Education Dept. Unveils New Gainful Employment Rules

Late last week, the U.S. Education Department formally released its new proposed gainful employment rule, which seeks to cut off federal financial aid to career-oriented programs whose graduates have high student loan debt relative to their incomes. While AACRAO commends the Obama administration’s efforts to promote college accountability and affordability, the draft rule does not do enough to protect students from predatory practices.

The new proposal comes a little less than two years after a federal judge threw out the original measure in June 2012, after the Association of Private Sector Colleges and Universities, the main trade group of the for-profit-college industry, challenged it in a lawsuit, The Chronicle of Higher Education reported.

The judge in the case agreed that the department had the right to issue the regulation but said the department had been "arbitrary and capricious" in setting the thresholds for one of the three key criteria it would use to determine whether a program would lose eligibility for federal student aid.

In May 2013, the department said it would drop any further efforts to revive the old rule and would instead develop a new one. It established a negotiated rulemaking panel in fall 2013 to tackle the issue, releasing a series of proposals for the controversial rule. Negotiators failed to reach consensus by the conclusion of the rulemaking session, leaving the department to submit their own final draft of the regulation.

The overall structure of the latest proposal hews closely to the draft version released by the Education Department in December. Programs would be separately judged on two kinds of tests – one based on how much debt the programs’ graduates incur relative to their eventual income, the other based on loan default rates of borrowers in for-profit and vocational programs – to determine whether programs pass or fail.

The measures would base the calculation only on students who receive federal student loans and Pell Grants. The calculation would exclude students who attend college using federal veterans benefits or military tuition assistance funds, as well as students who pay their own way. Programs that fail either test would stand to lose their eligibility to access Title IV funds.

Under the new proposal, programs would fail if their graduates' student loan debt payments exceeded 12 percent of their incomes and 30 percent of their discretionary incomes, the same ratios as in the original rule and the draft considered by negotiators this past fall. As in the draft, programs whose graduates have debt-to-income ratios of 8 to 12 percent or debt-to-discretionary-income ratios of 20 to 30 percent would fall in "the zone," and would have to warn students that they might become ineligible for aid. Programs that fail the debt-to-income test twice in any three-year period or are in the zone for four consecutive years would be ineligible for federal student aid.

Additionally, the proposal would require colleges to ensure that the programmatic student loan cohort default rate does not exceed 30 percent. That standard is the same as the statutory rate for institutions established by Congress through the Higher Education Act.

In a conference call with reporters last week, Deputy Director of the White House’s Domestic Policy Council James Kvaal said that the Obama administration was confident that the new standard could survive a legal challenge because the programmatic cohort default rate mirrors the well-established institutional one, the Chronicle reported.

Roughly 8,000 programs would be required to comply with the standards, Inside Higher Ed reported, including nearly all programs at for-profit institutions, as well as certificate programs at public and private non-profit institutions, such as community colleges. Together, those programs enroll close to one million students and receive nearly $26 billion in federal loans and $10 billion in federal grants per year.

An estimated 16 percent of all covered programs would fail under the proposed new gainful employment metrics, officials said. An additional 8 percent would fall in the warning zone. Among for-profits institutions, roughly 20 percent would fail and 10 percent would be in the zone.

The proposed gainful employment rules would also require programs to meet applicable accreditation requirements and state or federal licensure standards, according to the Education Department news release. Additionally, institutions would be required to make public disclosures on the performance and outcomes of their gainful employment programs, including information on costs, earnings, debt, default rates and completion rates.

The new proposal differs from the Education Department’s December draft version in a number of key areas. In some of its earlier iterations, the department proposed language that would have required programs that lose eligibility to provide some measure of debt relief for borrowers. AACRAO is extremely disappointed to see that provision dropped from new rule. 

The latest version also excludes a cap on the amount of federal financial aid received by programs about to lose eligibility, which would have prevented programs from growing at the same time that they could lose access to Title IV funds.

On the debt-to-earnings ratio, the median debt load would be amortized over a period of 10, 15 or 20 years, depending on the type of academic program, according to the rules. The rate would be calculated using the current interest rate on unsubsidized federal loans. Median debt levels in the metric would include only debt that is attributable to tuition and fees plus total allowances for books, supplies and equipment.

Under the latest version, programs would fall under the debt-to-earnings requirement if more than 30 students complete each year in the appropriate cohort, increasing from a minimum program size of 10 in the previously released draft. The change would subject substantially fewer programs to the test, allowing many programs to escape scrutiny. Another change creates a loophole that would make it easier for colleges to exclude graduates from the debt-to-earnings tests by, for example, re-enrolling them for as little as one day.

The new proposal would, however, provide some failing programs or ones in the zone an opportunity to appeal if less than half of all completers take on debt. This measure was sought by community colleges, given the relatively low price of two-year degree programs. According to the Association of Community College Trustees, only about 9 percent of students in certificate programs borrow. While the draft rules would make it easier for some colleges to gain an exemption from the debt-to-income tests, it would still subject the programs to the default rate test.

Following the release of the revised rule, the public now has 60 days to comment. The Education Department will consider that feedback before publishing a final rule in the following months.


Related Links

U.S. Education Department Press Release

Federal Register

The Chronicle of Higher Education

Inside Higher Ed