For proprietary cosmetology school owners and administrators, few phrases carry as much weight and potential anxiety as the "90/10 Rule." It’ s a cornerstone of federal financial aid compliance, a regulation that directly impacts your school’ s ability to participate in Title IV programs.

Ignoring it, misunderstanding it, or miscalculating it can lead to severe consequences, including the loss of federal funding - a lifeline for countless students and the very existence of many institutions.

But what exactly is the 90/10 Rule? Why is it so critical? And what do you, as a busy school leader, need to know to ensure your school remains compliant and financially sound?

This article aims to demystify this vital regulation, breaking down its complexities into clear, actionable insights. We’ II explore its purpose, how it’ s calculated, common pitfalls, and proactive strategies to ensure your cosmetology school not only complies but thrives.

The Essence of the 90/10 Rule: Protecting Taxpayer Investment

At its core, the 90/10 Rule is a safeguard designed by the U.S. Department of Education (DOE) to ensure that proprietary (for-profit) institutions are not solely reliant on federal student aid.

It mandates that a proprietary school must derive at least 10% of its revenue from sources other than Title IV federal student aid programs. Conversely, no more than 90% of a school’ s revenue can come from these federal funds.

The rule’ s intent is to demonstrate that a school provides a valuable education that students are willing to pay for, even without federal assistance. It encourages schools to attract a diverse student body and to offer programs that are marketable enough to generate non-Title IV revenue.

For cosmetology schools, this means that while federal Pell Grants, Stafford Loans, and otherTitle IV funds are crucial, a significant portion of your income must come from other avenues, such as cash payments from students, institutional loans, or revenue from services provided by students (e.g., salon service

How the 90/10 Rule is Calculated: The Formula for Compliance

The calculation of the 90/10 Rule is performed annually, typically at the end of your school’ s fiscal year. It’ s essentially a ratio of your Title IV revenue to your total revenue, with specific definitions for what counts as "revenue" in each category. The formula is:

Total Title IV Revenue / Total Revenue (including Title IV and eligible non-Title IV revenue) < 0.90 (or 90%)

Let’ s break down the components:

What Counts as Title IV Revenue (the "90" part)?

This includes all funds received by the school under Title IV programs, such as:

• Federal Pell Grants

• Federal Supplemental Educational Opportunity Grants (FSEOG)

• Federal Work-Study (FWS) funds

• Federal Direct Subsidized Loans

• Federal Direct Unsubsidized Loans

• Federal Direct PLUS Loans

• Federal Perkins Loans (though largely phased out)

It’ s important to note that this includes funds disbursed to students that are then applied to their institutional charges, as well as any Title IV funds returned to the DOE due to withdrawals or overpayments.

What Counts as Non-Title IV Revenue (the "10" part)?

This is where the creativity and strategic planning come in. Eligible non-Title IV revenue includes funds from sources such as:

• Cash payments from students: Payments made directly by students or their families from non-federal sources.

• Institutional loans: Loans made by the school to students, provided they meet specific criteria (e.g., bona fide, legally enforceable, and not structured to circumvent the 90/10 Rule).

• Revenue from non-Title IV programs: Income from programs not eligible for federal financial aid.

• Revenue from services provided by students: This is a significant one for cosmetology schools! Income generated from salon services, product sales, or other services performed by students as part of their training (e.g., haircuts, manicures, facials) can count towards the 10% portion.

• Revenue from other legitimate business activities: This could include rental income from school facilities, sales of educational materials (not covered by Title IV), or other ancillary services.

• State and local government grants/scholarships: Funds received from state or local programs that are not federal in nature.

Crucial Nuance: Not all revenue counts. For example, revenue from federal non-Title IV programs (like VA benefits or military tuition assistance) generally does not count towards the 10% portion.

Also, revenue from activities unrelated to the school’ s educational mission may be excluded. The rules are precise, and misclassification is a common audit finding.

Common Pitfalls and How to Avoid Them

Even with a clear understanding of the components, schools often stumble in their 90/10 calculations. Here are some common pitfalls:

1. Misclassifying Revenue: This is perhaps the most frequent error. Schools might mistakenly include federal non-Title IV funds (like VA benefits) in their 10% portion, or improperly account for institutional loans. Always verify the source and nature of all revenue streams against DOE guidelines.

2. Inaccurate Timing of Revenue Recognition: Revenue must be recognized in the proper fiscal year. Errors in unearned revenue calculations can directly impact your 90/10 ratio by misstating total revenue for a period.

3. Lack of Documentation: Auditors will require robust documentation for all revenue sources, especially non-Title IV funds. If you can’ t prove it, it doesn’ t count. Ensure meticulous records for cash payments, salon services, and institutional loans.

4. Over-reliance on Title IV: Some schools, particularly newer ones or those with limited marketing reach, may struggle to attract enough non-Title IV students or generate sufficient other revenue. This requires proactive strategic planning.

5. Ignoringthe Rule Until Year-End: Waiting untilthe end of the fiscal year to calculate your 90/10 ratio is a recipe for disaster. By then, it’ s often too late to make meaningful adjustments if you’ re out of compliance.

Proactive Strategies for Maintaining 90/10 Compliance

Maintaining compliance with the 90/10 Rule requires ongoing vigilance and strategic planning. Here’ s how you can proactively manage your school’ s ratio:

1. Monitor Regularly: Implement a system to calculate and monitor your 90/10 ratio at least quarterly, if not monthly. This allows you to identify trends and take corrective action before it’ s too late. Your QuickBooks Online setup should facilitate this tracking.

2. Diversify Revenue Streams: Actively seek and promote non-Title IV revenue sources. This could include:

• Cash-paying students: Offer incentives for upfront payments or payment plans not tied to federal aid.

• Institutional scholarships/grants: Fund scholarships from school resources.

• Robust salon/spa services: Market your student-run salon/spa to the public to increase revenue from services provided by students.

• Continuing education programs: Offer short courses or workshops not eligible for Title IV funding.

• Product sales: Sell professional beauty products to students and the public.

3. Review Institutional Loan Policies: If you offer institutional loans, ensure they are structured to meet DOE requirements for inclusion in the 10% portion. They must be bona fide and legally enforceable.

4. Educate Your Team: Ensure your admissions, financial aid, and accounting teams understand the 90/10 Rule and their role in maintaining compliance. Misinformation at any stage can lead to errors.

5. Seek Expert Guidance: The 90/10 Rule is complex, and the consequences of non- compliance are severe. Partnering with a CPA who specializes in cosmetology school finance and Title IV compliance can provide invaluable peace of mind. An expert can help you correctly classify revenue, optimize your financial systems, and develop strategies to maintain compliance.

Your School’ s Future Depends on It

The 90/10 Rule is more than just a compliance hurdle; it’ s a reflection of your school’ s financial health and its commitment to providing a valuable education that attracts a diverse funding base.

Proactive management, meticulous record-keeping, and a clear understanding of the regulations are paramount.

Don’ t let the complexities of the 90/10 Rule become a source of anxiety or a threat to your school’ s future.

By implementing the strategies outlined above and leveraging expert support, you can confidently navigate this critical regulation, secure your Title IV funding, and ensure your cosmetology school continues to thrive.

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