The Student Loan Ranger has talked a lot about the fact that, absent government intervention, the interest rate on subsidized Stafford loans will double from 3.4 percent to 6.8 percent on July 1.
We haven't talked as much about the fact that the Department of Education's new gainful employment regulations are also slated to take place July 1. In the long run, though, gainful employment may well have a larger impact on more students.
The regulations shift the federal government's student debt policies in a new direction. Most laws and regulations focus on borrowers who have already accrued student debt. Programs like Income-Based Repayment and Public Service Loan Forgiveness, for example, help eligible borrowers manage their student loan burden by ensuring their monthly student loan payments are affordable and by providing forgiveness for a working at a wide variety of public service jobs.
Gainful employment, in contrast, is designed to identify institutions that are not providing degrees that enable students to repay their student loans, and to revoke their eligibility for federal grants and loans. Since this would basically result in them going out of business, the regulations are designed to encourage underperforming institutions to lower tuition (so students take on less debt) and better prepare their students for employment.
Despite this definite shift in emphasis, however, the regulations are more of an evolution than a revolution for a couple of reasons.
To begin with, the rule applies only to "vocational" programs designed to lead directly to employment. While this definition includes approximately 42,000 public and private college programs and 13,000 for-profit college programs, three-fifths of them are exempt because they have fewer than 30 students starting to repay their loans.
In addition, the standards vocational programs must meet in order to retain their eligibility for federal loans are hardly draconian. (Sen. Tom Harkin, for one, thinks they aren't strong enough, according to the Chronicle of Higher Education.) A program passes scrutiny and is considered to lead to gainful employment unless it fails both prongs of a two-prong test for three out of four fiscal years.
The first prong is that 35 percent or more of its graduates must be successfully repaying their loans. The second prong is that that the annual loan payments of its graduates must be less than 12 percent of their annual incomes or less than 30 percent of discretionary incomes. Even in the for-profit sector, where gainful employment is projected to have the biggest effect, only 5 percent of the programs are projected to lose their eligibility.
But while it may be only an evolution, it's been a noisy one. The proposed rule received 90,000 comments—a Department of Education record—and approximately 75 percent of them were opposed to the regulation. It also roused the ire of House Republicans, who voted to block the regulation. So what's all the noise about?
We suspect most of it comes from the aforementioned for-profit sector. There's little doubt that for-profit programs fill a real need, and that many of them are both innovative and effective. On the other hand, students at for-profit colleges tend to take out more in loans (they account for only about 12 percent of higher education enrollment but about 25 percent of federal student aid) and have higher default rates (they account for almost half of all student dollars in default). Plus, some of the practices at for-profit colleges have drawn the attention of Attorneys General like Martha Coakley.
And students who are unable to find work in their chosen fields and struggle to pay off their student loans often suffer grave and long term financial consequences, as illustrated by the testimony of Danielle Jokela at a recent Judiciary Subcommittee on Administrative Oversight and the Courts hearing illustrates.
Despite the current vociferous opposition, we hope that gainful employment will ultimately strengthen vocational programs and provide better outcomes for their graduates. And, if it's successful, it may even be extended to other programs to help combat the continuing rise in tuition and slowly deflate the student loan bubble. We'll monitor the effect and update you in a future blog post.