Rule ties debt-to-earnings ratio to student aid.

April 14, 2014

This post originally appeared on the Workforce Data Quality Campaign (WDQC) website. Click here to learn more about the WDQC.

The proposed rule released today by the U.S. Department of Education (DoED) sets two types of metrics to determine the eligibility of career-oriented postsecondary programs for federal student aid: ratio of debt-to-earnings and cohort default rate.

These metrics are designed to make sure that students are not using Title IV federal student aid, like Pell Grants and loans, to enroll in programs that result in more debt than they will realistically be able to pay back.

The regulation only applies to postsecondary programs that “lead to gainful employment in a recognized occupation,” which includes most programs at for-profit institutions and some certificate programs at public and non-profit institutions.

The rule notes that about 4 million students receiving Title IV aid were enrolled in gainful employment programs in 2010. These students received approximately $9.7 billion in grants and approximately $26 billion in loans.

The Obama Administration characterizes the rule as targeting the programs with the worst outcomes for students.

“Of the title IV students who are in the lowest-performing programs, 98 percent of them are in programs at for-profit institutions,” according to a DoED press release. “While many students attended these programs hoping to improve their future, many will find themselves worse off than when they started.”

This is the Administration’s second try at the gainful employment rule. A final rule was released in June 2011 after more than two years of negotiations. About a year later, a U.S. District Court overturned most of the rule in June when it ruled on a legal challenge from the Association of Private Sector Colleges and Universities. The court said that a previous eligibility metric, loan repayment rate, was too arbitrary.

In today’s proposed rule, the loan repayment metric is replaced with the cohort default rate. Both metrics attempt to capture how well students are able to repay their loans, but the cohort default rate is somewhat more permissive. Some students may not be in default, but that doesn’t mean they are actually paying back their debt.

The new rule also changes the measurement of the debt-to-earnings ratio. Under the previous version of the rule, the ratio was calculated for all students in gainful employment programs. Now it applies only to students getting Title IV aid.

The change is a response to another court decision. About a year ago, the court stated that the rule’s requirement that gainful employment programs report information on all their students violated a prohibition against a national student unit record system put into the Higher Education Act in 2008.

DoED had been using the reported information to calculate programs’ average earnings by matching their student records with tax data held by the Social Security Administration. Without collecting student records, DoED would be unable to determine post-graduation earnings, effectively voiding the debt-to-earnings metric.

Under the new rule, DoED would conduct the data match using records on Title IV recipients that it already collects to administer student loans. This system, called the National Student Loan Data System, is exempt from the student unit record prohibition.

WDQC supports transparency of post-graduation earnings for all postsecondary programs, so we are pleased to see that DoED will be calculating average earnings under the new rule.

However, looking at only Title IV students could be problematic, especially for programs at community colleges. Only about one-fourth of community college students get federal aid, as compared to about 90 percent at for-profit schools, and there is little evidence about whether earnings differ for students who do or do not receive federal aid.

Another notable change from the previous rule is that the debt-to-earnings ratios no longer have a pass/fail threshold. Instead, there is a three-tiered system.

Separate from the aid eligibility metrics, the proposed rule requires gainful employment programs to disclose several pieces of information in order to enhance transparency. These disclosure requirements include data on post-program earnings, for both program completers and those who withdrew from the programs.

Unlike job training programs administered by the U.S. Department of Labor, gainful employment programs are not all required to disclose the percent of recent program completers who are employed. The rule requires programs to disclose the percent of former students placed in employment related to their training, but only if the school is already required to calculate such a rate by its state or accrediting agency.

The public has 60 days to comment on the proposed rule. DoED plans to review the public feedback and finalize the rule in the coming months. WDQC will provide updates and analysis as the proposed rule moves forward.