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Capitol Report

Coverage of legislation and regulatory activity that affects higher education

By Anne Gross

Department of Education Finally Issues Gainful Employment Regulations

On June 13, 2011, the Department of Education (ED) issued rules that will restrict the Title IV eligibility of certain vocational programs based on former students' ability to pay back their student loans. The so-called "gainful employment" regulations are the final piece of the package of program integrity rules published last fall.

Rule Rationale

In the final regulations, ED maintained the basic structure as proposed last July but made a number of modifications that should moderate the impact on affected programs.

The gainful employment rules target educational programs defined in the Higher Education Act of 1965 as eligible to participate in the Title IV federal student aid programs because they prepare students for "gainful employment in a recognized occupation." Such programs include most for-profit institution offerings (except for some liberal arts programs), as well as nondegree programs at public and nonprofit colleges and universities.

Although the rules are largely motivated by a desire to rein in proprietary sector abuses, ED estimates that of 55,000 existing gainful employment programs, some 30,000 are offered by public two-year institutions. Since this regulatory effort was first unveiled, it has provoked considerable controversy. For-profit institutions and their representatives launched media campaigns and extensive lobbying efforts. As part of the debate on the FY11 budget back in January, the House of Representatives passed a rider to block the regulations, but that provision was dropped from the final bill. An unprecedented 90,000 comments—25 percent supporting and 75 percent opposing—were generated in response to the notice of proposed rules published by ED last July.

Modifications and Measures

ED expects that only 1 percent of gainful employment programs offered by public and nonprofit institutions will fail the tests three times.

In the final regulations, ED maintained the basic structure as proposed last July but made a number of modifications that should serve to moderate the impact on affected programs. The department will judge each gainful employment program-defined by its CIP (classification of instructional program) code; credential level; and unique campus code-against three measures:

1. Repayment rate. At least 35 percent  of former students are repaying their federal loans related to the applicable loan program.

2. Debt-to-discretionary income ratio. The annual loan payment does not exceed 30 percent of typical graduates' yearly discretionary income.

3. Debt-to-total earnings ratio. The annual loan payment does not exceed 12 percent of typical graduates' yearly total earnings.

While the first measure considers only Federal Direct Loans and Federal Family Education Loans (FFEL), it includes all former students, not just graduates. Measures No. 2 and No. 3 rely on program completers' median and mean income, available from the Social Security Administration database. All federal and private debt incurred for attendance at the institution is considered in those calculations.

A loan program that fails all three of these tests in a year will be subject to sanctions that increase in severity until—should the program fail three times within four years—the institution loses eligibility to participate in Title IV. The following sanctions will apply:

For one failure. The institution must disclose the percentage by which the program missed the required rate and submit plans for improving the program. It must also establish a three-day waiting period for enrollment.

For two failures. The college or university must warn students in the program that their debts may be unaffordable and the program may lose eligibility. They also need to provide students with information about transfer opportunities.

For three failures. At this point, the institution's program loses eligibility for federal student aid and cannot regain eligibility for at least three years. 

Institutions will have an opportunity to challenge ED's calculations, in a manner similar to the appeals process for cohort default rates. Due to privacy issues, neither the institution nor ED will have access to individual income data, but will only be able to review the list of students that the department provides to the Social Security Administration. It is possible, but likely quite difficult, for institutions to provide income data from alternative sources.

The new rules will take effect on July 1, 2012, but will be phased in so that FY15 becomes the first year that any program could lose eligibility. ED plans to release preliminary ratio results to institutions in 2012 to encourage efforts to improve potentially failing programs.

Based on preliminary analyses (see figure, "Anticipated Impact of the Rule in FY 2012–15"), ED expects that only 1 percent of gainful employment programs offered by public and nonprofit institutions—and 5 percent of those offered by for-profit programs—will fail the tests three times and be barred from federal aid programs in 2015. This represents a total of 475 programs. As many as 1,823 programs are expected to fail in at least one year, with the vast majority of them being offered at for-profit institutions.

Conciliatory Concessions

The final rules include a number of changes, most of which should make it easier for programs to meet the new standards.

  • ED will measure performance using the third and fourth years after graduation in most cases, rather than the first four years. For medical and dental programs requiring long residency periods, the sixth and seventh years—or even later years—will be used.
  • The department provides an exception for small programs. If a program has fewer than 30 completers or borrowers over the two-year period, ED will establish a four-year period instead. If, after allowable exclusions, the program still has fewer than 30 completers or borrowers in the four-year period, it automatically passes. ED estimates that this exception will exempt the majority of gainful education programs, including as many as 20,000 of the 30,000 programs offered by community colleges.
  • Programs in which former students have a median debt of zero also automatically pass.
  • For the repayment rate, a loan counts as being repaid if (1) the loan balance is reduced by at least $1 during the year, (2) the loan has been paid off, (3) the borrower is making payments under an interest-only or income-based repayment plan, or (4) for graduate programs, all interest accrued for a consolidation loan during the year has been paid.
  • The debt-to-earnings ratios will be based on longer repayment periods depending on the educational level of the program. A 10-year period will be used for certificate and associate degree programs, 15 years for bachelor's and master's, and 20 years for others.
  • At the option of the institution, only debt up to the amount of tuition and fees charged the student for the program will be included in calculating median loan debt. The institution may provide the necessary student-specific data to ED.

Earlier Integrity Rules Already in Effect

Two other sets of regulations were finalized in November and took effect on July 1, 2011, that are integral to the new gainful employment rules. The program integrity regulations require that:

  • Institutions make a number of new disclosures concerning their gainful employment programs and provide the student-level data ED will need to calculate the debt burden measures by which such programs will be judged.
  • Institutions have until October 1 to provide this information to ED, a burden that will fall particularly heavily on the community college sector.

Institutions must follow specific procedures to obtain approval from ED for new gainful employment programs.

RESOURCE LINK Go to ifap.ed.gov/GainfulEmploymentInfo/ to access ED's dedicated resource page, which provides much useful information including frequently asked questions, detailed instructions and templates for providing data to ED, and supplementary guidance. 

NACUBO CONTACT Anne Gross, vice president, regulatory affairs, 202.861.2544