Fuzzy Math in the 90/10 Rule

Dan Golden has an excellent piece in Bloomberg today about Kaplan Higher Education and its recruiting tactics involving veterans, the centerpiece of which is instilling “FUD”—a militaristic-sounding acronym that stands for “fear, uncertainty, doubt”—in prospective students as a way of convincing them to enroll.

From a sense of civic duty to the ability to use GI Bill benefits to pay for college, there are a number of reasons why schools may see veterans as an attractive enrollment target. But perhaps most importantly, they represent a shortfall in a provision designed to restrict the percentage of student aid dollars that can be taken in by for-profit colleges. As Golden explains:

U.S. Secretary of Education Arne Duncan expressed concern Sept. 24 in an interview that the schools are pursuing veterans’ benefits to circumvent a law limiting the proportion of their revenue they can derive from federal aid to 90 percent.

Enrolling veterans helps Kaplan stay below the threshold because GI Bill benefits don’t count as government assistance under the law. Kaplan University, which derived 87 percent of its revenue from federal student aid in 2009, may have exceeded 90 percent if revenue from the GI Bill and Department of Defense tuition assistance for active-duty service members were added, said [Bradley] Safalow of PAA Research [a firm that analyzes higher education stocks].

What Golden and the stock analyst are talking about is the 90/10 rule, which states that for-profit colleges cannot receive more than 90 percent of their revenue related to education and institutional charges from Title IV student financial aid programs, which include Pell Grants, federal student loans, and work-study if it is used to pay for tuition. Schools that can’t get at least 10 percent of their revenue from other sources can lose access to the federal student aid programs. See page 30 of this PDF for more info.

This slide from a U.S. Government Accountability Office (GAO) report released in October provides a nice summary of the 90/10 calculation:

Notice anything odd?

Almost everything that isn’t federal student aid dollars, regardless of source, gets counted in the 10 percent figure. And that includes other federal education benefits, such as GI Bill assistance or federal job training money. It’s a great double-dip. The school gets federal dollars that directly offset a calculation designed to stop them from taking in too many federal dollars. Veterans are perfect for this opportunity because the GI Bill provides much larger benefits than any other federal program whose support is counted in the 10 percent.

The 10 percent share of the calculation has other odd inclusions. When Congress raised loan limits in 2008 (PDF), it stated that the newly allowed $2,000 of extra debt available to students would be counted in the 10 percent share. So are the net present value of any institutional loans made before July 1, 2012 (after that only the value of actual payments received counts).

Instead of all this complexity, the regulation should be a straight test–if the dollar comes from a federal agency of any sort, it’s in the 90 percent. If it comes from some other source it’s in the 10 percent. If it comes from the school itself, rather than an outside entity, then it’s not counted in either.*

*Colleges, obviously, wouldn’t like this rule since their percentages would likely increase a good bit. In addition, they’ll claim that 90/10 is already to blame for their high tuition costs. But the same GAO report mentioned above refutes this claim. (See page 35 of this PDF.) A thorough analysis of pricing data showed that GAO “did not find any relationship between a school’s tuition rate and its likelihood of having a very high 90/10 rate. Additionally, we found no correlation between a school’s tuition rate and its average 90/10 rate.