This is what a collective sigh of relief in the for-profit college sector looks like:
The US department of education on Thursday released the final version of its long awaited “gainful employment” rule, its flagship effort to curb the worst performing for-profit college programmes.
For-profit colleges, which get the majority of their revenues from federally subsidised loans, have been under scrutiny due to their former students’ high default and delinquent rates. Hedgies such as Steve Eisman have been shorting colleges’ parent companies and lobbying the department of education to introduce stricter regulation on the sector. A bumper Washington lobbying bun fight has been going on for months, with the gainful employment rule at the centre of the lobbying.
Ninety thousand comments and over a hundred public hearings later, we have a whitewash rule.
The first draft proposed that for-profit collge programmes be ineligible for federally subsidised loans, or at least subject to certain restrictions, if they had repayment rates or debt burdens below specific thresholds in any one year (table from the US department of education):
The final draft is softer. It removes the “restricted” option (the yellow sections in the table above) meaning that programmes are either eligible or ineligible for federal subsisdies. To become ineligible they would have to meet all of the following criteria for three out of four consecutive years:
1. Under 35 percent of former students repaying their loans (defined as reducing the loan balance by at least $1);
2. Estimated annual loan payment of a typical graduate over 30 percent of discretionary income; and
3. Estimated annual loan payment of a typical graduate over 12 percent of total earnings
Citi’s James Samford noted this move to a three strike policy in a research brief released on Thursday:
First Strike: The school must disclose by how much the program missed passing and how it plans to improve its performance, and a 3-day waiting period is established before students can enroll.
Strike Two: School must tell students in the failing programs that the program may become ineligible, that the debt levels may be unaffordable, and disclose transfer options.
Strike Three: The program loses eligibility for federal aid for at least three years. Based on these criteria, the earliest any of the programs could become ineligible is 2015 if they fail to pass on 2012, 2013, AND 2014 metrics.
There’s more evidence of softening in the full 436 page regulations brief, published alongside the rule announcement. For example, interest-only loans are now to be included in the calculations and colleges are to be given flexibility in how they define debt-to-income ratios. Page 59 contains an interesting summary of what the department is trying to do with the rule revision:
Under the framework established in these final regulations, the Department shifts from focusing on programs that have problematic debt levels (programs subject to restrictions) to targeting the lowest-performing programs (programs where the annual loan payment exceeds 30 percent of discretionary income and 12 percent of annual earnings and repayment rates less than 35 percent).
In other words, it’s less concerned with the amount of debt carried by ex-students than identifying the worst performing courses, even though they may only be taken by a handful of students.
Oddly, despite the softening, the department has not changed its estimate of how many programmes will wind up being ineligible — 5 per cent. And since this estimate derives from graduation data in a lousy job market (those leaving college in 2008), it’s questionable whether this estimate will prove to be accurate. The background brief reads as if the 5 per cent target came first — rather than starting with the number of students in dire financial trouble — and we wouldn’t be surprised if the new rules meant that fewer than 5 per cent of courses became ineligible.
The thinking behind the gainful employment rule is sound: private providers of publicly subsidised education programmes should be held accountable for what they achieve with taxpayer dollars. (One could also add that students shouldn’t be ripped off.) Despite its laudable emphasis on programme evaluation, US public policy still has a way to go to improve the scope and design of its outcome-based programming (apologies for the jargon).
Perhaps this is a decent first step, particularly given the consistent threat from Congress for the rule to be restricted from the department’s appropriations. But given all the time and effort that has gone into its creation, and continuing fears of a “bubble” in US higher education, it looks like an opportunity wasted.
Related links:
For-Profit Colleges Win Major Concessions in Final ‘Gainful Employment’ Rule – Chronicle of Higher Education
The biggish short — subprime student loans – FT Alphaville
Student loans: debt, defaults and delinquents – FT Alphaville