About Dr. Maestas

Wednesday, November 12, 2014

Gainful Employment Rule: The Death of For-Profit Colleges?

This past week, Secretary Arnie Duncan, U.S. Department of Education, released the final “Gainful Employment” regulation aimed primarily at protecting college students from incurring large loan debts while getting a college education.  The intent of the final version of the regulation will hold career programs accountable to ensure that their students are successful in getting an education that leads to a good paying job without incurring large debt in student loans.  The new rule will go into effect July 2015 and will have a huge impact primarily on the for-profit colleges who offer career training programs.

The final regulation comes after years of debate, revisions, and litigation.  The first version of the regulation was issued in June of 2011 and had two provisions: 1. The college’s cohort student loan default rate and 2.  The college’s debt-to-earnings ratio for its graduations in a given program.  The two provisions would have negatively impacted career training programs at community colleges and for-profit colleges.  The final version dropped the first provision, the student loan default rate, which was viewed by many as a major win for community colleges who had argued for elimination of this provision.  The elimination of the loan default rate is projected to save as many as 500 programs, most of which are at for-profit institutions.

The gainful employment rule now requires all career training programs, whether at private or public colleges, to prepare students for “gainful employment in a recognized occupation.”  Essentially, the program must ensure that the loan payment of a typical graduate can NOT exceed 20% of his or her discretionary income or 8% of his or her total earnings once the student graduates and gets a job.  Career training programs that exceed these levels will be at risk of losing the ability of their students to access federal student financial aid programs.  At stake is the potential loss of federal funding for financial aid, estimated to be $200 billion.

While students at for-profit colleges represent only 11% of the total higher education population, they account for 44% of all federal student loan defaults, according to the U.S. Department of Education press release issued on Thursday, October 30, 2014.  Additionally, students attending  two-year for-profit colleges can pay as much as four times the cost of attending public community colleges.  More than 80% of the students attending for-profit colleges take out student loans compared to less than 50% at public community colleges.

The Education Department has estimated that, based on their current data, approximately 1,400 career training programs serving 840,000 students would not meet the new regulation.  The press release did not mention how many colleges would be affected, but it did state that 99% of the 1,400 programs are in for-profit colleges.  This is particularly critical for for-profit colleges, since 90% of their revenue often comes from tuition through federal financial aid programs.

However, all programs will have the opportunity to make changes that can help avoid sanctions.  And according to the Department of Education, many colleges have already initiated changes to improve their programs.  Specifically, some colleges have instituted trial periods before their students have to commit. This allows students to decide if the program is a good fit for them.  Others have reduced the length of time to complete their programs and yet others have reduced the cost of their programs.  It should be noted that a few schools have actually closed programs in some locations that were judged to be performing poorly.

Moreover, there is room for improvement in many of these programs, whether they be public or private, for-profit or non-profit.  To encourage improvement, the Education Department is creating an inter-agency task force to help ensure proper oversight of the for-profit colleges.  The task force will include representatives from the Departments of Justice, Defense, Treasury and Veterans Affairs, the Consumer Financial Protection Bureau, Federal Trade Commission, the Securities and Exchange Commission and will even include the attorneys general from each state.  The intent is to leverage each agencies’ resources and expertise in an effort to better protect the interests of students and taxpayers.  The task force began meeting this year and will meet as needed, but at least once each quarter.

Critics of colleges and universities are not happy with the new regulation.  They feel that the Department of Education has watered down the initial regulation that was supposed to protect students who took out loans.  Student and consumer advocacy groups have pushed the Department to include college dropout rates. They feel that the debt-to-earnings provision looks at only students who complete their program and not at the students who failed to graduate or who dropped out.  The concern is that the new rule allows career programs, where most students take out loans but few graduate, to continue using taxpayer money to bury students in debt that they can’t repay as long as they limit the debt to the few students who do graduate.  On the other hand, Education Department officials contend that programs would still be required to report their completion and cohort student loan default rates.  They believe that disclosing this information would help prospective students and their parents understand their chances of succeeding in a given program.

As you can imagine, the for-profit colleges have been very critical of the Department and the new regulation. They claim that the Department has caved in to the pressure of the community colleges while ignoring the concerns of the for-profits.  According to Steve Gunderson, president and chief executive of the Association of Private Sector Colleges and Universities and their main lobbying group, “the gainful employment rule is nothing more than a bad faith attempt to cut off access to education for millions of students who have been historically undeserved by higher education.”

I believe that the U. S. Department of Education is headed in the right direction, but I agree with critics that it didn't go far enough to include a school’s student cohort loan default rate or its student dropout rate.  We have to start somewhere and this is a good start.  We must address the high loan default rate of institutions of higher education.  In times of limited resources, we must make the best use of taxpayer money.  But, rather than close programs based on one single metric, we should offer assistance to those 1,400 programs that are identified as not meeting the new regulation and do everything we can to ensure they will be successful.  If they refuse the help or choose to not make improvements, then after sufficient warnings, the programs should be sanctioned or closed.  One final point, the new regulation does allow sufficient warning in my opinion.  Programs that fail both debt-to-income tests twice in any three-year period or are in the zone for four consecutive years will be ineligible for aid.