ED Proposes Gainful Employment Rules
August 3, 2010
New standards for programs which are eligible for federal student aid because they prepare students for "gainful employment in a recognized occupation," including many non-degree programs offered by nonprofit and public institutions, were proposed by the Department of Education on July 26. Such programs would need to meet thresholds based on their students' repayment rates on federal loans and debt-to-income ratios in order to maintain eligibility for Title IV funds. These proposed rules, primarily aimed at for-profit institutions, are intended to address the problem of programs that cost too much relative to expected earnings of graduates or that do not adequately prepare students for careers in which they can find jobs. Comments are due September 9.
The proposed rules on gainful employment were originally intended to be part of the notice of proposed rulemaking published by ED on June 18 on a number of program integrity issues. Instead, the earlier notice only addressed peripheral pieces of the gainful employment proposal-- refining the definition of which non-degree programs at nonprofit and public institutions would be affected, and requiring institutions to both provide information to ED about students who complete covered programs and to post additional disclosures on their Web sites about the programs. The more controversial aspects of the proposal, including how ED would use the information that institutions report about their students and the standards that programs would need to meet, were held back and included in the second notice. ED still intends, however, to publish both sets of final rules by November 1 so that they will become effective on July 1, 2011, for the 2011-12 award year.
Most programs at for-profit institutions are eligible for Title IV assistance because they "prepare students for gainful employment in a recognized occupation." At nonprofit and public institutions, programs that are at least one academic year in length and lead to a certificate or other recognized credential (but not a degree) must "prepare students for gainful employment in a recognized occupation" in order to be eligible for Title IV funds. Eligibility for degree-granting programs at public and nonprofit institutions and certain liberal arts programs at for-profit institutions is not tied to "gainful employment." The phrase about gainful employment comes directly from the Higher Education Act, and has been used in these definitions for years without further explanation. ED is now seeking to define "gainful employment," and thus the eligibility of these vocational programs for Title IV funds, by tying it to student's ability to repay their loans.
For public and nonprofit institutions, these proposed rules will only affect programs that are at least one academic year in length, offer a certificate or other credential, but not a degree. Community colleges are likely to have many such programs in a wide variety of fields, such as automotive repair, geographic information systems, medical billing, and computer forensics. Four-year institutions also offer both undergraduate and graduate level certificates in various fields, such as accounting or paralegal services. Under the proposed rules, the continued eligibility of these programs would depend on the results of two different measures of their students' ability to repay their student loans. It is important to remember that the focus of the rules is on program eligibility, not institutional eligibility.
Two tests are proposed to assess whether a program offers training that leads to gainful employment. The result is a mix of possible outcomes: a program that meets both measures or scores very high on one will be fully eligible to participate; one that meets only one test would be placed in a restricted eligibility status; and a program that doesn't meet either will lose its eligibility for Title IV funds.
The repayment rate looks at whether students enrolled in a program are successfully repaying the principal on their Federal Family Education Loans (FFEL) or Direct Loans. This is expressed as a ratio:
Original outstanding principal of loans paid in full +
Original outstanding principal of loans with reduced principal during most recent year
Original outstanding principal of all loans
- Outstanding principal when loan entered repayment including any capitalized interest
- Loans that entered repayment during the preceding 4 years for all students who attended the program
- All loans taken out by students who attended the program (including noncompleters)
- Loans taken out at other institutions and for other programs (unclear)
- Loans of borrowers on an in-school or military deferment
- Loans that entered repayment in the last six months of the fiscal year
Loans that had been consolidated would not be considered repaid until the consolidation loan was repaid. The calculations would be based on the federal fiscal year, and would be calculated annually by ED based on its loan repayment records.
The debt-to-income ratio is the second measure--or more accurately, measures because there are several variations allowed. These ratios are designed to measure whether the average annual earnings of program completers is sufficient to allow them to make their annual loan payments. The annual loan payment would be the median loan debt of students who completed the program during the previous three years, based on a standard ten-year repayment schedule. Loan debt would include federal loans, private education loans (including institutional loans), and institutional financing plans obtained while the student attended that institution. The regulations would set thresholds for two slightly different measures.
One would look at total average earnings, using the formula:
annual loan payment < earnings threshold x average annual earnings
The other would compare loan payments to a measure of discretionary income:
annual loan payment < discretionary threshold x (average annual earnings - (1.5 x poverty guideline))
Thresholds and Consequences
The proposed thresholds for each measure are illustrated in the following table.
An additional variation would allow an institution that could show that a program's completers earn significantly more income a few years after finishing to use income data from students who are four, five, and six years out of school instead, but against a higher threshold.
Programs that fall in the restricted category would be required to provide a prominent warning in their promotional, enrollment, registration, and other materials alerting prospective and current students that they may have difficulty repaying their loans. The most recent debt-to-income ratios and loan repayment rates for the program would have to be provided. The institution would also be required to work with employers to make sure the program is meeting their needs, and limit new student enrollments in that program to the average enrollment level for the preceding three years.
Programs that do not meet either of the thresholds would fail the gainful employment standard and become ineligible for Title IV. New students entering the program would not be eligible for aid, although already enrolled students could continue to receive federal aid for the remainder of the award year and the following year.
Currently, an institution does not need to apply for approval of a new program that is eligible under the gainful employment provision if it already operates an approved program that prepares students for the same or a related occupation. Under the proposed rules, institutions would have to apply to ED for approval of any additional such program. The institution would need to provide five years of projected enrollments, documentation from unaffiliated employers that the proposed program aligns with recognized occupations at their businesses, and approval from the institution's accrediting agency if the new program would be considered a substantive change.
Data and Calculations
The regulations proposed on June 18 would require institutions to report data on students completing programs eligible for aid by virtue of preparing students for gainful employment, including identifiers (unspecified but likely social security numbers), date of completion, classification of instructional programs CIP code of the program, any private education loan known to the institution, and any institutional financing agreements. Initially, institutions would need to provide this data for the four previous years. Under the July 26 proposal, ED would use this information, along with other information available that ED maintains, as well as earnings data from another federal agency such as the Social Security Administration to calculate the repayment rate and debt burden for each program. ED would only receive aggregate earnings information from the other agency and would not have access to that data at the individual level in order to ensure privacy.
Timing and Transition
ED expects to issue final regulations by November 1, the deadline under the Higher Education Act for rules to take effect for the next award year, July 1, 2011. The consequences of failing to meet the thresholds would kick in the following year, beginning July 1, 2012. For the first year only, ED would cap the number of programs declared ineligible to those producing no more than 5 percent of program completers. This is intended to avoid massive displacement of students.
The notice of proposed rulemaking includes lengthy discussion of the rationale behind the proposal and much analysis of the likely effects of the proposed gainful employment standard, although most of the data presented applies to institutions rather than specific programs. ED projects that 289 proprietary institutions will have programs that fall in the restricted category, requiring a prominent debt warning, but only eight public institutions and one nonprofit institution would do so. ED also requests advice from commenters on a number of points. Comments are due September 9. NACUBO encourages members to determine which campus programs would fall into the "gainful employment" category, review the proposed regulations carefully, and file comments with ED if appropriate. Please share your concerns with NACUBO as well.
Vice President, Regulatory Affairs
Senior Policy Analyst