calculation for two consecutive years. The proposed regulations retain the 45-day reporting period for notifying ED of failure to meet the 90/10 requirements, but adds a requirement that, if an institution discovers new information after the 45 days following the end of its fiscal year that would lead to 90/10 failure, that it disclose that to ED immediately.

ED adds a requirement that institutions notify students when they fail the 90/10 calculation and explain to students that a subsequent failure could result in the institution’s inability to offer Title IV student aid. ED proposes to also add that institutions that lose Title IV eligibility are liable to repay any funds they disbursed in the fiscal year after losing eligibility. 

Changes in Ownership

ED adds and/or changes several definitions, including “additional location,” “branch campus,” “main campus,” “distance education”, and “nonprofit institution.” These changes are not specific to changes in ownership but apply broadly to all sections of the HEA and, as such, have implications that extend beyond changes in ownership.

Current regulations do not define what is considered an institution’s main campus, although references to the main campus exist throughout the regulations. ED proposes to add a definition of main campus as “the primary physical location where the institution offers programs, within the same ownership structure of the institution, and certified as the main campus by the department and the institution’s accrediting agency.”

ED adds to the existing definition of nonprofit institution a significant amount of detail on how it determines whether it considers an institution to be a nonprofit institution, specifying that ED “...considers the entirety of the relationship between the institution, the entities in its ownership structure, and other parties” and gives examples of when it would not consider an institution to be a nonprofit. Those include instances when the institution owes a debt to, or has a revenue-sharing or other type of financial agreement with a former owner or someone with a relationship to the former owner. Exceptions would be made if the terms of such arrangements were determined by ED to be reasonable based on the market price for the services or agreements. 

The proposed rules add a specification that distance education programs — other than those offered as prison education programs (PEPs) — are considered to be associated with the main campus if the institution offers both in-person and distance education options. For schools that only offer distance education, the institution’s location is considered to be the same as where its administrative offices are located. ED notes that these changes are relevant to several provisions in the regulations that relate to the location of either the student or the school. 

The proposed rules would require that institutions provide 90 days' notice to both ED and to enrolled and prospective students of an impending change in ownership. Institutions would also have to document that accreditation and state licensure are in effect as of the day before the proposed change.

Next Steps

ED will review public comments and draft final regulations based on comments received. Consensus was reached on the 90/10 rule changes, so ED is limited to non substantive changes on that topic. However, since consensus was not reached for changes of ownership, ED has more flexibility in incorporating public feedback into its final rule. If the regulations are published by November 1 they will become effective July 1, 2023.

NASFAA intends to submit comments on this topic. Watch Today’s News to read NASFAA’s comments. Please reach out to NASFAA at [email protected] with your concerns about the proposed rules and, if you submit your own comments, please also share them with NASFAA.

 

Publication Date: 8/11/2022


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