Final "gainful employment" rule released.

On June 2, the U.S. Department of Education released a set of final rules designed to measure the success of occupational training and other postsecondary programs in preparing students for “gainful employment.” The regulations, which have been the subject of significant controversy since they were first proposed in July 2010, will establish minimum loan repayment and debt-to-income standards that certain programs must meet in order to retain eligibility for student assistance programs under Title IV of the Higher Education Act.

Under current law, most programs at proprietary institutions and many non-degree programs at public and private non-profits may participate in Title IV assistance programs only if they prepare students for “gainful employment in a recognized occupation,” a term that has never been defined under law or regulation. Faced with growing concerns about program quality and potentially misleading recruitment practices in the for-profit sector, as well as the heavy student loan debts incurred by some students attending such schools, the Department initiated a negotiated rulemaking process in 2009 to address the integrity of programs covered by the gainful employment requirement. These negotiations led the Department to issue two separate “Notices of Proposed Rulemaking” (NPRMs) in 2010. The first NPRM dealt with a range of issues, including cracking down on incentives to college recruiters solely on the basis of student enrollment numbers and enhancing the Department’s ability to take action against institutions found to have engaged in “substantial misrepresentation” about their education or training programs; the final version of these rules was published in October 2010.

The second NPRM – the foundation of the final rule released yesterday – proposed a two-part test to determine whether programs were meeting a “gainful employment” standard: a debt-to-income ratio test, which would measure the relationship between the median annual loan payment for program completers compared to average discretionary income and annual earnings; and a loan repayment test that would measure the percentage of former students paying down the principal on their loans. Programs would be subject to two percentage thresholds for each of those three metrics, with eligibility status determined by performance. For example, programs achieving at least a 45 percent loan repayment rate, a debt-to-income ratio of 8 percent, and a debt-to discretionary-income ratio of 20 percent or less would have been fully eligible for Title IV, while programs with loan repayment rates below 35 percent, debt-to-income ratios above 12 percent, and debt-to-discretionary-income ratios above 30 percent would have been immediately ineligible for student assistance. Programs whose performance fell between those two ranges could be placed on restricted status, requiring institutions to provide warnings to current and prospective students about high debt levels associated with the programs, submit annual documentation from unaffiliated employers that the program curriculum aligns with occupations at those businesses and that there are projected job vacancies at those businesses, and limit enrollment in the programs.

The proposed rule generated significant attention – the Department received more than 90,000 comments during the public comment period – and was fiercely protested by the for-profit community, which among other things argued that the regulations would reduce access for low-income and other non-traditional students who are disproportionately represented in their programs. The regulations have also been the source of much discussion on Capitol Hill; Senator Tom Harkin (D-IA), Chair of the Health, Education, Labor, and Pensions (HELP) committee has held several hearings over the past year highlighting abuses in the for-profit sector, while the Fiscal Year (FY) 2011 continuing resolution passed by the House in February (H.R. 1) included a provision prohibiting the use of federal funds to implement the rule (the provision was not included in the final FY 2011 CR). Given the controversy surrounding the proposal, the Department delayed release of the final gainful employment rule from October 2010 to June 2011, and engaged in a series of public hearings and other meetings with stakeholders to further refine the rule.

The final rule released yesterday maintains the three original metrics for eligibility, requiring programs to achieve at least one of the following three standards to remain eligible: a loan repayment rate for former students of at least 35 percent, or a debt-to-income ratio of 12 percent or below, or a debt-to-discretionary income ratio of 30 percent or below for program graduates.  By adopting single thresholds for each test, the rule essentially eliminates the possibility of a program being placed on restricted status, though programs failing to achieve one or more of these outcomes are subject to certain disclosure requirements to prospective students. In addition, while the NPRM proposed that programs failing each of the tests become ineligible for Title IV immediately, the final rule provides that a program must fail the tests three times over four consecutive fiscal years before losing eligibility. This means that the first year in which a program could become ineligible would be 2015. The Department estimates that 18 percent of all for-profit programs will fail to meet these thresholds at least once, with five percent ultimately becoming ineligible. The Department estimates that 8 percent of programs at all institutions – including not-for-profits – will fail to meet the thresholds at least once, with 2 percent overall becoming ineligible.

In September 2010, National Skills Coalition submitted comments on the NPRM. We expressed strong support for the Department’s efforts to ensure that federal investments in higher education lead to meaningful opportunities for skill development and credential attainment for all students, and cracking down on fraudulent and abusive recruitment practices that encouraged students to take on excessive student loan debt. At the same time, we urged the department to recognize that the proposed rules could only be a first step in addressing the broader postsecondary access and completion challenges facing many hard-to-serve student populations, and encouraged the department to take additional steps to support career pathways for students across a range of institutions.