College & Workforce Readiness

‘Gainful Employment’ Rules Leave Many Disappointed

By Caralee J. Adams — June 10, 2011 6 min read
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Includes updates and/or revisions.

Ninety-thousand comments and numerous meetings later, a yearlong effort to draft new regulations for career-college programs has resulted in scant satisfaction, from supporters and critics alike, though the programs clearly gained more time to change their ways.

At the heart of the battle are 14 regulations—including the most controversial, on gainful employment—aimed at improving the transparency and quality of career programs. Under the new regulation, a program can lose access to federal student aid if too many of its students fail to find “gainful employment” as defined by three measures linked to loan repayment and income.

While the rule applies to occupational-training programs at all types of institutions, for-profit ones are most likely to be affected because of the high cost of tuition coupled with high student-loan debt and, often, poor job prospects. Students at proprietary colleges represent 12 percent of higher education enrollment, yet they take out 26 percent of all student loans and represent 46 percent of all student-loan dollars in default.

Last July, the U.S. Department of Education proposed new regulations requiring programs to disclose information about their loan-repayment rates and graduates’ earnings. And, if programs failed to perform at a certain level for students, they would have immediately lost federal loan dollars, which some schools rely on for 90 percent of their revenue.

The final regulations released June 2 include some provisions that take effect in 2012, such as banning programs from rewarding recruiters based on how much federal aid they bring in and prohibitions against misleading students.

But the gainful-employment rule gives programs until 2015 before facing the harshest penalty. The new version also takes away the threat of penalties for some poorly performing players and is expected to result in 2 percent of all programs losing federal aid.

Although many see the final rules as more favorable than the original version to for-profits, the colleges are not talking. The University of Phoenix, Strayer University, and DeVry University all declined comment, noting they were still reading through the 437-page document.

Clearing the Bar

New federal rules covering for-profit higher education institutions are intended to track the success of their students in getting jobs and repaying college loans. A program is in compliance if it meets at least one of these requirements:

• At least 35 percent of former students are repaying their loans;

• The estimated annual loan payment of a typical graduate does not exceed 30 percent of his or her discretionary income;

• The estimated annual loan payment of a typical graduate does not exceed 12 percent of his or her total earnings.

How the Rules Evolved

ORIGINAL PROPOSAL: Programs that didn’t meet the low debt-repayment rates or debt-to-income ratios would lose federal financial aid immediately, beginning as early as 2012.

FINAL VERSION: Programs must fail to meet the benchmarks in three out of four years before they lose eligibility. The earliest a college could lose eligibility is 2015.

Compliance Thresholds
ORIGINAL PROPOSAL: Programs that had poor records on student-loan repayments would have been placed in a “restricted status,” required to cap enrollment, and disclose debt levels to students. Those with a repayment rate of 35 percent or below, a debt-to-income ratio below 12 percent for the typical graduate, or a debt-to-discretionary-income ratio below 30 percent—would face loss of federal financial aid.

FINAL VERSION: Penalties would apply only to the worst-performing programs.

Loan Payments
ORIGINAL PROPOSAL: Only repayment of the principal balance on federal student loans counted. Calculations were based on 10 years for all programs.

FINAL VERSION: Students who make interest-only payments will be considered current. For associate degrees and certificates, the loan period is 10 years; for master’s and bachelor’s degrees, it is 15 years, and 20 years for other degrees.

Calculating Income
ORIGINAL PROPOSAL: How much money a graduate made in the first four years would be used to estimate debt-to-income levels and repayment rate.

FINAL VERSION: Income earned in the third and fourth years after graduation will be used for the calculations. Adjustments will be made for small programs, medical and dental programs, and improving programs.

SOURCE: U.S. Department of Education.

“They don’t want to rush to judgment,” Harris Miller, the president and chief executive officer of the Washington-based Association of Private Sector Colleges and Universities, said of the association’s board that is now reviewing details of the regulations. The group includes proprietary schools that provide career-specific programs. “A lot of the rhetoric makes it sounds like there are some dramatic changes. There are some structural changes. But we have to make sure that some of the rhetoric matches the reality of what the rule actually says.”

The group may pursue legislative or judicial remedies. Mr. Miller maintains the regulations are outside the statutory authority of the Education Department and will limit access to education for students.

Process Extension

Advocates of increased accountability for career programs, meanwhile, have not withheld their reaction.

“It was a huge, lost opportunity to address the clear problems in higher education,” said Jose Cruz, the vice president of the Education Trust, a nonprofit research and advocacy group in Washington. “The abuses of career colleges have been well and repeatedly documented. But the final, watered-down rule does not do nearly enough to curb these abuses.”

What Mr. Cruz and other student advocates are most disappointed in is the revised time frame. The original version held the worst-performing schools accountable immediately, based on compliance with debt-to-income ratios. Now, schools must fail the debt measures three times in a four-year period before losing eligibility. The first year a career program could become ineligible for student aid would be 2015. The department estimates 18 percent of for-profit programs will fail the threshold at some point.

“Now we are saying, we know there are toxic programs there, but we are not going to do anything about it for three years,” said Mr. Cruz.

The revisions are intended to give schools time to change, Undersecretary of Education Martha Kanter told a Senate panel last week. “We’ve got to create a model that will help them improve,” she said.

The department announced last week it will help schools that want to offer free trial periods for new students and tools to reduce student debt and lower costs.

See Also

Read more about gainful employment rules in our report: “Harsh Spotlight Shines on Fast-Growing For-Profits”

At the hearing, Sen. Tom Harkin, D-Iowa, pressed Ms. Kanter for her interpretation of stock prices soaring for large for-profit companies on June 3. While she dismissed the notion that the department has any control over the markets, Ms. Kanter stressed its efforts to target the worst-performing players.

Mr. Harkin, who has said the rules are an “important but modest first step” and suggested that legislation was needed to rein in the for-profits, had a different take on the stock-market rally. “What it said to me was that investors and Wall Street looked at this and said for the next three to four years at least, things are going to be pretty good.”

Mr. Miller of the Association of Private Sector Colleges and Universities said the rule is too complicated for colleges to digest immediately. “No one is going to jump up and down and say, ‘This is great’ because of a one-day spike in stock prices,” he said.

Sen. Mike Enzi, R-Wyo., who serves on the Senate education committee with Mr. Harkin, said in a statement that the final rule joins a growing list of burdensome regulations hurting the economy.

State Bound

Groups representing racial minorities and low-income communities—which make up a large chunk of the career-college student population—have different takes on the possible impact of the new gainful-employment rules.

Just as the U.S. Chamber of Commerce said the new rules would have a “chilling effect on job creation,” the National Black Chamber of Commerce said they were “unfair” and “unwise.”

Harry Alford, the president of the National Black Chamber of Commerce, said the measure could wipe out barber schools and other colleges that are the lifeblood of educating the African-American community. “We want the whole monster to go away,” he said. “We will continue to advocate for defunding it.”

In the House, 300 Republicans and 58 Democrats passed an amendment to H.R. 1 in February that would have cut off funding to enforce the gainful-employment rule. It died in the Senate.

The new regulations will help protect underserved communities and minorities who are being taken advantage of by nonprofits, said Nancy Zirkin, the executive vice president of the Leadership Conference on Civil and Human Rights, a nonprofit that represents 220 national organizations that promote and protect civil and human rights. “This bore a striking resemblance to the subprime-mortgage crisis all over again,” she said. “People were being sold a bill of goods and goods from which they would not be able to come out from under if they went into default. It really dooms the most vulnerable folks.”

Consumer and advocacy groups were “grossly outnumbered” by the for-profit industry that spent millions of dollars lobbying against the rules, said Ms. Zirkin.

In the end, the regulation was a compromise, in her view. “They didn’t want a rule, period, because they looked at that as a slippery slope. We felt a rule was absolutely needed,” said Ms. Zirkin. “I think in this case, all of us got something.”

The fight may move next to the states, where 11 state attorneys general from both political parties have launched investigations into the career-college industry’s recruiting, financing, and other practices.

Sandy Baum, a senior fellow at George Washington University’s education school, said in testimony to Congress last week that the market needs some accountability. “Postsecondary education is an investment that typically provides a high rate of return to both students and to society. But it can be a risky investment,” she wrote, saying that students who enroll in programs that graduate fewer than 20 percent of students are essentially playing the lottery. “It is difficult to come up with sound principles of public policy that would support our subsidizing them to play this lottery.”

A version of this article appeared in the June 15, 2011 edition of Education Week as ‘Gainful Employment’ Rules Leave Many Disappointed


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