The much anticipated regulations on gainful employment were pre-released today (Inside Higher Ed and the Chronicle both have links to the regs though they won’t officially come out until Monday). I have a few quibbles here and there, but I think it’s worth noting that the U.S. Department of Education did a really impressive job with this document. Its well written, explains both the reasons for defining gainful employment and why certain benchmarks were used, and provides substantial data to back up ideas. You may agree or disagree with it, but you have to admit that they clearly put a lot of work into this idea.
I’m not going to get into the minute details of the proposal because the above news stories already do a thorough job laying them out. Instead, I think there’s a couple really interesting things buried in the Department’s documents that are worth noting. Some are about the regulations themselves, others speak to the importance of doing a better job about handling student loan repayment and defaults.
The Department as accreditor?
The Department’s Inspector General has been busy taking accrediting agencies to task for finding egregious activities but doing nothing to punish them. That tactic has produced some results, but these new regulations would make the Department a much bigger player in determining for-profits’ eligibility for federal aid. Any new program hoping to get access to student grants and loans would first have to apply to the Department, disclosing expected enrollment and documents from employers stating the need for this program and the availability of jobs for graduates. That’s a huge step in preventing companies from setting up programs that provide few employment opportunities in the community. It also rightfully returns some of the power over federal student aid to the group that’s responsible for overseeing it.
More Nuanced
One problem I had with the original standard was that liberal arts degrees from a for-profit could be held to the standard, which is much harder to measure because the number of jobs tied to those degrees is so varied. The new proposal corrects for this, exempting those kinds of degrees offered at for-profits. It also removes any degree program offered at a public or private, not-for-profit.
A couple of other tweaks add some nice flexibility to the standard. Using social security data, rather than national earnings estimates ties the data to actual student outcomes and removes complaints about regional variation in earnings. Three different standards mean that even programs with higher debt-to-income ratios can still avoid problems if a lot of students repay their loans.
Required private loan disclosures
Programs can have their debt-to-income ratio calculated using a longer time frame if they can prove their students’ earnings jump over time. But if they wish to do so, the regulations require them to also provide information on private student loan borrowing. That would be some very welcome data to know.
The Percentage of Students Actively Repaying Their Loans is Very Low
The above chart comes from page 21 of the regulations and it shows the percentage of schools by sector that have student loan repayment rates above 45 percent, below 35 percent, and in between. (The repayment rate is defined as the original principal balance of loans fully paid off or having received enough payments in the last fiscal year to reduce the principal divided by the total principal balance of all loans that entered repayment in the last four fiscal years).
What it shows is striking. At two-year for-profits, more than 67 percent of schools have less than 45 percent of their loans being repaid. For the four-year institutions in this sector its more like 75 percent of schools. And that’s not even an average rate–who knows how few some of the students borrowing at the 40 percent of schools in that last column are actually repaying their loans?
More broadly, I also find it pretty discouraging that we are thinking of a 45 percent repayment rate as an acceptable standard. Shouldn’t we expect more than having less than half of borrowers being in active repayment?
Once a loan defaults, it isn’t worth much
A common talking point among some interested student loan parties is that the whole program is a scam because the government makes money off defaulted loans. But that not take into account the cost of collecting dollars or the fact that dollars collected in the future are worth less than a dollar today. Sure enough, the Department notes on page 31 that the net present value of the $9.2 billion worth of loans that defaulted last year is approximately $1 billion. Clearly, the costs of a defaulted student loan are not recouped and we would be much better off keeping loans out of default.
High debt burdens are associated with higher default rates
That’s a chart from 108 and it seems to pretty clearly show that higher debt burdens do in fact have some apparent correlation with higher rates of default. Even though the largest burdens don’t produce the worst rates, it’s still a strongly upward trend.
Final thoughts
I fully expect critics of this proposal to again throw out complaints about how numbers aren’t adjusted for income, race, etc. Controlling for those factors may explain some of the charts seen above. But there’s also something to be said about we define as acceptable. Defaulted student loans have a much higher cost to the taxpayer than anyone readily admits and they occur at a much higher rate than we think. Continuing to hide behind demographics to explain that, rather than doing something to address it, I think largely misses the issue. The end goal of this standard isn’t to shut people down, it’s to give enough of a scare to schools that they’ll try to do a better job keeping borrowers in repayment or lowering their debt burden. For-profits have pretty big operating margins, that’s not impossible.
I’ve supported the gainful employment standard in the past and I think this version also is quite strong. It establishes a clearer link between the promises made around vocational programs and their actual results. These regulations also counter many complaints about too many schools being affected, not enough flexibility, and relying on national averages instead of real data. It’s certainly not perfect, but it seems like a good compromise.
Click Image To Enlarge
5/11/2012 | U.S. News & World Report highlights ideas from "Moving On Up: How Tuition Tax Breaks Increasingly Favor the Upper-Middle Class." 
5/11/2012 | In Diverse, Steve Burd comments on the Obama administration's plans to address student debt. 
5/11/2012 | Kevin Carey talks to Salon about the government's role in rising student debt.
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What you aren’t being told, is that career colleges do not receive state or federal funding/dollars,and therefore their tuition is what the other colleges charge if they did not receive state funding.
Career colleges are also required to place their students and state schools are not required. The college I graduated from did nothing to secure me a job, nor was the cost of my loans 8% of my beginning income. The discussion is not comparing apples to apples.
The number of students who attend career colleges are a minute section ofstudents;and not necessarily the ones not paying back their loans. The career colleges are being used as a scape goat forissues that should be asked of state schools.
Their is a niche for career colleges, and other educational institutions need to accept them and learn about them before they close them.
Is it really fair to the for-profit schools that are career driven and have proven it through accreditation? They are lumped into the same group, so by regulating the bad we are also punishing the good with the current plan. Think about it before acting too rash.
I too have been receiving emails from one of my employers which happens to be a for profit school asking me to not support this bill. I think it has its merits and certainly will make the schools who are in the “business” of education more accountable in their recruitment practices as well as the promises they make to students about “gainful” employment potential. Not every student should be in college and those that are should not have to choose between owning a home or paying back a student loan when they complete their education which in most cases they will not be able to do either as it relates to their income and subsequent debt load. When you are only allowed to take one class at a time in an “accelerated” program and it takes you six years instead of 4 or 3 which is feasible and you are locked in once you start because your credits do not transfer anywhere you are fighting an uphill battle. Creating parity in the system is an imperative if we are to really make education “accessible”. Paying the upper echelons of the institution large salaries while faculty members do not even have working copiers in their faculty room and must share 2 computers is an injustice to the entire academic process. The money spent needs to benefit those it is intended to and not fatten the pockets of the executives who own shares of stock in the publicly traded for profit institution. I am all for free enterprise but it must be fairly managed, ethical, equitable and deliver on the “promised” outcomes.
I have been getting all kinds of emails from my college asking me to not support this act, but the truth is I am concerned about my education myself and I believe that this is fair. I am going to be $20,000 in debt from school when I finish a 2 year program that I had grants for as well. Not only am I going to have trouble finding a job, but I have no idea how much money I have to pay when on my student debt. My school is also telling me although it is only a 2 year course I have to apply for loans for 2 and a half. I think if it is a little harder for people like me to get into debt with the government that its a good thing not a bad thing.
Craigie is right: the cost to the taxpayer of defaulted loans is much less than anyone admits. On page 31, the Department of Education estimates the cost on the $9.2 billion in defaulted loans at less than $1 billion, so the net present value of the loans is $8.2 billion. It’s not that the $9.2 billion is worth less than $1 billion. Also, the Ed Dept states that cost of defaults is less than 1% of annual student loans – a very low percentage for any type of loan.
Nevertheless, we’ve got to do more to lower the student loan load. The reason the average debt is lower for public school students than for for-profits students is not that a for-profit education costs more. Per graduate, the cost is the same. Rather, state and local governments subsidize the public education thereby keeping the student loan levels down while the federal government financing (which is predominantly used at for-profits which don’t get state and local subsidies) is mostly in the form of loans. The solution to the debt then is to shift more of the federal money towards grants and away from loans.
Adjusting institutional competence based on the race and SES of the students they recruit is a recipe for dissension and bringing down the whole American postsecondary system as we have known it for five decades. It is a chicken-and-egg thing. If it is true (which has never been proven) that for-profit institutions have a higher percent of low-SES students than, say, community colleges, then so what? Isn’t the point that low-SES students, on an apples-to-apples basis, are doing better at community colleges than at for-profit institutions?
If the govt falls for the false tactic of adjusting institutional competence based on the race and SES of the students they recruit, then all you are doing is rewarding those institutions for doing something we should be discouraging — preying on students who have very low risk of success until they are loaded up with nondischargeable debt, which the schools have used to line the pockets of executives and investors.
Defaulted student loans have a high cost to the borrower in terms of damaged credit and fees/charges (for FFELP loans, at least), but they have a much low cost to the taxpayer than anyone readily admits and they occur at a much lower rate than generally believed.
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