Monday, August 2, 2010


I wanted to make sure that you did not miss this. This is very concerning. In speaking to Jim Cox, the executive director of AACS, a week or so ago I know that he was very concerned about what is happening in Washington and how it will impact schools. Here is an email that I received from David Mesko CPA who is a friend of mine. His firm audits many of the accounts that we work with. I will keep you posted as this develops.

Larry Kopsa CPA

The DOE issued a wide ranging notice of Proposed Rulemaking last week that could have a negative effect on cosmetology schools. Please note that these rules have not yet been adopted; at this stage the DOE has only stated that it would like to impose these regulatory changes, soon. The first test of the “Gainful Employment” section at the bottom of my email will be very difficult for cosmo schools to meet. If these rules are put into effect, many cosmo schools could lose eligibility to participate in T4. The major elements of their proposed new rules appear below.

• Schools must develop a written policy and process regarding assessment of the validity of students high school completion.

• Students may take an ATB exam, but could also demonstrate the ability to benefit by completing 6 semester credits or 225 clock hours at your school or another institution. Students admitted under this condition are not eligible for Title IV aid until they complete the 6 semester credits or 225 hours

• If a school’s employee or contractor is found to be making written or verbal “misrepresentations” to students, the school could lose Title IV eligibility.

• The 12 Safe Harbors relevant to incentive compensation are to be removed. Schools can still pay merit increases if they are based on a variety of factors, but paying incentives based upon graduation rates will no longer be permitted.

• Accrediting agencies must more rigorously review and evaluate schools’ assignment of credit hours.

• Credit hours must have documented high levels of “seat time” unless the program is 2 years in length and lead to a degree.

• Suggests that a semester credit and quarter credit programs should be converted to clock hour if the programs’ graduates’ licensure requires its. For academic years that are less than 900 clock hours, Title IV aid is prorated.

• New conversion of semester and quarter credit hours from clock hours will be 37.5:1 and 25:1, rather than the current 30:1 and 20:1 levels. This could reduce Title IV award levels unless the school can demonstrate outside coursework and preparation is required much like a traditional college.

• The $400 tolerance and 30% limitation for Verification will be removed.

• Published SAP policies must include pace of progression and how often the pace is measured.

• Transfer credits must count toward academic progression.

• For programs with true modular delivery, R2T4 will now be required regardless if a course is completed.

• If the institution requires its instructors to take attendance then the actual LDA must be used for R2T4 purposes rather than midpoint. In addition, the school will only have 14 days to determine that a student has withdrawn.

• For Gainful Employment, the NPRM that ED issued last week has several onerous sections, as well as two safe harbors, although ED didn’t use those words to describe them. The page numbers below refer back to the NPRM that was published by ED, in case you wanted to read them more thoroughly. ED has estimated that proprietary schools will lose eligibility for approximately 5% of the academic programs that they offer as a result of these Gainful Employment proposed rules – many industry analysts expect the losses to be much higher.

• The first “Debt to Income” test. For full eligibility, it retains the 8% rate, but adds 20% of “discretionary income” (the earnings in excess of 150% of the poverty line) as an alternative that could qualify a program. Restricted program eligibility is possible with debt rates as high as 12% of wages or 30% of the discretionary income wage level. Transfer in debt is no longer included in the calculation. ED IS NO LONGER BASING WAGES ON A BLS TABLE – INSTEAD THEY’RE PROPOSING TO USE THE SCHOOL’S GRADUATES’ ACTUAL WAGES AS REPORTED TO SS OR SOME OTHER FEDERAL AGENCY. INSTEAD OF SCHOOL’S SELF-REPORTING THEIR DEBT TO INCOME TEST RESULTS, ED WILL NOW DO THE CALC AND TELL THE SCHOOLS WHICH PROGRAMS ARE INELIGIBLE.

• The second “Repayment Rate” test. For full eligibility, programs which have a four year repayment of at least 45% of Original Outstanding Principal Balance of loans that entered repayment in the past four years. Programs with Repayment Rates as low as 35% could retain restricted eligibility. THIS TEST INCLUDES ALL STUDENTS WHO “ATTENDED” THE PROGRAM, INCLUDING DROPS.

o Programs which meet either 8% or 20% of Debt to Income test #1 and the 45% Repayment Rate of test #2 are fully eligible.
o Programs which meet only one of the two tests are still eligible for T4, but the school must widely publicize that students may have difficulty repaying their loans if they enroll in that program.
o Programs with Debt to Income Test #1 rates of 8-12% or 35-45%, and Repayment Test #2 rates below of 35-45% are Restricted (Must publicize that students may have difficulty repaying their loans, Must limit new enrollments to a trailing 3 year average level, and Must obtain demonstrated employer support for future placements).
o Programs which have Debt to Income Test #1 rates below 12% or 30%, or Repayment Rate Test #2 below 35% are ineligible for new students. These programs’ existing students can receive T4 for the rest of the current award year and the next award year.
o Penalties will be phased in during the Transition years beginning 7/1/11 and 7/1/12.


o Each location of the school which wants to offer a new program must provide 5 years’ enrollment projections to ED.
o Each location of the school which wants to offer the new program must provide documentation from employers that there are projected job vacancies for the projected enrollments