Policy & Funding

Final Gainful Employment Rule Formally Released, Met with Hostility

• By Dian Schaffhauser
• 10/31/14

The White House has formally published new regulations that require institutions to prove their graduates earn incomes that justify the size of their career-oriented school loans.

The new rules will apply to all schools — whether public, private non-profit and private for-profit institutions — that accept federal funding for occupational training; however, the feds have made no secret of the fact that for-profit schools will feel the biggest impact.

According to a 945 document about the new rules, the "Gainful Employment" (GE) regulations have two aspects. The first is an "accountability framework" that defines the measures by which the Department of Education will assess whether a given program is eligible for title IV, Higher Education Act funding. The second is a "transparency framework" for reporting and disclosure requirements to make data public about the outcomes of students enrolled in a given program.

Under the new accountability framework a college or university will have to certify that its GE programs are part of the institution's accreditation and meet state rules for occupation-specific licensing and certification. On top of that ED has established a debt-to-earnings ratio or D/E rate that compares the amount of debt (including tuition, fees, books, equipment and supplies) students incur in completing the program to the discretionary and annual earnings of those same students after finishing the program.

Under the new regulations, to pass the D/E rates measure, the GE program must have a discretionary income rate less than or equal to 20 percent or an annual earnings rate less than or equal to 8 percent. Each program will be assessed to determine whether it passes or fails the D/E rates measure or is "in the zone," a fudge factor. The zone for discretionary income is between 20 percent and 30 percent; the zone for annual earnings is between 8 percent and 12 percent.

A school that fails to meet the D/E rates for a program in two out of three consecutive years or can't get the rates into the zone for four successive years faces the loss of federal student aid for that program for a period of at least three years. In addition, it must warn students enrolled in that program that its future is murky and explain what their options are, up to and including a refund on tuition and fees.

Although the regulations go into effect on July 1, 2015, ED is offering a transition period of seven years in order to allow institutions to pass the D/E rates measure by reducing the loan debt held by their current students.

This isn't the first time the department has attempted to tackle gainful employment regulations. In 2011, ED issued regulations with three metrics, any one of which a program was required to meet: at least a third of former students in a program were repaying their loans; the annual loan payment of a typical graduate didn't exceed 30 percent of discretionary income; or the annual loan payment didn't exceed 12 percent of that typical graduate's total earnings.

Those rulings landed in court when the Association of Private Sector Colleges and Universities (APSCU) brought a suit against the department challenging its rulemaking authority. Although the U.S. District Court for the District of Columbia determined in 2012's "APSCU v. Duncan" that ED wasn't over-reaching, the rules were put on hold in the wake of a decision that some of the criteria lacked "adequate explanations."

Compared to the previous regulations, the department considers its new rules to have a "higher passing requirement" and a "shorter path to ineligibility." Previously, 193 programs probably wouldn't have passed the regulations, according to ED's assessment; now the department estimated that roughly 1,400 programs serving 840,000 students wouldn't pass the accountability standards. Of those, 99 percent are at for-profit institutions. The loss of federal student aid at those schools would have a major impact on their bottom lines, since nearly 90 percent of their revenue comes from public money.

The draft regulations went through an extensive public hearing process, generating some 95,000 public comments, according to the department.

"Career colleges must be a stepping stone to the middle class. But too many hard-working students find themselves buried in debt with little to show for it. That is simply unacceptable," U.S. Secretary of Education Arne Duncan said in a statement. "These regulations are a necessary step to ensure that colleges accepting federal funds protect students, cut costs and improve outcomes. We will continue to take action as needed."

The goal, the draft document stated, is to address "growing concerns" about educational programs that are "leaving students with unaffordable levels of loan debt in relation to their earnings, or leading to default."

The complaints cited by the department are not new: Too many programs fail to train students in the skills they need to get and keep jobs for which they're being trained; too many provide training for occupations where the wages to be earned don't justify the tuitions charged; and too many experience a "high number of withdrawals or 'churn.'" In addition, the department sees the new regulations as a way to temper programs that are "engaging in aggressive and deceptive marketing and recruiting practices" that pressure students and their families into making bad educational investment decisions.

On average, the department reported, a student will pay four times as much to attend a two-year for-profit institution as he or she would pay to attend a community college and is two times more likely to borrow money to attend school. While students at for-profit colleges represent only about 11 percent of the total higher ed population, they represent 44 percent of all federal student loan defaults.

In response to the new regulations, APSCU —  the same organization that took Duncan to court before —  is pinning its hopes on Congress this time around. In a statement, CEO and president Steve Gunderson called the rules "nothing more than a bad-faith attempt to cut off access to education for millions of students who have been historically underserved by higher education. Regulations created and issued based on bias against certain institutions have no place in our country. Furthermore, the debt-to-earnings metric is arbitrary and capricious."

Gunderson accused the department of favoring public institutions, which "benefit from generous taxpayer operational subsidies," over "private sector institutions where graduates are achieving real earning gains and successfully repaying their loans."

"We are hopeful," he said, "that the Congress will consider the best interests of all students when they reauthorize the Higher Education Act and develop policies that apply to all students, in all programs, at all institutions."

But it isn't only for-profit schools that are showing concern. The American Association of Community Colleges called the regulations "deeply flawed," for the "make work" reporting burden imposed on community colleges.

"Community colleges proudly offer access at an affordable cost to gainful employment programs to millions of students each year. Our institutions and programs judiciously allocate limited resources for the benefit of our students who are working to improve their lives through these programs," said President and CEO Walter Bumphus. "The millions of dollars in compliance costs that these the final regulations will entail will largely be wasted — a frittering away of precious and limited institutional resources."

However, at least one organization said the rules don't go far enough because the department dropped a provision that would have considered default rates of all program students, including those who have withdrawn without getting a degree or certificate. According to Maura Dundon, senior policy counsel at the Center for Responsible Lending, "Since a majority of for-profit college students are unable to complete their degree, the decision to eliminate consideration of default rates has seriously weakened the rule."

Specifically, the Center pointed to the problem of students who take out loans for programs that don't qualify them to practice their occupation in their specific states. "The rule fails to go far enough to protect online students or students located close to state lines, who may still find that the program does not legally qualify them to get needed licenses for a job in the state where they live."

The final version of the regulation is available in the Federal Register online here.