After years of negotiation, lawsuits, and more negotiation, the Education Department is preparing to release this month the final version of its controversial “gainful employment” rule. For-profit and community colleges, who are pushing for changes in the measure, are on the edges of their seats.
As currently written, the rule would judge career and technical programs based on their graduates’ default rates and debt-to-earnings ratios. Programs that exceeded the cutoffs would become ineligible to award federal aid—a death sentence for most.
The department’s goals are laudable. It hopes to shield students from programs that leave them saddled with debt they can’t repay. But its draft rule comes with several potential pitfalls. Here are five:
1. Some programs with many student-loan borrowers would escape scrutiny.
Under the proposed rule, programs at which fewer than half the graduates who received any type of Title IV aid borrowed would automatically pass the debt-to-earnings tests. That’s because the department’s metrics measure median debt, and the median debt for those programs would be zero.
That would exempt many programs at community colleges, where tuition levels and borrowing rates tend to be lower than at for-profit institutions. Only 9 percent of certificate seekers at public, two-year institutions took out federal student loans in 2011-12, and just over a third of all certificate completers did, according to the Education Department. At for-profit institutions, 68 percent of certificate seekers borrowed that year.
Many of the exempted programs would be small, with relatively few borrowers. But programs with more borrowers could also get a pass.
Here’s a simple way to think about the problem: Program A has 40 graduates with federal aid, and 21—just over half—are borrowers. Program B has 100 graduates, and 49 are borrowers. Program B may have more troubling borrowing patterns, but only Program A fails the test:
In this case, the rule protects Program B at the expense of its students, many of whom graduate with unmanageable debt.
2. Some programs with poor graduation rates would be spared.
The rule would exempt from the debt-to-income metrics programs that graduate fewer than 30 students over four years.
That would mean that thousands of programs at for-profit and community colleges would probably never be subject to the rule, according to an analysis by College Measures, a joint venture of the American Institutes for Research and Matrix Knowledge Group.
There are valid reasons for setting a threshold at 30. In many cases it would protect small programs from being punished simply because a handful of their graduates have high debt burdens.
But the cutoff could also spare programs at which many students drop out before graduating. In that way it would reward—even provide incentives for—low completion rates.
The department has acknowledged the limits of the 30-student threshold, and at one point considered lowering it to 10. But the department stuck with 30 in the draft rule to mirror the cohort default rate, which requires 30 borrowers.
That’s consistent, but is it logical? If the purpose of the gainful-employment rule is to protect students from shoddy institutions, does it really make sense to exempt programs with dismal graduation rates—programs that leave many students with heavy debt and no degree?
3. Some programs’ debt-to-earnings ratios could look worse than they really are.
According to the rule, the department would use earnings information from the Social Security Administration to calculate programs’ debt-to-earnings ratios.
But the Social Security database doesn’t include everyone. In some states only a fraction of public employees are represented, according to a 2010 report by the Government Accountability Office. In those cases, the Social Security Administration would report the graduates’ earnings to the Education Department as zero.
The earnings data are also likely to exclude some self-employed individuals, who are required to file a tax return only if they have a net income of $400. That may not sound like much, but graduates starting a new business often face significant start-up costs and may not turn a profit right away.
So just how many earners might be left out of the department’s data set? Thousands, if not hundreds of thousands, according to data provided to the department by the Social Security Administration in 2013. That year the percentage of graduates counted as having no earnings averaged 12 percent.
There’s no way to know what share of those graduates actually made money in that year. But an analysis by Eric Bettinger, an education professor at Stanford University, concluded that 6 percent of programs would fail the annual debt-to-income test if the missing incomes were concentrated among the lowest earners. If the zeros were spread across all income groups, as many as 19 percent would fail.
4. Some programs with few students in default might still be punished.
Under the draft rule, programs would lose their eligibility to award federal student aid if more than 30 percent of their borrowers were in default for three years in a row.
The department included that stipulation to identify programs that might pass—or bypass—the debt-to-earnings metrics but still leave large numbers of borrowers with debt they couldn’t repay. Unlike the debt metrics, this new default-rate measure would count dropouts as well as completers.
Including dropouts makes sense. After all, research shows they’re more likely to default.
But the metric itself isn’t really fair to small programs with very few defaulters. A program with 300 students and just 31 borrowers would fail the test if 11 of those borrowers defaulted. Hundreds of students would lose out on Pell Grants because a fraction of their peers defaulted.
Community colleges want the department to extend its “zero median debt” exemption to the default-rate metric, so programs at which fewer than 50 percent of students borrowed would automatically pass. But that’s hard to justify because a program could theoretically have 49 percent of its students borrow and 49 percent of those borrowers default.
5. The “transition period” doesn’t really help four-year and graduate programs.
The proposed rule includes a four-year “transition period” that would allow programs to substitute the debt of a recent group of graduates for the debt of the cohort being measured.
In theory, the transition period is supposed to give institutions an opportunity to reap the benefits of recent efforts to lower tuition and increase aid. Suppose, for example, that a bachelor’s-degree program did away with all debt immediately after the department published its first set of gainful-employment rates—an extreme, and costly, response, and one worth accounting for.
In practice, though, the transition period provides only limited relief, especially for bachelor’s and graduate programs. This chart, created by Marc Jerome, executive vice president of Monroe College, a for-profit institution in New York, explains why.
Even if a program did away with all debt after failing the department’s tests, it could eliminate only one year of debt for the following year’s graduates. By Year 3 of the transition, it would have eliminated two years of debt. It wouldn’t be until the transition period ended that an entire cohort would be debt-free.
Two-year programs could turn their rates around more quickly. After just one year of no loans, they could cut their graduates’ debt burdens in half—assuming all their students graduated on time.
Correction (10/9/2014, 1:00 p.m.): Our article on flaws in the gainful-employment rule had a few flaws itself. We said that for-profits and community colleges had been fighting the rule vigorously, but as that fight has been dominated by for-profits, we changed our wording. We clarified that the debt-to-earnings metrics and the 30-percent-default threshold apply only to students who borrowed federal aid. In an example of a failing college with 30 borrowers and 10 defaults, we didn’t take into account that colleges with 30 or fewer borrowers are protected; we changed those numbers to 31 and 11. In the pie chart, we changed the text to clarify that small programs will probably never be measured under the debt-to-earnings tests, specifically, rather than being exempt from the entire rule.