Splitting the Difference on Gainful Employment

WASHINGTON -- The U.S. Department of Education today released its long-awaited proposed regulations to define “gainful employment,” the mechanism that makes non-liberal arts offerings at for-profit colleges eligible for federal financial aid.

Striking a middle ground between aggressively attacking for-profit higher education and backing down under the sector’s intense lobbying pressure, the rule creates multiple paths to eligibility and takes aim at only the most egregious of bad actors.

“Overall I firmly believe that for-profit schools are doing a good job of preparing students” for the work force, Education Secretary Arne Duncan said, and “the many good actors should be protected from being tainted or being tarnished” by the misdeeds of a small minority.

“These schools -- and their investors -- benefit from billions of dollars in subsidies from taxpayers, and in return, taxpayers have a right to know that these programs are providing solid preparation for a job,” he said. The gainful employment metrics aim to do just that by considering graduates’ ability to repay student loan debt as a reasonable indicator of whether a vocational program does what Title IV of the Higher Education Act of 1965 says it must do to qualify for federal student aid: prepare students for “gainful employment in a recognized occupation.”

The regulations will be open to public comment for 45 days after they are published in the Federal Register in a notice of proposed rule making on Monday. Using those comments, he department will make revisions with the goal of publishing a final rule by Nov. 1, along with regulations on 13 other issues related to the integrity of the Title IV program, so that it can go into effect on July 1, 2011.

While the devil of the regulation is in the details -- and those details are still being processed and analyzed by observers and institutions -- the regulatory language appears to be a compromise between consumer advocates’ push for tough limits on student debt and the fears of for-profits that the rules would amount to a sector killer.

Though "economically significant," meaning it will have an annual effect on the economy of more than $100 million, the department said in the NPRM that the rule was necessary to battle excessive student debt, which has always been the department's stated goal for the regulations. "We have assessed the potential costs and benefits -- both quantitative and qualitative -- of this regulatory action and have determined that the benefits justify the costs."

Based on current data, 5 percent of programs -- serving 8 percent of students -- would face extinction. Those that do will have between now and the 2012-13 academic year to make changes before risking loss of Title IV funds. (And, in that academic year, no more than 5 percent of programs nationwide could be found to be ineligible for federal aid.)

Department officials project that if the regulations went into effect now, about 40 percent of programs would remain fully eligible for Title IV financial aid, while another 55 percent would face restrictions on their enrollments and increased debt disclosure requirements, the department estimates.

The regulatory impact analysis appended to the NPRM suggests that one way for at least half the for-profit sector to comply with the rules would be to lower prices by an average of 10 percent. Using current revenue data, that could amount to $835 million, the department wrote in its analysis. Officials anticipate that price cuts will amount to reduced operating margins. "Institutions are also expected to adjust their pricing as a result of the regulation. In other industries, the S&P 500 long-term average operating margin (a measure of profit) is six percent. Data from the publicly-traded institutions indicate that operating margins for 2007-2009 have averaged 17 percent, and were 21 percent in 2009."

For a program to be fully eligible for Title IV aid, its graduates would need to have a debt service-to-income ratio under 8 percent of their total income or 20 percent of their discretionary income. Or, of graduates and non-completers who entered federal loan repayment in the four most recent fiscal years, at least 45 percent would have to be paying down principal on their student loan debt. Forbearances and deferments (other than for program completers who qualify for public service loan forgiveness) would be considered nonpayments. Unless it passed at least one of the debt-to-income ratio tests as well as the loan repayment test, a program would have to disclose all of that data to current and prospective students.

Programs completely ineligible for federal aid would be those where fewer than 35 percent of former students are repaying their loans, and where graduates have a debt-to-income ratio greater than 12 percent of their total income and 30 percent of discretionary income. The department estimates that 5 percent of vocational programs serving 8 percent of students would lose their Title IV eligibility.

If these programs made no changes -- such as lowering their prices or placing students in higher-paying jobs -- by mid-2012, they would no longer be able to accept aid dollars for new students and would only be able to accept federal aid from current students for one additional year.

Between full eligibility and total ineligibility, the department estimates, are 55 percent of programs, which would face restrictions of their enrollments and be required to demonstrate employer support while warning students of their high debt levels and low repayment rates. (See chart for details.) Enrollments of restricted programs could only total the average of the last three years, allowing for no growth until the program could become fully compliant. Even if fewer than 35 percent of former students are repaying the principal on their federal loans, a program could still be Title IV-eligible so long as the debt-to-income ratio is below 12 percent of total income or 30 percent of discretionary income.

The previous version of the rule -- released in January ahead of the third and final round of a negotiated rule making process that also encompassed revisions to the department’s regulations surrounding 13 other areas related to the integrity of the Title IV program -- relied primarily on an 8 percent debt-to-total income ratio to determine Title IV eligibility.

Among the many criticisms that proposal faced was the concern that it would disproportionately threaten bachelor’s, master’s and doctoral degree programs, while favoring shorter certificate and associate degree programs. Income data were to have come from generalized information from the Bureau of Labor Statistics, which would have been more favorable to shorter programs. With data coming from graduates' actual salaries, the picture will likely be more unfavorable to programs across the board, several analysts said.

A student who earned an associate degree in accounting would have less debt than someone with a bachelor’s degree or M.B.A., and yet graduates of all three would be considered to have the same income. The proposed rule instead uses income data of a program’s actual graduates -- allowing for differences in program length and quality. The use of a debt-to-discretionary income ratio would also compensate for such differences.

Early Reactions

Perhaps in a sign of a successful compromise, the proposed regulations didn’t seem to fully satisfy anyone outside the department.

"My overall impression is that this is a reasonable compromise," said Mark Kantrowitz, publisher of Finaid.org. "It comes reasonably close to where the line should be. Maybe it throws away some of the wheat and keeps some of the chaff, but it gets close."

Terry W. Hartle, senior vice president of government and public affairs at the American Council on Education, described the proposed rule as "a multifaceted, flexible approach" with "no single bright line." It will prove to be, he said, "the most complicated regulatory package that the Department of Education has ever promulgated -- this really is a brave new world."

He said he anticipates substantial debate from Congress. "There will be lots of discussion on the Hill about whether or not this is doable and desirable."

Sen. Tom Harkin (D-Iowa), chairman of the Health, Education, Labor and Pensions Committee, who has initiated his own investigation of the for-profit sector, said that “on first glance, the regulation appears to set a low bar” for eligibility. “If we are allowing a school to continue to walk away with taxpayer dollars, despite the fact that less than a third of its students are able to repay their loans, that would seem to be a case of shockingly low expectations.”

A member of Harkin's committee, Sen. Lamar Alexander (R-Tenn.), who served as education secretary under George H.W. Bush, said the proposal threatened to "institute price controls on certificate and degree programs at thousands of institutions of higher education," an argument that the for-profits made during negotiated rule making.

The repayment rate option, which was much more stringent in previous iterations of the regulation -- and an alternative option to eligibility for exceptionally good programs -- appears to be a “safe harbor,” said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers. “Obviously in response to industry attack,” he said, referring to extensive lobbying efforts on the part of the Career College Association and the for-profits, “the department created multiple mechanisms for programs to qualify.”

Pauline Abernathy, vice president of the Institute for College and Success, echoed those sentiments. “When more than half the students with loans can’t afford to pay down the principal and yet the federal government continues to subsidize the program, there’s a problem,” she said. “I can only hope that making comments on that during the public comment period may help.”

Christine Lindstrom, U.S. Public Interest Research Group’s higher education program director, said she worried the rules wouldn’t go into place soon enough. “Students in these programs next year will see no new protections,” she said. “I don't want these standards to do too little, too late.”

More broadly, though, student debt advocates and critics of for-profit sector said they considered the proposed regulations promising.

“I applaud Secretary Duncan for moving forward with these new safeguards for students and taxpayers,” Harkin said. “This regulation is plain common sense. If a school can’t show that its students are repaying their college debt and not defaulting, this is a sure sign that the school is failing to prepare its students for gainful employment, as the law requires.”

Nassirian said he was "not dancing with joy" after being briefed on the proposal, but that he was optimistic that it would prove to be “a step in the right direction and a down payment on comprehensive reform” of for-profit higher education. Harkin is leading that reform charge on Capitol Hill; the HELP committee will hold its second oversight hearing on the sector on Aug. 4.

For-profit college officials were less enthusiastic and more reluctant to comment.

In a statement, the CCA said the metrics-based proposal “is unwise, unnecessary, unproven and is likely to harm students, employers, institutions and taxpayers.” Harris N. Miller, the group’s president, continued to push the same argument he has made for months, that “an approach based on a debt to earnings ratio is … by definition counterproductive.”

Instead, Miller urged the department to rely solely on disclosures published last month in an NPRM along with proposed rules for the other 13 program integrity issues. Programs will be required to disclose to the department and on their websites average student debt levels, as well as job placement and graduation rates. The comment period for that NPRM ends in early August.

Arthur Keiser, chair of CCA’s board of directors and chancellor and CEO of privately-held Keiser University, declined to comment without more information from the department.

The Apollo Group, parent of the University of Phoenix, said it would wait until examining the full regulation to provide detailed comments. Instead, it repeated the general critique of the rule it has had in the past. “Apollo cautions against policy with the potential for unintended consequences that could restrict educational access, limit students’ choices or unfairly disadvantage hundreds of thousands of historically underserved students. We advocate for a nondiscriminatory, systematic and deliberate process to explore how best to ensure students’ degree value and return on educational investment.”