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Anthony J. Guida Jr and David Figuli

excerpted from: Anthony J. Guida Jr and David Figuli, Higher Education's Gainful Employment and 90/10 Rules: Unintended Scarlet Letters for Minority, Low-income, and Other At-risk Students, 79 University of Chicago Law Review 131 (Winter 2012) (120 Footnotes Omitted)


A. The Gainful Employment Rule Improperly Singles Out Low-Income and Minority Students Attending Proprietary Colleges

In June 2011, ED issued its controversial gainful employment rule, which applies to most programs at proprietary institutions and only nondegree programs at public and nonprofit institutions. Under the GE rule, the words gainful employment--which sat dormant in the HEA for forty-six years --were now embroidered with minimum debt-to-income standards and loan repayment rates that programs must meet in order to retain eligibility for student assistance under Title IV. Under the complex rule (which is more than 5,500 words long and takes 157 pages to explain), each program an institution offers must meet at least one of three metrics to remain eligible for Title IV funding: (1) a 12 percent debt-service-to-total-earning ratio applied to graduates of a program; (2) a 30 percent debt-service-to-discretionary-income ratio applied to graduates of a program; or (3) a 35 percent loan-repayment-rate test for any person who attended a program. A program that fails all three tests in three out of four years is ineligible for further Title IV funding, a result that, in most instances, would lead to closure of the program.

ED's stated purpose for enacting the GE rule was to address programs offered by proprietary institutions that leave students with unaffordable debts and poor employment prospects. However, analyses by nationally recognized financial aid expert Mark Kantrowitz of data released by ED during the GE rulemaking process support the conclusion that it is the type of student enrolled--more so than the quality of the program offered or the institution offering it--that is the primary cause of excessive debt and student defaults. Kantrowitz found an almost linear relationship between the percentage [of] Pell Grant recipients and the average loan repayment rates, concluding that colleges that enroll primarily at-risk students who qualify for Pell Grants are extremely unlikely to have passing loan repayment rates under the original draft rule.

In litigation filed by the Association of Private Sector Colleges and Universities (APSCU) against ED to invalidate the GE rule, ED Assistant Secretary Eduardo M. Ochoa admits that ED erred in calculating the effects of race on repayment rates in the final GE regulation. Ochoa states that ED mistakenly used a variable called percent minority, which, while intended to measure the percentage of an institution's student body made up of minorities, did not include African American students in the data set. This resulted in ED significantly understating the relationship between race and repayment rates, such that, while ED originally estimated that race explained only 1 percent of the overall variance in repayment rates, it actually explained 20 percent of the variance. While ED claims the GE rule would not have been different had it known of the mistake before it issued the rule, APSCU has asserted that ED's error goes to the heart of the concerns raised in public comments filed during the rulemaking process that the regulation disproportionally impacted minority students and by itself requires that the GE regulation be vacated.

Because the GE rule does not adjust for these demographic correlations, it creates the perverse incentive for proprietary institutions to avoid enrolling low-income and minority students altogether. The GE rule also incorrectly focuses on the financial success of students as the main criterion for eligibility when the core metric of the Title IV program, as clearly stated in the statute and legislative history, is financial need. By predetermining program choices for students primarily based on their ability to pay for their schooling without borrowing, the GE rule will almost certainly have a disproportionate impact on low-income, minority, and other underserved students. Instead of helping disadvantaged students achieve their highest potential, the GE rule will reduce access to education for disadvantaged students based on the very factors that caused them to be disadvantaged in the first place.

B. The 90/10 Rule Creates Structural Incentives for Tuition Inflation and Barriers to Access for Low-Income and Minority Students

The 90/10 rule applies only to proprietary institutions and requires that at least 10 percent of an institution's revenues for tuition, fees, and other institutional charges be received from sources other than federal Title IV student aid. The rule was enacted to stem fraudulent and abusive practices that had been identified at proprietary institutions. An oft-stated rationale for the rule is that a proprietary institution providing a high-quality education should be able to derive a specific percentage of its revenue from non-Title IV programs. Stated slightly differently, students would be willing to pay at least 10 percent out of their own pockets toward their education if it were worthwhile.

While the 90/10 formula may seem fairly straightforward, the underlying details of the regulation are numerous, subjective, and extremely burdensome to implement. Further, the rule generally presumes that Title IV funds received by an institution are applied to institutional charges first (90 percent element). Institutions whose students overborrow are at a disadvantage because the Title IV aid these students receive often covers most, if not all, of the institutional charges, leaving little or no balance owed against which to apply non-Title IV (10 percent element) funds. For example, if institutional charges are $7,500 and a student has $2,500 in cash and receives $7,500 in Title IV aid, the revenue presumption deems the $7,500 in institutional charges to be fully paid by Title IV aid, resulting in a 90/10 ratio of 100 percent.

The 90/10 rule is fundamentally in conflict with the goal of educating low-income students. The rule presupposes financial resources that are not available to low-income students. This lack of personal financial resources devolves into the 10 percent element being sourced according to the rule from private student loans, military student aid, and employer tuition assistance. Because proprietary institutions have no authority to limit student use of Title IV federal student aid, their main tool for 90/10 compliance is increasing institutional charges beyond the maximum amount of federal aid to force students to fill the gap thus created with non-Title IV funds. The GE rule further complicates matters because a main tool for compliance with the debt restrictions of that rule is tuition reductions that will hurt their 90/10 scores, thus putting the requirements of the GE and 90/10 rules in conflict with each other and institutions in a catch-22.

House Speaker John Boehner (who was then chairman of the House Committee on Education and the Workforce) recognized the fundamental problems with the 90/10 rule in 2004:

[T]he 90/10 Rule . . . was put into place as part of the larger effort to reduce fraud and abuse that plagued the proprietary sector in the 1970s and 1980s. While I don't disagree that this rule was well intentioned years ago, today it seems not only unnecessary and ineffective, but also potentially harmful to students.

The rule requires proprietary institutions to show at least 10 percent of funds are derived from sources outside of Title IV student aid funding. While this may not seem like too much to ask, looking closely at this rule shows just how burdensome it may be.

Statistics show proprietary schools tend to serve larger populations of needy, high-risk minority and nontraditional students. In other words, the students most in need of federal assistance.

Yet when a proprietary schools serves a large share of needy students, many of whom rely on federal aid, the school's compliance with the 90/10 Rule is put in jeopardy. . . . Worse still, this rule creates an incentive for proprietary schools to raise tuition or move away from urban areas where students are more likely to depend on Federal aid.

In recent years, 90/10 rates at proprietary institutions have been increasing based on a host of factors that are outside their control. These changes include rapid and substantial increases in available federal Title IV aid, the collapse of the private credit markets and the associated end of private student lending for all but the best credit risks, and a deteriorating economy with considerable job losses. The result is that substantially more students are eligible for Pell Grants; substantially more students have an expected family contribution of $0, which makes them fully Pell eligible; students have cut back on their credit hour load, meaning that federal Title IV aid covers most, if not all, of their tuition instead of a portion of it; and fewer students are able to make even small cash payments towards their education. Exacerbating the situation are widespread reductions in grant aid in a number of states, which worsens the 90/10 ratio because state grants generally count toward the 10 percent and are presumed to be applied first to tuition and fees. Not surprisingly, institutions enrolling greater numbers of low-income students tend to have higher 90/10 scores.

The GE rule and the 90/10 rule do not measure educational quality. Instead, their standards are based on financial metrics that are highly influenced by student need. As outlined previously, the purpose of the HEA is to help disadvantaged students achieve their highest potential. The GE and 90/10 rules do just the opposite--limiting access to education for disadvantaged students based on the very factors that caused them to be disadvantaged.

The GE rule (for the most part) and the 90/10 rule do not apply to public and nonprofit colleges. At-risk students, however, will tend to have lower graduation rates, higher debt, and higher defaults regardless of which college they attend. Denying these students access to proprietary institutions will not solve their problem; it will only serve to exacerbate it and significantly reduce their chances of obtaining a degree. As demonstrated previously, public and nonprofit institutions are less successful in graduating at-risk students. Combined with the limited capacity at traditional colleges, the GE and 90/10 rules will serve only to further disadvantage the disadvantaged, in stark conflict with the HEA's statutory purpose to provide aid to students in need who otherwise may not be able to attend college.

Both rules should be eliminated in favor of polices that apply equally across all of higher education and that are designed to provide equal access and measures of success for at-risk students.