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ED Listens to Some For-Profit Concerns In Third Gainful Employment Language

There's a little over 24 hours to go until the start of the third and final negotiated rulemaking session around gainful employment and the Department of Education just released its latest set of proposed language. There's only five significant changes between this version and the one released in November: (1) the repayment rate is gone, (2) loan levels for debt-to-earnings calculations can be capped at tuition and fees, (3) programs cannot lose eligibility after one year for a high program cohort default rate, (4) more clarity on how borrower relief would work, and (5) schools can reduce the loan debt of current and future students to avoid penalties. All except number 4 are things that negotiators from for-profit colleges had called for or things that would benefit them.

The end result is gainful employment language that's a bit stronger than the first iteration released in August because it has a provision addressing high rates of student non-completion. But the Department also clearly listened to some of the concerns raised by the negotiators representing for-profit colleges to make concessions on several issues that take some sizeable steps back from the second version. We will find out on Friday whether negotiators believe this represents enough give and take.

The items released also include a new data file that for the first time gives us public information on program-level cohort default rates and a new picture of potential effects of the gainful employment regulation. All told, 80 percent of programs would pass with no problems, according to estimates from the Department. Another 7 percent would be in the zone, while the remaining 13 percent would fail. This is not radically different from the initial estimate the Department released back in August, which had 79 percent of programs pass, 12 percent be in the zone, and 9 percent fail.

No More Repayment Rate

The most substantial change between this version of the regulatory text and the second one is the elimination of the loan portfolio repayment rate. This proposal would have held programs accountable if borrowers were not making enough payments on their federal loans to reduce the principal owed from the start to the end of the year. It's now gone in every form (a different calculation of a repayment rate remains as a disclosure). There's no explanation given for its absence in any of the materials provided so there's no way to know why it's gone. While this does simplify the rule, it's hard not to be a little disappointed that we didn't at least get the data to see what effect this provision would have had.

It's clear from this version that the Department listened to concerns raised by the negotiators representing for-profit colleges on several issues. We will find out on Friday how that goes over at the table.

Loan Debt Cap

Negotiators representing for-profit colleges had repeatedly asked for the Department to consider only students' debt for tuition and fees when calculating debt-to-earnings ratios. They argued for this cap due to concerns about students borrowing more than was necessary for living expenses. Though the Department did not take this idea in the second iteration of the language, it's adopted here. When calculating a debt-to-earnings ratio, programs would now be judged based upon the lesser of the loans taken out by students or the total amount of tuition and fees charged to them. The data released contain the cap on tuition and fees for 15 percent of student records, but we have no way of knowing which ones are capped or uncapped. This means there's no way to know what effect this has in terms of program passage rates. While this change protects against egregious cases of overborrowing (which is more likely to be cited anecdotally rather than proven), it also ignores the question entirely of whether debt incurred to cover non-tuition-and-fee expenses needed to complete should be included when thinking about cost versus return.

A More Lenient Program Cohort Default Rate

The last iteration of the program cohort default rate would have operated exactly the same as the institutional cohort default rate. That means a program would lose eligibility if it had a rate at or above above 30 percent for three straight years or one year at or above 40 percent. That single failure option is gone now. This change saves approximately 233 programs out of the 6,815 that have data and one-quarter of the 943 programs that have default rates at or above 30 percent. It also means that there's no longer a way for any program at any level of performance to lose eligibility for federal student aid faster than two years.

On the other hand, thanks to the data provided we now know about 14 percent of programs fail the program cohort default rate. By contrast, only 666 of the 11,050 programs with debt-to-earnings data fail that test. Interestingly, only 114 programs fail both of the measures combined, indicating that each indicator may actually judge programs on a different type of performance. The table below presents the interaction between the program cohort default rate and debt-to-earnings performance.

Programs that Fail the Program Cohort Default Rate, by Performance on Debt-to-Earnings Rate

More Clarity on Borrower Relief

The borrower relief provisions that were added to the last set of language caused some confusion about who would get assistance. This language is clearer--it would be available to anyone who was or is enrolled in the program when the institution is notified that it could lose eligibility in the next year. The language for the amount of borrower relief required also bears a closer resemblance to the English language. For programs failing the debt-to-earnings rate, it states that the relief total is the amount needed to bring the debt levels down to where they would be passing, multiplied by the number of students. The program cohort default rate relief amount is described as the amount of loans to not fail that test. But programs fail a cohort default rate based upon numbers of borrowers, so schools could presumably choose to pay off the loan amounts of the defaulted borrowers with the smallest balances until they got to a default rate below 30 percent. Programs that have to provide both forms of relief must give the larger of the two amounts. Finally, students receiving debt relief would be given assistance proportional to the amount they borrowed for their program.

Debt Reduction to Avoid Penalties

The language also adopts a debt reduction proposal from Marc Jerome of Monroe College. This allows a program that is about to lose eligibility to offer institutional grants to every currently enrolled or enrolling student that would bring their debt down to the point where they would pass a debt-to-earnings test. It can only be offered for the length of the program (e.g., only for one year for a one-year certificate). It is only available in the four-year transition period that ends in 2018. The Secretary has the authority to review and terminate the plan.

Odds and Ends

These are all more minor changes, but other alterations include:
  • The interest rate on the debt-to-earnings calculation is now based upon the lower of the current undergraduate interest rate or the lowest in the last six years. The prior version was the lowest in the last four years. And it still means graduate programs would be judged on undergraduate interest rates.
  • The Department will calculate rates for discontinued programs, which protects against shutting down programs to restart them with less accountability.
  • Institutions get 45 days to provide evidence to challenge rates instead of 30. This is something negotiators had requested.
  • Disclosure requirements about a program having proper licensure or certification needed to cover the state in which the program operates, as well as any other states within the same metropolitan area.
  • New programs have to provide more information from businesses or organizations that would hire graduates in their field. This includes estimates of starting salaries and earnings after three years from those groups, as well as signed statements that the curriculum of a program would give the student needed skills and knowledge to work in that field.