June 15, 2017
Yesterday, Secretary of Education Betsy DeVos announced that the Trump Administration would be revisiting the Obama-era gainful employment (GE) regulations finalized in 2014. This news has many worried that the Department of Education (ED) will completely defang these important measures in the coming year. By weakening GE requirements, which hold career training programs accountable for the amount of debt students take on relative to their income after graduation, ED could cost taxpayers over a billion dollars and will remove critical protections for borrowers. But how much would it cost failing programs to pass ED's gainful employment benchmark?
Given the high stakes associated with failing the GE accountability metrics, the regulation has generated significant pushback from institutions at every step -- particularly for-profit colleges, which stand to lose the most. Despite their objections, however, currently failing certificate programs at for-profit colleges could meet existing regulatory requirements if they lower their net tuition or other costs by an average $3,534 per graduate over the course of the program. To uncover how much a program needs to lower costs per graduate, we calculated the average principal loan amount required to pass the GE rules and then subtracted it from the actual principal loan amount that graduates borrowed (See below).
|Failing or Zone Undergraduate Certificate Programs at For-Profit Colleges|
|Average Principal Borrowed per Program Graduate||$13,556|
|Average Principal Required to Pass D/E Ratio||$10,022|
|Principal Debt Reduction Needed to Pass D/E Ratio||$3,534|
As a reminder, to avoid sanctions under the gainful employment benchmarks, the average* graduate from any for-profit educational program, and any certificate program offered at a public or nonprofit college, must have an annual student loan payment that is below 20 percent of his annual discretionary income or 8 percent of his total annual income.** If the program fails the debt-to-earnings ratio for two out of three consecutive years, it loses federal financial aid eligibility. As of January, 2,042 career training programs across 777 colleges had not passed the benchmark in GE’s first year of implementation. And of the affected colleges, all but 34 are for-profit.
In addition to claims of bias against the for-profit sector, many affected colleges have expressed frustration with the way the debt-to-earnings rate is calculated. One common complaint is that institutions cannot control the amount of debt that students take on to cover living costs while enrolled (other than by indirectly adjusting the cost of attendance). Programs therefore argue that they shouldn’t bear the responsibility when a borrower fares poorly after graduating. But under the existing rule, colleges aren’t actually held responsible for any borrowing that exceeds direct educational costs.
When ED codified the regulations in 2014, policymakers provided a fair amount of flexibility for colleges to adjust their debt-to-earnings ratios to their advantage. Using annual and discretionary income, and relying on the higher of either the average or median earnings for a program’s graduates are four common permutations that may allow a college to inch into passing. But colleges also have another option at their disposal: During the rulemaking process, ED concluded that the total federal and private student debt used to calculate the debt-to-earnings ratio would not exceed the amount charged for tuition and other direct academic expenses like books and supplies. In other words, the amount of debt for which a college is held accountable has been capped to only include those costs within the institution’s direct control. So even if the average graduate has borrowed a great deal to cover living costs, the institution will not be held liable for these borrowing decisions.
To be sure, there probably aren’t many programs affected by GE that have relied on this provision. When ED studied the number of graduates from these programs who had borrowed in excess of tuition costs during negotiations in 2013, it discovered that the cap only applied to 15 and 17 percent of students in the 2007-08 and 2008-09 cohorts, respectively.*** With just a sliver of students in a GE program running up against the direct expenses cap, it is unlikely that many programs had their average debt level adjusted. So living costs are not to blame; instead, high tuition prices at for-profits are making the cap irrelevant and inflating student debt loads.
One way to estimate the profit that proprietary institutions derive from tuition -- and therefore the amount of wiggle room they have to shave student borrowing -- would be to compare the price a for-profit college charges for a credential with a similar program at a community college. For instance, researchers at AEI have shown that for-profit institutions charge students an average $8,649 in tuition for a certificate--over eight times the average amount a student would have to pay out-of-pocket to pursue a certificate at a community college. And on average, certificate earners at a community college earned $2,700 more than a for-profit graduate who studied the same topic. Of course, community colleges receive large general operating subsidies from state and local governments, allowing them to offer lower tuition. But even after accounting for this difference in public support, those who earned a certificate from a for-profit college paid roughly $3,100 more in net tuition than graduates from the average certificate program at a public college--close to the $3,500 by which for-profits need to lower their tuition or related costs to pass a debt-to-earnings test. This major gap in net tuition is unlikely a coincidence when it comes to how for-profits perform on the debt-to-earnings measure relative to community colleges.
The gainful employment data reveal substantially lower earnings among for-profit colleges than in comparable community college programs, a statement about the quality of education that many for-profit programs provide. But even worse, the average debt loads used in gainful employment measures--despite being capped by tuition and other direct educational expenses--dwarf those of the average community college graduate. Aligning the price of a credential with its value in the job market, while saving taxpayers money, should be something all policymakers support. One way to achieve alignment is to cut tuition.
*The debt-to-earnings ratio relies on the high of either the average or median earnings.
**Discretionary income is calculated by subtracting 150% of the national poverty line from total earnings. For an individual in 2017, $18,090 would be subtracted from total income to derive discretionary income. The regulations also establish a zone status for GE programs that have a discretionary income rate between 20 and 30 percent, and an annual earnings rate between 8 and 12 percent.
***Not all institutions provided tuition and fees information to the Department, when it conducted this data run.