Biden's 'Gainful Employment' Rule Needs Fixing
President Biden’s $400 billion student loan bailout is an implicit admission that colleges and universities have failed to deliver the reliable return on investment they promised their students. If no changes are made to the federal student loan program going forward, Uncle Sam will disburse $1 trillion in new student loans over the coming decade. But if today’s students are struggling to repay their loans without forgiveness, it follows that some of those future loans should not be made.
While the Biden administration has shown little interest in comprehensive limitations on new lending, it is likely to subject a small subset of higher education programs to at least some accountability. The proposed Gainful Employment rule, which would terminate career-oriented programs’ eligibility for federal student aid when their graduates’ earnings are too low or their debts are too high, is a welcome contribution to the higher education accountability conversation. But there are some significant problems with the rule as currently proposed.
An issue paper made available in March lays out the administration’s current thinking on Gainful Employment; a formal proposed rule is expected next year. The issue paper proposes measuring students’ loan payments relative to their earnings after graduation, along with whether their earnings exceed those of a typical early-career high school graduate in the same state. Programs would lose access to federal funding if their loan payments-to-earnings ratio is too high, or if absolute earnings are too low.
The catch is that the proposed rule only applies to certificate programs and degree programs at for-profit colleges. Degree programs at public and private nonprofit colleges face zero accountability under the rule. More than three-quarters of college students graduate from one of these uncovered programs; the Gainful Employment rule does nothing to protect them.
That Gainful Employment does not apply to all programs is a massive oversight. Defenders of the status quo claim the Education Department is constrained by the letter of the law: The Higher Education Act only includes a “gainful employment” requirement for certificate programs and for-profit colleges. But a separate clause of the Act also mandates a “quality assurance system” for all programs receiving federal funding, suggesting that a Gainful Employment-like rule could be applied to degree programs at nonprofit schools.
Extending Gainful Employment to all programs is certainly on sounder legal footing than forgiving $400 billion of student loans by executive order, so the Biden administration has no excuses on that front. But “Gainful for all” would still leave several problems to be solved. The current Gainful Employment framework subjects many trade schools to overly strict rules, while it would be far too lenient towards low-value master’s degree programs that leave students drowning in debt.
The rule’s requirement that programs deliver median earnings above those of high school graduates makes sense on its face: postsecondary education should increase students’ earnings above the high school level. But the comparison is not quite apples-to-apples.
People with only a high school degree are mostly male, and men tend to earn more than women at all levels of education. Many predominantly female certificate programs such as medical assisting generate seemingly low earnings. But when comparing graduates of medical assistant programs to a demographically similar group of high school graduates, the programs do appear to deliver a real earnings gain that justifies their cost.
Fortunately, there are ways to better target the Gainful Employment rule. For example, lowering the earnings threshold to 85 percent of its current level would do much to reduce the share of programs unfairly penalized under the current framework.
In contrast, “Gainful for all” would not be tough enough on graduate programs, specifically master’s degrees. The rule cuts off funding to programs whose ratio of estimated annual loan payments to graduate earnings exceeds 8 percent. But the rule also includes an escape hatch: programs where the ratio of loan payments to discretionary earnings (earnings minus 1.5 times the poverty line) can be as high as 20 percent.
Even programs where students owe far more than they earn can remain eligible for federal funding as long as they pass the “escape hatch” test. Even if Gainful Employment were applied to all programs, just 6 percent of master’s degree programs would fail, even though 40 percent of master’s degrees do not yield a positive return on investment for students.
A “Gainful for all” policy should eliminate the escape hatch and ensure that programs with high debt-to-earnings ratios are held accountable. Policymakers should also limit graduate loans on the front end to ensure that graduate schools cannot charge excessive tuition. Given that graduate education accounts for a large and growing share of new federal student loans, enforcing rigorous standards of quality in this sector is essential.
If the Biden administration is serious about fixing the federal student loan program, it must hold all higher education programs dependent on federal funding accountable for their outcomes. But “Gainful for all” is not enough — the administration must also make technical changes to its Gainful Employment framework to improve the rule’s targeting. Right now, the rule would unfairly penalize trade schools while letting wealthy universities with expansive graduate programs off the hook. The proposed rule as it stands is inadequate for the moment.
Preston Cooper is a senior fellow with the Foundation for Research on Equal Opportunity.
