Federal ‘gainful employment’ rule tightens oversight of for-profit colleges

l Are graduates spending 30 percent or less of their discretionary income on loan payments? This test seeks to ensure that loan payments are not eating up too much of the money left after graduates pay for basic needs.

l Are graduates spending 12 percent or less of their total income on loan payments? This standard, related to the previous test, establishes that loan bills should not consume more than about an eighth of total earnings.

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Programs that pass any of the three tests would retain eligibility to participate in federal aid initiatives, enabling qualified students to secure federal grants or loans.

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The gainful-employment rule was among more than a dozen Duncan proposed to target perceived abuses in a sector where, critics say, regulation had gone lax. The others, including one that restricted commission payments to student recruiters, were approved last year. Gainful employment was the most contentious by far. Pushback against a draft version last year delayed release of the rule.

In draft form, the rule would have yanked federal aid the first time a program failed the three tests.

With the new grace period, the final rule moves back the date when deficient programs could lose funding, to 2015.

“This should be a perfectly reasonable bar and one that every for-profit program should be able to reach,” Duncan said. “. . . But if you get three strikes over four years, then you’re out.”

Federal officials estimated that the draft version would have shuttered 16 percent of for-profit programs. (Each school can have many programs, such as culinary arts, nursing or graphic design.) They now predict that 5 percent will shut down.

Regulators also removed a draft provision that would have placed a wide swath of programs under “restricted” status even if they passed one or more of the gainful-employment tests. The final rule instead places mounting restrictions on programs only after they fail the three tests. A program that fails once must disclose that fact to students. After two failures, the institution must warn students about excessive debt and the potential for closure and give them transfer options.

Supporters of the rule say anyone displaced from a program that fails the federal tests is probably better off. Opponents say that they support the idea of monitoring earnings and debt but that details in the rule un­fairly penalize some types of for-profit programs, especially longer ones that lead to bachelor’s or professional degrees and generate more student debt.

Schools that operate for profit — running the gamut from cosmetology institutes to universities offering medical and legal degrees — have grown from 4 percent to 10 percent of full-time college enrollment since 2000, according to the College Board. Several factors have driven their rise, including a loosening of regulation under the George W. Bush administration and growing acceptance of colleges that operate primarily online.

The gainful-employment regulation also covers most non-
degree programs in public and private nonprofit colleges.