Rules that will restrict the Title IV eligibility of some vocational programs based on former students' ability to pay back their student loans were issued today by the Department of Education. The regulations are the culmination of ED's effort, begun in 2009, to improve its regulatory oversight of the Title IV student aid programs.
The regulations are widely known as the gainful employment rules since they target educational programs that are defined in the Higher Education Act of 1965, as amended, 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 offerings at for-profit institutions (except for some liberal arts programs), as well as nondegree programs at public and nonprofit colleges and universities. Although the proprietary sector is the focus of this effort to weed out poorly performing programs that do not adequately prepare students for careers and leave them saddled with more debt than they can hope to repay, thousands of undergraduate and graduate certificate programs at nonprofit and public institutions are also covered. In fact, the majority of gainful employment programs are offered by public two-year institutions (30,000 out of a total 55,000).
This regulatory effort was originally raised as one of the 14 issues in the negotiated rulemaking effort started by ED in late 2009 focused on program integrity in the Title IV programs. The issue proved so challenging and controversial, however, that the part of the rules that actually sets performance standards for gainful employment programs was split off into a separate rulemaking. ED published two notices of proposed rulemaking last summer: (1) on June 18, 2010, proposed rules on program integrity, including reporting and disclosure requirements for gainful employment programs; and (2) on July 26, proposed rules that would have required gainful employment programs to meet certain debt repayment standards.
The program integrity rules, based on the first notice, issued in June, followed ED's typical rulemaking schedule, with final rules coming out on October 29. Those rules, which take effect July 1, provide the necessary foundation for the gainful employment provisions. Institutions are required to make new disclosures to current and prospective students of each gainful employment program, including the median loan debt of graduates. Institutions also must provide data, including social security numbers, on all students who have attended gainful employment programs for the last three years to ED by October 1. ED needs this information to pull earnings data from government databases and to calculate the measures by which these programs will be judged. ED also published a second final rule on October 29 that focused on requiring institutions to notify ED before offering new gainful employment programs.
The second set of rules, proposing to judge gainful employment programs based on students' ability to pay their loans, set off a firestorm of protest from for-profit institutions and their representatives, who charged that the proposed rules would limit educational choices for the neediest students. At the same time, consumer protection groups and others lauded ED's effort, pointing to data showing higher debt levels for students at for-profit institutions and the hardships imposed on former students whose income is insufficient to repay student loans. An unprecedented 90,000 comments (75 percent opposed and 25 percent in favor, according to ED) were generated in response to the July 26 notice. Opponents also lobbied for support on Capitol Hill and succeeding in getting the House of Representatives to pass a rider blocking the regulations as part of the debate on the FY2011 budget back in January. (The provision was dropped from the final bill.) The notice published on June 13 that promulgates the gainful employment regulations discusses the substantive comments received on the proposed rule and ED's response.
In the final rule, ED maintained the basic structure as proposed last July, but made a number of modifications that should serve to moderate its impact on affected programs. Each gainful employment program, defined by its CIP (classification of instructional program) code, credential level, and the unique campus code, will be judged against three measures. A program needs to meet one of the following measures to pass.
- Repayment rate: at least 35 percent of former students are repaying their Federal Direct and Federal Family Education Loans (weighted by loan size). A loan counts as being repaid if: the loan balance is reduced by at least $1 during the year; the loan has been paid off; the borrower is making payments under an interest-only or income-based repayment plan; or, for graduate programs, all interest accrued for a consolidation loan during the year has been paid. Generally, this measure will look at those loans owed by students for attendance in the program which entered repayment three and four years earlier.
- Debt-to-discretionary income ratio: the annual loan payment does not exceed 30 percent of typical graduates' discretionary income. Generally, the annual loan payment is calculated based on the median loan debt for federal and private loans and institutional financing programs incurred by students who completed the program three and four years earlier. A loan repayment term of 10 years will be assumed for undergraduate or post-baccalaureate certificate programs. Discretionary income is the remainder of the mean or median annual earnings of the program's graduates minus 1.5 times the poverty level. Earnings data will be pulled from the Social Security Administration (SSA) database.
- Debt-to-total earnings ratio: the annual loan payment does not exceed 12 percent of typical graduates' total earnings. This ratio is calculated in the same manner as the debt-to-discretionary earnings ratio.
Alternatives and Exceptions
ED added a number of provisions to the final rules in response to comments it received on the proposed rules. The most significant of these in terms of the number of program affected is an exception for small programs. If a program has fewer than 30 completers or borrowers over the two-year period generally used for the measures, a four-year period will be used 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.
Other alternatives and exceptions include the following:
- Performance will be measured 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 longer will be used.
- For the first three years (FY2012-14), ED will also calculate the ratios using the first two years after completion and will use whichever period yields the higher result. This is intended to accommodate programs that take steps to improve program outcomes quickly during the transition period.
- Programs whose former students have a median debt of $0 also automatically pass.
- At the option of the institution, only debt up to the amount of tuition and fees charged to the student for the program will be included in calculating median loan debt for the purpose of calculating the ratios. The institution must provide the necessary student-specific data to ED. Required disclosures to students will still include all student indebtedness.
- Students will not be included in the debt-to-earnings ratios if they are enrolled in another eligible program during the calendar year for which earnings data is used.
Consequences of Failure
A program that fails all three of these tests in a year will be subject to sanctions that increase in severity until, if the program fails three times within four years, it loses eligibility to participate in Title IV.
- First Failure. The institution must provide a warning to enrolled and prospective students that explains the debt measures and discloses the amount by which the program missed passing. It must also describe any plans the institution has for improving the program's performance. The warning must be provided directly to the current or prospective student, either orally or in writing. It must be provided to current students as soon as possible (but no later than 30 days of when the institution is notified by ED that the program has failed the tests) and to prospective students when they first contact the institution to request information about the program. If a prospective student plans to use Title IV funds to pay for such a program, the institution must establish a three-day waiting period for enrollment after the warning is given.
- Second Failure. If a program fails for a second time within a three-year period, the institution must also provide a written warning to current and prospective students that their debts may be unaffordable and that the program may lose eligibility for student aid. The students must also be told about the institution's plan for the program and tell them about resources available to students to research other educational options and transfer opportunities.
- Third Failure. A program that fails for a third time within a four-year period loses eligibility for Title IV 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 was provided to SSA. Institutions will also be able to provide income data from alternative sources, although this will probably be difficult.
The new rules will take effect on July 1, 2012, but will be phased in so that 2015 will be 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, ED expects that only 1 percent of gainful employment programs offered by public and nonprofit institutions and 5 percent of for-profit programs will fail the tests three times and be barred from the federal aid programs in 2015, for a total of 475 programs. As many as 1,823 programs are expected to fail in at least one year, again with the vast majority offered at for-profit institutions.
ED has dedicated a resource page on its web site which provides much useful information including FAQs, detailed instructions and templates for providing data to ED, and supplementary guidance.