New Rule Released by the White House Targets High-Debt, Predatory Colleges

Last Updated on September 28, 2023 by Robert C. Hoopes

The Biden administration has finalized the gainful employment rule, a federal policy aimed at identifying and eliminating predatory or ineffective colleges. The rule seeks to ensure that students who invest time, energy, and money into higher education receive qualifications that justify their sacrifices. It is estimated that the rule will protect around 700,000 students annually who would have enrolled in nearly 1,700 low-performing programs.

The evaluation of programs is based on the debt-to-earnings ratio, comparing how much debt students carry after graduation with how much they earn. For-profit or certificate programs that consistently fail to produce gainful employment risk losing eligibility for federal financial aid.

The new rule introduces the earnings premium test, which measures whether graduates’ median earnings surpass those of individuals with only a high school diploma. Programs that fail either test for two out of three consecutive years will lose eligibility for federal aid.

Transparency provisions have been included in the regulations, requiring all institutions that receive federal financial aid, including private nonprofit colleges and public universities, to publish detailed information about attendance costs, graduates’ earnings, borrowing amounts, and other data. Prospective students must acknowledge the debt risks associated with their chosen program.

Advocates believe that these measures will protect students from institutions that burden them with debt without providing sufficient training or career prospects.

Programs that fail the debt-to-earnings test account for 4% of federal financial aid recipients but are responsible for nearly three times as many defaulters (11%). The earnings premium test helps identify institutions with high default rates that meet debt-to-earnings requirements but have lower debt levels.

The gainful employment rule has faced controversy in the past, with industry leaders arguing that it targets for-profit colleges while placing too much emphasis on earnings. The Trump administration rescinded the rule in 2019, leading to concerns over accountability for colleges.

Polls indicate that most Americans support the idea of gainful employment, with 8 out of 10 voters agreeing that higher education should result in graduates earning enough to repay their student loans.

The Biden administration’s proposed rules faced backlash from for-profit colleges and certificate programs, who believed they went too far and failed to protect most students. Education Secretary Miguel Cardona stated that the rule aims to fix a broken system and provide students with information about debt, earnings, and career prospects before they take out loans.

The publication of the rule is timely, as it needed to be finalized by November 1st to take effect the following July. Failure to meet this deadline would have postponed the implementation of the rule until at least July 2025.

Advocates argue that the gainful employment rule prevents failing colleges from continuing to operate, ensuring that the federal government holds colleges accountable for student outcomes.

An analysis by the Century Foundation suggests that Biden’s gainful employment rule will lead to increased earnings for students by directing them away from high-debt, low-earning programs and toward higher-value alternatives. Financial aid recipients could see their salaries increase by $3,400, with a 45% rise in annual earnings if they transfer from noncompliant institutions to higher-value colleges. Debt-to-earnings ratios would also decrease significantly.

The analysis challenges claims that gainful employment limits higher education options for students, as the nearest alternative institution offering the same discipline is typically within five miles, or less than three miles on average for other disciplines within the same field.

Proponents argue that gainful employment increases public trust in higher education by ensuring that students invest in programs that provide a worthwhile return on their investment.