This analysis was prepared by Venable, LLP, on behalf of AACOM.

On July 26, 2022, the U.S. Department of Education (the “Department”) released a Notice of Proposed Rulemaking (“NPRM”) to (1) revise the 90/10 Rule to implement the statutory change in the American Rescue Plan Act (“ARP”), which requires for-profit institutions to derive at least 10 percent of revenue from sources other than any federal education aid (including veterans and service member educational aid); (2) clarify the requirements for institutions undergoing changes in ownership, including with respect to for-profit institutions seeking to convert to nonprofit status; and (3) establish Pell Grant eligibility criteria for a confined or incarcerated individual enrolled in a Prison Education Program (“PEP”). The public is invited to comment on the proposed regulations until August 26, 2022. The Department will consider those comments and publish final rules in the Fall of 2022 and the rules will go into effect on July 1, 2023.

Key Points of the Proposed Rules

• 90/10 Rule: The proposed 90/10 regulations would:
  • Revise the 90/10 Rule to require for-profit institutions to include other sources of federal revenue (e.g., veterans and service member educational aid), in addition to Title IV revenue, in the calculation to determine compliance, which aligns with the amendment to the statutory rule enacted under the ARP.
  • Prohibit for-profit institutions from delaying the draw-down of Title IV funds past the end of the fiscal year to alter their revenue calculation or inflate their nonfederal revenue percentage.
  • Restrict how and when for-profit institutions can count institutional loans and alternative financing arrangements—like income-share agreements (“ISAs”)—as nonfederal revenue.
  • Clarify which revenue generated from institutional aid can count as nonfederal revenue for 90/10 purposes.
  • Modify the steps that for-profit institutions must take if they fail the 90/10 calculation by requiring them to notify students of the failure and potential loss of Title IV aid at the institution, as well as the U.S. Secretary of Education (the “Secretary”).
  • Make for-profit institutions liable for repaying all Title IV funds disbursed for the fiscal year after it became ineligible to participate in Title IV due to failing 90/10.
• Changes in Ownership: The proposed changes in ownership regulations would:
  • Clarify that an institution is not nonprofit if it is an obligor on a debt owed to a former owner or where it holds a revenue-sharing or other agreement with a former owner or a current or former employee or board member that is inconsistent with the market value for the services provided.
  • Require colleges to notify both the Department and their students of a planned change in ownership at least 90 days in advance.
  • Require a 10 percent letter of credit if the new owner is missing one of the two years of required audited financial statements and 25 percent if the new owner is missing both years. The Secretary may also require financial protection from the institution undergoing the transaction, as determined to be necessary.
  • Eliminate an existing requirement that the Department continue an institution’s participation with the same terms and conditions in their Title IV agreement as prior to the transaction.
  • Lower the threshold for reporting on changes in ownership from a change in 25 percent of the ownership interest to 5 percent and require a full review of change in control at a change of 50 percent, or at a lower level as determined to be appropriate by the Secretary.
  • Clarify or incorporate the definitions of main campus, branch campus, and additional location, and require that institutions report their distance education programs through the main campus of the institution (consistent with current practice).

Comment Period

Comments must be received by August 26, 2022 and must be submitted via the Federal eRulemaking Portal at www.regulations.gov. Comments received by fax or email, or those received after the comment period, will not be accepted. Comments should indicate they are submitted in response to “Docket ID ED-2022-OPE-0062” and be submitted in Microsoft Word Format or searchable Portable Document Format (“PDF”). Comments received will be available for public viewing in their entirety on the Federal eRulemaking Portal. 

The 90/10 Rule

The Higher Education Act (“HEA”) has long required for-profit institutions of higher education to obtain at least 10 percent of their revenue from sources other than Title IV federal student aid, like Pell Grants and federal student loans. A for-profit institution’s Title IV eligibility is placed in provisional status for two years if an institution fails the 90/10 calculation. If an institution fails for two consecutive years, it loses Title IV eligibility for at least the following two years and until it can demonstrate compliance with all other Title IV eligibility and certification requirements for a minimum of two years after it becomes ineligible. The HEA also requires the Secretary to publicly disclose on the College Navigator website for-profit institutions that fail the 90/10 calculation and submit a report to Congress that contains the federal and nonfederal revenue amounts and percentages for each for-profit institution. 

The ARP, enacted in 2021, changed the calculation to require for-profit institutions to include other sources of federal revenue (e.g., veterans and service member educational aid), in addition to Title IV revenue from the Department, in the calculation to determine if an institution complies with the 90/10 Rule. The Department convened a negotiated rulemaking (“Neg-Reg”) panel to develop the 90/10 implementing regulations. The Neg-Reg panel operated by consensus, defined as no dissent by any member when votes are taken. The proposed 90/10 Rule regulatory amendments, on which the Neg-Reg panel reached consensus, would align the regulations with the statutory changes mandated by the ARP. 

The material provisions of the proposed 90/10 Rule regulations are explained in specific detail below:

• Definition of the Revenue Requirement for For-Profit Institutions – The ARP amended the HEA to require for-profit institutions to derive at least 10 percent of their revenue from nonfederal sources, as opposed to just sources other than Title IV, HEA program funds. Proposed § 668.28(a)(1) would change the regulatory terminology to align with the statutory amendments.
• Calculating the Revenue Percentage – Section 668.28(a)(1) would be amended to require for-profit institutions with fiscal years beginning on or after January 1, 2023 to count Title IV funds and any other education assistance funds provided by a federal agency directly to an institution or student during that fiscal year, including the federal portion of any grant funds provided or administered by a nonfederal agency, to cover tuition, fees, and other institutional charges as federal revenue in the 90/10 calculation. It would also exclude from the revenue percentage calculation federal funds for that fiscal year that are 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. The Secretary would be required to identify the agency and federal assistance funds that must be included in the revenue calculation in a Federal Register notice that will be updated periodically.  Section 668.28(a)(1)(ii) proposes that federal funds subject to the 90 percent limitation be limited to Title IV, HEA program funds for any fiscal years beginning prior to January 1, 2023. Appendix C, which includes a formula for the 90/10 calculation, would be updated to reflect the other changes proposed to the 90/10 calculation as additional guidance to accountants and auditors.
• Disbursement Rule – Section 487(d) of the HEA provides that proprietary institutions must perform the 90/10 revenue calculation using cash basis accounting, with the exception of certain institutional loans issued between 2008 and 2012. Proposed § 668.28(a)(2) would maintain existing regulations regarding proprietary institutions' use of cash basis accounting to calculate their revenue percentage and would also specify that proprietary institutions must include federal funds used to pay tuition, fees, and other institutional charges that were provided either directly to the institution or paid by a student who received federal funds. The proposed disbursement rule would create a deadline for Title IV disbursements for a proprietary institution's 90/10 calculation. Specifically, the proposed regulations would require proprietary institutions requesting Title IV, HEA funds using the advanced payment method (§ 668.162(b)(2)) or the heightened cash monitoring method (§ 668.162(d)(1)) to request and disburse any funds to an eligible student before the end of the proprietary institution's fiscal year. In the proposed regulations, proprietary institutions requesting Title IV funds under the reimbursement or heightened cash monitoring methods in § 668.162(c) or (d)(2) would be required to make timely disbursements pursuant to § 668.164 to student accounts before the end of their fiscal years and report the funds that were disbursed to the student accounts as federal funds in the 90/10 calculations.
• Revenue Generated from Programs and Activities – Section 487(d) of the HEA provides that proprietary institutions may count in their 90/10 calculation funds generated from activities conducted by the institution that are necessary for the education and training of the institution's students as nonfederal revenue. Proposed § 668.28(a)(3) would add a requirement that activities conducted by the institution necessary for the education and training of its students must be related directly to services performed by students for the revenue to be counted in 90/10. Additionally, the proposed regulations would modify the criteria for revenue generated from programs ineligible for Title IV funds required to be included as nonfederal sources. Specifically, the proposed regulations would add a requirement that these funds be paid by a student or on behalf of a student by a party unrelated to the institution, an institution's owners, or affiliates. Additionally, for a proprietary institution to count revenue generated from an ineligible program, the proposed regulations would require that the ineligible program: (1) not include any courses offered in a program eligible for Title IV funds; (2) be provided by the institution and taught by one of its instructors of an eligible program; and (3) be located at its main campus, one of its approved additional locations, a location approved by the appropriate state agency or accrediting agency, or an employer facility. Furthermore, the proposed regulations would provide that the proprietary institution may not count revenue generated from an ineligible program where it only “provides facilities or test preparation courses, acts as a proctor, or oversees a course of self-study.” Finally, the proposed regulations would no longer include funds generated from an ineligible program that simply prepares students to take an examination for an industry-recognized credential or certification issued by an independent third party as allowable nonfederal revenue; such programs must provide the industry-recognized credential or certification in order to be included as revenue.
• Application of Funds – Proposed § 668.28(a)(4) would maintain the presumption that federal funds the institution disburses, or delivers to a student, will be used to pay the student's tuition, fees, or institutional charges. The proposal would also add a requirement that the presumption applies if the institution determines federal funds were provided to a student and the student makes a payment to the proprietary institution within the same fiscal year to pay tuition, fees, and other institutional charges. This section would also (1) clarify that grant funds from nonfederal public agencies can be counted as satisfying a student's tuition, fees, or institutional charges as long as those grant funds do not include federal or institutional funds. If a portion of those grant funds are federal, the proposal would allow the nonfederal portion of the grant to be counted as satisfying a student's tuition, fees, or institutional charges as long as the federal portion is included as federal funds under this section; (2) clarify that private sources must be unrelated to the institution, its owners, or affiliates; and (3) clarify that any contractual arrangement to provide job training must be between the proprietary institution and a federal, federal, or local government agency.
• Revenue Generated from Institutional Aid – Proposed § 668.28(a)(5) would:
  • Allow institution to optionally include institutional aid as allowable nonfederal revenue in the 90/10 calculation;
  • Create clear guidelines for allowing proprietary institutions to count payments representing principal payments on ISAs or other alternative financing agreements as nonfederal revenue in its 90/10 calculation;
  • Prohibit the sale of ISAs or other financing agreements owned by an institution from being included as nonfederal revenue; and
  • Maintain current regulations in § 668.28(a)(5)(iv) allowing certain qualifying scholarships for academic achievement or financial need to be counted as nonfederal revenue but clarifying what the term “outside sources” means in the regulation.
• Funds Excluded from Revenues – Proposed § 668.28(a)(6)(vi) and (vii), respectively, would add two new sources of revenue that must be excluded from the 90/10 calculation: any amount from the proceeds of the factoring or sale of accounts receivable or institutional loans, regardless of whether the loans were sold with or without recourse; and any funds, including loans, provided by a third party related to the institution owners or affiliates to a student in any form. 
• Sanctions – Proposed § 668.28(c)(3) and (c)(5), respectively, would add two requirements in cases where a proprietary institution fails the 90/10 revenue requirement: (1) the institution must notify students that if it fails to meet the 90/10 revenue requires at the end of the current fiscal year, it could potentially lose Title IV eligibility at the end of the current fiscal year if it failed to meet the 90/10 revenue requirements for the prior fiscal year; and (2) the institution would be liable to repay any Title IV funds that it disburses after the fiscal year it becomes ineligible to participate in Title IV due to failing the 90/10 revenue requirements for two fiscal years, excluding funds the institution was entitled to disburse under the regulations. An institution must report if it failed the 90/10 calculation no later than 45 days after the fiscal year or immediately if the failure is determined after the 45-day period.

Changes in Ownership

In response to a Government Accountability Office (“GAO”) report, which identified risks that some changes in ownership of postsecondary institutions pose to student and taxpayers (including continued “insider involvement”), and to address the growing complexity of these transactions, the Department has proposed amended regulations specifying stricter notice requirements, clarifying definitions, and prescribing new rules regarding continued program participation agreements. Like the 90/10 propose rule, the changes in ownership rule reflects language agreed to by consensus by a Neg-Reg panel. 

The material provisions of the proposed changes in ownership regulations are explained in specific detail below:

• New or Revised Definitions – Proposed § 600.2 would clarify or incorporate the following definitions:
  • “Additional location” to mean physical facility that is separate from the main campus and within the same ownership structure of the institution.
  • “Branch campus” to include physical facilities that are in the same ownership structure of the institution and that are approved by the Department as branch campuses.
  • “Distance education” to clarify that, except for an additional location at a correctional institution, for institutions that offer on-campus and distance education programs, the distance education programs are associated with the main campus. For an institution that offers only distance education, the institution is located where its administrative offices are located and approved by its accrediting agency.
  • “Main campus” to mean the primary physical location where the institution offers programs, that is within the same ownership structure, and that is certified as the main campus by the accrediting agency and the Department.
  • “Nonprofit institution” to specify that no part of an institution's net earnings benefits any private entity or person, rather than the existing reference to “any private shareholder or individual.” As in current regulations, private nonprofit institutions would continue to be required to be owned and operated by a nonprofit corporation(s) or association(s), legally authorized to operate as a nonprofit in the federal where the institution is located and exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code. Also, the Department proposes to clarify its current policy that, in general, an institution does not meet the definition of a nonprofit (public or private) if it is an obligor on debt owed to a former owner of the institution; holds a revenue-sharing agreement or any other agreement with a former owner or a current or former employee or board member or an affiliated person or entity related to the former owner, except where the Secretary determines that payments and terms under the agreement are reasonable based on the market price for the services or agreements; or engages in excess benefit transactions with a natural person or entity.
• Notice and Application Procedures for Establishing, Reestablishing, Maintain, or Expanding Institutional Eligibility and Certification – Proposed § 600.20(g)(1) would add a requirement that institutions must apprise the Department at least 90 days in advance of a proposed change in ownership. This includes submission of a completed form, federal authorization and accrediting documents, and copies of audited financial statements. It would also include reporting any subsequent changes to the proposed ownership structure at least 90 days prior to the date the change in ownership is to occur. The institution would also need to notify enrolled and prospective students of the proposed change in ownership at least 90 days in advance and submit evidence to the Department that such disclosure was made. The institution would have to meet this proposed 90-day deadline or risk having its Title IV participation interrupted upon the change of ownership. When a new owner does not have any acceptable audited financial statements, the new owner would be required to provide financial protection in the amount of at least 25 percent of the institution's prior year volume of Title IV aid. When a new owner does not have two years of acceptable audited financial statements but has one year, the new owner would be required to provide financial protection in the amount of at least 10 percent of the institution's prior year volume of Title IV aid.
• Standards for Identifying Changes of Ownership and Control – Proposed § 600.31(c) would remove the 25 percent threshold criteria for determining when a change of control occurs for other entities and replace them with a more substantial list of criteria that observe a proposed 50 percent threshold.
• Covered and Excluded Transactions – Proposed § 600.31(d)(8) would add a new type of covered transaction: the acquisition of an institution to become an additional location of another institution, excluding situations where the acquired institution closed or ceased to provide educational instruction. Among the excluded transactions, proposed § 600.31(e)(2) and (3), respectively, would add irrevocable trusts in which the transfer of the owner's interest is to a trust and the trustee includes only the owner and/or a family member, as defined in current § 600.21(f), and revocable trusts in which an owner has transferred an interest to the trust and then dies.

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