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It is generally accepted as a fact of life that college tuition rates rise at a faster pace than the rate of inflation would dictate. Many things factor into these rate increases, such as necessary infrastructure upgrades, salaries, and healthcare coverage. A hidden factor in these rate increases is actually the result of federal regulations, something known in the industry as "the 90/10 rule."
The 90/10 rule is a regulation that limits nontraditional schools from receiving more than 90% of their funding from Title IV funds (Pell grants and Stafford loans). These nontraditional schools are more commonly known as career colleges or trade schools and operate on a for-profit basis. These are not traditional 4-year colleges and universities or 2-year community colleges. These are schools that mainly cater to adult learners who wish to receive additional training for a career or to learn trades such as HVAC repair or jet engine mechanics. The regulation is meant to prevent these schools from being entirely supported by money received from the federal government. This essentially means that students attending these schools will have to pay for some portion of their education in cash because their federal funds will not cover their entire balance.
So how does the 90/10 rule drive up the cost of a college education? The effect is achieved in 2 ways. First, there's the percentage of students that attend a school who receive Title IV aid. If most of the students who attend a school are financially able to pay their own way without receiving federal aid, the 90/10 rule doesn't come into play. When an increasing percentage of students start receiving federal aid, problems result. I'll explain in a moment. The second component that comes into play is when Congress increases the amount of Pell grant money or Stafford loan money that a student is eligible to receive. If a student can get more money then that edges the total funding closer and closer to 90% federal coverage.
Here's what happens. In either scenario, the school begins taking in a greater portion of its total funds as federal aid dollars. It doesn't matter whether that money is coming as a result of more students attending who choose to apply for federal money or whether the increase is coming from a higher funding eligibility as a result of congressional legislation. More federal dollars are coming in. If that amount gets uncomfortably close to 90% of the total funding the school has to do something to decrease that percentage. A school is not going to turn students away in order to address a 90/10 problem, so the alternative is to raise the tuition. By raising the tuition the federal money that students receive doesn't go quite as far. In order to attend the school the students will have to come up with more money out of pocket to cover the cost of their education. They typically come up with this money by taking out private loans or using personal credit cards.
In response to the increase in tuition by the schools, Congress reacts by increasing the student eligibility for Pell grants and Stafford loans. In response to the increased grant and loan money coming in, these schools increase their tuition in order to stay within the 90/10 regulations. It becomes a vicious cycle with the net result being that tuition continues to increase because it has to.
How does this affect traditional 4-year and 2-year colleges? As the career colleges and trade schools increase their tuitions and are able to pay their instructors better it drives up the salary expectations of the traditional schools. A rising tide lifts all ships and rising tuition spreads across the board.
