What would you say if I suggested that the elimination of just one regulation could save students thousands of dollars in student debt? Ever heard of the 90/10 rule? It applies only to for-profit colleges and requires that no more than 90 percent of their revenue come from federal sources. Congress passed the regulation in 1992.
The rule was designed to protect students from “bad” schools. But, after nearly 40 years in the for-profit college business, I would posit that 90/10 has done just the opposite. I believe it is the cause of students’ excessive debt — from the direct loans they took out from for-profit colleges and private lenders.
They are known as “gap” loans and are used to pay the gap between tuition and fees not covered by other grants and loans. Most people don’t make the connection that 90/10 caused, or at least enabled, these kinds of loans, which are usually taken out on top of federal ones.
Before the 90/10 rule was introduced, competitive market forces were a factor in the for-profit college sector. The majority of for-profit colleges charged tuition that was less than the maximum students were allowed to receive in federal financial aid, which includes Pell Grants, available to low-income students, and federal student loans. From my experience as a college owner, competition kept tuition low, and students were the beneficiaries.
With the implementation of the 90/10 rule (intended to drive “fly-by-night” colleges out of business), compliance with the new law became the major driver of tuition policy, rather than market forces. The penalty for any for-profit college exceeding the 90/10 ratio was repayment of the entire year’s federal aid income and suspension from all federal aid programs for the next two years — essentially a death sentence. Could you repay 90 percent of your last year’s earnings and live for the next two years with no pay?
The 90/10 rule actually accomplished the opposite of what was intended. Students were not “protected,” and student debt sky-rocketed.
To protect themselves, many colleges responded by increasing tuition to about 20 percent above the maximum amount students could receive in federal financial aid. And, because of the higher tuition, student stipends from extra federal financial aid disappeared. So the students had to take out thousands of dollars in gap loans, which essentially created the gap loan industry as we know it today. Meanwhile, many for-profit college owners became rich at the students’ expense. It was the 90/10 rule that not only allowed that, but effectively encouraged it.
The 90/10 rule was also a big factor in attracting private equity money into the for-profit sector through colleges such as ITT and Corinthian (which became publicly traded in 1995 and 1999, respectively). Prior to the 90/10 rule, there were virtually no publicly traded school corporations.
In 2010, the Department of Education proposed the “gainful employment” rule, which ultimately went into effect in 2015. For-profit colleges were penalized if too many of their graduates landed in low-paying careers with excessive student debt. In my opinion, the rule, which I support, brought accountability to the for-profit sector and accomplished what the 90/10 rule could not. The gainful employment regulation, along with increased oversight, facilitated the closing of over 1,000 for-profit campuses.
Education researchers have found additional, unforeseen consequences of the 90/10 rule, however. It “is ineffective at measuring educational quality. Instead, it depends heavily on the demographics of each college’s student population, measuring ability to pay more than willingness to pay,” according to a 2013 report by the student aid expert Mark Kantrowitz. He estimated that 80 percent of public two-year colleges and 40 percent of public four-year colleges would fail the rule if it applied to them.
Today, many prominent Democrats are championing free college, arguing that students should not have to pay for their degrees. However, most of these same politicians believe that some students at for-profit colleges should pay — that’s the 90/10 rule! There’s a disconnect somewhere.
With the upcoming re-implementation of the gainful employment rule and the push for free college, it is time for 90/10 to go away. It may take a decade or more, but eventually tuition will come down at for-profit colleges, because market forces will again be at work. Gap funding — the loans students take out directly from colleges — will mostly go away, and the neediest students attending for-profit colleges will again have stipends for living expenses from federal aid.
If the 90/10 rule is revoked, my colleges would lower tuition enough to eliminate the need for most direct school-to-student loans. Its revocation would allow market forces to take hold, leading to the decline and eventual disappearance of high-priced, low-quality for-profit colleges. Students would be the winners.
The 90/10 rule actually accomplished the opposite of what was intended. Students were not “protected,” and student debt sky-rocketed. If we truly want to safeguard students’ financial futures, Congress needs to abolish this harmful 90/10 regulation.
Billy L. Clark is the president and part-owner of Delta Colleges in southern Louisiana.