Bloomberg News: For-profit colleges fight aid limit

Bloomberg News

January 18, 2011
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For-profit colleges are urging Congress to change a law that threatens their access to billions of dollars in federal student aid, the companies' biggest source of revenue.

Education companies that get more than 90 percent of their revenue from the Education Department's student grants and loans for two years in a row may lose eligibility for the money under the law. Apollo Group Inc. - operator of the University of Phoenix, the biggest U.S. for-profit college - and Santa Ana, Calif.-based Corinthian Colleges Inc. have said they may violate the limit next year.

For-profit college revenue already is being threatened by slowing new-student enrollment amid government investigations of sales practices and the use of federal funds. The companies are lobbying Congress to strike down the revenue cap, called the 90/10 rule, or extend an exemption that would help them comply for the next fiscal year.

Changing the rule will be the industry's most important battle in Congress, said Jarrel Price, an analyst with Height Analytics in Washington.

"If the industry fails to push Congress beyond gridlock, several schools are at risk" of violating the rule, Price said. "There's great urgency."

The 90/10 rule, enacted in 1998, requires for-profit colleges to get at least 10 percent of their revenue from sources outside the Education Department. The law is meant to ensure quality and discourage fraud at for-profit colleges by requiring students to invest some of their own money in tuition.

"University of Phoenix believes 90/10 is not a good measure of quality, which is better assessed through graduation rates, default rates, compliance audits, financial ratios, etc.," the for-profit college said.

Federal student grants and loans made up about 88 percent of the college's revenue in the year ended Aug. 31, Apollo said in October.

For-profit colleges are approaching the 90 percent cap as the Education Department has increased the availability of student loans and Pell Grants, said Harris Miller, president of the Association of Private Sector Colleges & Universities, a Washington-based trade group. Congress needs to act so the schools can continue to operate and students can stay in class, he said.

Strayer Education Inc., a for-profit college based in Arlington, Va., said Jan. 7 that enrollment for new semester dropped 20 percent from a year ago.
Apollo said Jan. 10 that new student enrollment for the three months ended in November dropped 42 percent from the year earlier to 56,500.

Congress granted an exemption to the 90/10 rule of up to $2,000 per student during the global financial crisis when unemployed workers needed job training. The exemption expires at the end of June.

Sen. Tom Harkin, D-Iowa, is chairman of the Senate education committee and investigated student recruitment, job-placement claims and use of government funds by for-profit colleges. He called the 90/10 rule "one of the few protections students at these schools have."

"Given the abuses that my committee has documented - alarmingly high dropout rates and crushing debt loads for students - the 90/10 rule clearly isn't enough," Harkin said in an e-mail. "I intend to look at ways to make it work more effectively to ensure that for-profit colleges put a renewed focus on the success of their students rather than the profits of their shareholders."

Harkin doesn't favor extending the exemption, said Justine Sessions, a spokeswoman.

Rep. John Kline, R-Minn. and chairman of the House education committee, said he is "not thrilled" with the 90/10 rule. Job placement and student loan repayment rates are better indicators of program quality, he said.

To avoid violating the 90/10 rule, education companies sometimes raise tuition above federal financial-aid limits, forcing students to pay the difference out of pocket or find the money elsewhere, said Miller, of the trade group.

An Obama administration proposal known as "gainful employment" encourages for-profit colleges to lower tuition so students won't default on loans, said Mark Kantrowitz, publisher of FinAid.org, a website that provides information on student aid.

"If they increase tuition to comply with 90/10, they're going to have problems with the gainful employment rule," he said. "They're going to be between a rock and a hard place."

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