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Going Ahead With Gainful Employment

April 21, 2010

WASHINGTON -- A long recession and a wavering job market have brought for-profit higher education institutions into the public eye as never before. Big advertising budgets have given them name recognition. Dramatic enrollment growth (fueled by increasing amounts of federal financial aid) and assurances to students that a degree or certificate is the path to a comfortable job in a specific field have brought them scrutiny.

Many newspapers, websites and TV networks have told the tale of programs at for-profit institutions that don’t prepare students for the jobs they’ve been all but promised -- and plunge them into debt in the process. While the anecdotes are often true, they’re only part of the story; some for-profit colleges (the institutions themselves prefer the term "private sector" or "market funded") do prepare students for good jobs and don’t sink them in an overwhelming pool of post-graduation debt.

Title IV of the Higher Education Act of 1965 requires all for-profit offerings other than those clearly designated as “liberal arts,” and non-degree vocational programs at nonprofit institutions, to show that they prepare students for “gainful employment in a recognized occupation.” If they don’t, they’re not supposed to be eligible for federal financial aid dollars.

No one, the U.S. Department of Education has contended, seems to have a satisfactory way of determining which programs meet that standard. “It’s illuminating for us that when we ask institutions how they’re complying with this current law, we have not received adequate answers," says Bob Shireman, deputy undersecretary of education. “And this is the law.”

Through a process of negotiated rule making that began last year after passage of the Higher Education Opportunity Act in 2008, the department has sought to develop a formulaic solution to the dilemma, in the form of regulations that define “gainful employment” using data on incomes and debt loads, as well as completion, job placement and loan repayment rates.

In essence, this is a crude mechanism to assess the quality and value of vocational programs. The “good” programs that help students get jobs without saddling them with debt could continue to exist and deliver Pell Grants and subsidized loans to their students. The “bad” programs -- the ones found to lead graduates to jobs they could’ve gotten without the educational experience or that don’t pay well enough for borrowers to repay their loans -- would be identified and put under closer scrutiny.

Representatives of the for-profit sector have aggressively fought such an approach, but most analyses so far suggest that the proposed regulations are unlikely to be a sector killer. The department has acknowledged the need for nonprofit and for-profit vocational programs, and has estimated that just 6 to 8 percent of programs that qualify for Title IV under gainful employment would potentially need to change under the proposed rules.

In research that’s been circulated but not yet publicly released, the Career College Association, the trade group that represents for-profit colleges and universities, has less-conservatively estimated that close to 20 percent of career college programs and a third of the colleges' students would be affected. In what the department would consider a positive outcome, some of the “bad” programs would shut down, while others would lower prices or work to improve their completion and job placement rates.

Though some observers have suggested that rewriting federal financial aid policy would be a better way to address these problems, the Obama administration’s Education Department is seizing on the opportunity it has now, with Democratic majorities in both houses of Congress, to effect change. The revision of the gainful employment rules could be a once-in-an-administration (if not once-in-a-career) chance for Shireman -- who has advocated for reform and increased protections for borrowers since serving in the Clinton White House -- and his staff to tackle what they consider to be a major source of student debt.

Shireman himself does not put it that way. "We have to do everything we can in the regulatory process, as well as in the legislative process, to protect taxpayers and students,” he says. “We have these regulatory opportunities so we have to take them.”

He does acknowledge that he is unwilling to wait for the next renewal of the Higher Education Act, in 2013, when lawmakers would be most likely to make major changes in the law. “We’re not going to wait for a reauthorization to ensure that federal funds are being used appropriately."

The department sent a version of the regulations to the White House Office of Management and Budget this month, and, though it’s still being revised, a final draft will be published by mid-June. Over the summer, there will be one last chance for public input and, by Nov. 1, the regulations will be printed in the Federal Register, to go into effect on July 1, 2011.

Defining Gainful Employment

The Education Department was slow to formulate a proposed definition of gainful employment. In November and December, during the first two week-long rule making sessions, the discussion among negotiators focused on whether the department had the statutory authority to establish a formulaic definition of gainful employment.

Many negotiators saw the department’s suggestions -- particularly one that sought to determine the value a credential would add to a recent graduate’s earning power, and to use that to determine an acceptable maximum tuition -- as price controls. The most vocal opponent was the lone negotiator representing for-profit institutions, Elaine Neely, senior vice president of regulatory affairs at Kaplan Higher Education. In December, Neely said she was “flabbergasted that [the department] would impose price controls when clearly Congress itself has not been able to come to the decision to do that on higher education.” By warning of a “slippery slope” toward price controls throughout higher education, Neely was able to get many representatives of nonprofit institutions on board in opposition to the proposal.

An idea that took up much less of the panel’s time was the department’s proposal to determine whether the starting salary in the field for which a program prepared students was sufficient to pay the average annual debt obligation of the program’s graduates. If the average debt load for a program’s graduates was $9,000 on a 10-year loan with a 6.5 percent interest rate, students would have loan obligations of $1,250. With a debt-service-to-income ratio of 5 percent, the starting income in that field would have to be at least $25,000 to be considered “gainful employment.”

By mid-January, as the department and negotiators prepared for the third and final round of rule making, this debt-service ratio had become the department’s preferred regulatory path. Based on a partial reading of a 2006 paper by Sandy Baum, of the College Board, and Saul Schwartz, of Ontario’s Carleton University, the department’s ratio became 8 percent. (While Baum and Schwartz’s paper discusses 8 percent as a generally accepted standard, most likely derived from mortgage underwriting standards, the authors suggest that a ratio as high as 18 percent could be appropriate for single people earning $150,000 annually.)

Under the proposal made in January, which remains the only complete definition made public by the department, vocational programs would be eligible for Title IV funds if their graduates' median annual payments on a 10-year loan were no more than 8 percent of the Bureau of Labor Statistics’ 25th percentile of annual earnings for people in occupations for which a given program prepared students.

Programs that exceed 8 percent could still be eligible for Title IV funds by producing what the department considers good outcomes: by showing that its graduates’ annual earnings are higher than the BLS’s 25th percentile and keep the debt-income ratio below 8 percent; by documenting that students have at least a 75 percent repayment rate on federal loans; or by demonstrating a program completion rate of at least 70 percent and an in-field employment rate of at least 70 percent.

In the third round of negotiations, debate was contentious and without resolution. Terry W. Hartle, senior vice president for government and public affairs at the American Council on Education, said he worried about cost, privacy and the potential for “unintended consequences.” A former Bush administration Education Department official, Todd Jones, president and general counsel of the Association of Independent Colleges and Universities of Ohio, said he saw the proposal as ripe for lawsuits.

Department officials were unwilling to reconsider the approach entirely, though they were open to constructive feedback. “We put things on the table partly because we think they’re a good idea and partly to get input,” Shireman says.

The department started with its most extreme -- but politically viable idea -- and was ready to negotiate, but many negotiators seemed too intent on persuading officials to obliterate the proposals to make good, constructive suggestions.

And, since the third round of negotiations ended in late January, the department has continued to discuss the proposals with stakeholders and to get feedback. “We recognize that some people felt – even we felt – that there was not enough discussion at negotiated rule making for whatever reasons,” Shireman says. “So we continue to hear from associations and institutions, getting input from them that continues to be helpful, to continue to hear what suggestions they have about what the term gainful employment should mean.”

Who Would Be Hit

In broad terms, the Department of Education’s goal is to determine which programs really are preparing students for gainful employment and not sinking graduates into chasms of debt.

“There’s a tremendous number of students graduating with incredibly high levels of debt,” says Rich Williams, higher education associate at the U.S. Public Interest Research Group, who represented students on the negotiated rule making panel. “And in some cases they’re unable to enter the fields they studied at the levels they thought they’d be qualified for.”

Pauline Abernathy, vice president of the Institute for College Access and Success, anticipates the regulations “will lead to programs that are currently leaving students in terrible debt either having to change the quality of their programs or their cost structure.” Before Shireman joined the Obama administration, he was TICAS’s president.

But it’s unclear whether the department’s proposed rules would really weed out those programs and would do so in a way that kept all good programs up and running. “I don’t think you can draw a line that separates the wheat from the chaff perfectly,” says Mark Kantrowitz, publisher of Finaid.org. “The choices are tough -- you either throw out the baby with the bathwater or, because you want to keep the baby no matter what, you’re going to get some bathwater too. I think that’s a reality that everyone needs to come to terms with.”

When applied to the existing landscape of vocational programs, the department's approach would seem to favor programs at public institutions over private ones (either for-profit or nonprofit), those that required fewer credits earned over more credits, and those in higher-paid fields like nursing and information technology over lower-paid careers in the arts.

Because the rules would apply only to certificate programs at community colleges, state universities and private, nonprofit institutions, they’re less likely to force any real change at nonprofits. Tuition on these programs at public institutions is so low that it’s relatively rare for students to take out loans. If they do, they’re likely to be small. Even at private nonprofits, where tuition is likely to be of a similar magnitude as at for-profit colleges, the fact that the rules apply only to non-degree programs will keep many programs out of regulatory reach.

Shireman and other department officials have insisted in many instances that the department is not "out to get" for-profit colleges and that it is not the department’s intention to regulate the sector out of existence. “We have made it quite clear that we are interested in improvement and outcomes all across the spectrum, all across the sectors,” he says.

Nonetheless, it seems clear that the gainful employment regulations will force the most change on for-profit institutions, which will have to choose between lowering tuition, improving student outcomes or shutting down programs that don’t align with the rules. In the short run, at least, all of these options would hurt the institutions’ bottom lines.

Even if some programs end, says Abernathy, of TICAS, “there will be plenty of other for-profit programs that will be very eager and capable of being able to meet that need, but that do so in a way where students and taxpayers are better off.”

For a field in which a for-profit institution offers multiple certificate and degree options, the ones that cost the least -- and often require the fewest credits -- are the ones least likely to be regulated out of existence. If an institution offered certificates, associate degrees and bachelor’s degrees in, for example, culinary arts, that all led to the same Labor Department-classified jobs and the same Bureau of Labor Statistics-reported 25th percentile of income, it’s logical that the 8 percent rule would make the preferred outcome a certificate and not a bachelor’s degree.

Kantrowitz, of Finaid.org, says that though the department’s existing proposals “really didn’t consider the impact on bachelor’s and graduate degrees,” he thinks the next draft of regulations will because the department hasn't shown any indication of wanting to discourage students from pursuing longer programs. “Take an associate’s degree versus a bachelor’s degree. Students are in school twice as long, paying twice the tuition, but they don’t have twice the income.”

Though programs would have the option of collecting their own salary data rather than relying on the BLS numbers, institutions often find it difficult to collect this information. As of now, observers say, few institutions have a comprehensive view of their graduates’ incomes.

Kantrowitz and others have suggested that the department use different labor data -- in his own calculations, Kantrowitz used federal Census data, which details age group and educational attainment but not field of employment -- but the ideal data set does not exist.

Apollo Group, which owns the University of Phoenix and other institutions, said in a March 30 earnings call that it has begun the process of analyzing its programs. But, “given the number and range of disciplines offered by our universities as well as the uncertainty regarding the implementation process of the draft proposal, our analysis is both extensive and complex.”

In mid-March, analysts at Morgan Stanley said they thought that Education Management Corp. (which runs the Art Institutes and Argosy University, among others) and ITT Educational Services would need to undergo the most widespread change to meet the regulations because of high tuition rates and, at Education Management, an enrollment that leans heavily toward low-paying arts fields.

Two companies that would have very few endangered programs, according to Morgan Stanley: American Public Education, Inc., which focuses on serving members of the military and public servants, who are less likely to take out student loans; and Capella Education Company, whose programs have very low loan default rates and would be able to qualify for Title IV funds under one of the alternative definitions of gainful employment.

Gregory W. Thom, Capella’s vice president of government affairs and general counsel, agrees that his company would probably have to make few changes to abide by the gainful employment regulation. “Capella is viewed by folks within the department as a high quality institution,” he says. “We have a degree of comfort that however this plays out, Capella would be fine and Capella would be in good shape.”

And yet, until the final regulations go into place and the institution can collect and calculate all the appropriate data, Capella can’t be sure that it’s out of the woods. “There are so many moving parts,” Thom says. “It’s premature to engage in speculation on how this is going to play out … at Capella on a program-by-program basis.”

A leader at another for-profit institution with low cohort default rates said he also thought his programs would meet at least one of the gainful employment rules, but still worried that they might not. Insufficient data and a still-unclear sense of the precise regulations the department will decide upon has left him feeling a bit uneasy about the outcomes.

The Feedback

At every hint that the Department of Education is backing down from proposed regulations that would force some programs offered at for-profit colleges to lower their prices, improve their outcomes or shut down, Wall Street analysts and the for-profit institutions breathe a sigh of relief.

When Secretary of Education Arne Duncan testified before the House of Representatives’ Education and Labor Committee on March 3, and was questioned on the gainful employment regulations, his comments that the department was "by no means wedded to any one direction" and "[didn’t] want to be overly heavy-handed” were perceived by for-profit boosters as signs that the department was open to scaling back the regulations.

Before and since, the Career College Association and lobbyists for for-profit institutions have pounded the halls of Congress trying to get members to put pressure on the department. Some members of the Congressional Black Caucus sent a letter to Duncan charging that the rules are discriminatory because for-profit institutions disproportionately serve minority students. A bipartisan group of 18 House members wrote to Duncan asking that he pull the plug on the department’s approach altogether.

Last week, when a report from Credit Suisse cited someone "close" to the Office of Management and Budget as saying that the department had seemingly decided to soften one of the alternative methods of qualifying for Title IV, higher education stocks soared as the rumor spread. The source told the bank that the option to demonstrate a program completion rate of at least 70 percent and an in-field employment rate of at least 70 percent had become a 50 percent completion rate and a 70 percent employment rate.

Though it is one of the possibilities the department is considering, the switch to a 50 percent completion rate is not final. Officials submitted a draft to the OMB to begin the process leading to the publication of rules and the public comment process, but are said to be continuing to analyze data and listen to feedback.

The for-profit institutions tout these small bits of news and others as indications that the department may be backing away from its tough-line approach, but it is unclear whether any perceived motion on the department’s part will actually materialize as dramatic changes to the next draft of regulations.

Teddy Downey, of Washington Research Group, says he doubts the department would take any steps that would dramatically lessen the reach of the regulations. In an e-mail message last week after the Credit Suisse rumor circulated, he said he anticipates "a very low chance that this change will amount to a truly significant loophole."

In an interview, he went further. "I don't think the department would do anything it doesn't think will have the desired effect. I think they have the data to support whatever they choose to do."

Kantrowitz, of Finaid.org, is skeptical of whether the department has the data, but he agrees that the department isn't backing down on gainful employment. "They're not going to do anything that doesn't have teeth in it," he says. "It may just be some kind of educated guess, but it's going to have teeth."

 

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