CRL welcomes moves by the U.S. Department of Education ("Department") to ensure that career education programs provide a sound return on investment for both students and U.S. taxpayers.
Students and displaced workers often look to career education programs to build the skills they need to gain employment in particular fields. Many of these programs are offered by for-profit colleges, although student tuitions are typically funded by federal financial aid. In 2011-12, the US government made approximately $28 billion in Title IV grants and loans to students attending for-profit colleges.
The Department is drafting a Gainful Employment rule to ensure that career education programs eligible for federal financial aid do not saddle students with loans they cannot repay. Under this proposal, programs that repeatedly leave students with high debt and few employment prospects would be cut off from federal funding. This rule also would protect U.S. taxpayers who bear the cost of federal financial aid programs and whose money is wasted by programs that do not work.
While the Department's Gainful Employment rule would apply to career education programs at all kinds of institutions, its impact would likely be strongest at for-profit colleges. A recent Government Accountability Office report found that for-profit college attendees had higher levels of debt, were less likely to pass licensure tests needed for employment, and were less likely to be employed than those who attended public or private, non-profit schools. In addition, nearly half (47%) of borrowers who default on federal student loans in the first few years of repayment had attended for-profit colleges, even though for-profits only enroll 12% of all students.
Under the Department's draft regulation, released last week, a career education program would be considered failing if its graduates had debt exceeding 12% of their annual earnings and 30% of their discretionary earnings. Discretionary income is defined as above 150% of the poverty line and applies to what can be put towards non-necessities. Ensuring that a borrower has the "ability to repay" a loan -- including a student loan -- is a tenet of good lending practices. Federal banking regulators have recently promoted similar standards for mortgage lending and small-dollar loans.
While debt-to-earnings ratio standards are important, CRL calls on the Department to further strengthen its draft regulation in two key areas:
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Include all attendees—not just graduates—when determining eligibility for Federal financial aid. Currently, the Department's draft regulation considers only the debt burdens of borrowers who graduate from their program, not all those who took out loans to attend the program. This is like measuring the success of a baseball team by counting only the games it won and ignoring the ones it lost. A 2013 study conducted for the Department showed that almost half of for-profit college students enrolled during 2003-04 had not completed school five years later, and that 86% of these students who did not continue were left with federal student loan debt, including 31% with debt exceeding their annual income.
This one-sided approach will also incent career education programs to "work the system" to improve their debt-to-earnings statistics. Already, one for-profit institution has begun offering scholarships to promising students on a retroactive basis, with the effect of lowering the debt-to-earnings ratios for likely graduates, while doing nothing for students who did not finish the program.
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Place greater emphasis on ensuring that programs meet licensure or other requirements for securing employment. Many jobs require that prospective employees obtain some sort of licensing or graduate from an accredited program. The Department's draft regulation should ensure that federal funding supports only career programs that meet this standard and enable graduates to actually become employed in the chosen field.
The Department's draft regulation does require institutions to disclose whether a career program meets licensure requirements; but this modest standard does not ensure that students are given enough information to assess their likelihood of finding employment after completing the program. And it does nothing to protect U.S. taxpayers funding career education programs that do little to help graduates get the jobs needed to repay their loans.
Through the Gainful Employment rule, the Department has the opportunity to significantly advance consumer and taxpayer protections in a major financial issue. Federal student debt totals around $1 trillion today. Ensuring that these loans provide real benefits to students and can be repaid is vital to the growth of our nation's employment base and our economy.
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For more information: Ellen Schloemer at 919-313-8528 or ellen.schloemer@responsiblelending.org or Ginna Green at 510-866-5989 or ginna.green@responsiblelending.org.