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WASHINGTON -- Today’s issue of the Federal Register includes the U.S. Department of Education’s notice of proposed rule making on "gainful employment," explaining the rationale and anticipated effects that the regulations will have on all of higher education but, in particular, on the swelling for-profit sector.

Friday's reports were based on limited information from a news release and a briefing phone call for reporters, but with the full NPRM released, Inside Higher Ed has been able to examine the proposal line by line to determine what the proposed regulation is intended to do -- and what it isn't. Much about the potential impact of the rules, however, is likely to remain in doubt for weeks, if not months -- much to the likely consternation of officials at for-profit colleges, who are left to wonder how serious the implications might be for their institutions.

As scrutiny of the for-profit college sector by members of Congress, the news media and investors has grown in recent months, the release of the proposed gainful employment rules has been built up as a significant moment in the Obama administration's attempts to regulate -- and arguably rein in -- the sector. Because most programs offered at for-profit colleges qualify for federal financial aid funding under Title IV of the Higher Education Act of 1965 by preparing students for "gainful employment in a recognized occupation," the NPRM has been regarded as a significant step toward understanding the administration's intentions.

On Friday, stocks of the publicly traded schools soared. The uncertainty of just how harsh the regulations would be was gone, at least for the time being, and early indications, based on merely the news release and some secondhand reports, were interpreted by some analysts and others as a significant softening from previous proposals by the department.

But whether the proposed rules would devastate the sector and its profit margins is unclear. A 45-day public comment period begins today and the department says it plans to issue final regulations by Nov. 1, so they can go into effect on July 1, 2011. Though the department has released some data projecting the effects of the proposed regulations, many of those statistics are based on debt levels for all students at an institution, rather than for individual programs, which is how the regulations propose to determine Title IV eligibility.

Last week, before the NPRM was released to the public, Terry W. Hartle, senior vice president of government and public affairs at the American Council on Education, described it as "the most complicated regulatory package that the Department of Education has ever promulgated -- this really is a brave new world." The regulatory impact analysis totals 70 pages, though the regulatory text is just 13. The preamble describing the rationale for the proposed regulations is 80 pages long.

The rules define gainful employment in two ways, one using debt-to-income ratios and another using loan repayment rates. In all, there are three tests that a program can pass to gain at least "restricted" access to Title IV funds -- the debt-to-earnings ratio, the debt-to-discretionary income ratio, and the loan repayment rate.

If a program does better than the department's preferred standard on any one metric -- 8 percent debt-to-earnings, 20 percent debt-to-discretionary income, 45 percent repayment rate -- then it is fully eligible for Title IV. If it meets none, it becomes totally ineligible, unless an appeal is successful. If it meets the minimum standards for one metric -- a debt-to-earnings ratio between 8 and 12 percent, a debt-to-discretionary income ratio between 20 and 30 percent, or a loan repayment rate between 35 and 45 percent -- it gains access to the federal financial aid programs on a "restricted" basis.

Based on Education Department data, 85 percent of for-profit would be eligible for Title IV funds (albeit with many required to disclose debt loads to students), 10 percent would be restricted from growing, and 5 percent would be ineligible. Those estimates, the department admits, are based on limited, institution-level -- rather than program-level -- data, and may turn out to be inaccurate.

Before details of the NPRM leaked out early last week, speculation about the proposal centered on whether the debt-to-income ratio would stay at 8 percent based on a 10-year loan -- as the department first proposed in January -- or would be loosened to a higher percentage, or a longer loan term. Though other metrics were proposed as alternatives intended to help “good” programs qualify even if they failed the debt-to-income test, all eyes were on what that ratio would be.

Debt-to-earnings ratio

In the proposed regulation, the ratio is still 8 percent -- sort of. One way for a program to be fully in compliance with the regulation is if the median debt loads of students who completed the program in the three previous fiscal years is no more than 8 percent of the average annual earnings of those students, regardless of the field in which they're working. Earlier iterations had just considered federal student loans, but the proposed regulation also takes into account debt load from private student loans and institutional payment plans. For these calculations, loan debt would not include education loans that a student borrowed for other programs, unless the programs were at the same institution or under the same ownership.

The Education Department would calculate this measure using data from the previous three fiscal years. Income data would come from an unspecified "federal agency" and federal student loan data would come from the department. Institutions would be required to provide the student's completion date, the amount of private loan debt and the amount of debt owed through institutional financing programs to the department.

But if an institution were able to show that completers generally “experience a significant increase in earnings after an initial employment period and [explain] the basis for that earnings pattern,” and could provide the department with the necessary data, it could instead be tested based on salaries of graduates who are four, five and six years out of the program.

If a program failed to meet the 8 percent debt-to-earnings ratio, it wouldn't mean sudden death. Even if the program didn't qualify for full Title IV eligibility under the gainful employment rules, through the other tests being proposed, it could still qualify if the debt-to-earnings ratio is between 8 and 12 percent, though with restrictions (discussed below).

Debt-to-discretionary income test

Another way for programs to meet the gainful employment standards is by demonstrating that completers' annual loan payments are within what the department considers a reasonable percentage of their annual discretionary income. For the department’s purposes, discretionary income is defined as the difference between the average annual earnings of program completers and one-and-a-half times the federal poverty guideline for a single person in the continental United States. The 2009 poverty guideline was $10,830.

For a program to pass this test without restrictions, the debt-to-discretionary income ratio can be no more than 20 percent. If it is between 20 and 30 percent, the program is restricted (unless fully compliant under another metric). If the ratio is above 30 percent, then the program must use another metric to meet the gainful employment rule.

As with the debt-to-earnings ratio, programs have the option of providing data from students who entered into repayment four, five and six years earlier, to pass the test.

Loan repayment rate

The proposed regulations offer another method of qualifying for gainful employment, which was discussed only in passing during the negotiated rule making process: the loan repayment rate.

Contrary to how it was described in the Education Department’s press release – the document reporters used to write their articles last Friday -- the loan repayment rate is not based on the percentage of “former students paying down the principal on their federal loans.” Rather, as defined in the proposed regulatory language, the repayment rate would be the percentage of principal repaid on all federal loans borrowed by the program’s recent graduates.

James Kvaal, deputy under secretary of education, said that while the difference in definition “can make a difference," the department’s “data analysis shows that it usually doesn't.”

A rate based on dollars repaid, rather than percentage of students repaying loans, is likely to be more unfavorable to programs where students take out larger loans, pushing on the department’s desired goal of encouraging institutions to lower tuition.

It’s also a metric that is more difficult to manipulate to a program’s advantage than a rate based on percentage of students repaying loans might have been. Institutions could have encouraged students who could afford to pay out of pocket to take out small federal loans that they could repay quickly.

As defined in the proposed regulations, the repayment rate is equal to the sum of the original outstanding principal balance (OOPB) of loans paid in full (LPF) and reduced principal loans (RPL) divided by the OOPB of all Federal Family Education Loans and Direct Loans borrowed by the program’s former students who entered repayment during the previous four fiscal years. The RPL total also includes loans from former students who in that fiscal year qualify for the public service loan forgiveness program, even if they are not paying down loan principal during that year.

The ratio excludes the original outstanding balance of former students with an in-school or military-related deferment status. But, unlike cohort default rate calculations, it makes no exception for students in deferment or forbearance for other reasons like unemployment.

Programs with a repayment rate above 45 percent fully pass this test and face no restrictions (though they may face restrictions over all because of their performance on other tests). Programs with repayment rates between 35 and 45 percent are restricted, and programs with repayment rates below 35 percent must pass one of the debt-to-income tests to be at all eligible for Title IV.

Restricted programs

For the last decade, for-profit institutions have thrived on ever-growing enrollments, which have boosted their bottom lines and their stock prices. But being deemed a “restricted” program under the gainful employment rule would throw a wrench into any future growth. The Education Department estimates that without making changes before the proposed regulations are enacted, 55 percent of programs governed by the gainful employment rule would fall into the restricted category.

The toughest restriction programs would face is a cap on the enrollment of Title IV recipients to the average number enrolled during the previous three years. On Friday, before the NPRM was released, some analysts had interpreted this provision as limiting growth to the average growth rate over the last three years, which would have been far less punitive, at least for programs that had been growing.

Even so, the conditions of restriction are not as punitive as the department could have made them. Under the proposed regulations, programs would be able to continue operating indefinitely under the restrictions. Though they would not be able to increase their enrollments of Title IV students, they would be able to keep revenues growing, raising tuition as federal student loan and Pell Grant maximums grow.

Restricted programs would also have to provide the department with annual affirmations from employers not affiliated with the institution. Employers would have to confirm that the program aligns with jobs their businesses need and where there are anticipated job openings or future demand. The number and locations of businesses would be based on the program’s size, though the regulation does not explain how this would be determined.

Whether students would want to enroll in a restricted program is hard to tell, especially since restricted programs would be required to make debt-warning disclosures. The proposed regulation requires each restricted program to have “a prominent warning in its promotional, enrollment, registration, and in all other materials, including those on its web site, and in all admissions meetings with prospective students, that is designed and intended to alert prospective and currently enrolled students that they may have difficulty repaying loans obtained for attending that program.” Programs would also have to disclose to current and prospective students their most recent loan repayment rate.

Ineligible programs

Without making changes before the regulations go into place, 5 percent of programs serving 8 percent of students would fall into the “ineligible” category, the Education Department estimates, by meeting neither of the debt-to-income thresholds, nor the loan repayment rate minimum of 35 percent.

Once the department notifies the institution that a program has been deemed ineligible, the institution must stop the disbursement of Title IV funds to students who begin the program after a date to be specified by the department. Students who began the program before it became ineligible would continue to receive Title IV aid to attend the program for the remainder of the current award year, as well as for the award year after that.

The year beginning July 1, 2012, would be the “transition” year, where notifications of ineligibility would be sent to programs serving at most 5 percent of students within each credential category -- certificate, associate degree, bachelor’s degree, and graduate and professional degrees. If programs serving more than 5 percent of students in any category are determined to be ineligible, the department would send notifications to the programs with the lowest loan repayment rates within that category.

Programs notified of their ineligibility during the 2012-13 year would be treated as restricted programs for the first year -- Title IV enrollment capped at the average of the last three years, employer affirmations and debt disclosures -- and would then lose Title IV eligibility the next year.

New Programs

The proposed regulations give the department the authority to approve new programs seeking Title IV eligibility.

Programs would need to seek this approval if they constituted a “substantive change” under federal regulations and would need to have approval from their accreditors. To apply, programs would need to provide the department with projected student enrollment for the next five years at all locations where the institution plans offer the program, as well as independent employer affirmations that there is demand for people with the job skills taught by the program. The department would be permitted to restrict the initial enrollment.

If a program undergoes substantive change based only on content, the department would calculate the debt-to-income and loan repayment metrics as soon as data became available.

For other new programs, the department would calculate the loan repayment rate using the program’s data and, for the first three years, loan data for any other programs offered by the same institution that prepare students for the same Bureau of Labor Statistics job family that entered repayment in the three previous years.

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