Cohort Default Rate Omitted from New Gainful Employment Regulations
December 16, 2014

In October, the Department of Education released the final version of its Gainful Employment (GE) rule. The new regulations are virtually the same as those proposed by the Department in March. These regulations detail the benchmarks that colleges will need to meet to continue receiving federal student grants and loans. It is worth noting that each year, the federal government contributes around $22 billion to gainful employment programs. Of these, $16 billion come from loans and the remainder from Pell Grants.

However, one of the two metrics proposed in March i.e. the programmatic Cohort Default Rate is conspicuous by its absence from the final version of the regulations. Under the metrics proposed in March, programs would be eligible for receiving federal student loans and grants if they had a programmatic Cohort Default Rate of less than 30 percent. Programs that had programmatic Cohort Default Rates of 30 percent or more for three successive years would be ineligible for receiving Title IV aid for a duration of three years.

Programmatic cohort default rates denote the percentage of borrowers who default on their student loans. Under the revised rule, the Department of Education will not hold programs responsible for their cohort default rates. Instead, the Department will evaluate programs solely on the debt-to-earnings ratios of their graduates.

Kelly Field reports that this exclusion primarily benefits community colleges. These colleges had argued that the program-level default rates were unreliable measures for the success or failure of their programs simply because only a relatively few community-college students borrowed money for attending college.

However, student and consumer advocates believe that the exclusion dilutes the rule, thereby enabling programs to weigh down students with massive burdens of debt. They recommend that the Department must include a measure in the rule for capturing the dropout rate from programs.

They highlight that the debt-to-earnings metric in the final version of the regulations only consider students who complete their programs. As a result, institutions where a majority of the students failed to graduate could slip under the radar. Clare McCann bears out this fact. She writes that over 60 percent of student loan defaulters constituted dropouts.

Department officials however, claim that the final set of regulations traces its origin to the feedback received from the public. Officials say they received around 95,000 comments. Based on these comments, they dropped the loan-default measure for creating regulations that are more streamlined.

Ben Miller writes that had the authorities implemented the proposals made in March, several programs would not have made the cut.

Number of Programs Programmatic Cohort Default Rate Debt-to-Earnings Ratio Outcome based on the New Regulations
394 programs Failed Passed Will pass
205 programs Failed In the Zone Will have time to make improvements to the programs
213 programs Failed Insufficient Data Not Evaluated

According to Miller, the exclusion of the programmatic Cohort Default Rate has had a definite impact. About 812 programs with a total enrolment of 191,666 borrowers are now passing the metrics specified by the latest regulations. However, he states that the Cohort Default Rate as a measure is not perfect by itself. This is because it fails to address a more significant question of whether borrowers are actually repaying their loans or not.

Who Will the New Gainful Employment Regulations Affect?

The Gainful Employment regulations will come into effect on July 01, 2015. They will affect:

  • Nearly all the programs at proprietary (or for-profit) institutions of higher education, regardless of credential levels and,
  • The non-degree programs at non-profit and public institutions, including community colleges

The regulations mandate that these programs will need to prepare students for securing gainful employment in a recognized occupation. Doing so would render these institutions eligible for receiving Title IV financial aid – as specified in the Higher Education Act of 1965. However, these regulations will not affect the degree programs offered at non-profit institutions.

What are the Two Metrics Stipulated in the New Gainful Employment Regulations?

The framework of the final Gainful Employment regulations comprise the following components:

  • Accountability i.e. the factor that distinguishes programs providing affordable training to students that result in well-paying jobs from programs that leave students burdened with high volumes of debt, in addition to poor earnings prospects and
  • Transparency i.e. a component that requires institutions to provide certain key information to consumers

What Does the Accountability Metric Measure?

Under the Accountability metric, institutions will need to certify that each of their gainful employment programs complies with:

  •  State licensure
  • Federal licensure
  • Certifications and,
  • Accreditation requirements

Therefore, institutions offering gainful employment programs will need to meet the prescribed minimum standards for the debt vs earnings of their graduates to maintain their Title IV eligibility. The table below highlights the categories applicable to the programs according to the new regulations.

A Gainful Employment Program will: If:
   

Pass

Graduates have annual loan payments amounting toLess than eight percent of their total earnings

 

OR

 

Less than 20 percent of their discretionary earnings

   

Be in the Zone

Graduates have annual loan payments amounting toBetween eight to 12 percent of their total earnings

 

OR

 

Between 20 to 30 percent of their discretionary earnings

   

Fail

Graduates have annual loan payments amounting toGreater than 12 percent of their total earnings

 

AND

 

Greater than 30 percent of their discretionary earnings

 

The new regulations declare that gainful employment programs would be ineligible if:

  • They fail to meet the criteria in two out of any three successive years or,
  • They are in the zone for four successive years

Note:

  • Discretionary earnings denote the difference of the graduate’s annual earnings and 1.5 times the national Poverty Guideline
  • The Department of Education determines the higher of the mean and median annual earnings of graduate students for calculating the annual income
  • The timelines specified enable schools to make their programs compliant as debt-to-income ratios are indicators of programmatic success
  • The Department of Education enables failing programs or programs that are in the zone to utilize the current year median loan debt in the debt-to-earnings metric, in an attempt to give the institutions time to reduce their tuition and fees during a transition period

What Does the Transparency Metric Measure?

Under this measure, the regulations require institutions to make public disclosures about the:

  • Performance of their gainful employment programs and,
  • Outcomes of their gainful employment programs

The information that institutions will need to provide will typically include details such as:

  • The cost of the gainful employment programs
  • The program length
  • The primary occupation that the program trains students for
  • The earnings of students enrolled in the gainful employment programs
  • The debts incurred by student enrolled in the gainful employment programs and,
  • The completion rates of students enrolled in the gainful employment programs

The new regulations require that institutions provide this information:

  • In their promotional material
  • On their web sites and,
  • Directly to prospective students, before they enroll for the programs

What is the Status of the Existing Gainful Employment Programs Today Vis-à-vis the New Regulations?

According to the Department of Education:

  • The vast majority of the gainful employment programs will pass the accountability metric
  • This includes the gainful employment programs offered at for-profit institutions
  • Around 1,400 gainful employment programs will fail the new regulations
  • These programs currently have a strength of about 840,000 students
  • Nearly 99 percent of these students have enrolled in these programs at for-profit institutions

The new regulations represent the latest attempt on the part of the administration for creating a set of gainful employment rules. Initially, the authorities had released these regulations in 2010. At the time, the regulations had included metrics such as:

  • Two debt-to-earnings standards and,
  • Loan-repayment rates that required that at least 35 percent of a program’s graduates must be actively repaying their loans

However, a federal judge had struck down the rules in 2012. The judge had approved the basic premise of gainful employment rules. But, the judge had also ruled that the Department had failed to provide adequate justifications for the 35 percent loan repayment rate specified in the rules.

Paul Fain writes that some people might feel that the elimination of the loan-default rates will protect the regulations from going through another lawsuit. However, department officials declared that that they had studied various legal issues across the entire breadth of the rules very carefully. As a result, they believe that the latest regulations will be able to withstand legal scrutiny, should that possibility materialize.