Very Minor Changes to Department of Education’s ‘Gainful Employment’ Rule

This morning the U.S. Department of Education announced much-anticipated revisions to its gainful employment rule, which render colleges ineligible for federal financial aid if average graduates need to spend too much of their salaries to paying off student loans. As a result of the proposed change former students will no longer be measured by how many of them are paying back their loans. The new standard would measure the schools based on how many of them are having trouble paying back their loans.

Gainful employment has long been as source of controversy, mostly because any restriction on how much federal money can be used to pay for programs evaluated based on a debt/earnings ratio adversely impacts for-profit colleges, which charge a lot of money and whose graduates don’t get very good jobs.

In 2012 Judge Rudolph Contreras of the U.S. District Court for the District of Columbia vacated several parts of an earlier draft of gainful employment regulations, because parts of the rules seemed arbitrary. As the Chronicle of Higher Education put it:

Contreras says the department failed to provide a factual basis for why a repayment rate of 35-percent [at least 35 percent of a program’s graduates must be actively repaying their student loans in order for the institution to continue to receive financial aid] would be a “meaningful performance standard.” Instead, he wrote, it has said it chose that figure “because approximately one quarter of gainful employment programs would fail a test set at that level.” But the department could have chosen a percentage under which only one-tenth of the programs would have failed and justified it by the same rationale, he said. Therefore, he accepted the argument that the standard was arbitrary and capricious.

And so the department went back to the drawing board. Under the new proposal, which the public will have 60 days to respond to, the first provision remains pretty much the same.

A program fails and an institution becomes ineligible for aid if student loan payments are greater than 12 percent of graduate (or former student) incomes. That was always pretty much the rule. What’s changed here is the loan repayment rate rule.

In order to eliminate that “arbitrary and capricious” 35 percent rule, the regulations tweak the sanctions a little bit.

The new plan will not evaluate schools based on student loan repayment rates. Rather, it will use student-loan default rates to determine whether a program’s students have unmanageable debt.

Under the proposed regulations, a program would lose eligibility for federal financial aid if its program has a default rate of 30 percent or greater for three consecutive years. If a school has too many former students who fail to make payments on student loans as scheduled according to the terms of the loans the school will lose access to federal financial aid money.

So, basically, the first measure of program effectiveness, the ratio of debt to salary, remains the same, but the second measure, the evaluation of how many students are in trouble, is different.

According to another piece at the Chronicle of Higher Education, Education Secretary Arne Duncan indicated that about 20 of programs would fail under the proposed new standards.

Under the earlier, repayment rate measure, approximately 25 percent of programs were supposed to fail.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer