For-Profit Colleges Used Loophole to Get Federal Funds. It Will Soon Close

New language agreed upon by higher education interest groups ensures for-profit colleges can't receive more than 90% of their revenue from federal financial aid.
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  • The 90/10 rule prohibits for-profit schools from earning over 90% of revenue from federal financial aid.
  • A loophole allowed the schools to apply federal military benefits to the remaining 10%.
  • Language regulating how for-profit colleges count income share agreements almost derailed consensus.

The Biden administration will soon close a loophole used by for-profit colleges to skirt oversight laws limiting the amount of revenue they can take in from federal student aid.

The 90/10 rule prohibits for-profit institutions from receiving more than 90% of their revenue from federal financial aid. However, it allowed for-profit colleges to circumvent the rule by applying federal military education benefits — such as the GI Bill — on the 10% side of the ledger.

Late last week, the Department of Education (ED) reached consensus with higher education interest groups — including representatives from for-profit institutions — on new language closing that loophole and requiring at least 10% of the schools' revenue to come from non-federal funds.

As the law is currently written, for-profit colleges can conceivably make all their revenue from Title IV financial aid and federal GI Bill funding, leading some for-profit institutions to aggressively recruit veterans.

Travis Horr, the negotiator representing U.S. military service members and veterans, applauded negotiators for reaching consensus on closing the 90/10 loophole.

"We really appreciate the department's work on this, and we are supportive of this," he said.

Bradley Adams, the for-profit institution representative, worked with both ED negotiators and Horr to make finishing touches on the regulations in a closed-door caucus discussion just before the final vote. Ultimately, all negotiators voted in favor of the regulation.

ED will soon file the new regulation in the Federal Register for public comment, and it will go into effect sometime in 2023. The department will not be able to make substantive changes to the language since negotiators reached consensus.

Income Share Agreements a Sticking Point

Consensus on the new 90/10 rule was almost derailed by language imposing limitations on income share agreements (ISAs), in which students receive education funding in exchange for a portion of their post-graduation salary paid over a set period of time.

Negotiators agreed on language ensuring for-profit colleges can't use ISAs as the next loophole to the 90/10 equation. However, they did not classify such lending in the same way as loans. That disappointed some negotiators.

ED recently issued a warning to institutions forming ISAs with students. In September, the Consumer Financial Protection Bureau (CFPB) took action against an ISA lender it said misled students. Advocacy groups including the Student Borrower Protection Center called the practice predatory in some situations.

Adam Welle, representing state attorneys general, told negotiators he wished the department would use this time to further regulate ISAs in higher education by classifying them as private loans.

However, ED's lead negotiator Gregory Martin said the department could not do that until the CFPB reclassifies ISAs as loans. He promised to include that ED's classification of ISAs will mirror whatever the CFPB decides in preamble text to the regulations.

Welle said he was satisfied enough with this clarification to vote in favor of consensus.