A for-profit college is a privately owned school run as a business, one that federal law labels a “proprietary institution of higher education” and subjects to a stricter set of rules than public colleges or nonprofit universities. Because these schools generate profits for owners or shareholders rather than plowing surplus revenue back into education, the Department of Education caps how much of their money can come from federal sources, tests whether their graduates earn enough to repay their loans, bans paying recruiters by the head, and monitors their financial health. Fail any of the major tests and the school loses access to federal student aid, which for most for-profit colleges means it can no longer operate.
How Federal Law Defines a For-Profit College
Under the Higher Education Act, a proprietary institution is a school that is neither public nor organized as a tax-exempt nonprofit under Section 501(c)(3) of the Internal Revenue Code.1Office of the Law Revision Counsel. 20 USC 1002 – Definition of Institution of Higher Education for Purposes of Student Assistance Programs Beyond ownership type, the school must offer training that prepares students for employment in a recognized occupation, hold accreditation from a nationally recognized agency, have operated continuously for at least two years, and be authorized by the state where it sits.2eCFR. 34 CFR 600.5 – Proprietary Institution of Higher Education
These schools are structured as corporations or limited liability companies. Ownership rests with private individuals, venture capital firms, or publicly traded companies, and their boards answer to shareholders rather than public trustees. That profit motive is what triggers every extra federal requirement below. Each institution formalizes its relationship with the federal government through a Program Participation Agreement, which spells out the conditions for receiving Title IV student aid and can be revoked if the school breaks them.3Office of the Law Revision Counsel. 20 USC 1094 – Program Participation Agreements
State Authorization and Accreditation Come First
Two gatekeepers stand between a for-profit college and federal student aid: the state where the school operates, and an accrediting agency recognized by the Secretary of Education. State authorization comes first. The school must be legally approved to operate under that state’s laws, and losing that approval ends federal funding immediately.4Federal Student Aid. General Subject – Final Regulations for State Authorization
Accreditation adds quality control on top of legality. Recognized accreditors conduct peer reviews of curriculum, faculty qualifications, student outcomes, and facilities.5U.S. Department of Education. Institutional Accrediting Agencies For-profit schools often hold national accreditation, though some pursue regional accreditation because it makes credit transfers easier for their students. Lose accreditation, and the school can no longer process federal grants and loans.
The 90/10 Rule: How Much Can Come From Washington
This is the rule most directly aimed at whether the market values what a for-profit school sells. At least 10% of the school’s revenue must come from sources other than federal education assistance.6Office of the Law Revision Counsel. 20 USC 1094 – Program Participation Agreements If students paying out of pocket, private employers, and other non-federal sources will not spend anything on the school’s programs, that is a signal the education may not be worth the federal investment.
What Counts as Federal Money Now
For any fiscal year beginning on or after January 1, 2023, “federal funds” in the 90/10 calculation includes more than Title IV student aid. The American Rescue Plan Act of 2021 expanded the definition to cover educational assistance from any federal agency, including GI Bill benefits, Department of Defense tuition assistance, and workforce training funds from the Departments of Labor, Health and Human Services, and others.7eCFR. 34 CFR 668.28 – Non-Federal Revenue (90/10) Before this change, military and veteran benefits were excluded, which allowed some schools to fill their classrooms with service members and technically clear the 10% bar while relying almost entirely on government money. That loophole is closed. Schools must use cash-basis accounting for the calculation, counting funds actually received during the fiscal year.
What Counts on the Other Side
Schools can satisfy the 10% requirement through tuition paid directly by students or families without federal funds, employer-paid tuition from private companies, and revenue from educational activities conducted on campus under faculty supervision when those activities are required for all students in a program. Institutional scholarships qualify only if they come from a restricted account funded by outside sources unrelated to the school or its owners. Payments on student loans or income share agreements issued by the school count, but only the principal portion.
What Happens if a School Fails
Miss the 90/10 threshold once and the school goes on provisional eligibility for the next two fiscal years. Fail again the following year and the penalty escalates: the school loses all Title IV federal student aid for at least two institutional fiscal years, and regaining eligibility requires demonstrating full compliance with all certification requirements for a minimum of two additional fiscal years after that. For most for-profit schools, losing Title IV access means closing, because the vast majority of their students rely on federal aid to pay tuition.
Cohort Default Rate Limits
The cohort default rate measures how many of a school’s borrowers default on their federal loans within a set window after entering repayment. It applies to every Title IV school, but it presses hardest on for-profit colleges because their students borrow at higher rates. Two thresholds trigger loss of eligibility:
- A school whose cohort default rate meets or exceeds 30% for three consecutive fiscal years loses access to the Direct Loan and Pell Grant programs for the remainder of that year plus the next two.
- A school whose rate hits 40% or higher in any single year loses Direct Loan eligibility for the remainder of that year and the following two.
The calculation counts every borrower, not just the ones the school managed to reach with default-management outreach, so a school with poor job placement and high dropout rates can end up on the wrong side of these numbers quickly.
Gainful Employment: Do Graduates Earn Enough
Because for-profit schools must, by definition, prepare students for employment in a recognized occupation, the Department of Education holds their programs to measurable outcomes. Gainful Employment regulations evaluate whether graduates actually earn enough to justify the debt they took on.8eCFR. 34 CFR Part 668 Subpart S – Gainful Employment Two tests do the work:
- The debt-to-earnings ratio compares the median loan debt of a program’s graduates to their annual earnings. If graduates are spending too large a share of their income on loan payments, the program fails.
- The earnings premium test compares graduate earnings to the typical earnings of a high school graduate in the same state. A program whose graduates do not out-earn people who never attended college fails.
A program that fails either test in two out of three consecutive award years loses its Title IV eligibility, and the school cannot reapply to restore that specific program for three years. This is where the regulation has real teeth: it does not shut down an entire school, but it can eliminate individual programs that saddle students with debt for credentials that do not improve their earning power.
Warnings You Should Start Receiving
Beginning July 1, 2026, when a program is at risk of losing eligibility based on its most recent scores, the school must warn both current and prospective students. Current students must receive written notice within 30 days of the Secretary’s determination, and that warning must be the only substantive content in the communication. Prospective students must receive the warning at first contact about the program, and the school cannot enroll them or collect any financial commitment until at least three business days after delivery. Students must also acknowledge viewing the warning through the Department’s program information website before the school can disburse any Title IV funds on their behalf.
A Rule That Keeps Changing
The Gainful Employment rule has a turbulent history. The Obama administration’s version was rescinded under the first Trump administration, the Biden administration finalized a new version in 2023, and as of early 2025, a federal negotiated rulemaking committee recommended replacing the current rule with a revised “earnings premium” framework. A federal court in Texas upheld the existing rule against an industry challenge. The regulations remain on the books and are reflected in the current Code of Federal Regulations, but the specifics could shift.
The Ban on Paying Recruiters by the Head
Federal law prohibits any Title IV school from paying commissions, bonuses, or other incentive payments tied, directly or indirectly, to enrollment numbers or financial aid awards.6Office of the Law Revision Counsel. 20 USC 1094 – Program Participation Agreements It covers anyone involved in recruiting, admissions, or deciding who gets financial aid. The only exception applies to recruitment of foreign students living abroad who are not eligible for federal aid.
The rule exists because of what happened when it was loosely enforced. For-profit colleges historically employed aggressive sales tactics, compensating recruiters based on how many students they signed up. That created a system where recruiters had every reason to enroll students who were unlikely to succeed, because the recruiter got paid regardless of whether the student graduated or defaulted on their loans. Third-party lead generators and servicers contracting with schools must also agree not to participate in incentive-based recruiting. Violations can bring fines, limits on Title IV participation, or termination of the school’s program participation agreement.
Financial Health Checks
The Department of Education also monitors whether a school is financially strong enough to keep operating. A composite score uses three financial ratios to gauge stability.9eCFR. 34 CFR 668.171 – General A score of 1.5 or higher passes. Below 1.5, the Department considers the school potentially unstable. Below 1.0, the school must post financial protection, typically an irrevocable letter of credit.
A school that fails the financial responsibility standards can remain in Title IV by posting a letter of credit equal to at least 50% of the federal student aid it received during its most recent fiscal year. If the school cannot manage that amount, the Department may allow continued participation under provisional certification with a smaller letter of credit equal to at least 10% of recent aid received. These letters of credit protect the government in case the school closes suddenly, ensuring funds exist to cover refunds owed to students and liabilities owed to taxpayers.
Separately, schools must show they have the staffing and systems to manage federal aid properly.10eCFR. 34 CFR 668.16 – Standards of Administrative Capability A school that cannot accurately calculate disbursements, track enrollment status, or process refunds on time may be placed on heightened cash monitoring, which delays its receipt of federal funds. For a school running on tight margins, that delay alone can create a cash-flow crisis.
What Happens if Your School Closes or Misled You
Two federal protections exist to keep borrowers from being stuck with loans for an education they never received or that was misrepresented to them.
Closed School Discharge
If your school closes and you were enrolled at the time, or you withdrew within 180 days before the closure date, you can have your federal student loans for that school fully discharged.11Federal Student Aid. Closed School Discharge The Department can extend that 180-day window for exceptional circumstances, such as the school losing accreditation or state authorization, or being placed on heightened cash monitoring in the period before closure.12eCFR. 34 CFR 685.214 – Closed School Discharge
For schools that closed on or after July 1, 2023, the discharge happens automatically one year after the official closure date if you did not complete your program at another location or through a teach-out arrangement. You do not need to apply. If you want the discharge sooner, contact your loan servicer once the closure date is confirmed. Students who finished their program before the school closed, or who completed it through an approved teach-out, are not eligible.
Borrower Defense to Repayment
Borrower defense is the mechanism for students who were misled. If a for-profit college made substantial misrepresentations about its programs, job placement rates, or other material facts, and you relied on those representations when you enrolled, you can apply to have your federal loans discharged. The legal standards vary depending on when you borrowed. Loans originated under the 2016 regulations require evidence of substantial misrepresentation, a favorable court judgment, or breach of contract. Older loans are evaluated under applicable state law.
There is no time limit on filing a borrower defense claim as long as you still have outstanding federal student loans. The process has been slow and politically contested. As of mid-2025, the U.S. Supreme Court was considering a case about whether the Department of Education can assess borrower defense claims before a borrower defaults and whether it can process claims on a group basis. The outcome will shape how quickly future claims move.
When Owners and Executives Can Be Held Personally Liable
Federal law allows the Department of Education to reach past the institution and hold individual owners and executives personally responsible for financial losses. Under the Higher Education Act, anyone who exercises “substantial control” over an institution can be required to assume personal liability for losses to the government, to students, and for civil and criminal penalties related to Title IV programs.13Federal Student Aid. Establishing Personal Liability Requirements for Financial Losses Related to Title IV Programs Substantial control means holding a significant ownership interest, serving on the board of directors, or acting as chief executive or another senior officer.
The Department evaluates whether to impose personal liability case by case. Factors that make it more likely include a high volume of approved borrower defense claims, a pattern of civil or criminal lawsuits involving fraud or misrepresentation, repeated composite scores below 1.0, failure to meet the 90/10 threshold, and executive compensation structures that could undermine the school’s financial stability. Schools with clean track records for the previous five years are generally exempt.
Ownership Changes and Nonprofit Conversions
When a for-profit college changes hands, the sale triggers a mandatory federal review. The school must notify the Department at least 90 days before the change takes effect.14Federal Student Aid. Change in Ownership Documentation, Reporting, and Requirements Within 10 business days after the deal closes, the school must submit audited financial statements for both the institution and the new owner, along with current state licenses and accreditation approvals. The school operates under a temporary provisional participation agreement while the Department reviews the transaction.
Some for-profit schools have tried to convert to nonprofit status, partly to escape the 90/10 rule and Gainful Employment requirements, which apply only to proprietary institutions. The Department scrutinizes these conversions closely. To be recognized as a nonprofit for federal aid purposes, the converted school must be owned and operated by one or more nonprofit entities with no part of its net earnings benefiting any private individual, hold 501(c)(3) status from the IRS, and be authorized as a nonprofit by every state where it operates. A school generally cannot qualify as a nonprofit if it still owes debt to a former for-profit owner or maintains a revenue-sharing agreement with that owner or their affiliates. These rules exist because some recent conversions appeared designed to change the school’s regulatory classification on paper without truly changing how the money flowed.