In March 2022, the Department of Education (ED) reached consensus with non-federal negotiators on a crucial regulation for proprietary institutions: the 90/10 rule. Broadly, the 90/10 rule requires proprietary institutions to receive at least 10% of their revenue from nonfederal educational assistance sources every fiscal year.
Because consensus was reached, the Department is obligated to publish a Notice of Proposed Rulemaking (NPRM) that contains the regulatory text that was agreed to during negotiated rulemaking. After the NPRM is published, the public will have the opportunity to provide comments on the notice. ED will then have until Nov. 1, 2022, to review and respond to all comments before issuing a final rule. The Department has the authority to make changes to the rule based upon comments received in response to the NPRM; however, when consensus is reached during negotiations, the Department typically attempts to structure the final rule to be largely consistent with the consensus text. Congress stipulated that the changes they made to 90/10 rule go into effect for institutional fiscal years beginning on or after January 1, 2023. If the Department misses the deadline to publish the 90/10 rule by November 1, 2022, it is unclear how the Department would apply the statutory amendment made to the 90/10 rule.
For now, we have analyzed the final 90/10 regulation that was agreed to in negotiations and will be included in the NPRM. The regulation keeps several existing portions of the rule in place, but there are significant changes for institutions to learn.
We will begin our breakdown by examining the 90/10 calculation’s numerator, which will be most notable for many institutions, before taking a look at the denominator and more general information about the rule.
What’s the Same
As always, Title IV aid is included in the 90/10 calculation’s numerator, while exceptions remain to exclude Federal Work Study (FWS) and the institutional match for Federal Supplemental Educational Opportunity Grants (FSEOG).
In addition to Title IV aid, the numerator now includes Federal Funds, defined as “any other education assistance funds provided by a federal agency directly to an institution or a student, including the federal portion of any grant funds provided by a non-federal agency.” The most impactful funds that will now be included in the numerator are benefits awarded by the Veterans Administration and the Department of Defense. This change could cause significant increases to some institutions’ 90/10 calculation, making it imperative to begin projecting the impact as soon as possible. ED will provide more detail on additional federal agencies and other funds that will fall into the numerator through a notice published in the Federal Register, updating it as needed.
Another substantial change is the numerator now includes federal funds provided directly to a student, whereas, historically, only funds paid to an institution were included. This can create uncertainty when tracking 90/10, as institutions are dependent on federal agencies providing reports to institutions with the amount students received, potentially after the end of the fiscal year. Per discussions with some clients, since funds provided to students for housing will not be included in the numerator, the impact of this change may be minimal to many institutions.
Our current understanding is that student cash payments will follow a methodology similar to the Presumptive Rule (see more below). Payments from students will be counted first in the numerator up to the amount that federal agencies report to the institution, while any payments beyond the reported amounts will be considered to have come from the student and will be included in the denominator. Additional complications could be created by the requirement to utilize a full year of institutional charges and payments. Our expectation is that the treatment will be similar to determining the source of stipends to students. Institutions will need to compare the total funds received by students for the entire fiscal year to cash payments received for the entire fiscal year.
The final change to the numerator is that any portion of state grants provided by federal funding will be required to be included in the numerator. The federal portion of state grants should be attainable using the OMB Super-Circular that each state must report. While breaking out the federal and state grants on a student-by-student basis could prove problematic, given these funds meet the Presumptive Rule and can be applied before any Federal Funds, we believe the allocation between federal (included in numerator) and state (included in denominator) can be done at the aggregate level.
What’s the Same
Despite initial attempts to eliminate payments for a variety non-Title IV programs from the denominator, the regulations discussed prior to the consensus vote continue to include most of this revenue. Institutions may continue to count revenue from non-Title IV eligible education and training programs offered by the institution as long as it is taught by one of its instructors at its main campus, one of its approved locations or an employer facility. Revenue for training required to uphold state licensing requirements may also continue to be included.
As touched on above, certain non-Title IV program payments were eliminated from the denominator. Specifically, revenue generated when an institution is only providing its facilities for test preparation courses, acts as a proctor or oversees a self-study course can no longer be counted. The regulations do specifically indicate that non-Title IV training revenue must come from sources unrelated to the institution. Proceeds from the sale of receivables, with or without recourse, are also no longer included in the denominator.
The regulations also outlined the requirements for payments made via income share agreements (ISA) to be counted in the denominator:
- Charges included in the ISA must be clearly identified and capped at the stated rate of institutional charges.
- Maximum time for repayment and the amount a student is required to pay must be clearly outlined, along with interest rates (either imputed or implied) and any financing fees.
- The imputed or implied interest rate on the ISA cannot exceed the Federal Direct Loan unsubsidized rate for borrower type on the date the ISA is signed.
- Payments are to be applied in accordance with debt repayment regulations.
Lastly, any funds from a third party that is related to the institution are excluded from the calculation. This change impacts employer contracts which may have previously been included as an independent outside source. Institutions owned by corporate entities with affiliated non-school entities could be impacted by this change.
What’s the Same
As always, the 90/10 calculation must be performed on a student-by-student basis for an institution’s fiscal year. The Presumptive Rule remains in effect, which means Federal Funds are counted first, except for:
- Grant funds from non-federal public agencies (with caveat noted above requiring federal portion of these funds to be allocated to the numerator) and private sources unrelated to the institution;
- Funds from contracts with the institution to provide job training to low-income individuals;
- Funds from savings plans that qualify for special tax treatment (i.e., 529 plans); or
- Institutional scholarships (these amounts must be from unrelated third parties or only the amount generated from income of a scholarship fund established by the institution or related party).
Additionally, the funds used in the calculation are limited to payments received by the school, or Federal Funds paid directly to the student and reported by the agency as noted above to cover institutional charges, including tuition and fees. The determination of whether textbooks, kits and other fees are institutional charges hinge on whether students can obtain them outside of the institution. These charges must be consistently applied as institutional or non-institutional in both the 90/10 and Return to Title IV (R2T4) calculations, and consistent with the cash management regulations.
The regulations included text specifying that only principal payments for institutional loans and ISAs can be included. Our understanding is that interest expense was never eligible, as it doesn’t meet the definition of an institutional charge, and we believe ED is making the clarification to eliminate any questions.
Historically, the 90/10 calculation has always been performed on the cash basis. However, the new regulations include a qualifier to this method, with the apparent intent to prohibit institutions from delaying drawdowns until the subsequent fiscal year to circumvent and pass the 90/10 rule. The qualifiers direct:
- Institutions on advanced payment methods or heightened cash monitoring 1 (HCM1) to drawdown all funds that students are eligible to receive prior to the fiscal year end; or
- Institutions on reimbursement or HCM2 to request the funds, post disbursements and report as federal funds prior to the fiscal year end.
Based on clarifications provided by ED during negotiations, we expect it to be acceptable for institutions to follow their typical timing to drawdown funds around year end. For example, an institution that has a policy in place to wait until after a drop/add period has been completed before drawing down funds would be in compliance if it waited around year end.
With the NPRM expected soon, institutions and financial aid professionals soon will have their chance to provide comment on the regulatory changes, including the 90/10 rule. We encourage everyone to share their opinion on the new rule by submitting a comment to the NPRM.
For more information on the 90/10 rule and other questions about Title IV regulations, visit www.mcclintockcpa.com. In addition, you can contact us to request assistance in recalculating your most recent fiscal year’s 90/10 according to the new regulations so that you can predict how significant the impact will be.
This article is featured in Career Education Review (CER). For more information about CER visit: https://www.career.org/cer.html