Avoiding the Cutoff

Nationwide credit crunch creates added challenges for 90-10 funding

Not a day goes by that Brian Stewart isn’t getting an update from his financial aid office on his school’s 90-10 status. It’s the ratio of how much tuition comes from federal funding versus private funding or cash. These days, it’s constantly changing on the three small campuses of Bryan College. Lose track or miscalculate how much tuition revenue comes from federal funds, and proprietary schools suffer what amounts to a funding death sentence: being cut off from all federal funding.

"If a student is eligible for 100 percent federal funding, you can’t deny them that. What do you do? Turning them away has to be considered," said Stewart, President of
Bryan College.

90-10 is a burr under the saddle of the industry that just became more uncomfortable. The funding model has been around for some time, but the nationwide credit crunch and its trickle down into the college lending industry has created new challenges. And the solutions offered up by the feds have some career colleges and students running in circles.

In the past 10 months, dozens and dozens of college lenders have dropped out of all or part of the Federal Family Education Loan Program, or FFELP. (The National Association of Student Financial Aid Administrators keeps an impressive running list on its web site, www.nasfaa.org.) Lenders say it’s the fallout of Congress cutting their subsidies in favor of increasing the amounts students can borrow in the midst of a bad economy.
This year, skittish investors have passed on traditionally safe student loan bonds, federally backed or not, that are needed to finance both. The people who make money lending money to students have essentially said, "not so
much anymore."

Traditional four-year colleges lobbied Capitol Hill as hard as the career college sector looking for relief, fearful of losing students who couldn’t find money for school. But thus far, the solutions seem to overlook the career college hurdle of 90-10. Students are getting more federal funding, the feds are buying back some subsidized loans to free up capital, but career colleges still have to maintain the ratio.
"I think there should have been more study done on the impact," said Stewart, referring to the increased funding.

Stewart and many others say they will likely have to raise tuition to maintain the gap. But, private loans to fill the 10-percent gap are harder to come by for less-affluent students who make up the majority of career colleges. Many lenders have turned their backs on students with sub-prime credit scores (below 620) seeking private loans. The true test comes between now and September – the busiest time of the year for student lending.

With fewer lenders willing to make the loans, more schools are jumping into direct lending – cutting out the middle man and becoming the originators of FFELP loans. Corinthian Colleges is one of them.

Jack D. Massimino, Corinthian’s Chief Executive Officer, told Corinthian shareholders, "… to ensure the availability of these [Title IV FFELP] loans in an unstable credit market, we are preparing our U.S. schools to participate in the Federal Direct Student Loan Program. All of our schools are now eligible to participate in the program."

But the news also came with this warning from Massimino: "As a result of the changes in student lending, however, we expect the rate of enrollment growth to slow to approximately 6 percent – 7 percent in the fourth quarter."

For Stewart, there is also the problem of being a single owner of a small school. Bryan College offers training in allied health, business and personal training. There are about 400 students on Bryan campuses in Topeka, Kan.; Springfield, Mo.; and Rogers, Ark.

"If you are a private school, it creates more issues because you may not have the cash flow," said Stewart.

Stewart is still hopeful that CCA lobbying on the reauthorization of the Higher Education Act will convince lawmakers to either drop the 90-10 altogether or allow schools more flexibility in how they meet the rule, perhaps by allowing money from 529 savings accounts to fall into the 10 percent cash side of the equation, or putting the "new" federal money toward the 10 percent side. At publication, President Bush had signed a temporary extension of the HEA to expire July 31. Lawmakers were still trying to hammer out differences between Senate and House versions before they all head home for the month of August. Another temporary extension leaves 90-10 in place going into the fall semester.
In the meantime, Stewart has not decided what he will do. Raising tuition is an easy option, but it’s risky, not very political and, of course, unpopular with students.

Jeff Freeman, President and Co-owner of Pinnacle Career Institute, is in a slightly different position. His school was one of the first for-profit schools to be a direct lender, but he too has fingers crossed for an end to the 90-10 rule.

"If it went away, it would put downward pressure on tuition in the for-profit industry," said Freeman, who is also looking at raising tuition. It makes him mad. As it stands, he fears students may be facing the same thing mortgage seekers have encountered: tighter requirements, fewer loans and better odds that they will lose everything.

"The kids with the least advantages in life are being hurt the most, again," Freeman said.

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