Unintended Consequences of the 90/10 Rule?

by Daniel L. Bennett

I've been doing some thinking about the so-called 90/10 rule, which stipulates that profit-seeking colleges must obtain 10% of their revenue from non-federal aid sources. Since proprietary schools do not get state subsidies, research grants, or have a massive income-earning endowment (profit-seeking firms would likely re-invest their retained earnings in growth opportunities anyhow, as they don't have the tax advantage of a public or non-profit organization), the other 10% of revenue usually is generated from out-of-pocket tuition charges. In other words, student tuition payments from private funds such as income, family savings, company sponsorship, private scholarship or private loans.

By requiring colleges to come up with revenue sources other than the federal government, politicians believed that profit-seeking colleges would be forced to provide something valuable that students would be willing to pay out of their own pocket for, with the intent of cracking down on the so-called diploma mills operating in the for-profit space. While the implementation of the rule did lead to some for-profit providers closing up shop, I wonder if there are negative unintended consequences as a result.

For instance, it may be possible that profit-seeking colleges have an incentive to set tuition at a level that exceeds the maximum federal student loan thresholds so that students have to come up with the remainder of the tuition on their own. It may also be possible that proprietary schools set their tuition above the combined maximum annual federal loan and grant thresholds, or some ratio of it depending on the particular target student demographics. In the absence of the 90/10 rule, it is possible that profit-seeking colleges might price their tuition at or below the federal aid thresholds.

I plan to empirically investigate this matter in the future. Stayed tuned.