Monday, July 26, 2010

A more detailed analysis of ED's proposed gainful employment rules

Now that I've had a chance to actually peruse (note I didn't say "read," since they are 93 pages long) the Education Department's proposed "gainful employment rules" for proprietary colleges, which were just published in the Federal Register today, I feel a little more qualified to comment on them.  Pay attention, folks:  comments are due to ED by September 9.

A few interesting observations about the proposed rules:
  1. Rather than basing eligibility for participation in the federal Title IV (student financial aid) programs solely on loan default rates, as do the current regs, the new rules use a two-part test: loan repayment rates and earnings-to-student loan repayment ratios.  Thus, institutions with programs that prepare students for gainful employment (i.e., vocationally-oriented programs) would have to demonstrate that students were both making enough money to pay back their loans, and were actually paying them back at acceptable rates.  No jokes please about programs that do not prepare people for gainful employment, i.e., most bachelor's degree programs.

  2. The application of the default and earnings-to-repayment ratios would result in institutions falling into three categories:
    -- Fully eligible to participate in Title IV
    -- Ineligible to participate in Title IV
    -- Partially eligible, but would have to curtail their growth and provide certain information to consumers about the risks of excessive borrowing
    The ED estimates that 5 percent of proprietary institutions would fall into the ineligible category, and 55 percent would become partially eligible.

  3. The new rules apply not just to proprietary (for-profit) colleges, as much of the press has focused on.  They apply to any higher education institution that offers gainful employment programs.  The ED estimates that the new regulations will affect the following number of institutions:
    -- For-profit: 22.7%, or 474 institutions
    -- Private, not-for-profit: 15%, 36 institutions
    -- Public: 11.8%, 252 institutions
    Note that the percentages are based only on the number of institutions in each sector that offer gainful employment programs.  Harvard, for example, would not be included in the denominator of the private, not-for-profit category.

  4. The Dept. of Education obviously has good data on default rates on federal student loans, from the National Student Loan Data System.  But the mystery was where it was going to get the data to calculate the earnings-to-repayment ratios.  Would it rely on the institutions to survey their graduates?  Would it survey graduates?  Or perhaps rely on a third party?  Well, the answer is found on page 43623 of the Federal Register:

    "The Department would calculate the average annual earnings by using most currently available actual, average annual earnings, obtained from the Social Security Administration (SSA) or another Federal agency,. . ."
    So the Department will most likely use Social Security Numbers to match student loan repayment amounts with individual's earnings, as recorded in the Social Security system.
Not surprisingly, the proprietary sector has come out guns ablazing against the regs, issuing a press release on the night they were announced titled, "Career College Association Rejects Metrics-Based Approach to Gainful Employment," calling the new rules "unwise, unnecessary, unproven and is likely to harm students, employers, institutions and taxpayers."  They're clearly not going to go down without a huge fight on this one.  We'll have to wait to see if they'll have any assistance from the other sectors, who obviously will not be as threatened by the regs as will the for-profit schools.  Bloomberg reported today that its index of 12 stocks of publicly-traded universities is down 2.1 percent, with DeVry leading the pack down 5.7 percent as of 3:00pm today.

It is too early to tell whether the regulations will survive largely in the form ED has proposed them.  One sign that they likely will is that Congress has grabbed onto this issue and doesn't appear ready to let go.  So some form of tighter rules will likely occur, and how much teeth they have will be determined in large part by the lobbying (and political donation) strength of the for-profit sector.

Stay tuned.

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