ED Releases Final Regulations Governing Changes in Ownership, Proprietary Institutions, and Prison Education Programs
10/31/2022
On October 28, the Department of Education published final regulations governing its procedures for colleges and universities undertaking changes in ownership, the 90/10 rule for proprietary institutions’ revenue sources, and Pell Grants for prison education programs.
In a press release, Education Secretary Miguel Cardona commented, “Today, we're raising the bar for oversight and accountability for colleges and career schools that prioritize profiting off federal financial aid programs over preparing students for success in the workforce.” Cardona added, “These new rules crack down on some of the most deceptive practices we see in higher education, such as predatory marketing tactics that target U.S. service members and veterans, and changes in ownership designed to evade accountability to taxpayers.”
The rules, published in the Federal Register, will become effective July 1, 2023; however, the 90/10 provisions will apply to institutional fiscal years beginning on or after January 1, 2023.
A brief summary of the rules is included below, and NACUBO will continue to analyze the Federal Register notice and share information with business officers as appropriate.
Changes in Ownership
The new regulations update the definition of a nonprofit institution to prevent improper financial benefits to a former owner or other affiliate of a college. The regulatory language tightens ownership and control provisions when a for-profit institution transitions to nonprofit status—to address risks that some changes in ownership of institutions present to students and taxpayers—and updates the definition of a nonprofit institution. The revised nonprofit definition indicates that no part of net earnings of a nonprofit institution can benefit a private entity or individual as determined by ED. Certain financing and revenue-sharing arrangements are excluded from those that nonprofit institutions can be party to.
The regulation intends to address earnings and non-arm’s length transaction benefits by former owners and other parties after a status change to a nonprofit institution. Under the new regulation, institutions undergoing any change in ownership are required to notify ED and their students at least 90 days prior to the change. Any change means that the requirement would apply to consolidations or mergers among current nonprofit institutions.
(NACUBO’s overarching concern is that processes for reviewing potentially beneficial transactions with those who may have control over a nonprofit institution will be applied to every nonprofit. For example, a financial responsibility regulation paragraph—34 CFR 668.23 (d) —indicates that audited financial statements should include a detailed description of all related entities and transactions with the institution for ED to review. Applying this to all institutions rather than to those with financial responsibility risk will present an audit and reporting challenge with additional costs that do not outweigh potential benefits.)
90/10
The 90/10 regulations change how proprietary institutions calculate and report to ED the percentage of their revenue that comes from federal sources, an effort to close a loophole that allowed for-profit institutions to aggressively recruit student veterans and servicemembers. The Higher Education Act requires proprietary institutions to derive at least 10 percent of their revenue from non-federal sources, generally defined as Title IV dollars. The American Rescue Plan Act of 2021 amended HEA provisions to allow for “federal sources” to mean all federal revenue, not just revenue from Title IV programs. This will allow for VA benefits and DoD tuition benefits to be included in the federal portion of a proprietary institution’s 90/10 calculation.
Prison Education Programs
Cardona noted, “I'm also proud that starting July 1, 2023, incarcerated students will have access to federal Pell Grants to enroll in high-quality prison education programs that we know reduce their risk of returning to prison and prepare these individuals to lead productive and meaningful lives in their communities.”
The regulations permit public, private nonprofit, and vocational institutions to offer Prison Education Programs (PEPs), where eligible students will have access to Pell Grants. PEPs offered at a correctional institution must be reported to ED as an “additional location,” per the regulations, though these correctional facilities do not need to be included in Clery Act campus reporting.
The publication of the final rules is ED’s first step in implementing its regulatory agenda. ED had shared proposed regulatory language earlier this summer and sought comments from the public. Several other topics were addressed during the Negotiated Rulemaking process, but those proposals are not expected to be published until 2023, with the earliest effective date being July of 2024.
