Almost All Nonprofit Institutions Would Pass the 90/10 Rule
In their most recent bills to reauthorize the Higher Education Act (HEA), House Republicans sought to eliminate the so-called “90/10” rule, which currently prohibits for-profit institutions from collecting more than 90 percent of their revenue from federal aid programs, while House Democrats proposed to revert back to the ratio of 85/15—such as it was when the rule was first established in the early 1990s. A new report from the Brookings Institution explores whether this rule unfairly targets the for-profit sector, and discovers that almost all nonprofit institutions already fall below threshold.
The authors of the report—Adam Looney and Vivien Lee—found that more than 97 percent of public and private nonprofit institutions already comply with the 90/10 rule, compared with 82 percent of for-profit institutions. For example, the authors wrote that public two-year institutions on average receive 46 percent of their funding from sources such as state legislatures and charitable organizations. They also found that if the rule was changed to a ratio of 85/15, 13 percent of for-profit schools in 2015 would have been found to be noncompliant, and 27 percent would fail the rule if it were adjusted to 80/20.
The authors noted that there are serious implications for students when institutions collect much of their funds from federal dollars—such as worse loan default and repayment rates. They found that the three-year cohort default rate (CDR) among for-profit institutions in 2015 that garnered 80 percent or more of their revenue from federal aid programs was 16.9 percent. That figure dropped to 12.8 percent for for-profit schools gathering less than 80 percent of their revenue from federal sources. That same year, public institutions saw a CDR of 10.2 percent, and private nonprofits had a rate of 7.2 percent.
Looney and Lee also found that while, overall, nonprofit schools with large portions of students receiving Pell Grants were not any more likely to fail the 90/10 rule, this proved the opposite for for-profit schools. The authors noted that “a higher share of students receiving Pell Grants is a strong predictor of noncompliance with the 90/10 rule only in the for-profit sector.”
The authors concluded that “eliminating the 90/10 rule would increase enrollment at lower-quality institutions,” and that the rule “does not differentially affect for-profit institutions.”
“Indeed, the largest consequence of universal application would be an expansion in regulatory and paperwork burden at compliant public and private universities. However, the application of the 90/10 rule within the for-profit section places clear constraints on the ability of for-profit schools with high default rates to expand using taxpayer dollars,” they wrote. “The 90/10 rule remains a key form of shared oversight between federal, state, and private educational authorities.”