Cohort Default Rates Thrown Out Under New Gainful Employment Rules

admin ., Compliance, Federal Student Aid Programs

Posted: December 12, 2014

The highly contentious issue of “gainful employment” rules, which mainly apply to for-profit and career schools, centers around the idea that students should receive jobs once they graduate from a program and the student should be able to handle the debt load he or she incurred while enrolled at that institution for a particular major.

At the end of October, the Obama Administration finalized rules that would help protect students from poorly performing career schools. Under the new rules, programs will no longer be held accountable for their cohort default rates, which indicate the percentage of borrowers who are not repaying their student loans. Instead, the programs will be evaluated solely on the basis of their graduates’ debt-to-earnings ratios. The new regulations will go into effect on July 1, 2015. The Department of Education estimates that 1,400 programs, 99% of them at for-profit colleges, will fail the new rule in the first year of implementation. This could impact up to 840,000 students in total if the projections come to fruition.

“Career colleges must be a stepping stone to the middle class. But too many hard-working students find themselves buried in debt with little to show for it. That is simply unacceptable,” U.S. Secretary of Education Arne Duncan said. “These regulations are a necessary step to ensure that colleges accepting federal funds protect students, cut costs and improve outcomes. We will continue to take action as needed.”

Critics of the new rules say they don’t go far enough. Advocacy groups have pushed the Department to include a measure in the rule that captures dropout rates. The debt-to-earnings metric looks only at students who complete their programs, meaning that an institution that failed to graduate most of its students could still be in compliance with the newly revised rule. Colleges will still be required to disclose their completion and cohort default rates.

The final rules state that programs will fail if their graduates’ student loan debt payments exceed 12% of their income and 30% of their discretionary income. Programs that fail both debt-to-income tests twice in any three-year period will be ineligible for Title IV aid going forward.