On July 26, 2010, the Department of Education published in the Federal Register a Notice of Proposed Rulemaking (NPRM) on Gainful Employment. On July 22, 2010, the Department issued a press release indicating that the Department will be defining in the NPRM whether a program successfully prepares students for gainful employment using a two-part test. The Department estimates that around 5 percent of all programs subject to the rule (i.e., all for-profit schools, with the exception of certain qualified liberal arts programs; all postsecondary vocational institutions; and any nondegree programs that are not less than one-year in length provided by institutions of higher education must prepare students for gainful employment in a recognized occupation) would no longer be eligible programs for Title IV purposes beginning 2012-2013 should the proposed rule become final. The Department also estimates that 55 percent of all programs would be required to warn their students about high debt-to-earnings ratios.
Comments are due September 9, 2010 and will go into effect on July 1, 2011 assuming the final regulations are published by November 1, 2010.
Secretary of Education Arne Duncan stated in the press release: “While career colleges play a vital role in training our workforce to be globally competitive, some of them are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use. These schools- and their investors-benefit from billions of dollars in subsidies from taxpayers, and in return, taxpayers have a right to know that these programs are providing solid preparation for a job. The rules we’ve proposed today will help ensure that career college and training programs use federal student aid to prepare students for success.”
The proposed gainful employment rules are complex and require careful analysis. The following is intended as an overview and general description of the proposed rules and not intended to provide a legal analysis of the rules or advice on their application.
The proposed definition of gainful employment would require an assessment as to whether the program provides training that leads to gainful employment by applying two tests: one test based upon debt-to-income ratios and the other test based upon loan repayment rates. The debt-to-income ratio has two separate components: a debt-to-earnings ratio and a debt-to-discretionary income ratio. The proposed rules would take into consideration whether former students, whether graduates or withdrawals, are repaying their federal student loans. The proposed rules would also examine the relationship between total student loan debt and average earnings for an institution’s graduates after attending a postsecondary education program.
Based on these two tests, the program may be eligible, have restricted eligibility, or be ineligible:
“Fully eligible program” would (1) need to have at least a 45% of their former students paying down the principal on their federal loans (as calculated under the regulations) OR (2) their graduates would need to have a debt-to-earnings ratio of 20% or less of discretionary income OR 8% or less of average annual earnings. Unless it passes both these tests, the program would have to disclose their loan repayment rates and debt-to-earnings ratios to current and prospective students and warn them that they may have difficulty repaying loans obtained for attending the program.
“Ineligible program” would (1) have less than 35% of their former students paying down the principal of their federal loans (as calculated under the regulations) AND (2) their graduates would have a debt-to-earnings ratio above 30% of discretionary income AND 12% of average annual earnings. An ineligible program may not offer student aid to new students and can provide Title IV aid for the remainder of the current award year plus one additional award year to current students, provided that it warns them about the high debt-to-earnings ratio.
“Restricted program” is a program that is not fully eligible or ineligible. Restricted programs are subject to limits on enrollment growth, must demonstrate employer support for the program, must warn prospective and current students that they may have difficulty repaying their loans, and must disclose their loan repayment rates and debt-to-income ratios.
The debt-to-income ratio is intended to provide a measure of program completers’ ability to repay their loans. The use of discretionary income is intended to recognize that borrowers with higher incomes can afford to use a larger share of their income for loan repayments, while the use of annual income is intended to address programs whose borrowers have lower earnings. The loan repayment rate is intended as a measure of whether program enrollees are repaying their loans, regardless of whether they completed the program.
There will also be a transition period:
During which the Department would limit the number of programs declared ineligible to the lowest-performing programs producing no more than 5% of completers during the prior award year (using a procedure outlined in the regulation); and
Additional programs and programs that fail to meet the debt thresholds but fall outside the 5% cap would be subject to the same rule as programs on a restricted eligibility status.
The following is a general section-by-section description of the proposed rule.
a. Gainful employment:
1. Debt Thresholds: The proposed regulation states that a program is considered to provide training that leads to gainful employment in a recognized occupation if:
The annual loan repayment rate is at least 35%;
Using the three-year period (3YP), the program’s annual loan repayment rate is 30% or less of discretionary income OR 12% or less of average annual earnings; OR
Using the prior three-year period (P3YP), the program’s annual loan payment is less than 20% of discretionary income or less than 8% of average annual earnings. (Note: As discussed below, the Department places limits on the ability of an institution to use P3YP data.)
2. Restricted status: The following conditions would place the program on restricted status unless it is already ineligible under the regulation:
The program has an annual loan repayment rate of less than 45%; AND
The program has an annual loan payment that is more than 20% of discretionary income AND more than 8% of average annual income using 3YP, and if applicable P3YP.
3. General: Definitions are provided that include:
A program is any educational program offered by the institution under §668.8(c)(3) or (d) (i.e., nondegree program of at least one academic year in length offered by an institution of higher education or a program offered by a proprietary institution of higher education or a postsecondary vocational institution);
A Federal fiscal year (FFY) is the 12-month period from 10/1 to 9/30;
A three-year period (3YP) is the period covering the three most recently completed award years prior to the earnings year;
A prior three-year period (P3YP) is the period covering the fourth, fifth, and sixth most recently completed award years prior to the earnings year (i.e., the three preceding the 3 YP);
Earnings Year is the most recent calendar year for which earnings data are available;
Discretionary income is the difference between the average annual earnings and 150% of the most current Poverty Guidelines for a single person in the continental U.S. [Note: The poverty guideline for 2009 was $10,830.];
The Classification of Instructional Programs (CIP) is a taxonomy of programs developed by NCES
b. Loan Repayment Rate (Rate based on dollars repaid rather than percentage of students repaying loans):
OOPB of LPF plus OOPB of RPL
OOPB of all loans for students attending the program
1. Original Outstanding Principal Balance (OOPB) is the amount of the outstanding balance on FFEL or Direct Loans owed by students who attended the program including capitalized interest on the date those loans entered repayment. The OOPB of all loans includes the FFEL and Direct Loans that entered repayment for the prior four fiscal years;
2. Loans Paid in Full (LPF) are loans to students who attended program that have been paid in full. However, a loan paid off in consolidation is not counted as paid in full until the consolidation loan is paid in full. The OOPB of LPF in the numerator of the ratio is the total amount of OOPB for these loans;
3. Reduced Principal Loan (RPL) represents a loan where payments made by a borrower during the most recently completed Federal FY reduced the outstanding principal balance of that loan from the beginning of that Federal FY. Loans for borrowers whose payments for the Federal FY qualified for the Public Service Loan Forgiveness program are included. The OOPB of the RPL in the numerator of the ratio is the total amount of OOPB for these loans;
NOTE: The Department indicated in commentary to the NPRM that loans would not be counted in the LPF or RPL as being repaid if borrowers are not actively repaying their loans, such as those in deferment or forbearance.
4. Exclusions: The following are excluded from the numerator and denominator:
The OOPB Of borrowers on an in-school deferment or a military-related deferment status; and
The OOPB of borrowers entering repayment after March 31 of the most recent federal FY.
c. Debt Measures: The Secretary determines annually for each program whether the annual loan payment is less than the discretionary income and earnings threshold according to the following formulas:
Annual loan payment < Discretionary threshold * (Average Annual Earnings – (1.5 * Poverty Guideline).
Annual loan payment < Earnings threshold * Average Annual Earnings.
2. Annual loan payment: The Secretary determines the median loan debt of students who completed the program at the institution during the 3YP and uses this amount to calculate an annual loan repayment based on a 10-year payment schedule and the current annual interest rate on Federal Direct Unsubsidized Loans. If data are available, the Secretary will also calculate the median loan debt of students who completed the program during the P3YP.
In general, loan debt includes Title IV loans other than Parent PLUS loans and any private educational loans or debt obligations arising from institutional financing plans. Loan debt does not include any debt obligations arising from student attendance at prior or subsequent institutions unless the institutions are under common ownership or control or are otherwise related entities.
3. Average annual earnings: The Secretary obtains from the Social Security Administration or another Federal agency the most currently available actual, average annual earnings of the students who completed the program during the 3YP. (P3YP data are used if the institution can show that the students completing the program experience a significant increase in earnings after an initial employment.) The institution provides the Secretary the information needed to calculate the annual debt measures, including the CIP code, and for each student who completed the program, the completion date, the amount received from private educational loans, and the amount of debt incurred from intuitional financing plans.
d. Debt warning disclosure: On or after July 1, 2012, unless the program has a loan repayment rate of at least 45% AND an annual loan repayment rate that is less than 20% of discretionary income or 8% of average annual income, the Secretary notifies the institution that it must (1) include a prominent warning in its promotional, enrollment, registration, and in all other materials and disclose to current and prospective students on its Web site, and in all admissions meetings with prospective students, that they may have difficulty repaying loans obtained for attending the program and (2) disclose the most recent loan repayment rate and most recent debt measures.
e. Restricted programs: If an institution’s program(s) is placed on restricted status, it must annually provide to the Secretary employer affirmations (described further below)and make the debt warning disclosures to current and prospective students (described above).
The Secretary will limit the enrollment of Title IV recipients in that program to the average number enrolled during the prior three award years.
f. Ineligible programs: Except for the transition year, on or after July 1, 2012, a program becomes ineligible if it does not meet at least one of the debt thresholds in paragraph (a)(1). (See above for a description of those thresholds).
If the Secretary notifies the institution that the program is ineligible, the institution may:
Not disburse Title IV funds to students beginning the program after the date specified by the Secretary; and
Disburse Title IV funds to students attending the program before it became ineligible for the remainder of the award year and the following award year following the date of notice.
The award year beginning July 1, 2012 is a transition year (2012-2013) and the Secretary would have a cap of 5 percent on the number of programs that would lose eligibility in 2012 as measured by the number of students completing those programs in a category based on credential (i.e., certificate, associate degree, BA degree, and graduate degree). The courses would be ranked within each category by loan repayment rate, from lowest to highest rate). From each category, beginning with the ineligible program with the lowest loan repayment rate, the Department would then identify the programs that account for a combined number of students that completed the programs in the most recently completed award year that do not exceed 5% of the total number of students who completed programs in that category.
For each ineligible program that falls within the 5% grouping by category during the transition period, the Secretary will notify the institution that the program is ineligible; and
For every other ineligible program, the Secretary will notify the institution that it must limit its enrollment of Title IV recipients in that program to the average number of Title IV recipients enrolled during the prior three years; it must provide the employer affirmations (described earlier in this summary); and it must provide debt warning disclosures (also described earlier in this summary).
g. Additional programs: Before an institution offers an additional program that is subject to the gainful employment requirements, the Secretary must approve the program. The institution must provide:
If the additional program constitutes a substantive change according to accreditation standards, documentation of the accrediting agency approval must be provided;
Projected student enrollment for the next five years for each location where the program will be offered;
Documentation from employers not affiliated with the institution affirming that the curriculum of the additional program aligns with recognized occupations at those employers’ businesses, and that there are projected vacancies or expected demand for those occupations at those businesses (the number and locations of the businesses for which affirmation is required must be commensurate with the anticipated size of the program); and
If the additional program constitutes a substantive change based solely on program content, the Secretary would calculate the loan repayment rate and debt measures for that program as soon as data is available; otherwise, the Secretary would use data from the other programs in the same job family.
The Secretary may restrict the approval for an initial period based on the projected growth estimates provided by the institution and demonstrated ability of the institution.
If the additional program constitutes a substantive change, the Secretary would calculate the loan repayment rate and debt measures for that program as soon as data are available. If not available, the Secretary would calculate by using loan data from other programs currently or previously offered by the institution in the same job family as the additional program. Information about job families and SOC codes is available at: http://www.bls.gov/oes/current/oes_stru.htm, or http://online.onetcenter.org/find/family.
The NPRM proposes to add a provision under which the Department may provisionally certify an institution with one or more programs that are ineligible or subject to restricted status under the regulations.
The NPRM adds a provision that would state that in a termination action against a program that did not meet the gainful employment requirements, the hearing official would accept as accurate the average annual earnings calculated by another Federal agency so long as the other Federal agency provided that calculation for the list of program completers identified by the institution and accepted by the Department. The hearing official may accept evidence from an institution about earnings from its graduates to establish a different amount for the average annual earnings of the program graduates if the information is reliable.
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