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Gainful Employment Take One: Motivation, History, and the Reality of the New Rules

Community College Insights
March 22, 2024

Key Takeaways:


  • The Department of Education (DOE) has used gainful employment rules to hold accountable the higher education institutions that receive federal student aid for labor market outcomes of their graduates and to protect students from predatory programs.
  • In July, a new set of rules aimed at financial transparency and gainful employment go into effect that will require all institutions participating in federal financial aid programs to report detailed data on students and programs. The DOE will use these data to construct two key metrics designed to illustrate the increase in earnings and debt burden associated with each program.
  • All degree and non-degree programs at for-profit institutions and all non-degree (certificate) programs at nonprofit institutions are subject to the gainful employment rules. Programs with failing metrics risk losing federal financial aid, with students unable to receive Pell Grant funds or federal loans for those particular programs.
  • In this article, we discuss the history and motivation of federal gainful employment legislation and what the new rules entail. In follow-up, we will dig deeper into the programs, institutions, and students who will likely be affected by the new requirements.

Introduction

The concept of "gainful employment" is not new to higher education. In fact, the phrase was first mentioned in the Higher Education Act of 1965. The term was used to describe institutions that would be eligible to receive federal financial aid, including student loans and the Pell Grant. In addition to degree-granting institutions, financial aid was also eligible to "any public or other non-profit collegiate or associate degree school of nursing and any school which provides not less than a one-year program of training to prepare students for gainful employment in a recognized occupation...." Thus, in theory, programs offered at these schools that do not result in gainful employment would not be eligible to receive federal financial aid, although this was not tested meaningfully until 2011.

Note:

All degree programs at for-profit institutions and all non-degree programs at nonprofit institutions (which includes all public colleges and universities) are subject to gainful employment scrutiny.

While recent gainful employment rules have been targeted toward for-profit institutions, as evidenced by the rhetoric of policymakers involved, non-degree programs at nonprofit institutions are also included due to the wording of the Higher Education Act. This is especially relevant for community colleges, which typically offer many non-degree certificate programs, and whose graduates typically have lower post-completion incomes than students who attend nonprofit four-year institutions.

Later this year, a new gainful employment rule will go into effect, and it has the potential to significantly impact Fifth District community colleges. The new gainful employment rule includes a stricter test on student incomes than previous regulations. Some community college programs will not pass the test and will lose financial aid eligibility. For some programs, this loss will amount to a death sentence. Others will not be impacted directly, but there will be serious indirect costs to the college or university via the administrative burden. In order to understand how the rule might impact Fifth District community colleges, it is imperative to understand what motivates gainful employment rules, the history of the rule itself, and the specific regulation that goes into effect this year.

History and Motivation Behind Gainful Employment Rules

Until the birth and subsequent widespread adoption of the internet, for-profit higher education institutions were limited in size and scope. These institutions tended to be career-based, localized companies that specialized in training for specific fields, such as cosmetology or truck driving. However, beginning in the early 2000s, larger for-profits entered the scene, offering a wide array of academic programs solely online, from certificates to bachelor's degrees to doctorates. As the financial crisis took hold in 2008 and unemployment rates rose, enrollment in for-profit institutions increased at an accelerated rate, representing almost 10 percent of total higher education enrollment in 2010.

Bar chart showing the for-profit institution share of total higher education enrollment between 1990 and 2021.

SOURCE: U.S. Department of Education, National Center for Education Statistics, Higher Education General Information Survey (HEGIS), "Fall Enrollment in Institutions of Higher Education" surveys, 1970 through 1985; Integrated Postsecondary Education Data System (IPEDS), "Fall Enrollment Survey" (IPEDS-EF:86-99); and IPEDS Spring 2001 through Spring 2022, Fall Enrollment component. (This table was prepared March 2023.)

Why is this problematic? Some might argue it's not. The Obama administration, however, disagreed. This opinion was driven by several factors, including the lagging labor force outcomes of students who graduated from for-profit institutions and their higher likelihood to default on student loans. In fact, a report from the National Center of Education Statistics examining student loan borrowers who started school in 2003, showed that 52 percent of students who attended for-profit colleges defaulted on their federal student loans by 2015. This is compared to 17 percent of students who attended four-year public institutions and 26 percent who attended public community colleges. Another study by Brookings showed that 46.5 percent of for-profit students who began school in 2004 defaulted on their loans within the first 12 years, compared to 11.8 percent of public four-year borrowers and 12.5 percent of community college borrowers. While default rates for borrowers who attended for-profit institutions had long been higher, the Brookings study shows an increase of 23 percentage points between those who began school in 1996 and those who began school in 2004. What's the primary difference between these two periods? The birth of fully online for-profit institutions and the scope of the institutions.

Note:

We've included the full, complicated history of the gainful employment rule at the end of this article.

The concern regarding the rise of the for-profit sector, low labor market performance by graduates, and high federal loan default rates, led the Obama administration to issue the first regulation in 2011 (finalized in 2014). In general, gainful employment rules are designed to inform students of programs that do not lead to income levels that would be expected for a college completer and to protect taxpayer dollars spent on federal student aid. There were over 800 programs that failed in this first round of gainful employment tests. While nearly 98 percent were programs at for-profit institutions, 2 percent were at nonprofit institutions. In addition to the 800 failures, there were also 1,239 programs that received a warning that they were close to failing (more specifically, they would have failed the test as originally constructed in the 2014 rule).

It is important to note that these regulations were officially rolled back in 2019 during the Trump administration, so the 2024 rules represent not only a tightening of previous policy, but also a return to for-profit and nonprofit, non-degree program regulation at the federal level.

The Final 2024 Gainful Employment Rule

The new gainful employment rule is part of a larger regulation known as the Financial Value Transparency and Gainful Employment (GE), Financial Responsibility, Administrative Capability, Certification Procedures, Ability to Benefit (ATB). The final rule was published in the Federal Register on Oct. 10, 2023. Within this broad set of compliance and reporting requirements for all institutions participating in federal financial aid programs (known as Title IV), there are two frameworks that take effect on July 1, 2024:

  • The gainful employment eligibility and accountability framework (GE), which applies to GE programs, and uses the same definition as previous rules. GE programs include all degree programs at for-profit institutions and all non-degree programs at nonprofit institutions. For community colleges, GE programs are generally certificate programs.
  • The financial value transparency accountability framework (FVT) which applies to non-GE programs. Non-GE undergraduate programs comprise all degree programs at public and private nonprofit institutions. In general, associate degrees at community colleges fall under the non-GE umbrella.
Note:

The students included in these metrics are limited to those who received Title IV funding.

Beginning in July 2024, schools will be required to submit program and student-level data on enrollment, completions, and withdrawals for each covered GE and non-GE program. Schools will also submit data typically reported to the National Student Loan Data System. The U.S. Department of Education (DOE) will match records of program completers with data from other federal agencies to calculate the program cohort's median income three years after completion. At community colleges, this is primarily students receiving Pell Grant aid as fewer community college students borrow via federal student loans. Both the FVT and GE frameworks rely on two metrics, calculated annually:

  • The Debt-to-Earnings Rate (D/E) test is designed to measure loan affordability relative to income. A program will pass the D/E test if the median annual payments on debt acquired for the program is less than 8 percent of annual earnings or less than 20 percent of discretionary earnings (note that this is the same standard as the 2014 rule).
  • The Earnings Premium (EP) test is designed to measure the extent to which a program increases a student's earnings. A program will pass the EP test if the median annual earnings of students in the cohort three years after completing the program exceeds the earnings threshold (ET). The ET is defined as the median income for workers within the institution's state who are ages 25-34 in the labor force and for whom the highest educational attainment is a high school degree (roughly $25,500 nationally in 2019 but varies by state).

Not all programs will be subject to these tests. For example, a program’s median income is only calculated for a cohort of at least 30 students who completed the program over a period spanning two to four years and for whom the DOE is able to match with income data. A program with a cohort smaller than 30 students with no comparable programs over the same period are excluded. Students from graduate programs that require significant training post-graduation will have a longer time horizon over which earnings are measured.

The DOE will publish these metrics along with additional data provided by the institution on a program information website (this is expected in early 2025). To comply with the FVT framework, schools will be required to provide a link to this website to all current and prospective students. The goal of providing this information is to increase transparency around student outcomes and empower students and their families to make sound decisions about where to invest time and money in higher education.

Consequences for GE Programs

While all schools must provide extensive, shareable data on the program information website, there is a significant difference in consequences for failing to pass the metrics tests. Specifically, programs subject to the gainful employment accountability and eligibility framework could risk losing federal financial aid eligibility.

Consequences for Failing Metric Tests
Fails D/E TestFails EP Test
Non-GE graduate programsProspective students must acknowledge that they have reviewed the data on the program information website prior to enrolling.None.
Non-GE undergraduate programsNone.None.
GE programs

Fails either metric in a single year: School must provide a warning to current and prospective students that the program is at risk of losing federal financial aid eligibility; students must acknowledge the warning prior to enrolling and/or receiving Pell Grant funds or federal loans.

Fails the same metrics in two of three consecutive years: Program loses federal financial aid eligibility; eligibility cannot be reestablished for three years.

The requirements for GE programs are designed to encourage students to enroll in only those programs that provide financial benefit to students and to minimize the burden of unpaid debt on taxpayers. The goal is for students to self-select into higher-quality programs by directing federal financial aid to those programs.

Schools must submit their initial program and student data by July 31, 2024. The DOE will begin matching student records with earnings records to start calculating median value. By Oct. 1, 2024, schools must report student data from the most recently completed award year. Schools will not be subject to the consequences of failing their respective metrics until 2026.

Will These Changes Have the Desired Effect?

Overall, the DOE estimates that 842 public and 640 private nonprofit (non-GE) degree programs would fail at least one metric in a given year. However, their estimates could only be calculated for about 18 percent of programs due to lack of available data. On the GE side, the DOE calculated estimates for 13 percent of programs. Based on these estimates, roughly 90 percent of students in GE programs that will fail at least one metric are enrolled at for-profit institutions. This means that 10 percent attend nonprofit schools, and given that most non-degree programs at nonprofit institutions are taught at community colleges, a significant number of community college programs could be impacted.

In a subsequent post, we will take a deeper look at the kinds of programs, students, and communities that are likely to be affected by the new gainful employment rule. While protecting taxpayer funds and students enrolling in higher education programs are important goals, it is also important to have a clear view on the types of programs that will likely be impacted.

A Brief History of Previous Regulations:

2009: The U.S. Department of Education (DOE) forms committees to begin looking into the requirement that for-profit colleges and non-degree programs must lead to "gainful employment."

2011: Final gainful employment rules are issued. Programs would lose federal financial aid eligibility if they do not meet at least one of the following tests:

  • More than 35 percent of program graduates are paying principal on their federal student loans three years after graduation.
  • Typical program graduates have loan payments that are less than 30 percent of discretionary income.
  • Typical program graduates have a total student debt to overall income ratio of less than 12 percent.

2012: Gainful employment rule was struck down by the U.S. District Court for the District of Columbia, although the judge indicated that the debt-to-earnings ratio test was reasonable.

2014: New regulations are finalized. The finalized regulations removed the loan repayment test and modified the student debt-to-earnings ratios. Programs would lose federal financial aid eligibility if they do not meet at least one of the following tests for two out of three consecutive years:

  • Typical program graduates have loan payments that are less than 20 percent of discretionary income.
  • Typical program graduates have a total student debt to overall income ratio of less than 8 percent.

2014 and 2015: Rule is upheld in two court cases brought by for-profit higher education trade groups.

2017: Among additional court challenges, the Trump administration begins the process of repealing gainful employment rules and refuses to enforce them during the repeal process.

2019: Gainful employment rule is formally rescinded.

2020: Eighteen states file a lawsuit against the DOE claiming that the delay in implementing gainful employment rules violated the Administrative Procedure Act. The case was dismissed.

2020: Gainful employment rule repeal officially goes into effect.

2021: Biden administration announces their plans to reinstate gainful employment rules. However, since it was repealed, the rule goes through the entire rulemaking process again.

2023: Final new gainful employment rules are announced. The new rules go into effect July 2024, with metrics published in early 2025 and first "failures" announced in 2026. (Details provided in article above.)


Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

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