For-Profit Accountability and Pell Grants in Prisons

The Education Department released its latest set of proposed regulations this week, including new standards of accountability for for-profit colleges through a revision to the 90-10 rule, a new process for colleges seeking changes in ownership and codifying Pell Grant eligibility for incarcerated individuals.

The negotiators and the Education Department reached a consensus on both the proposals on 90-10 and Pell Grants for incarcerated students during the negotiated rule-making process, where stakeholders negotiate pending regulatory agenda items with the department.

“This announcement is one important step that the Biden administration is taking as a part of a broader effort to ensure that student debt is affordable and that colleges are held accountable for unaffordable debts,” said Under Secretary James Kvaal.

The much-anticipated proposed rule on income-driven repayment (IDR) is expected to be released in “coming weeks,” according to Kvaal. The IDR proposal was on track to be released alongside Tuesday’s regulatory agenda items, however, the department announced last week that it would now be considered separately.

The proposed regulations will undergo a 30-day public comment period, and if published by Nov. 1, they will go into effect by July 2023. Here’s what the department proposed.

Closing the 90-10 Loophole

The Education Department proposed to expand the types of federal funding included in the calculation of the 90-10 rule—a rule created in the 1992 amendments to the Higher Education Act that require all federally funded for-profit colleges to get at least 10 percent of their institutional revenue from nonfederal sources. The rule was created as an accountability metric for for-profit colleges to ensure that they are not overly reliant on sources of revenue from the federal government.

If a college fails the rule two years in a row, it loses eligibility for Title IV funding, which includes all federal student loan funding, Pell Grants and federal Supplemental Educational Opportunity Grants.

The current rule only requires colleges to count Title IV funding in their 90-10 calculations, and some have raised concerns about for-profit colleges using a loophole in the 90-10 rule to aggressively recruit veterans and other military service members. The proposed regulations would close this loophole by expanding the definition of what qualifies as federal aid to include both funds that go directly to a college and to students. This means grants from nonfederal agencies that cover tuition, fees and or other educational costs, including GI Bill aid and other federal scholarships for active-duty service members, which are currently not counted in the 90-10 rule. The department said that it will frequently publish and update all programs required for inclusion in 90-10 calculations in the Federal Register.

“Predatory, deceptive practices that target veterans and service members have no place in higher education, period,” said Education Secretary Miguel Cardona. “The Biden-Harris administration believes educating our veterans and service members should be about honoring their contributions to our country, not exploiting them for financial gain. These proposed regulations enact welcome changes by Congress to better protect students who have served, and continue to serve, our nation.”

According to department estimates, 92 for-profit colleges would fail under the new proposed rule based on their total Pell Grant and federal loan volume in the 2019–20 academic year.

Reforms to the 90-10 rule were originally slated to be enacted through the legislative process in the 2021 American Rescue Plan, however, the for-profit industry struck a deal with the Senate to push the change to be negotiated in this year’s rule-making process. The Education Department was able to reach a consensus with the for-profit industry and other stakeholders during the negotiated rule-making process on the proposed 90-10 rule.

Jason Altmire, president of Career Education Colleges and Universities, which represents the for-profit industry, said that he was happy the department adopted language they had agreed upon during the negotiated rule-making process, but the industry still disagrees that 90-10 should be used as an accountability metric.

“This 90-10 formula has nothing to do with quality—this is a financial formula,” said Altmire. “They are making it more difficult for schools to pass the threshold.”

Altmire said that although he is “concerned” about the possibility of colleges failing under the proposed calculation, he said that it is expected that some colleges will fail.

“If you’re adding a new population of students into the calculation, you’re going to have more schools fail,” said Altmire. Across the entire for-profit sector, 2 percent of undergraduate students are veterans, according to College Scorecard data from the 2018–19 academic year.

Donna Gurnett, the president of the Association of Proprietary Colleges, an organization representing 11 colleges in New York State, said that the changes to 90-10 are “not really an issue.” Out of the 23,000 students enrolled in the colleges that they serve, a small population, around 500 students, receives federal military benefits.

She said her main concern was ensuring that colleges had at least a year to transition to the new calculation method.

Altmire said that since Congress proposed changes to 90-10 in 2021, for-profit colleges have been preparing for a change in the rule for the last two years. “We do feel our schools have the ability to do what they have to do to come into compliance,” he said in an interview with Inside Higher Ed.

Strengthening Rules for Changes in Ownership

The department proposed to clarify the process for for-profit colleges that are attempting to convert to public or private nonprofit status. These changes include safeguards for “the riskiest transactions,” where new owners are missing certain financial statements from prior owners.

In 2020, the Government Accountability Office raised concerns about for-profit college officials who hold leadership roles in tax-exempt nonprofit organizations purchasing for-profit colleges and converting them into tax-exempt nonprofit colleges. In their analysis, one-third of 59 for-profit colleges between the years 2011 and 2020 had conversations that involved a sale to a tax-exempt organization where a former owner was an insider to the conversation.

The new proposal seeks to eliminate “insider involvement” in ownership changes by providing clear definitions for what is a for-profit and a nonprofit college as well as increasing Education Department oversight in the changes of ownership.

“We’ve seen really a blurring [of] lines between nonprofit and for-profit institutions in a lot of ways in higher education, and so as the sector continues to evolve and the types of institutions that are in the market continue to evolve, it definitely makes sense to provide greater clarity,” said Michelle Dimino, the deputy director of education at the think tank Third Way.

Under the proposal, colleges would have to notify both the Education Department and their students 90 days in advance of a planned ownership change.

Additionally, the department will require a 10 percent letter of credit if the new owner is missing “one of the two years of required audited financial statements,” said a fact sheet on the proposal. If the new owner is missing two years of required statements, they will be required to submit a 25 percent letter of credit.

Pell Grants for Incarcerated Students

The department proposed to codify Pell Grant eligibility for all incarcerated individuals enrolled in an eligible prison education program.

“We have seen the power of these programs providing new and valuable opportunities to incarcerated students,” said Kvaal. “These regulations would ensure these programs are serving incarcerated students on the same level.”

The department began the Second-Chance Pell experiment in 2015 and allowed a limited number of colleges to apply for Pell Grants for incarcerated students through a waiver. There are now 28,000 students enrolled in programs through Second-Chance Pell.

Currently, individuals in prisons that are not part of the Second-Chance Pell program are not able to qualify for Pell Grants. The new proposed rule would change this, allowing all incarcerated individuals in a prison with an eligible prison education program to be eligible for Pell Grants.

Pell Grants for incarcerated students cannot exceed the cost of attendance. This includes any other federal assistance an incarcerated student may receive, such as veterans’ assistance.

Prison education programs are regulated by either the federal Bureau of Prisons or the state department of corrections. The new proposal would ensure that these programs are operating in the “best interest” of incarcerated students by requiring the federal Bureau of Prisons or the state department of corrections, who oversee prison education programs, to report postrelease continuation of education and job-placement rates. The department proposed a two-year timeline for institutions to create and implement their best interest framework.