Proposed Rule Links Federal Student Aid to Loan Repayment Rates and Debt-to-Earnings Levels for Career College Graduates

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Proposed Rule Links Federal Student Aid to Loan Repayment Rates and Debt-to-Earnings Levels for Career College Graduates

July 23, 2010

The Obama Administration released today its proposed regulations requiring for-profit career colleges to better prepare students for "gainful employment" or risk losing access to federal student aid. The proposed rules seek to protect students from taking on unsustainable debt they cannot repay and to protect taxpayers from high loan default rates.

Secretary of Education Arne Duncan said, "While career colleges play a vital role in training our workforce to be globally competitive, some of them are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use. These schools- and their investors- benefit from billions of dollars in subsidies from taxpayers, and in return, taxpayers have a right to know that these programs are providing solid preparation for a job. The rules we've proposed today will help ensure that career college and training programs use federal student aid to prepare students for success."

To qualify for federal aid, the law requires that career colleges and training programs prepare students for gainful employment in recognized occupations. The Department would define whether a program successfully prepares students for gainful employment using a two-part test: measuring the relationship between the debt students incur and their incomes after program completion; and measuring the rate at which all enrollees, regardless of completion, repay their loans on time. If a program graduated a large share of students with excessive debt-to-earnings ratios, it would be required to clearly disclose debt burdens to current and prospective students. The program could also become ineligible to participate in federal student aid programs.

Congress specifically authorized the Department to set different rules for occupational training and for-profit colleges because federal student aid may, by law, account for up to 90 percent of their revenues. The need for new rules has become especially acute in recent years as enrollment, debt loads, and default rates have grown rapidly at for-profit colleges. The median federal student loan debt carried by students earning associate degrees at for-profit institutions in 2007-08 was $14,000 – almost double the median debt for their peers at non-profit institutions. The majority of community colleges graduates during the same time period did not borrow. In addition, while 88 percent of recent borrowers from nonprofit institutions and 80 percent of borrowers from public institutions were able to pay down the balance of their student loans in recent years, only 55 percent of borrowers attending for-profit institutions were able to pay off more than accrued interest.

There have also been media reports of overly aggressive career college recruiters signing up students, only to have them drop out weeks later and default on their loans. Despite these concerns, for-profit institutions have never been required to substantiate the claim that they are preparing students for "gainful employment." This new rule would require recruiters and promotional materials for career colleges to disclose information on debt burdens to prospective students if the program did not meet the proposed debt-to- earnings levels or repayment standards.

"While proprietary schools have profited and prospered thanks to federal dollars, some of their students have not. This is a disservice to students and taxpayers, and undermines the valuable work being done by the for-profit education industry as a whole," Duncan continued.

Formally known as a Notice of Proposed Rulemaking (NPRM), today's action followed a year-long negotiation between the U.S. Department of Education and higher education stakeholders regarding 14 specific program integrity issues.

The Department addressed 13 of the 14 issues in their entirety in the NPRM published on June 18th, and partially addressed "gainful employment" by requiring these institutions to provide prospective students with their programs' graduation and job placement rates and provide the Department with information that will allow it to determine student debt levels and incomes after program completion.

"One of the most important levers of accountability is transparency. Everyone should have the facts," Duncan said. Secretary Duncan noted that the regulation was particularly important in light of the difficult economy. "Now more than ever, we need to use every tool at our disposal to make sure that taxpayer dollars are well-spent."

The Proposed Definition

The proposed definition of gainful employment announced in today's NPRM would take into consideration whether former students are repaying their federal student loans and the relationship between total student loan debt and average earnings after a postsecondary training program.

Fully eligible programs will either have at least 45% of their former students paying down the principal on their federal loans; or their graduates will have a debt-to-earnings ratio of less than 20% of discretionary income or 8% of total income. The programs would have to disclose their repayment rates and debt-to- earnings ratios unless they pass both these tests.

Ineligible programs will have less than 35% of their former students paying down the principal on their federal loans; and their graduates will have a debt-to-earnings ratio above 30% of discretionary income and 12% of total income. An ineligible program may not offer federal student aid to new students. It can provide one additional year of aid to current students, provided that it warns them about the high debt-to-earnings ratio.

Restricted programs are those that are not fully eligible or ineligible. Restricted programs are subject to limits on enrollment growth, and the institutions must both demonstrate employer support for the program and warn consumers and current students of high debt levels.

Gainful Employment Proposed Rule

Debt Burden
Repayment Rate   Above 12% of Total Income
Above 30% of Discretionary Income
Below 8% of Total Income
Below 20% of Discretionary Income
Above 45% Fully Eligible Fully Eligible Fully Eligible
35% to 45% Restricted Restricted Fully Eligible
Below 35% Ineligible Restricted Fully Eligible

The Department's proposal does not lower a program's repayment rate as a result of students who may be in lower-paying public service jobs. Program completers who qualify for Public Service Loan Forgiveness would be counted as "paying down the principal of their federal loans". Borrowers in income-based repayment would be treated as successfully repaying their loans if their incomes are high enough to allow them to pay more than the interest on their loans.

The public will have 45 days from the date of publication to comment on this NPRM, and the Department encourages institutions of higher education and other interested entities to comment both on these rules and their impact. The Department will carefully review all the comments it receives, with the goal of publishing a final rule by November 1.

Programs that fail to meet all of the repayment rate and debt-to-earnings ratio tests will be immediately required to alert applicants and current students that they may have difficulty repaying their loans after graduation. To give programs an opportunity to improve and to ensure data integrity, the Department is proposing that the 2012-13 academic year is the earliest a program could be found ineligible for federal student aid. In addition, there would be a cap of five percent on the programs that could lose eligibility in 2012, (as measured by the number of students completing those programs subject to the rule) to allow for a year of transition.

If there are no changes to their costs or quality (as measured by their graduates' earnings), the Department estimates that 5 percent of all programs would no longer be eligible to offer their students federal student aid and 55 percent of all programs would be required to warn their students about high debt-to-earnings ratios. The NPRM includes a detailed discussion of our analysis, and additional data are available at

The full NPRM may be found at

Additional information on the Department's negotiated rulemaking efforts may be found on the web at: