An Earnings Threshold Would Sanction Only Low-Value College Programs

Next year, the Department of Education will inject some much-needed consumer protection into the higher education system. Currently, the federal government subsidizes most accredited programs, whether or not the program provides an education of value to students or to taxpayers. The upcoming gainful employment regulations promise to change that by holding career-oriented programs accountable for student outcomes.

The regulations follow similar rules introduced during the Obama administration. The 2014 gainful employment regulations sought to stop the flow of federal financial aid to for-profit and short-term programs that left students with unaffordable debt. But before any low-performing program lost access to federal aid, the Trump administration rescinded the regulations. Now the Biden administration is planning to revive—and strengthen—them.

While we do not yet know exactly what will be in the new regulations, a draft released last year suggests the administration is considering adding an earnings threshold to the debt-to-earnings ratio seen in the 2014 rule. The new earnings metric will ensure the government does not subsidize programs that consistently produce low wages, while the debt-to-earnings ratio will ensure taxpayers stop subsidizing programs that come with excessive debt loads, even where they lead to slightly higher earnings.

The new earnings test would compare workers’ median wages three years after graduation to the median wages of high school graduates aged 25 to 34 in the state where the college is located (or nationally, for schools where most students aren’t located in-state). The earnings threshold is designed to measure whether a college degree produces higher earnings than what students could make with just a high school diploma. This is a critical accountability metric, since 90 percent of students choose to attend college because they want to make more money.

Students also expect the extra money to be enough to achieve financial independence and avoid material hardship. To see if the proposed threshold would meet this bar, we compared the median wages of young high school graduates in each state to a living wage in that state using MIT’s Living Wage calculator, which reports the wages needed to sustain families without reliance on government assistance. The living wage budgets only necessities—like transportation, housing, and childcare—leaving out the costs of entertainment, vacation, or retirement savings.

Even with this bare-bones accounting, the median wage of a high school graduate is lower than a living wage for a single adult in 46 states (see Figure 1). Across the nation, the living wage for a single adult is almost $8,000 higher than the median high school wage. While most people who took out student loans within the last three years are childless, a quarter are single adults raising children, according to New America’s 2022 Varying Degrees survey. For these single-earner families with a child, the gainful employment threshold is, on average, $47,000 below a living wage (see Figure 2). This means that some programs will pass the proposed earnings threshold even though their graduates consistently do not make enough to support themselves and their families.

Still, measuring program wages against the typical wages of a high school graduate has some advantages: it is a simple, straightforward measure that will resonate with consumers. The low bar gives programs some cushion, regardless of the local labor market circumstances or the socioeconomic makeup of their student body. And it means policymakers can be absolutely certain that failing programs are undeserving of continued public subsidy.

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