Gainful Employment Regulations Put on Hold

Despite a recent court decision, advocates say more is needed to protect students.

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A few weeks ago, we wrote about new regulations that were to take effect on July 1 to ensure career education programs were preparing their students for gainful employment.

But on June 30, a federal district judge vacated the regulation's debt-measure scheme, as well as portions of the regulation it ruled were "intertwined" with the scheme.

The result? Gainful employment is on hold.

We won't go into the long history of the gainful employment regulation, but will instead state simply that the Student Loan Ranger agrees with Kevin Carey in his New America Foundation blog and our friends at The Institute for College Access and Success: Congress and the Obama administration cannot back down from the gainful employment fight.

The regulation was designed to reveal programs that burden students with high levels of student debt, while providing relatively low-level credentials. It would weed out sub-par programs by setting standards for gainful employment and restricting or revoking students' eligibility to qualify for federal student aid for programs that failed the standards.

Career education programs at public, nonprofit, and for-profit colleges were subject to the regulation. And, while he ultimately struck down this iteration of the regulation, U.S. District Judge for the District of Columbia Rudolph Contreras upheld the Department's authority to regulate these programs in this way.

So why, then, did Judge Contreras vacate the regulation? To determine the worst-offending programs, the Department was to look at three different debt measures. A program would be unaffected if: its graduates' annual loan payments are less than 12 percent of their annual incomes; or its graduates' annual loan payments are less than 30 percent of their discretionary incomes; or more than 35 percent of its former students are successfully repaying their loans. Only if a program failed all three of these measures—and did so for three out of four consecutive years—would its eligibility be revoked.

The three-pronged test was very loose–as long as a program met one prong, it would be fine. Three prongs meant three opportunities to escape scrutiny.

But in the end, the court found that the Department did not provide an adequate rationale to support the final prong, the 35 percent repayment threshold. The entire scheme was struck down because the three measures work together (since a program would have to fail all three prongs). 

According to the Department, the 35 percent threshold was selected because it would weed out the bottom 25 percent, the worst performing programs. In practice, according to information collected by the Department, only 5 percent of programs were expected to fail the three-prong test. (Sadly, a little more than one third met all three prongs.)

These were all for-profit programs, which is not surprising, given that students at for-profit schools tend to borrow more in loans (accounting for only about 12 percent of higher education enrollment but about 25 percent of federal student aid) and have higher default rates (accounting for almost half of all student dollars in default).

[Find out how to prepare for student loan repayment.]

In fact, from the point of view many advocates (and your Student Loan Ranger), the 35 percent threshold was too low of a standard. That basically says that even though almost two thirds of its students may be drowning in debt they can't repay, a program would be considered successful. 

So, where do we go from here? The judge only found fault in the rationale behind choosing the specific 35 percent threshold; the importance of having a repayment rate measure remains. The need to regulate the gainful employment requirement and protect taxpayers and students also remains: Student debt levels continue to rise and 30 state attorneys general are jointly investigating industry practices at for-profits, according to Inside Higher Ed

In his ruling, Judge Contreras stated, "Concerned about inadequate programs and unscrupulous institutions, the Department has gone looking for rats in ratholes—as the statute empowers it to do."

As the Court found, "[t]he Department has set out to address a serious policy problem, regulating pursuant to a reasonable interpretation of its statutory authority."

The Student Loan Ranger hopes the Department continues to push forward. We're also hoping other sectors of education will follow its lead. (Lawyerist has, for example, highlighted the need for similar standards for law school.)

[Learn more about paying for law school.]

To learn more about student debt and options for relief, download our free education debt manual and register for a free student debt webinar. This Thursday, July 12 at 3 p.m. ET, we'll demystify Income-Based Repayment. And for more student loan news and tips, follow us on Facebook and Twitter (#studentdebthelp).

Radhika Singh Miller is a program manager for Educational Debt Relief and Outreach at Equal Justice Works. She has served on student loan committees in the Department of Education's negotiated rulemaking focusing on the College Cost Reduction and Access Act (CCRAA) and other debt relief initiatives. Radhika graduated from Loyola Law School Los Angeles. Prior to joining Equal Justice Works, she was a staff attorney at the Partnership for Civil Justice, focusing on constitutional and civil rights litigation and advocacy.