Gainful Employment for Thee, Not Me

The U.S. Department of Education released its latest draft of new gainful employment regulations on March 14. Gainful employment is the term used for the department’s standards for vocational programs at for-profit institutions and community colleges. Under the new rules, schools at which a large percentage of students fail to find jobs after graduation will become ineligible for federal funds.

The rules, however, would exclude most programs at four-year non-profit institutions. Only vocational programs leading to certificates at such schools are included. The paralegal and nutrition certificate programs of Meredith College (Raleigh, N.C.) are an example.

Using the latest Department of Education data, New America Foundation, a non-profit organization that focuses on public policy issues, calculated what the new regulations would mean for 7,934 for-profit and community college programs. If the regulations were applied today, they found that 5,969 of the programs measured would pass, 665 would be in the “zone” of concern, and 1,300 (16 percent) would fail. (See a more detailed breakdown here.)

The new standards are intended to root out bad programs that fail their students on at least one of two measures.

First, in order for a program to pass, its graduates must have an annual debt-to-earnings ratio at or below 8 percent or a discretionary rate at or below 20 percent. That means that a recent graduate making $35,000 per year must have student loan payments of less than either $233 per month or less than 20 percent of his or her government-calculated “discretionary” income.

Second, the school’s cohort default rate—which follows graduates and non-graduates for three years after entering repayment—must be below 30 percent. In other words, a program or school would lose eligibility for federal funds if its graduates’ average student debt exceeded a certain percent of their income or if 30 percent or more of its former students defaulted on their student loans within three years.

The consequence of failure to meet those standards is the loss of federal Title IV funding, which includes student loans, Pell grants, and work study programs. However, this occurs only after the school or program has failed on a measure for at least two years or has been in the “zone” (that is, close to failing) on the debt-to-income measure for four consecutive years. (The full text of the regulation is available here.)

These standards seem reasonable. The thresholds are generous, consequences only kick in after several years of failure, and programs that do become ineligible for federal funds can re-enter Title IV with a clean slate after three years. Therefore, most programs offering beneficial education and training will survive. Those that are simply skimming federal money from credulous students will not.

So why not apply the standards to everyone?

The short answer is that policymakers were specifically concerned about vocational programs and for-profit institutions. For years, members of Congress and education department rule-makers have pointed out that some for-profit institutions have very high drop-out rates, low academic standards, and engage in “deceptive marketing and recruiting practices.” Thus, the gainful employment regulations started out as a direct attack on those schools.

But because the rules stress vocational training, community colleges were included as well. The intent of the new rule is to “address growing concerns about educational programs that, as a condition of eligibility for title IV…funds, are required by statute to provide training that prepares students for gainful employment in a recognized occupation…but instead are leaving students with unaffordable levels of loan debt in relation to their earnings, or leading to default.”

Community colleges and for-profit schools, which often have open enrollment policies, are more likely to enroll (and even graduate) students who aren’t in a position to benefit from higher education and thus will not get good jobs. The new rules will give administrators strong motivation to root out programs that yield poor educational and job placement results.

If the rules make sense for community colleges and for-profit schools, then public and private four-year schools, although their focus is not mostly vocational, ought to be held to the same standards.

In many cases, four-year schools bill themselves as employment-plus programs; they claim to give students the skills to succeed in the job market and to participate in civic life. We should expect the graduates of four-year schools to be employable. Or, if they are more interested in personal growth than job prospects, to borrow well within their means (or not at all).

My own alma mater, North Carolina State University, was founded to meet the needs of the people of North Carolina for a “liberal and practical education in the several pursuits and professions in life” (emphasis mine). Gainful employment is explicitly part of its mission.

Here in North Carolina, two four-year non-profit schools would run afoul of gainful employment regulations if they were applied across the board. The National Student Loan Data System shows that Livingstone College, an HBCU in Salisbury, had a cohort default rate of 32.4 in 2010. Saint Augustine’s College, an HBCU in Raleigh, had a default rate of 30.6. Both schools would fail the default rate standard.

It’s difficult to know whether any North Carolina universities would fail based on debt-to-income ratios because reliable income data are not publicly available. And for many North Carolina schools, information on average debt is not published. Among schools that do provide it, students at two schools have debt that’s well above the national average. At Chowan University, average debt is $38,932. At Mid-Atlantic Christian, it’s $37,108. Nationally, average debt is $29,000.

It’s questionable whether such schools should continue to receive federal funding. Making them liable to gainful employment regulations would be a useful signal for students: buyer beware! All colleges and universities should graduate students who are ready to enter the workforce. There is no good reason why four-year schools shouldn’t have to prove that they do so in order to receive federal funding.

Ever since the passage of the Higher Education Act in 1965, federal funding has been steadily ratcheting up—more money for more students to go to a huge array of schools. These rules are a long-overdue ratcheting down. Even if they only apply to a small section of colleges now, they make it easier to follow the same logic in the future.

Title IV Ineligibility