Improving Gainful Employment

President Barack Obama took to the Northeast in late August to unveil a new plan for college affordability. Standing before raucous crowds at several universities, he laid out a reform agenda, which included the idea that “it is time to stop subsidizing schools that are not producing good results, and reward schools that deliver for American students and our future.” Obama would do this by having the U.S. Department of Education (Department) produce a rating of colleges and asking Congress to tie the results of those ratings to aid eligibility.

While the ratings plan received widespread attention from the mainstream media, the Administration released another higher education accountability plan a week later that drew little notice outside the trade press. If enacted, the proposal would accomplish the first half of what the President called for, directly targeting the parts of higher education with some of the worst results for students. Even better, the plan can be carried out without any congressional involvement. All it requires is defining a six-word phrase.

That phrase is “gainful employment in a recognized occupation.” It’s a clause that has been in the Higher Education Act in one form or another since the law was first enacted in 1965. Today, all programs offered by for-profit colleges, as well as many non-degree programs at public and private nonprofit colleges, must show they are preparing their students for gainful employment in order to maintain eligibility for federal student aid. The proposal released in August would define what it means to prepare students for gainful employment by judging programs’ performance on several outcome measures. These metrics try to measure what students are getting for their educational investment by looking at how much they are earning three and four years after they graduate compared to the amount of debt they took on to pursue a program. Programs that repeatedly fail to meet or exceed these performance standards would have their access to federal financial aid limited and eventually revoked.

The Department's proposal contains many sensible elements, but also some potential weaknesses, such as not holding programs accountable if they have large numbers of students fail to complete. Recognizing those difficulties, this policy brief addresses some of the thorniest challenges within the gainful employment rule by offering clear, simple, and actionable policy suggestions, backed up where possible by impact estimates. In total, these recommendations propose the following accountability system:

• Programs should only be subject to one measure of the average debt levels of graduates compared to their annual earnings, unlike the Department's proposal which included a second measure of income adjusted for basic living expenses.
• Instead of the second measure of debt compared to earnings, programs would have to meet three minimum performance tests:
  • A minimum withdrawal rate test, which shows that no more than 33 percent of students in a program withdrew between the start and end of an academic year--a requirement based on an existing regulatory provision that dates back nearly 40 years.
  • A student loan repayment rate test that avoids some of the legal challenges this measure faced in the past by replacing a percentage threshold with a test of whether the total amount of outstanding student loan principal owed by students who attended a program is at least $1 lower than it was at the time those loans entered repayment.
  • A minimum income test that shows the average earnings of graduates from any program where graduates have student loan debt are at least equal to a full-time minimum wage employee--a standard that protects against programs that avoid penalties due to low debt levels while still leaving student in or close to poverty.
• A program that fails all of these minimum standards and/or has graduates with too much debt on average compared to their annual income would risk losing the ability to receive federal student aid.

• Programs would "pass," "struggle," or "fail," based upon how they did on either the annual debt-to-earnings measure or the three minimum performance standards. But a program can be no better than the worst level achieved on either the minimum performance tests or the annual debt-to-earnings rate--so failing either means a program fails.

• Most struggling and failing programs would be given opportunities to improve. However, programs whose student loan payments relative to the income of graduates are more than 300 percent above expert-recommended levels should lose access to aid immediately. This immediate eligibility loss idea is borrowed from the existing measure of student loan default and reflects the idea that there is some level of performance so low that the likelihood of great harm to students outweighs the chances of improvement.

Click here to read a copy of "Improving Gainful Employment."