The U.S. Department of Education (ED) published the 90/10 rule near the end of 2022 that includes significant changes beyond just redefining what funds should be included in both sides of that equation.
This makes it crucial that institutions understand the nuanced changes, update their processes to calculate 90/10, and undergo extensive proactive planning during 2023 to avoid unexpected failures.
This article will break down the key changes, ramifications of failure, and highlight the type of institutions or revenue streams which are mostly likely to be impacted by these changes. We’ll conclude with a deeper analysis of changes and how they affect many institutions.
As always, McClintock & Associates is here to help. We are recognized experts in Title IV compliance for the education sector.
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Introduction
Numerator Expands Beyond Title IV
Clarifying the Denominator
Action Steps
Ramifications of Failure
Our Analysis
The New 90/10 Rule Changes a Longstanding Standard
Don’t mess with a good thing. The old adage seems to apply to the 90/10 calculation. While the proprietary education sector and many advocates clearly believe the 90/10 is a poor measure of educational quality and outcomes, the fact is that the calculation changed little in the last two to three decades. Thus, while the sector would prefer to eliminate the regulation, changing the 90/10 calculation wasn’t their highest concern. However, the current administration and critics of the sector, had other plans.
When does the New 90/10 Rule Take Effect?
On October 28, 2022, the U.S Department of Education (ED) published final regulations surrounding the 90/10 calculation for proprietary institutions. The Moran-Carper Amendment (part of the American Rescue Plan) required all federal education assistance funds to be included in the 90/10 numerator. The final rule specifies that it applies for fiscal years beginning on or after January 1, 2023.
What Changed in the New 90/10 Calculation?
In publishing these rule changes, which are located at 34 CFR 668.28, ED took a broad brush to redefine many areas of the 90/10 regulations.
Numerator Expands Beyond Title IV
The new regulations impact the numerator, now defined to include “federal funds”, and the denominator, which includes payments received outside of the federal funds for Title IV programs, as well as payments received for programs that are not eligible for Title IV.
The numerator now includes all educational assistance provided by any Federal agency. Thus, Title IV aid is now only one of a number of funding sources that is included in the numerator. The most significant Federal agencies that will now be included in the numerator are provided by Veteran Affairs and the Department of Defense
On December 16, 2022, ED published a Federal Register that lists all Federal education assistance funds that must be included as Federal funds in the 90/10 calculation. ED will publish updates to this list for subsequent fiscal years, as needed. When new fund sources are added, institutions must include them in the numerator in the fiscal year after their posting in the Federal Register.
The Federal Register currently lists 80 sources of Federal education funds. While many won’t apply to most institutions, the listing should be closely reviewed.
Disbursements
These funds may be disbursed directly to the institution, directly to a student for purpose of paying an institutional charge or commingled with non-Federal funds in a disbursement made by a non-Federal agency. If the funds are disbursed directly to the student, the student must make a payment to the school for the funds to be included in the 90/10 calculation.
A certification from the agency or from the student can be relied upon as the basis for the treatment of the payment. Footnote 4 in the Federal Register expands on an institution’s requirements to make a good faith attempt to obtain the proper support of funds provided directly to students for institutional charges. The onus is on the institution. If an institution identifies a Federal payment which is not in the Federal Register, the institution needs to properly account for this in the 90/10 calculation.
Institutions must also identify any Federal grant for the payment of institutional charges sent directly to the student. In most cases, Federal grants for institutional charges are sent directly to the institution and funding sent directly to the student typically are not for institutional charges. For example, Veterans Administration payments sent directly to a student for a housing allowance are not included in the 90/10 calculation numerator as the housing expense is not an institutional charge.
Draw Down Timing
The final (and possibly fuzziest) update the regulations made to the numerator require institutions to make all eligible Title IV draw downs before the end of their fiscal year. However, ED did not define what is “eligible”.
In essence, ED doesn’t want institutions to intentionally delay drawdowns to “manage” the 90/10 calculation. This will be a facts and circumstances analysis. In our mind, ED can monitor this at a high level using the G5 system. Thus, institutions with larger year-over-year fluctuations in Title IV drawdown and whose 90/10 rate is closer to 90% may need to explain these drawdown fluctuations to ED or their auditor. Throughout the process ED has communicated that an institution following a consistent process of waiting until after a drop/add period for all terms would not violate this criteria if the drop/add period extended beyond the institution’s fiscal year end.
Clarifying the Denominator
As mentioned above, ED unexpectedly revised the denominator. In our opinion, some of the changes codified previous interpretations by ED. The regulations clarify that scholarship funds that meet the presumptive rule only includes cash received from independent private sources with no relation to the institution. In addition, cash payments received for retail product sales are specifically excluded from the calculation. In our experience, most schools were already excluding these payments from the calculation before the new rule.
Sale of Accounts Receivable
In addition, ED eliminated the funds from the sale of accounts receivable to be included in the 90/10 calculation, arguing that the proceeds from these sales weren’t generated by the education being provided to students. While the sector didn’t unanimously agree with ED’s position, the point was conceded during negotiated rulemaking in an effort to gain consensus. The regulations also clarified that payments for institutional loans should only include the principal payment and not any payments for the interest generated by the loan. We see this as a clarification: interest is a finance charge not an institutional charge required for education. Similar restrictions were included for payments received from Income Share Agreements. To-date, our experience has been limited with these types of arrangements so an institution pursuing this path for 90/10 reasons should review the regulations closely.
Federal Funding in Non-Federal Sources
The regulations added a new requirement that all Federal funds need to be included in the numerator and this includes any Federal funds that are included in Non-Federal agency funds. At this time, there is no clear guidance as to how institutions can obtain the Federal percentage from non-federal grants (e.g. state grants, workforce contracts). The new rules ask that schools make a good-faith effort to reach state or location agencies to obtain the allocation of federal and non-federal funds. If an institution can’t determine the Federal portion of non-Federal grant funds, then the entire amount is excluded from the 90/10 calculation.
While the preamble and Footnote 4 in the Federal Register indicates ED expects institutions to attempt to determine the Federal and non-Federal share included in grant funds and that ED will evaluate whether a good faith attempt was made, there is no guidance or definition of what represents a “good faith attempt”. The preamble indicates that ED feels institutions are best suited for obtaining this information.
Explore our resources for essential updates, key dates, and FAQs.
WIOA Funds Reclassification
The most concerning and unexpected change in this area is the potential reclassification of Workforce Investment Opportunity Act (WIOA) funds to the numerator. WIOA Title II (ED) and WIOA Title I (Department of Labor) are both included as Federal funds in the published Federal Register. Non-Federal portions of these grants may still exist, and the amount will likely vary based upon the state and the local agency involved. Institutions need to identify any funding sources they have that were included in the list of Federal funds I the Federal Register and begin the search for reporting that will enable them to identify the Federal and non-Federal portions of the funds.
New Requirements for Non-Title IV Programs to be Included
The most impactful changes the final rule add new restrictions on the non-Title IV eligible programs that can be included in the denominator. From discussions with industry colleagues, the changes in this section are the ones which stray the most from the original intent of the Amendment and drift from the negotiated rule making consensus language.
Many of the changes have elicited follow-up with ED as to the reasoning and intent which was evident through the comments to the proposed regulation and available to read in the preamble of the final regulations. The regulations do not change the five basic requirements that enable a non-Title IV eligible program to be counted in the 90/10 calculation.
Revenue from programs which meet one of the following five criteria initially continue to be eligible to be included in the 90/10 calculation.
The program must be:
- Licensed or approved
- Accredited
- Provide an industry-recognized credential
- Provide training needed to maintain state licensing requirements, or
- Provide training to meet additional licensing requirements for specialized training for practitioners that already meet the general licensing requirements in that field
However, the devil is in the details. ED added additional criteria that must be met.
The new requirements for non-Title IV programs to be eligible are below with sub-bullets offering our clarification.
To be eligible, the programs must also:
- This instructor does not have to also teach a Title IV eligible program but needs to be an employee of the institution and not an independent contractor.
- Be taught at its main location or one of approved additional locations, at another school facility approved by the appropriate state agency or accrediting agency, or at an employer facility.
- ED has tightened or, in essence, provided guardrails which didn’t previously exist.
- Do more than merely provide facilities for test preparation courses, act as the proctor, or simply oversee a course of self-study.
- The regulations are taking a position that these activities are not education or training.
- Be taught in person, as distance education programs are specifically excluded.
- This is the most significant change and wasn’t discussed during negotiated rulemaking. The irony is that state boards, accreditors and ED have expanded distance education opportunities for Title IV programs as a result of COVID but now completely disallow it for non-eligible programs and training, even though payments for Title IV eligible programs are included. This seems like an unreasonable position that could be subject to challenge through the courts. However, until that happens, schools will need to perform 90/10 calculations excluding payments received.
- Only include payments from unrelated entities.
- This is consistent with payments from independent private sources, noted previously, that need to be from unrelated entities.
- Not include any courses included in a Title IV eligible program.
- This is the other significant change regarding non-Title IV revenue. Numerous comments were submitted to the proposed regulation but ED didn’t make any notable changes frustrating institutions. In many instances, short-term programs are a subset of a large eligible Title IV program and using the same courses makes economic and business sense. An example would be a short-term non-Title IV Phlebotomy class that is a carve-out from a larger medical program. ED’s goal is to prevent an institution from offering a similar Title IV and non-Title IV program and enrolling a subset of students into the non-Title IV program to ensure the 90/10 calculation is passed. The regulations didn’t define “course” for the purpose of non-Federal revenue and the preamble indicated ED would review on a case-by-case basis if an institution shouldn’t include revenue from an ineligible program because it included content from an eligible program. Thus, ED has a wide amount of latitude in this area. While we do understand ED’s position and concern to some degree, finding common ground on what is a reasonable number of courses from a Title IV program to be used in a non-Title program or how this could be structured is the entire point of negotiated rulemaking. Potentially a consensus change could have been reached if this topic was vetted in more detail during negotiated rulemaking. Again, to us, this change seems designed solely to increase the number of institutions that fail the 90/10 calculation instead of trying to determine the quality of education that an institution provides, which doesn’t seem to be the point of Federal regulations. That is a decision for Congress and the purpose of the Higher Education Act.
Takeaways and Next Steps
When it comes to identifying the percentage of federal funds from non-federal sources, we see an issue for institutions. To us, no clear path exists for contacting state, local, and other agencies to determine this. As an Allied Member on the Mid-Atlantic Associations of Career Schools board, we are working with the Pennsylvania Higher Education Assistance Agency (PHEAA) to identify this amount. To-date, no specific report or process as yet been identified.
While ED issued a Q&A document on December 16, 2022 which addresses the allocation of commingled Federal and state funds, along with other topics, we are unaware of any specific examples of a report that can be obtained to complete the allocation of funds.
Consider These Action Steps to Prepare for Your Next 90/10 Calculation
Set up processes and procedures with the Financial Aid Department to be aware of any funding being provided directly to a student and the purpose of this funding. Generally, most Federal funds for institutional charges are disbursed directly to students but institutions need to be certain.
Review all fund sources in your student information system, especially ones for which funding was received in the last two years. Compare this listing to the Federal Register ED published. Make changes and updates to the student information system to properly classify the fund sources.
Identify non-Federal grants which may have Federal funds included. Reach out to these agencies to begin the process of obtaining the Federal share percentage. Thoroughly document dates, times, discussions, etc. with personnel from these agencies, especially if the Federal share can’t be determined. Have these agencies send written proof (e.g., mail, email) to document the percentages provided.
Continue to disburse Title IV funds at the institution’s normal and historic intervals. Document if a material change occurs from past practices of drawdowns closer to year-end (e.g., personnel vacation, software issues, change in class timing).
If ineligible programs and training are part of the 90/10 calculation, review instructor contracts to ensure they are an employee and not an independent contractor. Review all agreements with education and training performed in conjunction with another institution. Review the legal structure if any ineligible program or training is performed by a wholly owned subsidiary.
Test your student information system (SIS) in advance of year end and consider testing it more than once depending on the complexity of the calculation.
Set up a more robust 90/10 calculation system or process if the rate is going to be close to 90%. This could entail new software or a new model.
Engage with external resources, as needed, to fill institutional gaps in technology, process changes, and understand of the regulations.
New Disclosure Format
ED also issued a revised Appendix C which demonstrates how the 90/10 calculation must be disclosed in the annual audited financial statements which is more detailed than the prior version. ED indicated in the preamble that Federal funds and Title IV funds should not be combined in the Appendix C so ED can observe the impact of other Federal funds on the 90/10 rate. In addition, ED intends to monitor non-Federal revenue included in institution’s 90/10 calculations via Appendix C.
Ramifications of Failure
If an institution fails the 90/10 regulation for one year, it must notify currently enrolled and prospective students of the failure. This notification needs to be in plain language and clearly communicate that a consecutive failure leads to the loss of Title IV funding for two years. The communication is left to the discretion of the institution and ED expects that it would be accessible to all students such as via email or published on the institution’s website. Failure for one-year results in provisional certification for a minimum of two fiscal years subsequent to the year of failure.
Finally, remember that failure of 90/10 for one year is also required to be reported to ED within 45 days of the fiscal year end and is a discretionary trigger under the Borrower Defense to Repayment regulations. Failure of the 90/10 regulation for two years in a row leads to the loss of Title IV funding. An institution is liable for any Title IV aid disbursed after the last day of the fiscal year it becomes ineligible to participate in the Title IV programs as a result of failing the 90/10 rate for two consecutive years.
Our Analysis
Institutions and Revenue Streams Most Impacted by the New 90/10 Rule
As stated earlier, ED took this opportunity to broadly change the 90/10 regulations. The changes are likely to increase 90/10 for all institutions. We believe the institutions in the following situations are most at risk to fail 90/10 under the new rule:
- Most obviously, institutions that were close to 90% under the old rule.
- Schools with a large number of Veterans enrolled in their programs. Congress added Veterans Affairs funding to the numerator to close what proprietary school detractors called the ‘loophole’. However, this clarifies the biggest problem with 90/10, it is an affordability metric, not a qualitative metric. There is no differentiation between an institution that attracts veterans because it offers short affordable programs that enable Veterans to get into the workforce quickly and without much debt versus an institution that simply recruits Veterans aggressively. While both schools face the same struggle passing 90/10, one is the model for how taxpayer money should be invested.
- Trade schools who often have large veteran enrollments and typically receive workforce grants (e.g., WIOA). They seem like an unintended target of the new rule as they tend to have solid graduation rates, high placement rates and met the previous gainful employment metrics.
- Online schools – schools that only provide distance education now have no way to create revenue from non-Title IV programs to be included in the denominator.
- Institutions which passed 90/10 by utilizing revenue from non-Title IV eligible programs that will no longer qualify to be included. It is imperative for schools to proactively review the content of these courses (to ensure they do not include courses that are also part of a Title IV eligible program), where they are taught, and who is the teaching them. There is significant nuance to these considerations, so we recommend working with your auditor and potentially legal counsel as well. It is important to complete this review quickly as changes might be required to be made before revenue in the current year can be included. Institutions which have arrangements or contracts to teach at another school need to ensure this training meets the requirements to be included in the 90/10 calculation. Questions to ask is who is providing the education, what instructors are providing the education being taught, who developed the curriculum, are the students enrolled at the proprietary institution or just at the other institution, and does the location qualify? Finally, if the non-Title IV revenue is being provided by a wholly owned subsidiary of the institution, management needs to be certain this still represents the Title IV institution and collapsing the wholly owned subsidiary into the institution’s legal entity may be prudent.
Institutions Less Likely to be Impacted
Institutions less at risk include cosmetology schools due to the service revenue being generated as part of the students’ education; institutions eligible for significant state grants funds as the Federal portion included in the numerator is likely to be small (we feel working with state agencies to obtain the Federal percentage should be doable); institutions in wealthier areas which receive more cash payments from students; and institutions with significant unrelated employer contracts.
Final Word on the New 90/10 Rule
Changes to the 90/10 rule will have broad implications and impacts across the proprietary education sector. Though some schools and programs are at greater risk than others, virtually everyone will need to recalibrate their calculations and review funding sources to mitigate risk and be compliant.
Even if the 90/10 rate at an institution may not significantly vary, the calculation will change in regard to the new requirements. Our Title IV experts are ready to help and review your process and calculations to ensure compliance.
