Last week, the U.S. Department of Education released several new potential regulations aimed at for-profit vocational schools and misuse of the federal student loan program. While much of the attention during this process has focused on other regulations targeted at how for-profit schools pay recruiters for enrolling students, Inside Higher Ed picked up on an interesting new proposal concerning new debt limits for specific programs:

But perhaps the most significant proposal is the department’s regulatory language linking debt and income for all programs and institutions that are eligible for Title IV funds because they “prepare students for gainful employment in a recognized occupation.” The department opted to embrace that approach rather than propose regulatory language that would have tied tuition costs at such programs to the expected earnings of recent graduates. Though both were discussed during December’s second round of rule making and criticized by some panelists as “price controls,” the debt approach seems to be less objectionable heading into next week’s deliberations.

The result of implementing a debt-to-income limit could be to weed out (or at least cut tuition at) vocational programs and institutions that don’t yield their recent graduates in-field jobs that pay well enough for them to repay their student loan debt on a 10-year schedule.

Specifically, this proposal would create a debt-to-earnings ratio for borrowers, where a student’s annual loan payments would be capped at 8 percent of their expected earnings. Schools would calculate this figure by taking the median debt level for students in a specific program, determining the annual payment on that debt based on a standard 10-year repayment time frame, and then dividing that amount by the 25th percentile of earnings for the profession the program is preparing students for, as reported in the Bureau of Labor Statistics (BLS). This lower bound is chosen as a way to approximate the lower starting salaries recent graduates face.

Curious to how this would work out for actual programs, I turned to the BLS data, which reports 25th percentile annual earnings for several occupations across sector. Using this data, I calculated the maximum borrowing amount for different professions using the 8 percent standard. (My methodology is at the bottom since it’s kind of long.)

The chart below shows what some of the debt limits would be for specific professions based upon the 8 percent standard and using BLS data:

As expected, the allowed debt levels would fluctuate a good bit based upon the profession targeted by the program. Students in nursing school, for example, would still be able to borrow somewhere between $18,000 and $28,000 depending on the type of nursing position they hope to attain. By contrast, cosmetology school students would have much lower limits.

But the actual implications of the limits are harder to discern because training for these professions take different amounts of time to complete. For example, most cosmetology degrees or certificates can be obtained in a year, so the $8,000-$11,000 cap probably would not be too much of a limit. On the other hand, some of these debt limits could be too low for multi-year programs.

That said, there are several things to like about the concept of limiting debt for certain vocational programs based upon income. These certificates and degrees are often marketed with flashy Web sites and slick materials that fail to discuss important issues like expected earnings or whether students are able to get jobs following graduation. Some sort of debt cap could introduce more realistic expectations into the equation and make students think harder before enrolling.

Second, all of the debt caps mentioned fall well below the maximum Stafford loan limits. This means that students could take out all of their loans without having to resort to expensive private options. That would be a very positive outcome given all the concerns about predatory lending at vocational for-profit schools. The one caveat to this is that limiting borrowing should not mean students have to fill a larger gap with these alternative loans.

Not surprisingly, some people are calling for the 8 percent test to be expanded to all parts of higher education. That’s not a bad idea, though it would require careful thought. A debt-to-earnings test would be a very worthwhile tool for programs such as law school, which produce significantly more graduates each year than are actually needed. Realizing that not even the mythical corporate law job can produce enough earnings to pay off more than $100,000 in debt could go a long way to slowing down the growth of this type of education.

My guess though, is that the more popular critique will be to apply the 8 percent to those “worthless” liberal arts degrees that are a popular target today. I’m not against applying a standard for the tuition at those programs—in fact, I think it would be good for targeting many of the high-price, low-quality private colleges that operate throughout the country. But such a standard would have to be implemented carefully and consider a very broad category of jobs. This would reflect the fact that liberal arts degrees are not designed as specific preparation for a given subject, but rather use interchangeable content to impart important skills—how to write, analyze multiple sources, synthesize information, etc.—that can be easily transferred to any number of positions. My guess is accurately capturing the scope of positions a liberal arts degree prepares someone for would probably be too wide for this to work, but I would be in favor of it if it proved to be doable.

For many people, specific degree or certificate programs are seen as a ticket to a better life and higher earnings. But all too often those dreams can’t survive the debt that comes with their price tag. Clearer thinking about how to limit borrowing so that debt levels more accurately reflect employment possibilities seems like a promising path to explore.

*The BLS data reports the same occupation in different sectors, meaning nurses employed at hospitals, schools, and health clinics are all counted separately. Therefore, I condensed the data by weighting the earnings by the percentage of people with that occupation in each industry versus the total number of people with that occupation.  From there, I took the salary number and multiplied it by 8 percent to get the maximum total annual debt payment allowed. I divided that by 12 to get the maximum monthly payment.

From there, I worked backward through this equation here to solve for the loan principal. I assumed that the interest rate was fixed at 6.8 percent and compounded monthly for 10 years, or 120 months. To get a rate for the equation I turned that 6.8 percent figure into a monthly number, which is done by running the equation (1.068)^(1/12) – 1.