For-Profit Schools:

Large Schools and Schools that Specialize in Healthcare Are More Likely to Rely Heavily on Federal Student Aid

GAO-11-4: Published: Oct 4, 2010. Publicly Released: Oct 4, 2010.

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In the 2008-2009 school year, about 2,000 for-profit schools received almost $24 billion in grants and loans provided to students under federal student aid programs. In the early 1990s, Congress was concerned that some for-profit schools receiving federal student aid were recruiting students who were not ready for higher education. Many of these students left school with no new job skills and few employment prospects in their fields of study and many defaulted on their federal student loans. In response, Congress enacted the 85/15 rule in 1992, which required for-profit schools to obtain at least 15 percent of their revenues from sources other than federal student aid. Proponents of the rule believed that for-profit schools offering a quality education should be able to earn a minimum percentage of their revenue from sources other than federal student aid. In 1998, Congress amended this law to create the 90/10 rule, which reduced to 10 percent the proportion of revenues schools must obtain from sources other than federal student aid. These revenues can include cash payments from students, private student loans, state educational grants, and federal education assistance payments for veterans. For-profit schools are required to report in their annual financial statements the percentage of their total revenues obtained from federal student aid funds. This calculation is called a school's "90/10 rate" and it is verified each year by an independent auditor. Schools that do not comply with the 90/10 rule risk losing their eligibility to participate in federal student aid programs. As required by the Higher Education Opportunity Act, we are providing information on for-profit schools' compliance with the 90/10 rule. Specifically, this report addresses the following questions: 1. What percentage of for-profit schools is in compliance with the 90/10 rule and to what extent do schools derive their revenues from federal student aid funds? 2. What school characteristics are associated with higher average 90/10 rates? 3. What school characteristics are associated with an increased likelihood of having a very high 90/10 rate?

Between 2003 and 2008, almost 100 percent of for-profit schools reported complying with the 90/10 rule. During this period, the average percent of revenue received from federal student aid (the average 90/10 rate) for all for-profit schools increased slightly from 62 to 66 percent. In 2008, schools with the following characteristics had significantly higher average 90/10 rates than schools without these characteristics. Specifically, these schools: (1) Had high proportions of low-income students; (2) Granted degrees no higher than associate's; (3) Specialized in healthcare; (4) Offered distance education; (5) Were large (with 2,000 students or more); (6) Had a publicly traded parent company; (7) Were part of a corporate chain. We found that in 2008, schools that (1) were large, (2) specialized in healthcare, or (3) did not grant academic degrees were more likely than others to have very high 90/10 rates (above 85 percent), when controlling for the effects of other characteristics. Large schools and schools that specialized in healthcare both had higher average 90/10 rates and were much more likely to have very high 90/10 rates than other schools.

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