New Gainful-Employment Rule Could Change the Game for All Colleges

For-profit colleges, with their high rates of student borrowing and default, are the most likely to strike out under the U.S. Education Department’s gainful-employment rule, released this month.

But the rule, which will cut off federal aid to programs that fail to meet benchmarks for loan repayment and debt-to-income ratios three times in a four-year period, is a game-changer for all of higher education, placing new limits on student borrowing and creating new definitions of student success.

Until now, the federal government has placed relatively few conditions on the receipt of federal student aid. To be eligible to participate in federal grant and loan programs, colleges have had to be licensed, accredited, and financially stable. For the most part, Washington has stayed out of the business of judging institutional quality, leaving that task (for better or worse) to accrediting agencies.

The gainful-employment rule, with its controversial "metrics" for evaluating institutions, gives the Education Department a much larger role in defining and assessing college quality. It lets the government decide whether a vocational program is a good investment and effectively limits what certain institutions can charge for programs in low-wage fields.

By linking a program’s eligibility for federal aid to its students’ debt burdens, the department hopes to encourage colleges to lower their prices or adjust their offerings to prepare students for better-paying jobs.

But critics of the rule, like Harris N. Miller, president of the Association of Private Sector Colleges and Universities, accuse the department of "price fixing."

The rule also represents a significant shift in the federal approach to debt management. Historically, Congress and the Education Department have focused on debt burdens at the back end, offering students with lower-paying jobs the option of extending their repayment period or paying their loans as a percentage of income. The gainful-employment rule turns that approach on its head, limiting borrowing at the front end for the borrowers who are most likely to struggle with their debts.

So far, the rule applies only to "vocational" programs, a category that includes 42,000 programs at public and private colleges, and roughly 13,000 programs at for-profit colleges. (Three-fifths of all programs would be exempt from the rule, because they have fewer than 30 completers: students starting to repay their loans.) It is likely to have the biggest effect on the for-profit sector, where 5 percent of programs are expected to become ineligible for federal aid, according to the Education Department.

For-profit colleges, and their Republican allies in Congress, argue that the rule should be applied to all institutions, as a matter of fairness. They say students are struggling with unmanageable debt at nonprofits as well, and accuse the administration of discriminating against one sector.

Expanded Reach? Unlikely
Such a change is unlikely to happen anytime soon, in large part because it would require Congress to change a longstanding provision in the law that defines programs preparing students for "gainful employment." Lawmakers never meant for the provision to apply to liberal-arts programs, which do not advertise themselves as paths to employment. Congress is more likely to repeal the provision altogether than expand its reach to nonvocational programs.

But the rule still leaves traditional colleges uneasy, in part because it ties eligibility for federal aid to a single measure of student success: borrowers’ ability to repay their loans. The colleges worry more about the precedent that the rule sets than about its specifics.

"There’s no question the Department of Education is breaking new ground with this regulation," said Terry W. Hartle, vice president for government and public affairs for the American Council on Education. "They’re defining educational success in an extremely narrow way."

One way the rule could seep into the nonprofit sector is through increased disclosures. Under the gainful-employment rule, colleges will be required to provide students with more information about graduates’ debt burdens and job-placement rates. The Education Department may opt to publish programs’ debt-to-income ratios and loan-repayment rates as well. With a little more data, the department could do the same for traditional colleges.

Such information would enable students to shop around for colleges with a track record of producing employable graduates with minimal debt, says Andrew P. Kelly, a research fellow in education-policy studies at the American Enterprise Institute.

"These are important bits of consumer information that are woefully lacking in the higher-education market," he said. He hopes lawmakers will "supersize" the rules’ disclosure requirements, applying them to all institutions.

"When it comes to measuring important labor-market outcomes, the rule could prove to be the proverbial camel’s nose under the tent flap that accountability proponents have been looking for," he said.


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