Your Guide to 'Gainful Employment'

WASHINGTON -- The Education Department’s final “gainful employment” rule, which strives to hold most programs at for-profit colleges and certificate and vocational programs at nonprofit institutions to a new federal standard on student debt and employability, was released Thursday.

June 3, 2011

WASHINGTON -- The Education Department’s final “gainful employment” rule, which strives to hold most programs at for-profit colleges and certificate and vocational programs at nonprofit institutions to a new federal standard on student debt and employability, was released Thursday.

Compared to the proposed rule that the agency published last July to intense criticism (from for-profit colleges) and applause (from consumer advocates), the final version was widely perceived as more favorable to the institutions, especially among those who had pushed for greater regulation and who said they were disappointed that the administration had backed away from more stringent provisions.

To stay eligible for federal financial aid, each program will have to meet one of three benchmarks: a federal student loan repayment rate of at least 35 percent, a debt-to-income ratio of less than 12 percent or a debt-to-discretionary-income ratio of less than 30 percent.

The chart below aims to help explain the complicated rule and show how it evolved -- amid intense lobbying by for-profit colleges, hundreds of meetings, and much political brokering -- from proposed to final.

The Outcome ... Under the Proposed Rule ... Under the Final Rule ...
Institutions have longer to prepare. The Education Department would have started collecting data and holding programs accountable immediately, and students in ineligible programs could have been disqualified from receiving federal financial aid as early as 2012. The earliest a college could lose eligibility is 2015. Data collection will begin Oct. 1 of this year. (Note: This paragraph has been updated to correct an error.)
Thresholds are lowered, and the “yellow zone” disappears. The department set minimum and preferred standards for debt-to-income ratios and repayment rates. Programs that fell between the two would be considered to be in the “yellow zone,” required to tell students about debt levels and capping enrollment. The gold standard for full eligibility was a 45 percent repayment rate, a debt-to-income ratio below 8 percent, or a debt-to-discretionary-income ratio below 20 percent. The higher thresholds are eliminated. Programs that meet the standards that were formerly considered minimal -- either a 35 percent repayment rate, a debt-to-income ratio below 12 percent for the typical graduate, or a debt-to-discretionary-income ratio below 30 percent -- are now considered fully eligible.
Programs get more chances to improve. Programs whose debt repayment rates or debt-to-income ratios fell below specific benchmarks in a given year would have been ineligible for federal financial aid immediately. A “three strikes” process is in place: Programs must fail to meet the benchmarks in three out of four years before they lose eligibility. A single bad year will no longer put a program in serious jeopardy.
Programs on the brink face less punitive action. Programs that fell into the “yellow zone” would have had to warn graduates prominently that they might not be able to repay their loans, and enrollment would have been capped at the average for the previous three years. Institutions also would have had to provide the department with affirmations from employers testifying to the existence of job openings in the field. Programs that miss the benchmarks for one or two years face increased disclosure requirements, including letting students know that they failed the first time. The second time, they must inform students about opportunities to transfer and warn them that they might not be able to repay their debt. But enrollment will not be capped and the employer-affirmation requirement no longer exists.
Bureau of Labor Statistics data can be used to measure income -- but only for the first three years. Bureau of Labor Statistics data on salaries in various fields could not be used to calculate a college's debt-to-income ratios. For-profit institutions prefer that data to those from the Social Security Administration, which the colleges contend will understate graduates' income (because students may not report all their income) and will not be available to the colleges before evaluations begin. Bureau of Labor Statistics data can now be used during the transition period before the rule is fully enforced, but beginning in 2015, analyses must be based on Social Security Administration data, which deal with individual students rather than generic career fields.
Debt-burden calculations are adjusted. All student borrowing was included in the overall debt load. Colleges will be held accountable for students' debt only up to the level of tuition and fees and other educational expenses, so institutions are not responsible for students who borrow more than strictly necessary to cover rent or other expenses while enrolled.
Annual loan payments for debt-to-income ratios will also be calculated differently, assuming that students will take longer to pay off many loans. Loan payments were calculated using a 10-year amortization for all programs. The loan period for associate degrees and certificates will be assumed to be 10 years loan period, for master’s and bachelor’s degrees 15 years, and for other degrees 20 years.
Repayment rate calculations change. A borrower was counted in repayment only if he or she paid down the principal balance on his or her federal loans. Repayment rates will be based on loan principal and interest, so students who make interest-only payments will be considered current. So will those in the federal government's income-based-repayment program. An anti-abuse rule will limit the number of students who are paying less than accrued interest.
Students’ debt and income levels will be checked a few years after students finish programs. Debt-to-income levels would have been measured throughout students' first four years after graduation, potentially penalizing programs whose students did not get jobs immediately after finishing. Both the repayment rate and the debt-to-income ratios will be based on students in their third and fourth years after graduation. Adjustments will be made for small programs, medical and dental programs and improving programs.
Fewer programs will be found ineligible. The Education Department predicted when the proposed rule was released that 5 percent of all programs would lose eligibility, but fully 55 percent would have been in the "restricted yellow zone."

With the elimination of the "yellow zone," that 55 percent will now pass.

Predictions of ineligibility have dropped to 2 percent for all programs and 5 percent for for-profit programs. Eight percent of all programs -- and 18 percent of for-profit programs -- are predicted to fail all measures at least once, but recover before accumulating "three strikes."

Sources: Education Department,, Inside Higher Ed reporting


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