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Court Strikes Down Gainful Employment Rules

June 28, 2012

Just as the Department of Education released a preliminary run of the debt measures for so-called gainful employment programs, the U.S. District Court for the District of Columbia vacated most of the rules. In a decision issued June 30, the day before ED's rules establishing debt measures were to take effect, the judge found that ED had acted arbitrarily when it established a minimum acceptable repayment rate for Title IV loans.

According to the ruling, ED's rationale for picking a 35-percent repayment rate was based on the proportion of programs that would pass or fail at that level and, therefore, was not reasonable:

The debt repayment standard, by contrast [to the debt-to-income ratios], was not based upon any facts at all. No expert study or industry standard suggested that the rate selected by the Department would appropriately measure whether a particular program adequately prepared its students. Instead, the Department simply explained that the chosen rate would identify the worst-performing quarter of programs. Why the bottom quarter? Because failing fewer programs would suggest that the test was not "meaningful" while failing more would make for too large a "subset of programs that could potentially lose eligibility." Debt Measure Rule, 76 Fed. Reg. at 34,397. That this explanation could be used to justify any rate at all demonstrates its arbitrariness. If the Department had chosen to disqualify the bottom ten percent of programs, or the bottom half, it would have offered the same rationale: the rate chosen disqualified the percentage of programs that it was intended to disqualify, and to have disqualified fewer would have made the test too lenient while disqualifying more would have made the requirement too stringent. This is not reasoned decision making. [Association of Private Colleges and Universities v. Duncan, U.S. District Court for the District of Columbia, June 30, 2012, p. 30-31]

Generally, nondegree programs at nonprofit and public institutions-and most programs at for-profit schools-must lead to gainful employment to be eligible for Title IV funds. The June 2011 final rules had laid out minimum scores on three measures of student ability to repay education loans:

  • Repayment rate for Title IV loans of at least 35 percent.
  • Debt-to-income ratio for program completers no higher than 12 percent.
  • Debt-to-discretionary income ratio for program completers no higher than 30 percent.

Programs that failed all three measures for three out of four years would lose eligibility for Title IV aid. Institutions with programs that failed any of the measures would need to provide warnings to students. A separate rulemaking set forth requirements for institutions to request approval from ED before any new gainful employment programs would be eligible for Title IV funds.

The Court did not find that ED had exceeded its statutory authority in seeking to establish stricter standards for gainful employment programs, saying, "Concerned about inadequate programs and unscrupulous institutions, the Department has gone looking for rats in ratholes-as the statute empowers it to do." [p.21] Nevertheless, because the regulations contained intertwining provisions, the court threw out most of the gainful employment regulations. The following are vacated and remanded to ED:

  • The debt measure rule in its entirety.
  • The reporting requirements under which institutions were required to provide data on all students in gainful employment programs because, without the debt measure rule, the resulting database is not necessary. These rules, along with disclosure requirements, were published as part of the program integrity regulations on October 29, 2010.
  • The rules on approval of new programs, because institutions will have no longer have an incentive to "game the system" (also in the program integrity regulations).

The only part the Court let stand is a requirement that institutions must disclose information about each program to prospective students.
ED has not yet announced whether it plans to appeal the decision.

Trial Gainful Employment Data Released Last Week

Days before the court decision gutting the gainful employment rules, ED released a preliminary run of the student debt measures intended to judge the efficacy of gainful employment programs. The data were provided for informational purposes only; the first official calculations were not scheduled until 2013.

Institutions received letters detailing the results for each of their gainful employment programs, along with the student-level data files used to calculate the measures. Data for all programs were also made available to the public.

Institutions reported some of the information used in the calculations, such as identification of program enrollees and completers, program classifications, and amount of institutional and private loans. Other data, such as Title IV loan debt, came from the National Student Loan Data System. Finally, income data for completers was provided to ED in the aggregate by the Social Security Administration.

Of the 193 programs that failed all three measures this year, none was offered by public or nonprofit institutions, but 92 programs that failed one or more of the measures were. Although the universe includes 27,583 gainful employment programs offered by 3,612 schools, ED calculated both of the debt ratios for only 3,695 programs because a program needed to have at least 30 completers over the two-year period to be included. (Next year, when the data were to have been officially calculated, ED planned to follow a special procedure to gather data for four years so small programs could reach 30 completers, if possible.) The following chart shows the preliminary results for the 3,695 programs:

Source: U.S. Department of Education

Institutions do not need to take any actions based on the informational rates provided; they may, however, want to review the accuracy of data for gainful employment programs.

Resources

ED has posted much of its information on the Gainful Employment Resource Page of its Information for Financial Aid Professionals (IFAP) website. Links to several webcasts intended to help institutions understand the gainful employment data are included under Training.

Contact

Anne Gross
Vice President, Regulatory Affairs
202.861.2544
E-mail

Bryan Dickson
Policy Analyst
202.861.2505
E-mail