What’s In A New Regulation Targeting For-Profit Colleges

Two important pieces of higher education news hit headlines on Wednesday. First, the University of Idaho will acquire the University of Phoenix, a for-profit giant, and manage it as a fully-online nonprofit entity going forward. Phoenix will maintain its current leadership.

Second, the Biden administration released its proposed Gainful Employment (GE) rule, which would deny federal funding to certain higher education programs where graduates’ debts are too high or their earnings are too low. While more accountability for federally-funded colleges is a welcome step, the rule is narrow in scope: it applies only to for-profit institutions and certificate programs.

That limitation means that Phoenix, which would have previously been subject to GE as a for-profit, will soon be exempt as a nonprofit. Even though 13 of Phoenix’s degree programs would have lost federal funding under GE due to excessive debt or low earnings, those programs will now maintain access to federal grants and loans—even if their outcomes don’t change.

What’s in the Gainful Employment rule

The 1,077-page proposed regulation closely resembles a draft GE framework that the Education Department (ED) published early last year. After the rule is formally published in the federal register, the public will have 30 days in which to submit comments. ED aims to finalize the rule by November 1 and implement it in July 2024.

Among the key provisions of the proposal:

• A covered higher education program “fails” the GE rule if its graduates’ debts are high relative to their earnings. Specifically, programs fail if the median student graduates with an estimated annual loan payment greater than 8% of their annual earnings and greater than 20% of their discretionary earnings, defined as their annual earnings minus $21,870.
• Separately, a covered program fails the GE rule if graduates’ earnings are too low. Programs fail if the median student is not earning as much as the typical labor force participant aged 25 to 34 with only a high school diploma, in the same state as the institution.
• If a program fails either measure in two of three consecutive years, it will lose access to federal student aid. Programs that fail in a single year must notify students of this fact.
• Only certificate programs, as well as degree programs at for-profit colleges, are covered by the rule. Degree programs at public or private nonprofit colleges are exempt. ED applies consequences at the program level: even if one program at a school fails GE, students in other programs may continue to access federal aid.
• In addition, ED will collect and publish new data on debt, earnings, tuition costs, and licensure exam pass rates for all programs, not just those GE covers. Students will need to acknowledge they are enrolling in a program where debt is high relative to earnings even if that program is exempt from a loss of federal funding under GE.

GE will improve transparency and strengthen accountability (for certain schools)

The federal government funds thousands of postsecondary programs that do not provide students with a return on investment, which can leave students with unpayable debts. When borrowers struggle, taxpayers must pick up the tab. Existing measures designed to hold federally-funded colleges accountable for student outcomes have proven inadequate.

New rules of the game are needed. GE’s focus on debt relative to earnings is welcome, as programs should be assessed based on how well their costs (tuition and debt) stack up against their benefits (labor market returns). The GE rule is also right to emphasize program-level rather than institution-level outcomes. Often, the difference in outcomes between a nursing and a cosmetology program at the same institution is greater than the difference in overall outcomes between two institutions.

While it would be better if GE applied to all programs, ED has taken a step in the right direction by publishing data on student outcomes for programs exempt from GE. Research has shown that transparency alone can drive colleges to close poorly-performing programs, even if those programs are not subject to a loss of funds. The data can also inform research into potential future policies to hold GE-exempt programs accountable.

ED also estimates that the rule will save taxpayers $12.6 billion over ten years, as GE will kick several low-quality programs off the federal dole. That hardly makes President Biden’s Education Department a paragon of fiscal responsibility—it represents only a sliver of the cost of mass loan cancellation ($400 billion), income-driven repayment expansion ($230 billion), the student loan payment pause ($195 billion), and various other executive actions—but it’s something.

But GE will leave most students unprotected

The GE rule creates multiple arbitrary distinctions between programs that are covered by its accountability provisions and those that are exempt. Most notably, among degree programs only for-profit colleges are subject to the rule. The case of the University of Phoenix illustrates the silliness of this distinction—because the institution will transfer to new (nonprofit) ownership, it will be subject to far less regulatory scrutiny. This is far from the first time that a for-profit college has converted to nonprofit status, thereby escaping stricter regulation.

GE also makes a distinction between credential levels. Certificate programs are covered, but not degree programs. Consider Riverside City College, a public community college which offers both an undergraduate certificate and an associate degree in cosmetology. Both programs have similar earnings outcomes (graduates earn $14,443 in the certificate program and $14,697 in the associate degree program), meaning both would fail GE if the rule applied across the board. But because of GE’s limited coverage, only the certificate fails—the degree program may continue to draw federal aid.

Using ED data, I find that 55% of students enrolled in programs that would fail GE if the rule were applied universally will nevertheless remain unprotected, thanks to the exclusion of degree programs at nonprofit schools. Among those exempted are programs such as the University of Southern California’s master’s degree in theater. Students who finish this program face estimated annual loan payments of $8,609 against median earnings of just $30,912, meaning ED expects loan payments to consume 28% of earnings.

Some of GE’s defenders argue that the Higher Education Act only applies the term “gainful employment” to for-profit colleges and certificate programs, meaning that any federal regulation based on the “gainful employment” statutory authority must necessarily exempt other programs. But ED could easily rely on another provision of the Act, which states that agreements with institutions participating in the student loan program shall “provide for the implementation of a quality assurance system.” ED could use this authority to apply a GE-like rule to all schools.

And GE’s measures of student outcomes are problematic

Setting aside the mass exemptions from GE, there are also problems with how the rule’s accountability metrics are designed, as I show in a report for The Foundation for Research on Equal Opportunity. The regulation is too strict in some places but too lenient in others.

GE compares graduates’ median earnings to the typical earnings of young people with only a high school diploma. This might appear to make sense, but it ignores demographics. Most high school graduates are male, whereas many certificate programs are predominantly female. For instance, 60% of certificate programs in medical assisting—a predominantly female field—would fail GE as written because graduates’ earnings are too low. But when we compare medical assistants’ earnings to the earnings of high school graduates with similar demographics, medical assisting programs do provide an earnings boost. Kicking these programs off federal aid could destroy a first rung on the career ladder in healthcare for many working-class women.

For graduate credentials, the GE rule creates the opposite problem. Among graduate degree programs at for-profit schools (the only ones subject to GE), 126,000 students are in programs where debt service exceeds 8% of earnings. But GE creates an “escape hatch” for high-debt programs: debt service may be up to 20% of discretionary earnings (earnings minus $21,870) for programs with high debt-to-earnings ratios. Because of this escape hatch, fewer than half (60,000) of students in for-profit graduate programs are protected under GE.

The GE rule is too strict towards trade programs but too lenient towards graduate programs. If anything, it should be the opposite. Trade programs serve students with few other avenues for upward mobility, so policymakers should ensure they do not inadvertently shutter those options. Graduate programs, however, serve college graduates who are far less likely to be poor, but who could be harmed by runaway student debt burdens at the graduate level. Stricter controls could be justified there.

Moving forward on Gainful Employment

Transparency and accountability for federally-funded colleges and universities are always welcome. While the proposed GE rule has some upsides, it also has fundamental flaws. As it works toward a final rule, ED should rework the metrics it uses to assess financial value under GE and employ its full authority under the Higher Education Act to apply outcomes-based accountability to all higher education programs, regardless of sector or credential level.