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Analysis: Biden Administration Plans New Gainful Employment Crackdown on Colleges That Overwhelm Grads With Debt

In May 2023, the U.S. Department of Education released a highly-anticipated set of proposed rules designed to protect student loan borrowers. Any potential online student who plans to pay for their program through student loans must know how these changes will affect them.

The draft protections center around a new gainful employment rule, accompanied by related regulations to ensure that potential students accurately understand their financial obligations when enrolling in particular programs. This rule would end student loan financing support for programs whose alumni repeatedly fail over several years to earn enough income to afford their educational debt repayments.

The gainful employment rule would also improve financial transparency. That’s because the regulation mandates for the first time that all schools must disclose a vast spectrum of accurate data related to their graduates’ earnings, the total costs of enrollment in their programs, and the funding their students usually borrow. The Education Department will also require that each institution post all this information on a website that’s accessible to the public.

“Every single year, 700,000 students enroll in postsecondary programs that leave them with unaffordable debt or earnings no better than (those of) a typical high school graduate in their state,” said Secretary of Education Miguel Cardona in a press call. “Investing in a college degree or career certificate is supposed to pay off. Instead, too many students are getting ripped off.”

Not the First Gainful Employment Rule

This isn’t the first time the Department of Education has proposed or implemented regulations based on the gainful employment (GE) concept. The notion dates back to the Higher Education Act of 1965, the landmark legislation within President Lyndon Johnson’s visionary and sweeping Great Society domestic agenda intended to eliminate all racial injustice and poverty across America. Title IV of the Act established America’s first federal student loan program, but this statute only authorized loans that would fund educational curricula directly contributing to “gainful employment” among borrowers.

Forty-nine years later, in 2014, President Barack Obama’s Education Department enacted the first gainful employment rule after finding that for-profit colleges operated the overwhelming majority of poorly performing programs. That rule gave the Department the authority to cut off federal student aid to schools with programs that saddled graduates with excessive amounts of debt relative to their expected low salaries following graduation. During the remainder of the Obama Administration, several schools terminated low-performing programs voluntarily rather than risk the public relations damage from enforcement actions by the Department.

However, for-profit colleges such as the University of Phoenix and free-market advocates attacked the policy as a form of overreaching. As a result, President Donald Trump and his Education Secretary Betsy DeVos—an aggressive adversary against student interests—rescinded the rule in 2019.

After the Biden Administration took over, Democrats led by the Congressional Progressive Caucus pushed for the Education Department to reinstate a strengthened version of the rule. However, a controversial early draft of the proposal encountered opposition from lobbyists for community colleges and some four-year non-profit universities. So many hearings and lobbying negotiations on Capitol Hill resulted that the target date for the proposed regulation’s public release and comment phase had to be pushed back to May 2023.

Two Value Tests

Under statutory amendments to the Higher Education Act, federal law already mandates that all for-profit college degrees and non-degree certificate programs at all schools must provide education that contributes to “gainful employment.” And at last, after more than half a century, we now have a proposal that attempts to specifically define what that concept means based on objective criteria.

How will the Department decide if schools can continue to receive student loan revenues because their programs deliver sufficient gainful employment value to students? The proposed regulation will apply two tests in evaluating the value delivered by for-profit degrees and certificate programs offered by all institutions. The actual calculations are complicated, but in summary, those institutions will need to show that their graduates could afford their student loan payments through two metrics known as the debt-to-earnings ratio and the earnings premium.

First Test: Debt-to-Earnings Ratio

Graduates’ aggregate share of their median yearly earnings required for their student loan debt payments, called their debt-to-earnings ratio, cannot exceed 8 percent of their annual earnings, or 20 percent of their “discretionary” earnings.

The proposal defines discretionary earnings as equalling annual earnings less than 150 percent of the federal poverty level for an individual, which in 2023 equals about $22,000. The Department will characterize curricula that fail to meet the minimum debt-to-earnings ratio thresholds as “high-debt-burden” programs.

Second Test: Earnings Premium

Typical graduates must earn at least as much as the median high school graduate in their state’s labor force between ages 25 and 34 who failed to pursue any higher education. Such earnings average out to about $25,000 across the nation but differ by state. The Department will characterize curricula with typical salaries lower than those earned by the median high school graduate as “low earnings” programs.

A Swift Reaction

Applying these metrics, the Associated Press conducted an analysis of data released by the Department of Education. AP found that overall, 22 percent of programs operated by for-profit schools would face a crackdown that will deprive them of their federal funding. Within that group, almost two-thirds of certificate programs in cosmetology would see their student loan privileges canceled, along with more than a third of programs in medical support services for sectors like dentistry.

The reaction was swift and predictable. Nicholas Kent, the chief policy officer at Career Education Colleges and Universities—a for-profit education industry association—argued that the proposal is skewed against the schools in his group. He told AP that “this law continues to target for-profit institutions and programs, while at the same time, the methodology is one that lets the vast majority of even poor performing public institutions off the hook.”

But student advocates counter that the results accurately represent higher education’s realities in 2023, including the facts that graduates of for-profit colleges earn substantially lower salaries while laboring under greater debt loads and higher likelihoods of defaulting on their student loans. For example, the DOE’s announcement was viewed as a “strong proposal” by Aaron Ament, the president of the borrower advocacy group Student Defense:

Ever since the Trump Administration illegally repealed the 2014 Gainful Employment rule, students have been left unprotected from predatory higher ed profiteers. The Department’s proposed regulation is an important step toward restoring basic rules of the road for career college programs. . .

While we applaud the Department’s efforts and urge swift completion of the rulemaking process, this proposal will not take effect until July 2024 at the earliest. We also remain concerned that the finalization or implementation of this proposal could be stalled or completely sidelined by legal challenges. The Department should, once and for all, concede that the repeal of the 2014 Rule was illegal and consent to its immediate reinstatement as a bridge and a backstop to its new rule.

How the University of Phoenix Escapes

So now we have some new and potentially significant information to consider. We can expect that many for-profit colleges could soon lose funding for a fifth or more of their programs after the new regulations become law. We also know that in addition to the 7,400 public comments filed before the comment phase closed on June 19, the Education Department had heard from vocal student lobbyists who want the 2014 Obama Administration’s rule reinstated before the launch of the new regulations planned for July 2024.

And we also now understand why the owners of the University of Phoenix were trying to sell their college on such a swift timetable—as we pointed out in three recent articles analyzing the negotiations—and why the State of Idaho approved the Phoenix acquisition so quickly. A crackdown like this one by the Education Department means that Phoenix could lose at least an additional 20 percent of its Title IV funding at a time when the school is already facing income threats from another Federal Trade Commission enforcement action, almost 50,000 borrower defense to repayment claims, and six U.S. senators who want the school’s federal funding shut off.

But if the U of I buys Phoenix before the new gainful employment and financial transparency regulations take effect, Phoenix escapes the crackdown. Why? Because the proposed Idaho deal structure will convert Phoenix from a for-profit to a non-profit corporate entity, and in that case, the school’s bachelor’s and master’s degree programs will fall outside the purview of the Education Department’s new regulations.

In this event, Phoenix would only face losing federal funding that supports non-degree certificate programs in cases where most graduates wouldn’t meet the two new gainful employment value tests. These certificate programs probably amount to a much smaller proportion of Phoenix’s program offerings and federal funding when compared with the school’s bread-and-butter academic degree curricula.

Douglas Mark

While a partner in a San Francisco marketing and design firm, for over 20 years Douglas Mark wrote online and print content for the world’s biggest brands, including United Airlines, Union Bank, Ziff Davis, Sebastiani and AT&T.

Since his first magazine article appeared in MacUser in 1995, he’s also written on finance and graduate business education in addition to mobile online devices, apps, and technology. He graduated in the top 1 percent of his class with a business administration degree from the University of Illinois and studied computer science at Stanford University.