New Law May Cause For-Profit Colleges to Collapse

The House of Representatives passed a $1.9 trillion relief bill a few days ago, and the legislation is now before the Senate. House Democrats inserted a provision that would modify an obscure statute that requires for-profit colleges to obtain at least 10 percent of their revenues from non-federal student aid.

The purpose of the 90/10 rule is to require for-profit colleges to obtain at least a small part of their income from non-federal sources. As a recent paper by the Veterans Education Project noted:

The rationale for the [90/10] policy is that a worthwhile educational provider should be able to attract other sources of revenue beyond federal grants and loans and that students should be willing to put some of their own money toward their education (i.e., “skin in the game”).

Or as Representative Bobby Scott (D-Virginia) put it, the rule requires for-profit institutions to “show some semblance of attraction to people.”

Under current law, GI Bill benefits–federal student aid for veterans–are not counted as federal student aid under the 90-10 rule. Thus, for-profits can get 90 percent of their revenue from federal student aid and get additional federal money from veterans’ benefits without violating the 90/10 rule.

The House version of the COVID relief bill would change the way the 90/10 rule is calculated by including veterans benefits as federal student aid. The Wall Street Journal criticized the measure, pointing out the rule change would cause 87 for-profit schools to fall out of compliance with federal regulations and perhaps close.

I disagree with the Wall Street Journal. For-profit colleges have a long and well-documented history of providing overly-expensive, often substandard services to students. As the Brookings Institute reported recently, for-profit schools enroll only 10 percent of postsecondary students but account for half of all student loan defaults.

Moreover, on average, for-profits are four times more expensive than community colleges, and black and Latino students are overrepresented in this low-performing education sector. Indeed, some research suggests that a for-profit college education may be no better than no college education at all.

Tightening the 90/10 rule is a modest reform. All it will do is require for-profits to find more non-federal operating funds than they are required to have now.

If the Senate includes the modified rule in its version of the COVID legislation, some for-profits may indeed close. We should not mourn their loss.

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