Department of Education Plans Crackdown on Poor Performing College and Vocational Programs
November 4, 2013

Back in 2011, the Obama administration developed regulations to encourage college programs to better prepare students for “gainful employment” and to take action against schools who are failing to adequately prepare graduates for real world job opportunities. Career colleges that did not satisfy the requirements would lose their ability to receive Pell Grant funds and to be eligible for federal student loans. 

At the time, Education Secretary Arne Duncan said, “These new regulations will help ensure that students at these schools are getting what they pay for: solid preparation for a good job. We’re giving career colleges every opportunity to reform themselves but we’re not letting them off the hook, because too many vulnerable students are being hurt.”

Why Gainful Employment Regulations Matter

The issue was (and still is) that many students take out pricey loans to pay for vocational training but find they have limited opportunities and are left unemployed or underemployed, and with oppressive student loan debt. For a school to be considered adequately leading to gainful employment, the original criteria developed said schools had to meet one of these three standards:

#1 At least 35% of former students are repaying their loans (although this could mean reducing the balance by as little as $1)

#2 Estimated annual loan payment of a typical graduate does not exceed 30% of their discretionary income.

#3 Estimated annual loan payment of a typical graduate does not exceed 12% of their total earnings.

Gainful employment guidelines prompted lawsuit

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Legal Challenge to Gainful Employment Regulations

After the initial regulations were released, the Association of Private Sector Colleges and Universities (APSCU) filed a court challenge claiming the gainful employment standards were unconstitutional. They won on the basis that the first prong – the 35% measure – was arbitrary. The other standards were based on mathematical formulas of debt to income ratios and because the court found the three were “intertwined,” the failure of the first prong took all three down. This loss occurred last summer.

Based on this poor result, DOE went back to the drawing board and redrafted the guidelines. Rather than a three prong test, the committee simply struck the objectionable first prong and will use the two that are based on hard statistics. However, this was not all they did to the regulations. Where before all students that completed the program (no matter how they paid) were part of the calculations, the most recent iteration only uses information from those that paid using federal funds (student loans and Pell Grants).

Sample Calculations Based on Refined Gainful Employment Regulations

It’s perplexing why the DOE would have not constructed the calculation this way to begin with because not doing so unreasonably skews the numbers. APSCU members may find it much more challenging to be approved for federal funds under these revised regulations and may regret ever filing the case that resulted in the refined regulations.

Here are a couple of sample calculations to illustrate the differences:

Suppose a school graduated 5,000 students and 3,000 used federal funds to finance their education. The calculations in the regulations are complex (because it’s the government that crafted them) but it looks like they take a cumulative look at debt and income to figure the ratios.

Assumption: Of the 5,000 grads, 500 are unemployed, 2,000 are earning $25,000, 2,000 are earning $30,000, and 500 are earning $35,000. Aggregate income = $127,500,000

Assumption: Of the 3,000 grads that used fed funds for school: 300 are unemployed, 1,500 are earning $25,000, and 1,200 are earning $30,000. Aggregate income = $73,500,000

Assumption: Of the 3,000 grads that used loans to finance school, the average debt is $25,000, resulting in monthly loan payments of $288 and annual loan payments totaling $3,456.  3,000 students x $3,456 annual payments = $10,368,000 annual aggregate debt payments

Gainful employment helps students with debt

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Discretionary income results:

Under the old regulations, all of the grads would enter into the calculation. Assuming a household size of two, the poverty line is $15,510 x 5,000 grads = $77,550,000 – you subtract this from gross income to get discretionary income, so $127,500,000 – $77,550,000 = $49,950,000 x 30% = $14,985,000. This would mean that they would pass on this prong because loan payments are less than the 30% of discretionary income.

Under the new regulations, they would consider just the 3,000 grads. $15,510 x 3,000 grads = $46,530,000 – this would be subtracted from the gross income of these grads, so $73,500,000 – $46,530,000 = $26,970,000 x 30% = $8,091,000. The school would fail on the revised regulation because the loan payments of more than $10 million annually far exceed the 30% tolerance level!

Total earnings results:

Under the old regulations, all of the grads would enter into the calculation. Above we calculated that the aggregate income of all 5,000 grads was $127,500,000. 12% of these earnings = $15,300,000. The $10 million of loan payments does not exceed the tolerance level, so under the old regs, the college would pass muster.

Under the new regulations, they would consider just the 3,000 grads. Above we calculated that the aggregate income of these 3,000 was $73,500,000. 12% of these earnings = $8,820,000. The school would also fail on this prong because the $10 million in loan payments far exceeds the tolerance level established by the regulations.

Gainful employment calculation 2011

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Final Thoughts

While the 35% measure may have been arbitrary, it was also easily more feasible to survive than the other two mathematical measures. Only a handful of schools (less than 220 according to2012 statistics) had a 30% default rate. Most default rates hover at around 11% or less. You can see by the comparison above that the new regulations without the prong they objected to are much more onerous. APSCU may rue the day they challenged the gainful employment regulations and found themselves facing much stricter guidelines!

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