How To Make Gainful Employment Regulations Even Better

Recently, the U.S. Department of Education published its proposed Gainful Employment (GE) rule. These regulations, which were a long time in the making, will prevent students from enrolling in programs that leave them worse off than if they never enrolled. Strengthening the rule further through six key changes will prevent more low-quality programs from slipping through the cracks.

For decades, the Higher Education Act has required that all career-oriented programs— programs at for-profit institutions and programs of one year or less at public and nonprofit institutions—lead to “gainful employment in a recognized occupation.” A rule issued under the Obama administration finally articulated what “gainful employment” meant—that programs that leave graduates with more debt than they could ever hope to repay would have to improve or would risk losing eligibility for federal financial aid.

That rule worked to protect students—by 2016, 60 percent of programs that would have failed the rule voluntarily shut down. Unfortunately, the Trump administration rescinded the rule before it could be fully implemented, allowing institutions to once again go unchecked in enrolling students in extremely low-financial-value programs (often through use of predatory tactics), all while being heavily subsidized by taxpayer dollars.

Now, the Biden administration has proposed a new GE rule, one that builds on ensuring students can repay their debts upon graduation while also requiring that a graduate earn more than what they would have with only a high school degree. This new rule will go a long way toward improving key consumer protections in our higher education system and end the flow of taxpayer subsidies to programs that have little to no labor market value.

At New America, we support the Department’s new regulation. We also believe there are key ways the Department could strengthen GE further to align with the statutory intent that for-profit and certificate programs lead to gainful employment and economically secure lives for students. Click the button to read about six important changes in detail, or read on for a summary.

#1—Raise the Earnings Threshold for Graduate Programs

GE is designed to ensure that students earn more because of their educational investment. To do this, the median earnings of program graduates are compared to the median earnings of high school graduates. The comparison makes sense for undergraduate students, whose alternative to college is entering the labor force with only a high school diploma.

But GE also applies to graduate programs in the for-profit sector and graduate certificate programs at public and nonprofit institutions. These graduate students consider whether to return to school after earning a bachelor’s degree, so it is only fair that their college programs are held to a higher earnings threshold. The Department should use an earnings threshold for graduate programs that compares these programs’ earnings to the earnings of bachelor’s degree holders in the same broad field as the graduate program. Any lower threshold would allow a continuation of the status-quo, in which as many as two-thirds of for-profit graduate programs leave their students with such high debt and low earnings that they would have been better off not returning to school.

#2—Include Non-Completers in the Earnings Threshold

As currently proposed, the regulations would evaluate college quality considering only the earnings of students who graduate. But college programs have an obligation to benefit all students who invest time and money in them, not just the students who graduate. By leaving out the earnings of non-completers, the GE tests ignore the experiences of most students, since only two-thirds of bachelor’s students and less than a third of certificate and associate degree students complete their degrees. Moreover, leaving out non-completers will make some low-quality programs look more effective than they are, helping these programs skirt GE sanctions.

The Department has expressed a commitment to, “holding GE programs accountable for the outcomes of students who do not complete a program and ensuring that institutions make strong efforts to increase completion rates” as far back as the 2014 regulatory process. It is time to follow up on that commitment by including the earnings of non-completers in the earnings threshold.

#3—Include Parent PLUS Debt in the Debt-to-Earnings Test

GE will also use a debt-to-earnings test to ensure programs – even programs with wages high enough to pass the earnings threshold – do not saddle students with unreasonably high student loan debt. The debt-to-earnings median debt measure includes most federal loans and private loans, capped at the amount taken out for fees, supplies, and tuition. But the measure would leave out Parent PLUS loans, an important and growing part of families’ financing of postsecondary education. By excluding a source of federal higher education debt, the Department is undercounting debt obligations for each educational program and introducing a major loophole that will be exploited by institutions looking to skirt sanctions.

We know from experience that omitting Parent PLUS debt from an accountability measure does not end well. In the 1990s, Congress introduced the Cohort Default Rate (CDR) to cut off federal financial aid to colleges whose borrowers had exceedingly high default rates. But the CDR failed to consider Parent PLUS loans. Over time, the CDR became toothless as colleges learned how to skirt the rule, including by encouraging Parent PLUS debt over other federal student loans that are used to calculate CDR (income-driven repayment plans and forbearances also played a role). This time around, the Parent PLUS loophole must be closed by including them in the debt calculation of debt-to-earnings so that the gainful employment regulations remain effective.

#4—Require Programs to Pass Both Debt-to-Earnings Tests

The debt-to-earnings test is made up of two ratios: one comparing loan payments to graduates' median earnings, and one comparing loan payments to earnings above 150 percent of the poverty line. Both ratios are based on decades of research showing that student loan burdens higher than the ratios are unaffordable for most borrowers. The problem is that the GE regulations would let programs pass the debt-to-earnings test by passing either ratio, undermining the research showing debt above each ratio is unreasonable. The fix is simple: career-oriented programs must be able to pass both ratios in order to receive federal financial aid.

#5—Use a 10-Year Repayment Timeline for All Programs

A quirk of the debt-to-earnings calculation means that some graduate programs are held to lower standards than certificate programs – even though these graduate programs take more of students’ time, energy, and money. The debt-to-earnings ratios spread graduates’ median student loan principal across a set number of years in order to approximate yearly loan payments. A longer number of years makes the yearly loan payment lower for any given loan balance. GE would spread loan principal across 10 years for certificate programs but up to 20 years for some graduate programs.

The result is that low-quality graduate programs can avoid facing GE sanctions. For example, a certificate program with median earnings of $40,000 could pass the test with median debt of $35,000. But a doctoral program with the same earnings could pass with debt over $20,000 higher, at $58,000.

Average repayment timelines are longer in graduate programs only because these programs are more likely to leave students with unaffordable debt. Using a 10-year timeline in the debt-to-earnings calculation for all career-oriented programs would avoid the trap of lowering accountability standards as repayment timelines lengthen in response to higher debt. The change would also respect students’ time as a major cost of college by requiring long college programs to meet the same basic standards as other programs.

#6—Simplify the Debt-to-Earnings Ratios with a Consistent Interest Rate

When interest rates are held constant, each debt-to-earnings ratio is equivalent to a much simpler ratio of total median debt to yearly income. Given that many borrowers repay using an income-driven repayment plan (so their monthly payments do not vary based on the interest rate of their loans), there is no reason that the debt-to-earnings threshold should fluctuate each year based on interest rates. Instead, the Department should choose a constant interest rate to simplify the debt-to-earnings ratios.

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