What Do “Gainful Employment” Regulations Accomplish?

Funding-eligibility tests can do real good if used universally, not selectively.

The Biden administration will soon implement a set of regulations that are commonly known as “Gainful Employment.” These regulations would restrict some college programs’ eligibility to participate in federal financial-aid programs like Pell grants and student loans.

The Higher Education Act, originally passed in 1965 and amended many times over the years, includes a provision that requires “vocational” programs to prepare students for “gainful employment.” The law defines vocational programs as any program at a for-profit college, as well as any non-degree program (e.g., certificate programs) at public and private non-profit colleges.

As a matter of logic, this definition fails miserably. Under it, a master’s in business administration from the Wharton School is not considered vocational, but a master’s degree in social work from a for-profit college is. Unfortunately, when you pit logic against the law, the law wins. Thus, we are stuck with this definition of vocational education until Congress remedies the flaw.

When you pit logic against the law, the law wins.But the law is silent on the definition of “gainful employment,” and, until 2010, no presidential administration had bothered to try to define it. That year, the Obama administration tried to do so in large part by utilizing student-loan repayment rates, the logic being that if a program succeeds in preparing its students for vocational success, then those students should be able to repay their loans. Programs where the repayment rate was too low would lose eligibility for federal financial aid.

However, the courts threw out the Obama regulations, and one of the reasons was that the repayment-rate threshold was chosen to ensure that an (arbitrarily) predetermined share of for-profit programs would fail.

In 2014, the Obama administration tried to define gainful employment again. This time, it passed muster with the courts. The new version used two debt-to-earnings tests, cutting off programs where students had excessive debt relative to their earnings. For example, if a program’s typical student earned $40,000 after graduating, then any loan payment greater than 12 percent of this income (e.g., a monthly payment of more than $400) would result in that program losing eligibility for student loans or the use of Pell grants in the future.

However, the first gainful-employment data were released just days before the Trump administration took office. That administration stopped enforcing the regulations and eventually rescinded them, due largely to the illogic inherent in relying on the law’s definition of “vocational,” as well as because of the resulting selective targeting (more on that shortly).

The Biden administration is now attempting to define gainful employment for the third time. I’ll refer to these iterations as GE1, GE2, and GE3.

While the final regulations have not been issued yet, the draft regulations will use two categories of tests. The first would resurrect the debt-to-earnings tests from GE2. (There are two of these tests. One asks whether debt payments account for more than 8 percent of income, and the other asks whether debt payments account for more than 20 percent of discretionary income, defined as income above 150 percent of the poverty line). The second test is an earnings floor—graduates must earn more than someone with a high-school diploma.

Gainful-employment regulations attempt to apply accountability at the level of the university program.Conservatives should have a love/hate relationship with gainful employment. In its various iterations, it has made several notable contributions in the area of accountability.

For instance, prior to GE, what little accountability there was in higher education was conducted at the level of the institution (e.g., the University of North Carolina-Chapel Hill). GE has instead tried to apply accountability at the level of the program (e.g., the bachelor’s degree program in accounting at the University of North Carolina-Chapel Hill). This is a huge step forward, for two reasons.

First, it ensures we don’t throw the baby out with the bathwater by punishing good programs at bad schools, while also ensuring that bad programs at good schools can’t escape accountability. For example, a theater program at Harvard failed GE2, and the school responded by closing the program.

Second, because institutional accountability was essentially a death sentence for the entire college, it was hardly ever enforced, whereas program-level accountability does not pose an existential threat to the entire institution, thus allowing for tougher enforcement.

In addition, the various versions of GE have introduced much better accountability metrics. Before GE, essentially the only accountability metric in higher education was the Cohort Default Rate, the percentage of borrowers at a college who defaulted on their loans. While default rates are not an inherently invalid accountability metric, in practice they were not effective. In addition to being extremely lenient (a college would only fail if at least 30 percent of borrowers defaulted), the rise of income-driven repayment plans (where the monthly amount due is based on income, not how much you borrowed) rendered default rates obsolete. Borrowers could make $0 “payments” under these plans and still not be in default.

In contrast, GE has introduced a series of accountability metrics—repayment rate (GE1), debt-to-earnings tests (GE2), and earnings floors (GE3)—as well as relatively tough thresholds that constitute a dramatic step forward in higher-education accountability. If and when these metrics are implemented, they will benefit students by providing them with better information, as well as taxpayers by eliminating subsidies for low-value programs. For example, while no program was officially punished by GE2 (programs needed to fail for several years before being sanctioned, and GE2 was only in effect for one year), colleges voluntarily closed many programs that performed poorly on the GE2 tests.

Gainful-employment regulations allow progressives to selectively punish for-profit colleges.But gainful employment also has a darker side. In particular, it is clear that progressives are not implementing gainful employment as part of a broader push for accountability but, rather, because it allows them to selectively punish for-profit colleges, whose existence they find intolerable.

This is clear for several reasons. First, early GE efforts tried to apply accountability to for-profits alone. Progressives relented on including non-degree programs at public and private non-profits only because the language in the Higher Education Act makes it very difficult to treat the two differently.

Second, GE1 had an explicit goal of shutting down a large share of the for-profit college sector. It was thrown out by the courts in part for precisely this reason. GE2 accomplished much the same thing but without making it a declared goal of the program. GE3 will presumably avoid this legal landmine, as well.

Third, GE tests and metrics keep being manipulated to provide get-out-of-jail-free cards to favored constituencies. For example, GE2 included the annual earnings rate (AER), a debt-to-earnings test that assessed whether debt payments exceeded 8 percent of income. There is a lot of support in the literature and among private financial companies for this metric and threshold. Yet, as previously mentioned, GE2 also included a second test, the discretionary income rate (DIR), which assesses whether debt payments exceed 20 percent of discretionary income (income above 150 percent of the poverty line).

There is not much convincing support for this metric or threshold. Even the article cited by the government as providing the justification states, “There is weak theoretical rationale for this type of calculation. Any attempt to draw a line between discretionary and nondiscretionary expenditures is fraught with difficulty.”

So why supplement the AER with the DIR? Because it helps protect graduate programs (many of which fail AER but pass DIR), which are favored by progressives, in part because they’re often cash cows for top-tier universities, a core progressive interest group.

Another get-out-of-jail-free card tries to protect community colleges. When calculating debt payments in GE3, the total amount of debt is pretty much the only valid choice. But the Biden administration wants to use the lesser of total debt or a net adjusted price figure: the amount for tuition, books, and supplies less institutional (i.e., college-funded) grant aid.

Selective accountability is not accountability. It is persecution.That helps community colleges, which tend to have low tuition, meaning that while many community-college programs might fail using the actual amount of debt their students accumulate, they will pass because much of that debt is ignored. This artificial lowering of debt will help community colleges pass the gainful-employment test, but it won’t help the students, who are still responsible for making payments on their total debt, not the artificially lowered debt.

It is clear to anyone following gainful employment that progressives are using it, as much as possible, to selectively target for-profit colleges. To them, non-degree programs at public and private non-profit colleges should be provided get-out-of-jail-free cards when possible, with the remainder of programs simply being collateral damage.

But selective accountability is not accountability, it is persecution. The irony is that the general approaches used in gainful employment (repayment rates, debt-to-earnings tests, earnings floors) are good approaches to take. They just shouldn’t be applied selectively. Real accountability in higher education should take the gainful-employment metrics and apply them universally.

Andrew Gillen is a senior policy analyst at the Texas Public Policy Foundation.