What the new gainful employment rule means for college students
A new gainful employment rule has just gone into effect, and it could have a substantial impact on college students in a few years.
The gainful employment regulation requires vocational programs at for-profit higher education institutions and nondegree programs at community colleges to meet minimum thresholds with respect to the debt-to-income rates of their graduates. Programs that fail to meet these minimum requirements could lose access to all federal financial aid for a period, putting them at a higher risk of closing.
Proponents of the rule say it will weed out programs that saddle students with unmanageable education loan debt and lead to few quality job prospects. Critics of the rule argue that gainful employment will ultimately limit opportunity for students, especially those who turn to for-profit schools for flexible schedules as they juggle family, work and school.
Gainful Employment's Rocky Road
In 2009, the Department of Education began a negotiated rule-making session with the goal of strengthening federal aid program regulations to better serve students and families. Gainful employment was rooted in the concept that a school should experience consequences for the lack of success of its alumni. Under the rule, nearly all programs at for-profit institutions and a few other institutions had to meet a minimum repayment and student debt-to-income ratio, and more information had to be disclosed to current and prospective students.
The idea was to try and ensure that programs where students needed to take on debt to attend provided a robust enough education that these students could obtain employment with wages high enough to allow them to successfully repay that debt.
If the schools failed to meet these minimum criteria, access to federal student aid for those programs would be withdrawn. Many students cannot afford higher education without financial aid, so pulling a program's eligibility for federal aid programs is in most cases the death knell for that program or school.
The Association of Private Sector Colleges and Universities, the national association of for-profit schools, led the criticism of gainful employment and filed a lawsuit in 2012 claiming the rule was "arbitrary and capricious" and that the Department of Education had overstepped its authority in issuing it. The courts, for the most part, agreed.
In 2014, the Department of Education issued a new version of the gainful employment rule. This version maintained the disclosure, reporting and a version of the debt-to-income requirements, but did not require a minimum repayment rate. The association filed another suit later that year, but this time the courts sided with the Department of Education just in time for the July 1, 2015 effective date.
How Gainful Employment Works
The rule measures a program's graduates' debt-to-income as follows:
• Programs whose graduates have annual loan payments less than 8 percent of total earnings or less than 20 percent of discretionary earnings are considered to have passed the requirements.
• Programs whose graduates have annual loan payments between 8 percent and 12 percent of total earnings or between 20 percent and 30 percent of discretionary earnings are considered to be "in the warning zone" and at risk of failing the requirements.
• Programs whose graduates have annual loan payments greater than 12 percent of total earnings and greater than 30 percent of discretionary earnings have failed the requirements.
• Programs that fail in two out of any three consecutive years or are in the zone for four consecutive years are no longer eligible for federal student aid for a minimum of three years.
There are a few more details that are important for consumers to be aware of. Gainful employment rules apply to most programs, certificates and degrees at for-profit institutions and most nondegree and certificate programs at all other schools. Only schools or programs that participate in the federal financial aid programs fall under the rule.
The rule only measures statistics for those students who actually complete the program. This is an important distinction, because students who do not complete their programs of study have the highest rate of default. Some proponents of gainful employment believe the rule does not go far enough, because if it only counts graduates, it leaves out a substantial portion of borrowers who would likely fail to meet the threshold.
What This Means for Consumers
Higher education consumers who currently attend or plan on attending vocational or nondegree programs should pay particular attention to how the program fares under the gainful employment rules. Schools at risk of failing the requirements must disclose this to both current and prospective students.
Students who attended a school that had to shut down because of gainful employment would be eligible for a discharge of their federal student loan debt However, that's not really an ideal situation, both for the student and the taxpayer who ultimately pays when federal debt is forgiven. A much better turn of events is for students to go into these types of programs with eyes wide open.
While there is still quite a bit of controversy around the rule, only time will tell if it is a truly effective way to help consumers determine the value of a program of higher education. One thing's for certain, though: More easily available and understandable public data to help families make the college choice is always a good thing.
Copyright 2015 U.S. News & World Report
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