Revised ‘Gainful Employment’ Rule Breaks Little New Ground

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The goal of the new proposal "is not program elimination," Secretary of Education Arne Duncan told reporters, "but making sure taxpayer dollars are used wisely."
March 14, 2014

The Education Department released a revised "gainful employment" rule late Thursday, a little less than two years after a federal judge threw out the original measure, calling portions of it "arbitrary."

The new proposal hews closely to a draft version rejected by a rule-making committee in December, judging for-profit and vocational programs based on their graduates’ debt levels and their borrowers’ default rates. The cutoffs for programs to pass and fail the rule are unchanged from the draft proposal, as are the associated penalties.

After the revised rule is published in the Federal Register, the public will have 60 days to comment on it. The department will consider that feedback before publishing a final rule in the following months.

Debt-to-Earnings Measures

Under the new proposal, programs would fail if their graduates' student-loan debt payments exceeded 12 percent of their incomes and 30 percent of their discretionary incomes, the same ratios as in the original rule and the draft considered by negotiators this past fall.

As in the draft, programs whose graduates have debt-to-income ratios of 8 to 12 percent or debt-to-discretionary-income ratios of 20 to 30 percent would fall in "the zone," and would have to warn students that they might become ineligible for aid.

Programs that failed both debt-to-income tests twice in any three-year period or were in the zone for four consecutive years would be ineligible for federal student aid.

However, the department did make a couple of key concessions to for-profit institutions in the latest rule, exempting programs with 30 or fewer borrowers, rather than 10, and extending the assumed repayment period to 15 years for bachelor’s and master’s degrees and 20 years for doctoral programs. The combined changes bring the rule back in line with the 2011 version.

Cohort Default Rates

But the new rule differs from the original in one key respect: Rather than evaluating programs based on loan-repayment rates, it would judge them based on programmatic cohort default rates. That change was made in response to the court’s finding in 2012 that the department had shown no reasoned basis for its repayment rate, James R. Kvaal, deputy director of the White House’s Domestic Policy Council, said in a conference call with reporters on Thursday.

Mr. Kvaal said the Obama administration was confident that the new standard could survive a legal challenge because the programmatic cohort default rate mirrors the well-established institutional one. In keeping with the institutional cohort default rate, it would cut off aid to programs whose borrower default rates exceeded 30 percent for three consecutive years.

Roughly 8,000 programs would be subject to the metrics, including vocational programs at public and private institutions and all programs at for-profit colleges. Together, those programs receive roughly $26-billion in federal loans and $10-billion in federal grants per year.

In December the department estimated that a full 13 percent of programs subject to its latest draft proposal at that time would fail the proposal’s two-part test, while 7 percent more would fall into the zone that would trigger warnings to students.

It’s unclear how the department’s concessions would affect those numbers, but Secretary of Education Arne Duncan told reporters on Thursday that a "one-year snapshot" suggests that 20 percent of programs would fail and 10 percent would be in the danger zone. He hastened to add that those were "very rough numbers" and promised that institutions would be given "time to improve."

"The goal is not program elimination," he said, "but making sure taxpayer dollars are used wisely."

For-Profit Group’s Response

For-profit colleges wasted no time in criticizing the rule. In a news release issued Thursday evening, their main trade group, the Association of Private Sector Colleges and Universities, warned that the rule would "deny millions of students the opportunity for higher earnings."

"The government should be in the business of protecting opportunity, not restricting it," said Steve Gunderson, the group’s president.

Mr. Gunderson called the department’s rule-making sessions this past fall a "sham," saying the series of meetings with negotiators had been held "with the sole goal of reaching a predetermined conclusion."