College & Workforce Readiness

‘Gainful Employment’ Rule Proposal Draws Fire

By Caralee J. Adams — November 16, 2010 5 min read
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Amid a national push for college-and career-readiness, the U.S. Department of Education is considering rules aimed at weeding out postsecondary programs—especially career-focused, nondegree programs—that leave students with big debts and little prospect of gainful employment.

But the proposal, the subject of two days of public hearings in Washington earlier this month, has generated intense debate, including complaints from for-profit educational institutions that it is anti-business, unfair, and unnecessarily complicated.

The proposal, which would also affect programs at nonprofit and public colleges, could limit a school’s access to federal financial aid if its students have debt levels that are classified as too high or if student repayment rates are considered too low.

Supporters contend the rules are necessary to keep students from being lured into programs that don’t adequately prepare them for jobs and that leave them in debt.

The federal government has a big stake in the issue since taxpayers have helped propel the for-profit industry forward with federal student loans and with Pell Grants to low-income students.

For-profit schools represent 11 percent of all higher education students, 26 percent of all student loans, and 43 percent of all loan defaulters, according to the Education Department. More than a quarter of for-profit institutions receive 80 percent of their revenues from taxpayer-funded financial aid.

And while enrollment at institutions of higher education increased by 31 percent from 1998 to 2008—from 14.9 million students to 19.6 million students—the number of students entering the 14 publicly traded for-profit schools soared 225 percent, to 1.4 million over the same period, according to a report by the Senate Health, Education, Labor, and Pensions Committee.

The cost of attending such programs is often higher than that of similar nonprofit programs, and students are twice as likely to default on those college loans, according to a separate Senate report. More than 95 percent of students at two-year for-profit schools took out student loans in 2007, while only 16.6 percent of students attending community colleges did so, according to the same Senate report.

Since the proposal was released in July, the Education Department has received nearly 90,000 comments from individuals and organizations. Because of that volume, the public-comment period was extended, and the rules are being issued in two phases.

Penalties Would Vary

Under the proposal, programs could face varying levels of penalties depending on the debt-income ratio and repayment rates of their former students. A program would be cut off from federal financial aid if the repayment rate of its students was below 35 percent and the annual loan payment was both above 12 percent of average annual earnings and 30 percent of discretionary income.

Programs that met the next level of thresholds—repayment rates under 45 percent are one factor—could either be subject to restrictions and additional oversight or be required to alert students that they might have difficulty repaying their loans.

Industry Concerns

Representatives of the for-profit education sector, such as Harris Miller, the president of the Association of Private Sector Colleges and Universities, maintain that the proposed regulations wouldn’t solve the problem of excessive student debt and would eliminate critical programs in higher education.

“In this case, we have proposed rules that single out a specific set of students and schools, rather than apply to all students across the board. And that will harm only lower-income students and working adults, whose higher education choices are already very limited,” Mr. Miller said last week in a press release.

He maintains that the income-debt ratio is not a good measure of a program’s success because in the early years of a college graduate’s career, earnings are typically low compared with what he or she might earn 10 years later.

In a Nov. 11 statement, the Apollo Group, the parent company of the for-profit University of Phoenix, said it was deeply concerned that the proposed new regulations could constrain students’ ability to choose the school or program best suited to their needs.

It also criticized the proposal’s complexity and said the provision has “the potential to unfairly disadvantage hundreds of thousands of historically underserved students.”

But Justin Draeger, the president of the National Association of Student Financial Aid Administrators, or NASFAA, said that before signing up for a program, students should be able to know the likelihood of getting gainful employment, and that the proposed rules could provide protection to students.

“Students and families should consider how much debt they are willing to take on for a program or a career, what schools offer, and then do a cost-benefit analysis,” he said.

While NASFAA supports the concept of the proposal, it is lobbying for some changes in the way it would be implemented. The Washington-based group would like the rules to use existing measures of student-loan repayment, rather than rates that don’t take into account students who are in valid repayment plans but not paying down principal.

Although for-profit institutions have been most active in opposing the rules, the American Council on Education, which represents a wide range of institutions, said it could actually cover about 53,000 programs, of which 80 percent are at nonprofit and public colleges.

Exemptions Sought

The Washington-based ACE—whose members include presidents and chancellors of all types of accredited, degree-granting institutions, including community colleges and four-year institutions, private and public universities, and nonprofit and for-profit colleges—supports the proposal’s intent. But it also gathered signatures from 58 other higher education organizations in asking the Education Department to consider exemptions from the regulations.

For example, it requested exemptions for programs that enroll very few students who borrow money, such as those offered at community colleges, where only 5 percent of students in certificate programs take out federal loans.

“That’s not where the big-time borrowing is going on,” said Anne Hickey, the associate director for government relations at the ACE. “We hope they take steps to better target programs most likely to have problems.”

The portion of the regulations linking gainful employment to federal student aid is expected to be released next year and take effect in 2012.

A version of this article appeared in the November 17, 2010 edition of Education Week as ‘Gainful Employment’ Proposal Draws Fire

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