Education Industry Reporter

Department of Education Publishes “Gainful Employment” Rule

Posted in Department of Education, Gainful Employment, Higher Education News

CONTRIBUTED BY
Dennis Cariello
David P. Lewis
Patricia V. Edelson
Allison L. Kierman
Jacob Frumkin
Sarah E. Castle

 

[NOTE - Links in this article have been revised]

The Department of Education has at last provided public access to its final “gainful employment” regulation.

The GE Rule, which will likely be published on or about June 13, 2011 and becomes effective on July 1, 2012, has been over two years in the making.  Originally part of the “Program Integrity” regulatory package, the GE Rule seeks to define the phrase “gainful employment” in an effort to provide a federally mandated return on investment for students attending institutions subject to the rule, or alternatively, ensure that students are making payments on their student loans at a sufficient rate.

As was the case when the Department published a Notice of Proposed Rulemaking (NPRM) on July 26, 2010 about this rule (referred to herein as the Draft Version), opinions about the impact of a regulation with the size (over 430 pages) and scope of the GE Rule are likely to change as those subject to the GE Rule begin to work with it and better data becomes available. Thus, this analysis is subject to future revision.

A quick summary of the GE Rule

Under the GE Rule, as with the Draft Version, the Department will examine, on a program-by-program basis for each institution: (i) the percentage of federal loans (by dollar volume) experiencing repayments for persons who attended a given program (Repayment Rate) and (ii) the annual ratio of loan payment to income experienced by graduates of a program (Debt Burden). Relative to the Draft Version, there are a number of positive changes in the GE Rule:

  • The GE Rule is simpler than the Draft Version. Programs may achieve compliance by meeting one of three standards, rather than needing to comply with multiple measures.
  • There are multiple opportunities for remediation. Programs that fail the GE Rule must fail to achieve compliance with any of the three standards in three out of four consecutive years to lose Title IV eligibility and may not lose Title IV eligibility until 2015.
  • The standards are less stringent than originally proposed. The GE Rule utilizes a 35 percent repayment rate, a 12 percent debt to income ratio and a 30 percent debt to discretionary income ratio, each of which was the least stringent of the standards proposed in the Draft Version.
  • The Repayment Rate standard has been liberalized. The definition of “repayment” now includes repayments of principal and, in some cases, interest. The GE Rule also looks at repayments occurring only in the third and fourth year after leaving the institution, rather than the first  four years, thus giving students more time to find employment.
  • The Debt Burden standard has also been liberalized. The Debt Burden excludes debt incurred by students that exceeds institutional charges. The formula also amortizes debt over a 15-year period for bachelor’s and master’s programs, and over 20 years for doctoral and first-professional degree programs. In addition, the Debt Burden is generally measured during the third and fourth year after graduation.

There are, however, a number of concerns:

  • The GE Rule is still complicated. The released version of the GE Rule encompasses 438 pages of new rules and explanatory text, and despite efforts at simplification is still complex and confusing.
  • The GE Rule influences institutions to act as underwriters. In general, an institution’s repayment rate performance may be adversely affected if it admits a student who has previously defaulted on a student loan. This effectively creates underwriting criteria for student loans. While this may benefit taxpayers at some level, it may preclude some students from having access to programs that will permit necessary career shifts and force such students into longer-term programs not subject to the GE Rule.
  • After a transition, the Department will use actual income data. While the Department is allowing otherwise failing programs to utilize salary data from the Bureau of Labor Statistics to calculate the debt burden from 2012 to 2014, the Department will use Social Security Administration actual salary data after 2014.
  • The data needed to assess compliance may not be readily available to institutions. While utilizing actual earnings data poses an obvious data collection problem, additional needed data may be difficult to access as well. In addition, it remains to be seen if the Department has designed a method to accurately account for programmatic debt, especially in the case of consolidation loans and debt incurred at multiple institutions.
  • The impact of the GE Rule on a given institution is difficult to assess.  We expect many issues to arise during the transition period that expose unintended consequences.
  • More Departmental guidance is needed. There are a number of definitions and gaps in the formulas that will require further clarification from the Department.

Predictably, there are unanswered questions about the rule and its effect:

  • The impact of utilizing data only from years three and four of repayment is unclear. While this should positively impact those programs whose students take longer to become employed or reach their full income potential, it may exacerbate compliance issues associated with students who are likely to leave the workforce.
  • The impact on bachelor’s programs may vary. The 15-year amortization term for debt service of bachelor’s program graduates increases the potential that such programs will achieve regulatory compliance. If the wage stratification that naturally occurs over time between holders of different degree levels within the same program manifests itself in years three and four after graduation, institutions may opt to offer higher-level degree programs.

Our full analysis discusses the GE rule in its entirety.