U.S. Department of Education Opens Gainful Employment Regulations
The U.S. Department of Education announced Wednesday, June 14, 2017 that it is reopening the gainful employment regulations that went into effect less than two years ago, on July 1, 2015.
The Higher Education Act of 1965 requires most programs at private, for-profit colleges and nondegree certificate programs at public and private nonprofit colleges to “prepare students for gainful employment in a recognized occupation.” [20 USC 1002(b) and (c), 20 USC 1088(b)]
The existing gainful employment regulations interpret this statutory requirement by defining two metrics of affordable debt after graduation. Specifically, the typical college graduate of a gainful employment program must have a debt-service-to-earnings ratio less than 8 percent or a debt-service-to-discretionary-earnings ratio less than 20 percent. Otherwise, the program can lose eligibility for Title IV federal student aid.
The regulation-setting process permits the federal government to push through its own version of the regulations if the negotiated rulemaking committee fails to reach consensus, which occurred during the previous gainful employment rulemaking process.
The Trump administration is believed to be more favorable to for-profit colleges than the Obama administration. Education Secretary Betsy DeVos said that the current gainful employment regulations are “overly burdensome and confusing for institutions of higher education.”
Nevertheless, for-profit colleges should not start celebrating just yet.
Having the gainful employment regulations swing from one partisan extreme to another every four to eight years will yield a complicated regulatory compliance environment. Compliance with the gainful employment regulations requires a long runway, given the backward-looking nature of the rules.
Thus, for-profit colleges will need to comply with the strictest set of regulations, regardless of which political party is in control.
There are, however, several ways in which the gainful employment regulations could be improved and simplified:
- Eliminate the debt-service-to-discretionary-earnings threshold. All programs that fail the debt-service-to-discretionary-earnings ratio also fail the debt-service-to-earnings ratio. Accordingly, the debt-service-to-discretionary-earnings ratio is redundant. It adds no new information and can be eliminated.
- Eliminate the zone. Programs that are in the zone (e.g., debt-service-to-earnings ratios of 8 percent to 12 percent and debt-service-to-discretionary-earnings ratios of 20 percent to 30 percent) quickly progress to failure. There is little that a program in the zone can do to retain eligibility. Even drastic changes to tuition and fees or admissions standards might not be enough. The zone should be eliminated.
- Adopt a more rational threshold on the debt-service-to-earnings ratio. The 8 percent threshold on the debt-service-to-earnings ratio is based on the difference between old mortgage underwriting criteria for all debt and mortgage debt. This is not a good basis for setting the threshold, since there is no statutory requirement that college graduates be able to buy a home. It is not based on credit underwriting standards for student loans. Also, mortgage lenders have no expertise regarding student loan debt.
Instead, an analysis of federal data demonstrates that reasonable and affordable student loan debt involves a threshold between 10 percent and 15 percent. This corresponds to the rule of thumb that total student loan debt at graduation can be repaid in 10 years or less if it is less than the borrower’s annual income. This assumes that half of the net increase in income after taxes from a college degree can be devoted to repaying student loan debt, on average. A 12-14 percent threshold seems like a reasonable compromise, given the typical range of interest rates.