Order Code RL32182
CRS Report for Congress
Received through the CRS Web
Institutional Eligibility and the
Higher Education Act: Legislative History
of the 90/10 Rule and Its Current Status
Updated January 19, 2005
Rebecca R. Skinner
Analyst in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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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 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
reauthorization.
As Congress considers the reauthorization of the Higher Education Act, the
90/10 rule may be targeted for elimination or modification. Other possible issues for
reauthorization may include modifying the percentage of funds that must be derived
from non-Title IV sources, changing the formula to calculate revenue, and changing
the order in which funds are applied to institutional charges.
This report will be updated as needed.

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Contents
90/10 Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Legislative History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Impetus for the 85/15 Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1992 HEA Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
GAO Evaluation of Student Outcomes at Proprietary Schools . . . . . . . 5
1998 HEA Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Department of Education Changes the Formula . . . . . . . . . . . . . . . . . . 6
Violations of the 90/10 Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Reauthorization of the Higher Education Act . . . . . . . . . . . . . . . . . . . . . . . . 8
Elimination of the 90/10 Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Modifications to the 90/10 Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

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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 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 institution of higher education 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, proprietary institutions also are required to 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.
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 the current HEA reauthorization.
90/10 Rule
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.
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 RL31926, Institutional Eligibility for
Participation in Title IV Student Aid Programs Under the Higher Education Act:
Background and Issues, by Rebecca R. Skinner. (Hereafter cited as CRS Report RL31926,
Institutional Eligibility.)

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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 of students enrolled in those Title IV-eligible programs3
It should be noted that, by regulation, the numerator does not include Leveraging
Educational Assistance Partnership (LEAP) program or Federal Work Study (FWS)
funds. The denominator only includes revenues generated from school activities
necessary to the education or training of students to the extent that they are not
included in tuition, fees, and other institutional charges.
In calculating revenue, institutions must use the cash basis of accounting. That
is, revenue is recognized only when it is received, and only when it is received from
a source outside of the institution. In addition, charges for books, supplies, and
equipment are included in the formula only if they are included specifically in tuition,
fees, or other institutional charges. Institutional grants in the form of tuition waivers
and institutional scholarships do not count as revenue because they do not represent
an inflow of cash from outside the institution.4 Finally, Title IV funds must be used
to pay institutional charges prior to the use 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, which can be used before Title IV funds.
2 Information for this section was taken from U.S. Department of Education, Office of
Federal Student Aid, Volume 2 — Federal Student Aid Handbook 2003-2004, Ch. 1, pp. 2-9
through 2-11. (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 (e)(3).
3 For more information about Title IV-eligible programs, see Office of Federal Student Aid,
Volume 2, pp. 2-13 through 2-17.
4 Exceptions for institutional scholarships exist under specific circumstances. For more
information, see Office of Federal Student Aid, Volume 2, pp. 2-10.

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Legislative History5
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 General
Accounting Office (GAO), Congress, and Office of the Inspector General (IG) 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 schools.6 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.7 When default rates
peaked nationwide in 1990, default rates at proprietary schools reached 41%
compared with an overall default rate of 22%. Many proprietary schools were failing
to provide 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
5 This report draws, in part, on information contained in archived CRS Report 90-424,
Proprietary Schools: 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.)
6 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. General Accounting 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.
7 GAO, Testimony.

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institutions that might be misusing federal dollars. Therefore, it was concluded that
these institutions should not be subsidized by federal dollars.8
All institutions, 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/certification.9 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 schools 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 IG 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 schools 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.10
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.11 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
8 See for example, General Accountability Office (formerly General Accounting Office),
Testimony, pp.10-11; Congressional Record, Letter from the Office of the Inspector
General, pp. H5322-H5334; and Congressional Record, Aug. 8, 1994, pp. S10918-S10923.
(Hereafter cited as Congressional Record.)
9 For additional information about the triad, see CRS Report RL31926, Institutional
Eligibility.)
10 For more information about this precedent, see for example, Congressional Record, Letter
from the Office of the Inspector General, p. H5327.
11 It should be noted that 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.

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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 schools must derive at least 15% of their
revenue from non-Title IV funds.12 The formula, as stated in regulations, used to
determine whether proprietary institutions were in compliance with this requirement13
was similar to the formula currently used to determine compliance with the 90/10
rule.
The 85/15 rule generated considerable controversy. The Career College
Association, representing proprietary schools, brought several unsuccessful court
challenges against the provision.14 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
in the denominator, it would be easier for proprietary institutions to meet the
requirements of the rule.
GAO Evaluation of Student Outcomes at Proprietary Schools. After
the 1992 HEA amendments, given ongoing concerns about the performance of
proprietary schools, GAO was asked to examine the relationship between proprietary
school performance and reliance on Title IV funds.15 The GAO study found that
proprietary schools 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 schools to
obtain a higher proportion of their revenues from non-Title IV funds would result in
12 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.
13 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.
14 See for example, Education Daily, July 21, 1994, p. 5.
15 General Accountability Office, Proprietary Schools: Poorer Student Outcomes at Schools
That Rely More on Federal Student Aid, GAO/HEHS-97-103, 1997.

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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 the 85/15 rule’s revenue requirements.
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.16
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 defined
by ED regulations in effect at the time of enactment.17
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 meet the requirements of the 90/10 rule.18
16 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 schools 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 schools to comply with the rule.
17 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
institutional charges. For more information, see 34 CFR 600.5, revised as of July 1, 1997.
18 After the 1992 HEA amendments were implemented, the Secretary of Education proposed
that proprietary institutions could calculate their compliance with the 85/15 rule 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, Feb. 10, 1994, 59 FR 6446-64675; and Federal Register,
(continued...)

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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 IRAs.19
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.20 Based on FSA data on violations for January 1, 2000 through
December 31, 2002 (the three most recent years for which data are available), a total
of 277 institutions lost their eligibility to participate in Title IV programs for a variety
of reasons.21 Of these institutions, 70.0% of the institutions were proprietary
institutions (194 institutions), 14.8% were public institutions (41 institutions), and
15.2% were private, non-profit institutions (42 institutions). Only two proprietary
institutions, however, lost their eligibility to participate in Title IV programs due to
violations of the 90/10 rule. Both violations occurred in 2001, with no violations in
2000 or 2002. Thus, of the 194 proprietary institutions that lost their eligibility for
Title IV programs over the three-year period for which data were analyzed, 1.0% lost
their eligibility due to the 90/10 rule.
More specifically, for example, one of the two schools was found to have
derived 90.30% of its revenue from Title IV funds for the fiscal year ending
December 31, 2001.22 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
18 (...continued)
July 15, 1999, 64 FR 38271-38282.)
19 For additional information about regulations regarding the 90/10 rule, see Federal
Register, Oct. 29, 1999, 64 CFR 58608-58611; and Federal Register, July 15, 1999, 64 CFR
38271-38282.
20 For additional information about institutional eligibility requirements to participate in
Title IV programs, see CRS Report RL31926, Institutional Eligibility.
21 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.
22 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, Mar. 2003.
Available at [http://www.ed.gov/about/offices/list/oig/areports.html].

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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.
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.23
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.24 Those opposed to eliminating the 90/10 rule also 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).
23 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
on 21st Century Competitiveness, hearing on H.R. 3039, the Expanding Opportunities in
Higher Education Act, Sept. 11, 2003. Available at [http://edworkforce.house.gov/hearings/
108th/21st/hr303991103/moore.htm].
24 See for example, Testimony of Dr. Donald E. Heller, in House Education and the
Workforce Committee, Subcommittee on 21st Century Competitiveness, hearing on H.R.
3039, the Expanding Opportunities in Higher Education Act, Sept. 11, 2003. Available at
[http://edworkforce.house.gov/hearings/108th/21st/hr3039091103/heller.htm].

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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 to waive the
rule for proprietary institutions demonstrating that they serve their students well.25
It was suggested that proprietary institutions might be held to the same standard as
short-term programs,26 which must demonstrate a 70% graduation rate and a 70% job
placement rate.27
The impact of eliminating the 90/10 rule is difficult to determine. It is possible
that many of the proprietary schools 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.
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.28 This led to
declines in cohort default rates at all institutions, including proprietary institutions.
However, cohort default rates at proprietary institutions have remained higher than
25 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.)
26 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.
27 In 1994, Senator Pell subsequently proposed a similar waiver that the Secretary of
Education could grant to proprietary schools 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.
28 U.S. Department of Education, Cohort Default Rate Guide, 2001. Available at
[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.

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those at two-year and four-year non-profit institutions.29 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 1995.30 ED also provided
staff training in detecting fraud and abuse at postsecondary institutions.31 Finally,
during the 1990s, accreditation organizations that worked with proprietary schools
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. While discussions have focused on the elimination of the 90/10 rule or
modifications that do not change the percentage of revenue received from non-Title
IV sources, Congress could consider 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 process32 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.33 This change would increase the
29 For FY2001, the most recent year for which cohort default rates are available, the cohort
default rate was 5.3% at public institutions, 3.5% at private institutions, and 9.0% at
proprietary institutions. For more information, see U.S. Department of Education,
Institutional Default Rate Comparison of FY1999, 2000, and 2001 Cohort Default Rates,
available at [http://www.ed.gov/offices/OSFAP/defaultmanagement/2001instrates.html].
30 Senate Committee on Governmental Affairs, Hearing on Proprietary School Abuses, p.
121.
31 Ibid., p. 37.
32 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/
index2002.html].
33 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
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.
(continued...)

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size of the denominator in the formula used to calculate the percentage of revenue
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.
33 (...continued)
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 James B. Stedman.

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