Keep “Public Service” Loophole Out of Gainful Employment Rules

The Obama administration is taking a second crack at implementing “gainful employment” regulations (the courts struck down the first attempt) that would cut off federal aid to career training programs where students take on excessive debt relative to the incomes they go on to earn. It’s a worthy policy. A career training program from which lots of students leave with more debt than they can repay is a proxy for a bad deal – for students and taxpayers.

Simple enough. Until the loopholes were added. Yes, everyone knows that the administration agreed to water down the rules last time, but one loophole in particular never received the scrutiny it deserved.

During the first iteration of the rules back in 2011, the administration agreed to add a loophole that student aid advocates supported for borrowers using the Public Service Loan Forgiveness program. That program provides large repayment subsidies and loan forgiveness to borrowers working in non-profit or government jobs who use the Income Based Repayment (IBR) program (or Pay As You Earn for more recent borrowers). Of course, the schools most affected by the gainful employment rules—for-profit colleges—benefited from the provision, since it watered down the rules.

Fortunately, that loophole isn’t in this most recent version of the regulations. As a result, these program integrity rules have more integrity. Moreover, the way the new version of the rules is designed, an exemption for Public Service Loan Forgiveness (PSLF) would be less meaningful. The earlier rules required programs to pass any one of three tests to remain eligible for aid, meaning the exemption alone would theoretically allow a program to pass; the newly proposed rule would require programs to pass every test to remain eligible for federal money, so passing one test using the exemption doesn’t let a program off the hook for the other two.

But the regulation-making night is still young. The final regulations could look very different, raising the stakes for avoiding another PSLF loophole.

The “Public Service” Loophole: A History

To guard against another loophole, it helps to understand what happened the last time the administration developed the gainful employment rule. The 2011 rule included a loan repayment test whereby a percentage of students who attended a program had to make progress on paying down their loans after leaving school, or that program would risk losing eligibility for federal student aid.

Meanwhile, the Income-Based Repayment program for federal student loans, which borrowers use to qualify for Public Service Loan Forgiveness, allows them to make payments on their loans that by design may not pay down their loan balance or even the accruing interest. Borrowers in PSLF have their remaining loan balance forgiven after 10 years of income-based payments. In other words, borrowers who (legally) pay down their loans slowly or not at all, depending on their debt and income levels, and plan to get PSLF earn the biggest benefit.

So on the one hand we have a federal program that delivers big benefits to borrowers who may not pay down their loans (PSLF), and on the other we have a proposed accountability measure (gainful employment) that says if a borrower does not pay down his loans, his education program ripped him off. The Obama administration and many student aid advocates support both initiatives, which is to say they believe that a high debt-to-income ratio is an indicator of a bad educational outcome, except when it’s not. They want it both ways. (Read Ben Miller and Alex Holt on why there is actually little risk that the two initiatives would ever conflict on a meaningful scale in practice.)

A Good Outcome Regardless of Debt?

Back in 2011, faced with a decision between tougher rules to shut down low-quality education programs, or Public Service Loan Forgiveness, the administration chose the latter. They wrote the initial gainful employment rules such that they treated 100 percent of borrowers making progress toward PSLF as successfully paying down their federal student loans, no matter how out of sync their earnings were with their debts or whether they worked in public service jobs even remotely related to the training they received. Put another way, PSLF borrowers were treated as a “good outcome” for a school’s program even if the borrowers would otherwise have helped trigger the gainful employment rule’s debt-to-income or loan repayment rate tests.

PSLF borrowers were treated as a “good outcome” for a school even if the borrowers would otherwise have triggered the gainful employment rule.

Because of how the 2011 rules were designed, exempting borrowers enrolled in IBR and planning to receive PSLF meant that in the eyes of the federal gainful employment rules, a career training program was always a good deal for those students, no matter what they borrowed to pay for it, or what they earned afterward.

Don’t Excuse “Public Service” From Quality Control

And don’t make the mistake of thinking students from gainful employment-covered programs aren’t likely to end up in so-called public service jobs. “Public service” is defined under PSLF as working for just about any governmental or not-for-profit entity, regardless of the nature of the work. As such, one in four jobs in the U.S. economy qualifies!

A child care assistant could easily end up working in a qualified position, as could a teaching assistant with an associate’s degree. And someone with a four-year degree in public safety from a for-profit university surely fits the bill. All the more reason that such programs should be subject to rules meant to ensure students (and taxpayers) don’t overpay for credentials.

In fact, it’s even more important to include borrowers working in PSLF-qualified jobs in the gainful employment regulations if the program they attended was not aimed at training students for public service jobs. Imagine someone with a two-year health care technician credential whose school prepared him poorly to work in that field and left him with a lot of debt. It’s conceivable that he ends up working in another field because of that poor training, and instead winds up in a low-paid clerical job at a non-profit organization. He’s eligible for Public Service Loan Forgiveness because he works at a non-profit—but he’s deeply in debt, and working far outside his intended field.

Under the 2011 gainful employment regulations, the Obama administration agreed to count that student’s dubious career training program as a success—with a nod from student aid and consumer advocates.

This time, keep the loophole out.”