Institutional Eligibility and the Higher Education Act: Legislative History of the 90/10 Rule and Its Current Status

Institutional Eligibility and
the Higher Education Act: Legislative History
of the 90/10 Rule and Its Current Status
Updated November 6, 2007
Rebecca R. Skinner
Specialist in Education Policy
Domestic Social Policy Division

Institutional Eligibility and the Higher Education Act:
Legislative History of the 90/10 Rule
and Its Current Status
Summary
Title IV of the Higher Education Act (HEA; P.L. 89-329, as amended by P.L.
105-244) authorizes programs that provide federal student financial aid to support
student attendance at institutions of higher education (IHEs) meeting Title IV
eligibility requirements. To participate in these programs, proprietary (for-profit)
institutions must meet requirements included in Section 102 of the HEA, including
requirements that proprietary institutions have been in existence for at least two years
and derive at least 10% of school revenue from non-Title IV funds. This latter
requirement forms the basis for the 90/10 rule.
The 90/10 rule was put into effect by the 1998 HEA Amendments (P.L. 105-
244), replacing its predecessor, the 85/15 rule, which was authorized by the 1992
HEA Amendments (P.L. 102-235). The 85/15 rule was similar to a requirement that
had been placed on the veterans’ assistance programs administered by the then
Veterans’ Administration to prevent institutions from being established solely to
profit from the payments received by veterans.
Supporters of the 85/15 rule argued that the rule was necessary to stem
fraudulent and abusive practices that had been identified at proprietary institutions.
It also was argued that implementing the rule might restore some market incentive
to education as proprietary institutions would be unable to charge more than what
students not receiving enough federal financial aid to pay all their institutional
charges were willing to pay. Detractors of the new rule argued that requiring
proprietary institutions to obtain at least 15% of their revenue from non-Title IV
sources could limit access to low-income students if proprietary institutions were
forced to deny admission to students receiving Title IV funds to meet the required
percentage of non-Title IV revenues.
During the 1998 reauthorization process, Congress reduced the percentage of
revenue that proprietary institutions had to obtain from non-Title IV sources to at
least 10%. Congress declined to make changes to the formula for calculating revenue
that had generated controversy since its inception following the 1992 reauthorization.
The U.S. Department of Education, however, opted to modify the definition of
revenue and calculation of eligibility through regulations following the 1998
reauthoriz ation.
As part of its consideration of reauthorizing the HEA, the Senate has passed a
bill (S. 1642, Higher Education Amendments of 2007) that would eliminate the 90/10
rule as a condition of institutional eligibility for proprietary institutions. Rather, the

90/10 rule would be moved to HEA Section 487 (Program Participation Agreement),

where it would continue to affect only proprietary institutions.
The HEA may be considered for reauthorization by the 110^th Congress. This
report will be updated as warranted by legislative action.

Contents
The 90/10 Rule and Related Formula..................................2
Legislative History.................................................4
Impetus for the 85/15 Rule.......................................4
1992 HEA Amendments........................................6
GAO Evaluation of Student Outcomes at Proprietary Institutions........7
The 1998 HEA Amendments.....................................7
Department of Education Changes the Formula......................8
Violations of the 90/10 Rule.........................................8
Reauthorization of the Higher Education Act...........................10
Elimination of the 90/10 Rule...................................10
Modifications to the 90/10 Rule.................................12
Brief Overview of Relevant Legislation from the 110^th Congress............13
Brief Overview of Relevant Legislation from the 109^th Congress............15

Institutional Eligibility and the
Higher Education Act: Legislative History
of the 90/10 Rule and Its Current Status
Title IV of the Higher Education Act (HEA; P.L. 89-329, as amended by P.L.
105-244) authorizes programs that provide federal student financial aid to support
student attendance at institutions of higher education (IHEs) meeting Title IV
eligibility requirements. The HEA includes two definitions of institutions of higher
education for the purposes of Title IV eligibility. HEA, Section 101 recognizes
nonprofit institutions that are, among other things, legally authorized by the state,
accredited or preaccredited by an agency or association recognized by the U.S.
Department of Education (ED), and that award a bachelor’s degree or provide at least
a two-year program that is accepted as credit toward the completion of a bachelor’s
degree. HEA, Section 102 expands the definition of an IHE for the purposes of Title
IV eligibility only. Section 102 recognizes proprietary (for-profit) institutions of
higher education, postsecondary vocational institutions, and institutions outside of
the United States as being eligible for Title IV programs.¹ To participate in Title IV
programs, in addition to other requirements, proprietary institutions must have been
in existence for at least two years and derive at least 10% of school revenue from
non-Title IV funds. This latter requirement forms the basis for the 90/10 rule.
As part of its consideration of reauthorizing the HEA, the Senate has passed a
bill (S. 1642, Higher Education Amendments of 2007) that would eliminate the 90/10
rule as a condition of institutional eligibility for proprietary institutions. Rather, the

90/10 rule would be moved to HEA Section 487 (Program Participation Agreement),

where it would continue to affect only proprietary institutions. The House
Committee on Education and Labor has not yet considered an HEA reauthorization
bill.
This report begins with an introduction to the current 90/10 rule and the formula
used to determine whether an institution is in compliance with the rule. This is
followed by a brief overview of the legislative history of the 90/10 rule and its
predecessor, the 85/15 rule. The report concludes with a discussion of the 90/10 rule
with respect to HEA reauthorization and a brief overview of relevant legislation
considered in the 110^th and the 109^th Congresses.

¹ Foreign institutions are eligible to participate only in Title IV, Part B (i.e., Federal Family
Education Loan (FFEL) program). For more information about foreign institutions’
participation in Title IV, Part B, see CRS Report RL33909, Institutional Eligibility for
Participation in Title IV Student Aid Programs Under the Higher Education Act:
Background and Reauthorization Issues, by Rebecca R. Skinner. (Hereafter cited as CRS
Report RL33909, Institutional Eligibility.)

The 90/10 Rule and Related Formula
The 90/10 rule states that a proprietary institution must derive at least 10% of
its revenue from non-Title IV funds. Failure to comply with this requirement results
in an institution losing its eligibility to participate in Title IV programs.
The current formula² used to calculate proprietary school compliance with the

90/10 rule is stated in program regulations as follows:

(i) Title IV funds used for tuition, fees, and other institutional charges
divided by
(ii) Sum of revenues generated by the school from: (1) tuition, fees, and
other institutional charges for students enrolled in Title IV-eligible training
programs; plus (2) school activities necessary for the education or training of³
students enrolled in those Title IV-eligible programs
The denominator only includes revenues generated from school activities necessary
for the education or training of students to the extent that they are not included in
tuition, fees, and other institutional charges.
Several funds are excluded from both the numerator and denominator for
determining institutional compliance with the 90/10 rule. Leveraging Educational
Assistance Partnership (LEAP) program, Special Leveraging Educational Assistance
Partnership (SLEAP) program, and Federal Work Study (FWS) funds can not be
included, except under specific circumstances.⁴ Institutional funds used to match
federal student aid funds and refunds paid to or on behalf of students that have failed
to complete the period of enrollment (e.g., withdrawn, expelled) may not be included.
Finally, the cost of books, supplies, and equipment may not be considered unless
those costs are institutional charges.⁵
In calculating revenue, institutions must use the cash basis of accounting. Under
the cash basis of accounting, revenue is recognized only when it is received rather
than when it is earned. For the purposes of determining compliance with the 90/10
rule, revenue is considered “an inflow or other enhancement of assets to an entity, or
a reduction of its liabilities resulting from the delivery or production of goods or

² Information for this section was taken from U.S. Department of Education, Office of
Federal Student Aid, Volume 2 — School Eligibility and Operations, 2006-2007, pp. 2-8
through 2-11, available online at [http://ifap.ed.gov/sfahandbooks/attachments/0607FSA
HBkVol2Master.pdf]. (Hereafter cited as Office of Federal Student Aid, Volume 2.)
Additional information about the 90/10 rule also is available in 34 CFR 600.5.
³ For more information about Title IV-eligible programs, see Office of Federal Student Aid,
Volume 2, pp. 2-1 through 2-2.
⁴ See Office of Federal Student Aid, Volume 2, p. 2-9 and 34 CFR 600.5(e) for additional
information about the treatment of these funds under the 90/10 rule.
⁵ For more information, see U.S. Department of Education, Office of Federal Student Aid,
Volume 5 — Overawards, Overpayments, and Withdrawal Calculations, available online
at [http://ifap.ed.gov/sfahandbooks/attachments/0607Vol5Master.pdf].

services.”⁶ An institution may only recognize revenue when it represents cash
received from a source outside of the institution. Thus, institutional grants in the
form of tuition waivers do not count as revenue because they do not represent an
inflow of cash from outside the institution.
Current regulations permit several types of non-Title IV revenue to be included
in the denominator of the 90/10 calculation.⁷ Revenue generated by the institution
from activities that are necessary for its students’ education or training may be
considered in the denominator.⁸ These activities must be conducted on campus or
at a facility under the institution’s control, performed under the supervision of a
faculty member, and required of all students in a specific educational program.
Examples of specific non-Title IV revenue that may be included in the denominator
include non-Title IV funds used by students to pay tuition, fees, and other
institutional charges; loan repayments received by the institution during the fiscal
year for which the determination is made; and institutional scholarships if the funds
were disbursed from an established restricted account and the funds in that account
are funds from an outside source.⁹
Finally, Title IV funds must be used to pay institutional charges prior to the
application of other funds unless the student receives grant funds provided by
nonfederal public agencies or independent private sources, funds from qualified
government agency job training contracts, or funds from a prepaid tuition plan. Thus,
institutions are able to count all funds available from these sources toward their 10%
non-Title IV funds requirement.¹⁰ It should be noted that although funds from
prepaid tuition plans, authorized under Section 529 of the Internal Revenue Code
(529 plan), may be applied to institutional charges prior to Title IV funds, funds from
tuition savings plans, also authorized by Section 529, may not be applied prior to
Title IV funds.¹¹

⁶ Office of Federal Student Aid, Volume 2, p. 2-9.
⁷ 34 CFR 600.5(e)(4)
⁸ Revenues from auxiliary enterprises, such as revenue from vending machines or the sale
of equipment and supplies to students that are not necessary for their education or training,
may not be considered revenue for purposes of complying with the 90/10 rule.
⁹ For more information about the treatment of institutional scholarships, see Office of
Federal Student Aid, Volume 2, pp. 2-10.
¹⁰ Without this provision, institutions would have to consider Title IV aid first, which could
limit the amount of funding applied from these other sources. For example, if a student had
$10,000 available from a prepaid tuition plan and institutional charges were $12,000, the
institution could apply the full $10,000 toward these charges even if the student had $6,000
in federal student aid. Without this provision, the institution would have to apply the $6,000
of federal student aid toward institutional charges first, and then would only be able to
apply $6,000 from the student’s prepaid tuition plan toward institutional charges and
compliance with the 90/10 rule.
¹¹ Prepaid state tuition plans, established under Section 529 of the Internal Revenue Code,
currently are applied toward institutional charges prior to Title IV aid because this mirrors
how they are treated in determining eligibility for Title IV aid. In contrast, tuition savings
(continued...)

Legislative History¹²
The 90/10 rule was put into effect by the 1998 HEA amendments (P.L. 105-
244), replacing its predecessor, the 85/15 rule, which was authorized by the 1992
HEA amendments (P.L. 102-235). This section provides a brief overview of the
impetus for developing the 85/15 rule, the 1992 HEA amendments, and the 1998
HEA amendments.
Impetus for the 85/15 Rule
Limiting the amount of revenue proprietary institutions could derive from Title
IV funds became a topic of debate in Congress for several reasons. During the late

1980s and into the 1990s, the Government Accountability Office (GAO), Congress,

and Office of the Inspector General (OIG) at the U.S. Department of Education
conducted investigations of student aid programs and found evidence of extensive
fraud and abuse; some of the worst examples of these practices were found at
proprietary institutions.¹³ According to GAO, for example, from FY1983 to FY1993,
federal payments to honor default claims on student loans across all institutions
increased from $445 million to $2.4 billion.¹⁴ When default rates peaked nationwide
in 1990, default rates at proprietary institutions reached 41% compared with an
overall default rate of 22%. Many proprietary institutions were failing to provide

¹¹ (...continued)
plans established under Section 529 are treated as family savings plans and included in the
calculation of the estimated family contribution. For more information about the treatment
of Section 529 tuition savings plans during the negotiated rulemaking process, see U.S.
Department of Education, Office of Postsecondary Education, 2002 Negotiated Rulemaking
for Higher Education, Team Two — Program and Other Issues: No Tentative Agreement,
Third Session — April 24-26. For more information on the treatment of Section 529 plans,
see CRS Report RL32155, Tax-Favored Higher Education Savings Benefits and Their
Relationship to Traditional Federal Student Aid, by Linda Levine and Charmaine Mercer
(hereafter referred to as CRS Report RL32155, Tax-Favored Higher Education Savings
Benefits).
¹² This report draws, in part, on information contained in archived CRS Report 90-424,
Proprietary institutions: The Regulatory Structure, by Margot A. Schenet; and archived
CRS Report 97-671, Institutional Eligibility For Student Aid Under the Higher Education
Act: Background and Issues, by Margot A. Schenet. (Both archived reports are available
from the author of this report.)
¹³ See for example, Letter from the Office of the Inspector General, House, Congressional
Record, (June 29, 1994), pp. H5327-H5328. (Hereafter cited as Congressional Record,
Letter from the Office of the Inspector General.) See also U.S. Government Accountability
Office, House Committee on Government Reform and Oversight, Testimony before the
Subcommittee on Human Resources and Intergovernmental Relations, Ensuring Quality
Education From Proprietary Institutions, statement of Cornelia M. Blanchette, Associate
Director, Education and Employment Issues, Health, Education, and Human Services
Division, GAO/T-HEHS-96-158, June 6, 1996, pp.1-3. (Hereafter cited as GAO,
Testimony.) The Senate Permanent Subcommittee on Investigations conducted some of the
investigations of fraud and abuse in Title IV programs in 1990.
¹⁴ GAO, Testimony.

students with a quality education or training in occupations with job openings,
focusing instead on obtaining federal student aid dollars. As a result, students left
proprietary institutions with no new job skills or few prospects of employment in
their field of study and burdened with substantial loan debt. At the same time, there
was evidence that proprietary institutions were recruiting low-income students who
were not qualified to participate in postsecondary education and who had little
chance of even completing a program. Arguments were made that if proprietary
institutions were providing a high-quality education, they should be able to attract a
specific percentage of their revenue from non-Title IV programs. Thus, proprietary
institutions that were overly dependent on Title IV revenue were considered
institutions that were not providing a high-quality education, and institutions that
might be misusing federal dollars. Therefore, it was concluded that these institutions
should not be subsidized by federal dollars.¹⁵
All IHEs, including proprietary institutions, eligible for Title IV funds are
governed by a three-part regulatory structure commonly referred to as the “triad.”
The triad consists of accreditation, licensure by a state agency, and eligibility or
certification.¹⁶ In addition to concerns of fraud and abuse during the late 1980s and
early 1990s, there also were concerns that the triad was not providing enough
oversight of the activities of proprietary institutions. First, there were concerns that
accrediting bodies of proprietary institutions were hesitant to withdraw accreditation
due to its financial implications (e.g., an institution could potentially sue the
accrediting body). Second, studies had found that state regulation of proprietary
institutions was limited in its effectiveness. For example, gaps in state laws allowed
fraudulent practices to continue, and existing laws were not adequately enforced.
Third, the OIG found that ED’s certification procedures, at the time, were inadequate
to protect the federal government’s or students’ financial interests.
Various suggestions were made prior to the 1992 HEA reauthorization about
how to strengthen the federal role in eligibility and certification, including requiring
annual financial reports from all institutions or requiring that institutions submit
financial reports based on their dependence on federal aid or their default rates. The
idea of evaluating institutional soundness or basing the need for monitoring on
institutional dependence on federal funds was already being used in veterans’
assistance programs. Veterans were not permitted to enroll in courses in which over
85% of the enrollees had all or part of their tuition or fees paid to them or for them
by the then Veterans’ Administration or the institution. Evaluations of the veterans’
assistance programs found that the policy had helped prevent abuse.¹⁷

¹⁵ See for example, General Accountability Office (formerly Government Accountability
Office), Testimony, pp.10-11; Congressional Record, Letter from the Office of the Inspector
General, pp. H5322-H5334; and Congressional Record, August 8, 1994, pp. S10918-
S10923. (Hereafter cited as Congressional Record.)
¹⁶ For additional information about the triad, see CRS Report RL33909, Institutional
Eligibility.)
¹⁷ For more information about this precedent, see for example, Congressional Record, Letter
from the Office of the Inspector General, p. H5327.

Thus, there was precedent for implementing a rule such as the 85/15 rule as a
condition for proprietary institutions to be eligible to participate in Title IV
programs.¹⁸ There were arguments for and against the proposal. Those in favor of
an 85/15 rule argued that it would stem abuse and might restore some market
incentive to education as proprietary institutions would not be able to charge more
than what students not receiving enough federal financial aid to pay all their
institutional charges were willing to pay. Those against the proposal argued that it
could limit access for low-income students if proprietary institutions were forced to
deny such students admission in order to meet the required percentage of students not
receiving Title IV student aid.
1992 HEA Amendments
The 1992 HEA Amendments contained an amendment specifically targeted at
the source of revenue for proprietary institutions. The definition of a proprietary
institution for purposes of HEA Title IV eligibility was changed to state that
proprietary institutions must derive at least 15% of their revenue from non-Title IV
funds.¹⁹ The formula, as stated in regulations, used to determine whether proprietary
institutions were in compliance with this requirement²⁰ was similar to the formula
currently used to determine compliance with the 90/10 rule (see previous discussion).
The 85/15 rule generated considerable controversy. The Career College
Association, representing proprietary institutions, brought several unsuccessful court
challenges against the provision.²¹ In addition, ED’s regulations implementing the
85/15 rule were delayed by language in appropriations statutes. Also, there were
disputes about the formula used to calculate the percentage of funds derived from
non-Title IV sources. There were discussions about whether the numerator should
include all Title IV aid received by students or only the portion used to pay tuition
and fees. There also was debate about whether the denominator should include only
revenues from Title IV-eligible courses or revenues from other similar contract
training or related businesses.
It should be noted that changes to the numerator or denominator of the formula
could have substantial effects on proprietary institutions. For example, if the formula
were changed to include more sources of revenue in the numerator, proprietary
institutions may require more offsetting revenue to meet the requirements of the rule.
If, on the other hand, the formula was changed to include more sources of revenue

¹⁸ The rule as it applied to veteran’s assistance programs was based on percentage of
enrollment, not revenue, in part because individual programs and not institutions were
approved.
¹⁹ In the 1992 HEA amendments, the definition of a proprietary institution and specific
requirements that these institutions had to meet to be eligible for Title IV programs were
found in Section 481 of the HEA.
²⁰ Information about the formula used to determine compliance with the 85/15 rule was
taken from 34 CFR 600.5, revised as of July 1, 1997.
²¹ See for example, Education Daily, July 21, 1994, p. 5.

in the denominator, it would be easier for proprietary institutions to meet the
requirements of the rule.
GAO Evaluation of Student Outcomes
at Proprietary Institutions
After the 1992 HEA amendments were enacted, given ongoing concerns about
the performance of proprietary institutions, GAO was asked to examine the
relationship between proprietary school performance and reliance on Title IV funds.²²
The GAO study found that proprietary institutions that were more dependent on Title
IV funds had poorer student outcomes in terms of student completion and placement
rates, and higher student default rates. The researchers also concluded that requiring
proprietary institutions to obtain a higher proportion of their revenues from non-Title
IV funds would result in substantial savings from a reduction in student loan defaults.
However, GAO acknowledged that increasing the required proportion of revenue
derived from non-Title IV funds could limit student access to postsecondary
education as proprietary institutions might have to deny access to low-income Title
IV aid recipients to comply with more stringent revenue requirements.
The 1998 HEA Amendments
The most significant change made to the 85/15 rule during the 1998 HEA
reauthorization was to alter the percentage of non-Title IV revenues proprietary
institutions were required to earn. The 85/15 rule became the 90/10 rule, meaning
that proprietary institutions had to earn at least 10%, rather than 15%, of their
revenues from non-Title IV funds.²³
There also were discussions of altering the formula used to determine whether
an institution was in compliance with the rule. For example, the House proposed to
include revenue from non-Title IV-eligible programs provided on a contractual basis
as non-Title IV revenue in the denominator of the formula. In conference, the House
and Senate agreed to continue to define non-Title IV revenues as they were defined²⁴

by ED regulations in effect at the time of enactment.
²² General Accountability Office, Proprietary Schools: Poorer Student Outcomes at Schools
That Rely More on Federal Student Aid, GAO/HEHS-97-103, 1997.
²³ In legislation passed by the House (H.R. 6 as introduced and H.Rept. 105-481) and Senate
(S. 1882 and S.Rept. 105-181), the 85/15 rule remained intact; however, the House proposed
including revenue from services provided on a contractual basis in the denominator of the
formula. For proprietary institutions providing services on a contractual basis, this would
have made it easier for them to meet the revenue requirements from non-Title IV funds. In
conference, the Senate did not agree to this change, but both the House and Senate did agree
to change the percentage of non-Title IV revenues that proprietary institutions had to receive
from 15% to 10%, making it easier for proprietary institutions to comply with the rule.
²⁴ For example, according to regulations, the numerator did not include State Student
Incentive Grant (SSIG, now called LEAP) or Federal Work Study program funds. In
addition, the amount charged for books, supplies, and equipment was not included in the
numerator or denominator unless the amount was included in tuition, fees, or other
(continued...)

Department of Education Changes the Formula
Following the reauthorization of the HEA in 1998, ED opted to make changes
to prior regulations stating how revenue was defined and institutional eligibility
calculated. For example, new regulations explicitly stated that proprietary
institutions must use the cash basis of accounting in determining whether they met
the requirements of the 90/10 rule.²⁵ The new regulations also specified that
scholarships could only be recognized as revenue if they represented cash received
from an outside source. Under most circumstances, institutional scholarships
provided by proprietary institutions do not meet this criteria. As with institutional
scholarships, tuition waivers were not considered revenue. The regulations also
stated that cash revenue from institutional loans could be recognized only when the
loans were repaid. The new regulations also clarified that Title IV funds had to be
applied to student charges before most other sources of payments, such as education
IR A s .²⁶
Violations of the 90/10 Rule
The Office of Federal Student Aid (FSA) at the U.S. Department of Education
is responsible for tracking institutional violations of Title IV eligibility
requirements.²⁷ Based on FSA data on violations for January 1, 2000 through
December 31, 2005, a total of 530 IHEs lost their eligibility to participate in Title IV
programs for a variety of reasons.²⁸ Of these IHEs, only three proprietary institutions
lost their eligibility to participate in Title IV programs due to violations of the 90/10

²⁴ (...continued)
institutional charges. For more information, see 34 CFR 600.5, revised as of July 1, 1997.
²⁵ After the 1992 HEA amendments were implemented, the Secretary of Education
(Secretary) proposed that proprietary institutions could calculate their compliance with the
85/15 rule of Education using the cash basis of accounting to determine Title IV program
revenues (numerator) and the accrual basis of accounting to determine total revenue
(denominator). The cash basis of accounting recognizes revenue when it is received,
regardless of when payments are due. The accrual basis of accounting recognizes revenue
when it is incurred, regardless of the actual date of collection or payment. Based on
comments received by ED, the Secretary agreed that the same basis of accounting should
be used for the numerator and denominator. The cash basis of accounting was selected
because that is the accounting method used by Title IV institutions to report and account for
Title IV program expenditures. (For more information, see Federal Register, February 10,

1994, 59 FR 6446-64675; and Federal Register, July 15, 1999, 64 FR 38271-38282.)

²⁶ For additional information about regulations regarding the 90/10 rule, see Federal
Register, October 29, 1999, 64 CFR 58608-58611; and Federal Register, July 15, 1999, 64
CFR 38271-38282.
²⁷ For additional information about institutional eligibility requirements to participate in
Title IV programs, see CRS Report RL33909, Institutional Eligibility.
²⁸ Institutions lose Title IV eligibility for reasons such as closure, loss of accreditation,
failure to meet administrative capability or financial responsibility requirements, or
voluntary withdrawal. Data on violations of institutional eligibility requirements based on
unpublished data provided by the U.S. Department of Education.

rule. Two violations of the 90/10 rule occurred in 2001, and one violation of the

90/10 rule occurred in 2004.²⁹

More specifically, for example, one of the two institutions was found to have
derived 90.30% of its revenue from Title IV funds for the fiscal year ending
December 31, 2001.³⁰ As a result of this violation of the 90/10 rule, the institution
should not have received Title IV funds for the period extending from January 1,
2002 through September 30, 2002, as the institution was ineligible to participate in
Title IV programs. The institution had to return Title IV funds received during
FY2002, the year for which it was ineligible to participate in Title IV programs.
However, the institution has asked ED whether traditional rounding rules apply to the

90/10 rule; that is, anything below 90.50% would be rounded down to 90%.

According to the FSA office, the use of a rounding rule is being considered.
Another proprietary institution was found to have violated the 90/10 rule in
2002.³¹ An examination of the institution’s annual compliance audit revealed that the
institution had derived 92% of its revenue from Title IV funds in 2002. As a result,
the institution was found to be ineligible to participate in Title IV federal student aid
programs in 2003.

²⁹ While it appears that only three proprietary institutions lost their Title IV eligibility due
to violations of the 90/10 rule, it is possible that other proprietary institutions violated the
90/10 rule in conjunction with other violations (e.g., fiscal mismanagement). The specific
reason for loss of Title IV eligibility is determined by the U.S. Department of Education.
Thus, if an institution has multiple violations, the primary violation may not be attributed
to a violation of the 90/10 rule. In addition, if an institution voluntarily closes or voluntarily
withdraws from Title IV eligibility, the reason for loss of eligibility could then be recorded
as “closure” or “voluntary withdrawal” rather than a violation of the 90/10 rule. For
example, ED issued a combined emergency action and termination/fine action against Teddy
Ulmo Institute based on allegations of misconduct and breach of fiduciary duty, including
violating the 90/10 rule. The institution voluntarily closed, so ED’s actions were rendered
moot. The institution’s loss of Title IV eligibility was not recorded as a 90/10 violation.
For more information, see [http://www.ed-oha.org/cases/2003-42-SF.pdf].
³⁰ U.S. Department of Education, Office of the Inspector General, Audit of American School
of Technology’s Administration of Title IV HEA Programs, Columbus, Ohio, March 2003.
Available at [http://www.ed.gov/about/offices/list/oig/areports.html].
³¹ In data provided to CRS by the U.S. Department of Education, no violations of the 90/10
rule were indicated for 2002, but two violations were indicated for 2001. It appears that one
of the two violations of the 90/10 rule in 2001 may have actually occurred in 2002. A final
determination in the specific violation of the 90/10 rule was issued in June 2005. The
institution appealed the decision and a final judgement was rendered in November 2005.
U.S. Department of Education, Office of Hearings and Appeals (OHA), Index of OHA
decisions, docket number 05-49-SA. Available online at [http://www.ed-
oha.org/ ohaindex.html ].

Reauthorization of the Higher Education Act
As Congress considers reauthorization of the Higher Education Act, it may
consider continuing, eliminating, or modifying the 90/10 rule. This raises several
questions and issues that are addressed below.
Elimination of the 90/10 Rule
As Congress debates the reauthorization of the HEA, it may consider
eliminating the 90/10 rule. One of the primary reasons offered for the elimination of
the 90/10 rule is that it limits proprietary institutions’ ability to serve low-income
students dependent on Title IV aid. That is, because proprietary institutions must
derive at least 10% of their revenue from non-Title IV funds, they must enroll some
students who are not solely dependent on federal student financial aid. Thus, it is
possible that some students interested in attending the institution may be denied
admission. Proponents of the elimination of the rule also argue that in addition to
being limited in their ability to serve low-income students receiving federal student
aid, some proprietary institutions must change their mission or programs to be more
attractive to students who will be able to pay for their own education. Proponents
also argue that the 90/10 rule provides incentives for institutions to raise their tuition
and fees above the amount of funds available to students through Title IV loans and
Pell Grants in order to generate non-Title IV revenue; thus, making it harder for low-
income students to enroll.³²
Opponents of eliminating the rule suggest that for-profit institutions are
fundamentally different from not-for-profit institutions based on their profit-seeking
motive, raising questions about why these institutions should be fully supported by
the federal government and tax-payer dollars. In addition, proprietary institutions
have more flexibility than public and non-profit institutions to develop revenue
sources other than Title IV due to their less restrictive missions. There also are
concerns that without the 90/10 rule, incidents of fraud and abuse by proprietary
institutions may increase.³³ Those opposed to eliminating the 90/10 rule argue that
the rule protects low-income students from incurring debt to attend proprietary
institutions that will not adequately prepare them for employment, and potentially
experiencing the multitude of problems associated with student loan default (e.g., bad
credit rating, no additional federal aid for higher education).

³² Various arguments against having the 90/10 (or 85/15) rule have been made since
Congress first considered implementing the rule. See for example, Congressional Record,
Letter from the Office of the Inspector General, pp. H5322-H5334; Testimony of Mr. David
Moore, in U.S. Congress, House Education and the Workforce Committee, Subcommittee^st
on 21 Century Competitiveness, hearing on H.R. 3039, the Expanding Opportunities in
Higher Education Act, September 11, 2003. Available at [http://edworkforce.house.gov/
hearings /108th/21st/hr3039091103/moore.htm] .
³³ See for example, Testimony of Dr. Donald E. Heller, in House Education and the
Workforce Committee, Subcommittee on 21^st Century Competitiveness, hearing on H.R.

3039, the Expanding Opportunities in Higher Education Act, September 11, 2003.

Available at [http://edworkforce.house.gov/hearings/108th/21st/hr3039091103/heller.htm].

The potential access problem associated with the 90/10 rule and its predecessor
was acknowledged prior to the implementation of the 1992 HEA amendments.
While there may be a number of ways to resolve the access problem, including the
elimination of the rule, in 1995 ED proposed adding a mitigating circumstances
section to the legislation that would allow the Secretary of Education (Secretary) to
waive the rule for proprietary institutions demonstrating that they serve their students
well.³⁴ It was suggested that proprietary institutions might be held to the same
standard as short-term programs,³⁵ which must demonstrate a 70% graduation rate
and a 70% job placement rate.³⁶
The impact of eliminating the 90/10 rule is difficult to determine. It is possible
that many of the proprietary institutions that were engaged in fraudulent or abusive
practices prior to the implementation of the 85/15 rule and its successor the 90/10
rule have already closed or altered their practices to comply with statutory language.
There are still questions, however, whether there are enough other safeguards to
prevent proprietary institutions from potentially engaging in fraudulent or abusive
practices, and to identify those that do. In addressing this issue at a hearing, ED’s
Deputy Inspector General suggested that caution should be exercised when
considering the elimination of any rule, including the 90/10 rule, until the effects of
such an action are better understood.³⁷
It should be mentioned that other measures have been implemented that also
have reduced the incidence of fraud and abuse in HEA Title IV programs. For
example, the HEA cohort default rate rules were established to prevent institutions
with a high percentage of their students defaulting on loans received through the
Federal Family Education Loan (FFEL) program or Ford Federal Direct Loan (DL)
program from participating in FFEL, DL, or Pell Grant programs.³⁸ This led to

³⁴ Testimony of David A. Longanecker, Assistant Secretary for Postsecondary Education,
U.S. Department of Education, in Senate Committee on Governmental Affairs, Permanent
Subcommittee on Investigations, hearing on Abuses in Federal Student Grant Programs:
Proprietary School Abuses, held on July 12, 1995, S.Hrg. 104-477 (Washington: GPO,
1996), p.40. (Hereafter cited as Senate Committee on Governmental Affairs, Hearing on
Proprietary School Abuses.)
³⁵ Short-term programs are programs offered by proprietary institutions or not-for-profit
postsecondary vocational institutions that provide at least 300 but less than 600 hours of
instruction during a minimum of 10 weeks of instruction.
³⁶ In 1994, Senator Pell subsequently proposed a similar waiver that the Secretary could
grant to proprietary institutions if they demonstrated graduation and job placement rates of
70% and student loan default rates of less than 25% for FY1991 and FY1992, and had not
had their eligibility for Title IV programs limited, suspended, or terminated. (See
Congressional Record, p. S10918.) Neither Senator Pell’s or ED’s suggestions regarding
the application of a 70% graduation rate and 70% job placement rate have been applied.
³⁷ U.S. House of Representatives. Hearing before the Committee on Education and
Workforce Development, “Enforcement of Federal Anti-Fraud Laws in For-Profit
Education.” Serial No. 109-2, March 1, 2005, p. 60. Available at [http://www.gpo.gov/
congress/house/house06ch109.html ].
³⁸ U.S. Department of Education, Cohort Default Rate Guide, 2001. Available at
(continued...)

declines in cohort default rates at all institutions, including proprietary institutions.
However, cohort default rates at proprietary institutions have remained higher than
those at two-year and four-year non-profit institutions.³⁹ In addition, during the early

1990s, ED strengthened the eligibility and certification component of the triad,

resulting in lower percentages of institutions receiving certification for participation
in Title IV programs. For example, in 1990, 17% of initial applications to participate
in Title IV programs were denied compared with 43% in 1995.⁴⁰ ED also provided
staff training in detecting fraud and abuse at postsecondary institutions.⁴¹ Finally,
during the 1990s, accreditation organizations that worked with proprietary
institutions began to accredit fewer institutions, the number of proprietary institutions
participating in Title IV programs declined, and a lower proportion of Title IV funds
went to proprietary institutions. While these measures have helped to identify and
reduce incidents of fraudulent and abusive behavior at proprietary institutions, it is
difficult to know whether these measures alone would compensate for the elimination
of the 90/10 rule.
Modifications to the 90/10 Rule
Short of eliminating the 90/10 rule, Congress may debate several other changes
to the rule. First, Congress may reevaluate the percentage of funds proprietary
institutions must derive from non-Title IV funds, possibly increasing or decreasing
the percentage of revenue proprietary institutions must receive from non-Title IV
funds. Second, Congress may consider changes to how revenue is defined or to the
formula used to calculate revenue. Congress also may examine the order in which
funds are applied to institutional charges that affects the calculation of non-Title IV
revenue. For example, during the 2002 negotiated rulemaking process⁴² instituted by
ED, participants suggested that distributions from “IRS 529” tuition savings plans
should be added to the list of exceptions of non-Title IV sources of funds that can be
applied toward institutional charges prior to Title IV aid. This change would increase
the size of the denominator in the formula used to calculate the percentage of revenue

³⁸ (...continued)
[http://www.ifap.ed.gov/drmaterials/finalcdrg.html]. For more on cohort default rates, also
see CRS Report RL30656, The Administration of Federal Student Loan Programs:
Background and Provisions, by Adam Stoll.
³⁹ For FY2004, the most recent year for which cohort default rates are available, the cohort
default rate was 4.7% at public institutions, 3.0% at private institutions, and 8.6% at
proprietary institutions. For more information, see U.S. Department of Education,
Institutional Default Rate Comparison of FY20021, 2003, and 2004 Cohort Default Rates,
available at [http://www.ed.gov/offices/OSFAP/defaultmanagement/2004instrates.html].
⁴⁰ Senate Committee on Governmental Affairs, Hearing on Proprietary School Abuses, p.

121.

⁴¹ Ibid., p. 37.
⁴² The negotiated rulemaking process is used by the Secretary of Education to seek input
from the public and major interest groups in developing proposed regulations for HEA, Title
IV in compliance with HEA, Section 492. For more information about the negotiated
rulemaking process, see [http://www.ed.gov/policy/highered/reg/hearulemaking/2002/index

2002.html].

derived from non-Title IV sources, making it easier for proprietary institutions
enrolling students with 529 tuition savings plans to meet the 90/10 rule. Finally,
Congress may consider moving the 90/10 rule to another section in the HEA, such
as to the Program Participation Agreement (PPA) in Section 487.⁴³ This could lessen
the penalties for violations of the 90/10 rule, while continuing to apply the rule to
only proprietary institutions or the rule could be expanded to apply to all IHEs.⁴⁴
Brief Overview of Relevant Legislation
from the 110^th Congress
This section provides a brief overview of relevant provisions contained in S.
1642, the Higher Education Amendments of 2007 — the primary vehicle for HEA
reauthorization in Senate in the 110^th Congress. S. 1642 was reported by the Senate
Committee on Health, Education, Labor, and Pensions on July 10, 2007, without a
written report. It was subsequently passed by the Senate on July 24, 2007, by a vote
of 95-0.⁴⁵ No similar action has been taken by the House Committee on Education
and Labor.
S. 1642 would eliminate the 90/10 rule as a specific institutional eligibility
requirement for proprietary institutions. It would move the 90/10 rule to the PPA but
continue to apply it only to proprietary institutions. By making this change, the
penalties for violating the 90/10 rule would be the same as those imposed for
violating any provision of the PPA (e.g., fine, suspension, termination); in addition,
proprietary institutions could be placed on provisional certification status⁴⁶ and be
subject to increased monitoring and reporting requirements for a violation of the
90/10 rule. Under S. 1642, a proprietary institution that violated the 90/10 rule for
two consecutive years would lose its Title IV eligibility until it is able to demonstrate
that it is in compliance with the requirement. The bill would require the Secretary
to publicly identify any institution that failed to meet the 90/10 rule in any given year.
S. 1642 would incorporate current regulatory language into statutory language
regarding the use of the cash basis of accounting and several sources of allowable
non-Title IV revenue, while also expanding the sources of non-Title IV revenue to
include sources of revenue that are currently prohibited from being counted toward
the 10% requirement. Below is a brief overview of each of the sources of non-Title
IV revenue that are specifically included in the Senate bill that could be counted
toward the 10% requirement:

⁴³ All institutions participating in Title IV federal student aid programs are required to sign
a PPA that governs their participation in the programs. For more information, see CRS
Report RL33909, Institutional Eligibility.
⁴⁴ Although both H.R. 609 and S. 1614, considered in the 109^th Congress, would have moved
the 90/10 rule to the PPA and applied it to all IHEs, Congress could move the 90/10 rule to
the PPA and apply it only to proprietary institutions.
⁴⁵ See record vote number 275.
⁴⁶ For more information about provisional certification, see HEA, Section 498(h).

^!Funds used by students other than Title IV aid used to pay their
institutional charges: This would codify provisions currently
delineated in regulations.
^!Funds used by institutions to satisfy matching requirements for
Title IV programs: Current regulations strictly prohibit institutions
from counting these funds toward the 10% requirement. If
institutions are allowed to count these funds toward their 10%
requirement, they may be able to count the same funds twice: once
when they are initially received by the institution from an outside
source of funding (e.g., a student paying tuition), and again when
they are used to match Title IV program funds in either the same or
a subsequent year.
^!Funds used by a student from a 529 plan to pay institutional
charges: This would codify provisions currently delineated in
regulations. As discussed earlier in this report, however, the issue
related to 529 plans is whether funds from both college savings
plans and pre-paid tuition plans should be applied toward
institutional charges prior to applying Title IV to these charges.
Current regulations allow funds from 529 pre-paid tuition plans, but
not funds from 529 college savings plans, to be applied before Title
IV aid.
^!Funds paid by a student to the institution for a training program
that is not eligible for Title IV funds but is approved or licensed
by the appropriate state agency or an accrediting agency
recognized by the Secretary: Current regulations strictly prohibit
institutions from counting these funds toward the 10% requirement.
The 90/10 rule is focused on the use of Title IV funds, which are
awarded only to students participating in Title IV eligible
programs.⁴⁷ Therefore, only revenue generated by the institution that
is related to Title IV eligible programs is included in the 90/10 rule
calculation.
^!Funds generated by the institution from activities that are
necessary for the education and training of students that are
conducted on campus or at a facility under the control of the
institution, are performed under the supervision of a faculty
member, and are required to be performed by all students in a
specific educational program: This would codify provisions
currently delineated in regulations.
^!For institutional loans, only the amount of loan repayment
received by the institution during the fiscal year for which
compliance with the 90/10 rule is being determined: This would
codify provisions currently delineated in regulations.
^!For institutional scholarships provided on the basis of academic
merit or financial need, funds must be distributed from an
established restricted account and must represent designated

⁴⁷ For more information about Title IV eligible programs, see CRS Report RL33909,
Institutional Eligibility.

funds from an outside source or income earned on those funds:
This would codify provisions currently delineated in regulations.
^!Tuition discounts provided based on academic merit or financial
need: Tuition discounting is the use of institutionally funded grants
to help reduce the price of attendance for students. Thus, tuition
discounting is similar to providing an institutional scholarship and
would presumably have to meet the requirements placed on
institutional scholarships to be counted toward the 10% requirement
currently. Despite this similarity, the Senate bill would not require
funds used for tuition discounting to come from an established
restricted account that includes only designated funds from an
outside source or income earned on those funds. Thus, funds used
for tuition discounting could be double-counted toward the 10%
requirement: once when the institution originally receives the funds
(e.g., from a student paying full tuition), and again when the
institution provides a discount to another student either in the same
or a subsequent year.
Brief Overview of Relevant Legislation
from the 109^th Congress
This section provides a brief overview of relevant provisions contained in H.R.
609, the College Access and Opportunity Act of 2005, and S. 1614, the Higher
Education Amendments of 2005 — the primary vehicles for HEA reauthorization in^th
the 109 Congress. H.R. 609 was passed by the House on March 30, 2006, by a vote
of 221-199 (H.Rept. 109-231).⁴⁸ S. 1614 was reported by the Senate Committee on
Health, Education, Labor, and Pensions on November 17, 2005, without a written
report. A report (S.Rept. 109-218) was subsequently filed on February 28, 2006. It^th
was not considered on the Senate Floor during the 109 Congress.
Both H.R. 609 and S. 1614 would have eliminated the 90/10 rule as a specific
institutional eligibility requirement for proprietary institutions. Both bills would
have moved the 90/10 rule to the PPA and applied it to all institutions, including
public and not-for-profit institutions. By making this change, the penalties for
violating the 90/10 rule would have been the same as those imposed for violating any
provision of the PPA (e.g., fine, suspension, termination); however, institutions could
have been placed on provisional certification status and been subjected to increased
cash monitoring for a violation of the 90/10 rule. Under H.R. 609, any institution
that violated the 90/10 rule for three consecutive years would have lost its Title IV
eligibility. Under S. 1614, an institution would have lost its Title IV eligibility for
violating the 90/10 rule for two consecutive years. Both bills would have required
the Secretary to publicly identify any institution that failed to meet the 90/10 rule.
Both bills would also have incorporated current regulatory language into statutory
language regarding the use of the cash basis of accounting and sources of allowable

⁴⁸ For more information, see House Roll Call Vote Number 81, available online at
[http://clerk.house.gov/ evs/2006/roll081.xml].

non-Title IV revenue. Finally, H.R. 609 and S. 1614 would have expanded on the
sources of allowable non-Title IV revenue to include, for example, funds used by
institutions to match federal student aid funds and tuition discounts. As previously
mentioned, current regulations strictly prohibit proprietary institutions from including
these funds in their 90/10 calculation.