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Gainful Employment Summary Part 3 of 3: Penalties

Final regulations published today in the Federal Register affect the Title IV eligibility of any non-degree program at any level of study at all institutions, and virtually all programs at for-profit institutions. Students in these programs are permitted to receive Title IV aid (including Pell Grant, Direct Loans, and federal campus-based aid programs) only if the educational program prepares the student for gainful employment in a recognized occupation. The new regulations define -- for the first time -- the standards that will be used to measure "preparation for gainful employment." More than five out of six postsecondary institutions participating in federal student aid offer programs that are affected by the new regulations.

This article is the third of three summarizing the new gainful employment regulations.  Part one introduces the final rule and details one of the three measures: repayment rate. Part two details the two debt-to-earnings ratios. This article discusses penalties for failing these debt measures.

Beginning with the debt measures calculated for fiscal year (FY) 2012, the Department of Education (ED) will begin imposing penalties on institutions having a gainful employment program that fails to meet any of the minimum standards. The minimum standards require a gainful employment program to have an annual loan repayment rate of at least 35 percent, or a debt-to-earnings ratio in which the annual payment on the program’s median loan debt is either no greater than 30 percent of average discretionary income or no greater than 12 percent of average annual earnings. A program failing all three of the minimum standards will be designated as either a failing program or an ineligible program depending on when and how often the program fails the standards over a period of four consecutive fiscal years. A program’s status as either failing or ineligible and the penalties associated with that status apply to each location of an institution offering the program. 

A program that fails all of the minimum standards for a single fiscal year is a failing program. A failing program retains that status until it either passes the minimum standards for each of the three following FYs or is determined to be an ineligible program within the four-FY period. Once a program fails to meet any of the minimum standards for three out of the four most recent FYs, the program becomes an ineligible program.

For example, suppose a program fails the minimum standards for the first time in FY 2012. If the program passes the minimum standards for FY 2013, FY 2014, and FY 2015, the program no longer is labeled as failing. Should the program fail the minimum standards for FY 2017, the program once again becomes a failing program. If the program passes the standards for FY 2018 but fails them for FY 2019 and 2020, the program becomes an ineligible program.

Failing Programs

Students enrolled in a failing program remain eligible to participate fully in the Title IV programs. However, the institution must provide, in an easy to understand format, plain language timely warnings about the program’s status directly to each student enrolled in the program and each prospective student who expresses an interest in the program. The institution also must provide, to the extent practical, alternatives to English-language warnings for students whose first language is not English.  Although schools can develop their own warnings, ED plans to develop a model warning form through the information collection process under the Paperwork Reduction Act of 1995. Since this is a lengthy process, the preamble provides a link to the Plain Language website where schools can access the plain language guidelines and examples. 

The preamble to the final rules points out ED’s belief that a program that only failed the standards for one FY still is capable of significant improvement. ED was also concerned that requiring too harsh a warning early on may cause unnecessary program closures. Thus, ED chose to implement a two-tiered warning system—first-year failure and second-year failure—that balances the informational needs of enrolled and prospective students with the level of risk that the program will lose its Title IV eligibility. 

The warning must be provided to an enrolled student no later than 30 days after the date ED notifies the institution it has failed the minimum standards. For a prospective student, the institution must provide the warning when the student first contacts the institution about the program. If the prospective student plans to finance the cost of the program using Title IV funds, the regulations require a three-day cooling off period, starting the day after the date the institution first provided the warning. The institution cannot enroll the student until after the three-day cooling off period. Should the student try to enroll more than 30 days after the warning was provided, the institution must provide the warning again and a 3-day cooling period applies. The cooling off period provides the student an opportunity to consider his/her commitment   to enroll in the program in light of the information about the program’s failure to pass the minimum standards. This includes evaluating the potential consequences of enrolling in the program, comparing similar programs offered by other institutions, and evaluating other educational options.

The timely warnings provisions do not explicitly address a prospective student who first contacted the institution about the program before the institution was notified that it was subject to the first-year or second-year warning requirements, but has not yet enrolled. Since the provisions governing each of these warnings require the institution to provide the warning to each prospective student, the same timely warning requirements would apply. However, in this situation, the institution would provide the warning during its next contact with the student.

If a program fails the minimum standards for a single FY, the first-year warning requirements apply. The institution’s warning must explain the debt measures and inform the student of the amount by which the program failed the minimum standards. The warning also must explain any actions the institution plans to take to improve the program’s performance under the debt measures—that is, to increase the program’s loan repayment rate and/or decrease the program’s debt-to-earnings ratio. The regulations do not specify specific steps a school must take to improve its performance under the debt measures.

A first-year warning is not publically disclosed. The institution must deliver the warning directly to each student enrolled in the failing program either in writing or orally. A written warning includes sending an e-mail directly to the student. An oral warning includes a face-to-face conversation, a group presentation at which the school can document the student’s attendance, or a phone call. If the institution provides the warning orally, it must document it provided the warning and maintain documentation of the student’s presence and how the information was provided, including any script and/or other materials used to deliver the warning.

If a program fails the minimum standards for two consecutive FYs or for two out of the three most recently completed FYs, the second-year warning requirements apply. Table H in the preamble contains scenarios illustrating how the first-year and second-year warning requirements are applied. Although the institution can provide the warning orally, it also must provide the warning in writing.

Because a program subject to the second-year warning requirements has an increased level of risk that the program will lose its Title IV eligibility, the institution’s warning must contain the same information as required for a first-year warning as well as a clear and conspicuous statement that a student  who enrolls or continues in the program should expect to have difficulty repaying his/her student loans. In addition, the warning must explain:

  • The actions the institution has already taken to improve the program and plans to take in response to the second failure;
  • The risks associated with enrolling or continuing in the program, including the potential consequences for, and options available to, the student should the program lose its Title IV eligibility; and
  • Available resources, including the College Navigator, the student may use to research other educational options and compare program costs.

If the institution plans to discontinue the program voluntarily, the warning must include the timeline the institution will follow for discontinuing it and options available to the student, such as transferring to another eligible program at the school or to another institution. In addition to sending the warning to students, the institution must display it prominently on the home page of its website and include it in all promotional materials sent or made available to prospective students. The preamble points out that the term promotional materials is broadly defined and includes such things as course catalogues, brochures, television ads, and poster advertisements that mention or list the program. However, if a poster is an advertisement for the institution as a whole or for other institutional programs that have not failed the minimum standards for more than one of the three most recent FYs, the warning is not required.

Ineligible Programs

The earliest a program can become an ineligible program is not until calendar year 2015 after the Department has calculated the debt measures for FYs 2012 through 2014. However, the regulations provide for a transition year during which the number of programs losing their Title IV eligibility will be limited to no more than five percent of the total number of students who completed their programs during FY 2014. To ensure no sector bears more than five percent of the initial impact of the new regulations, the regulations apply the cap to each of three institutional categories—public, private nonprofit, and proprietary—based on the total number of program completers in the particular institutional category. Within each institutional category, loan repayment rates will be sorted from lowest to highest. Starting with the lowest loan repayment rate, the Department will identify ineligible programs until the five percent cap is reached, but not exceeded. As the cap on ineligible programs is approached, if the number of students completing the program for the next rate (as well as other programs with the same rate) would exceed the five percent cap, the cap will be applied excluding programs having that rate. Although no sanctions will be applied during the transition year to ineligible programs that have a rate over the cap, the preamble states that a program’s rate during the transition year will count as a failing year in subsequent years.

Once the Department notifies the institution of the program’s ineligibility, the institution can make no further disbursements of Title IV funds to students enrolled in the program. However, if the school receives notification of the program’s ineligibility during a payment period or Direct Loan period of enrollment, the institution may make disbursements as permitted under the conditions specified in §668.26(d) of the Student Assistance General Provisions regulations.

Reestablishing Program Eligibility

As indicated earlier, an institution may voluntarily discontinue a failing program. If chooses to do so, it also relinquishes the program’s Title IV eligibility. If the institution later chooses to offer the program and re-establish its Title IV eligibility, the program must satisfy a two- or three-year wait-out period before the institution may seek to re-establish the program’s eligibility under §600.20(d) of the Institutional Eligibility regulations. Similarly, a program that becomes ineligible under the debt measures also must satisfy a wait-out period. 

For failed programs, the length of the wait-out period depends on when the institution voluntarily discontinued the program. For purposes of re-establishing the program’s eligibility under the debt measures, the institution voluntarily discontinues the failing program on the date the institution provided the Department written notice relinquishing the program’s Title IV eligibility. If the institution voluntarily discontinued the program after being notified that it must provide first-year warnings or within 90 days of being notified that it must provide second-year warnings, the wait is 2 FYs following the FY the program was voluntarily discontinued. If the institution voluntarily discontinued the program more than 90 days after notification that it must provide second-year warnings, the wait is 3 FYs.

The purpose for the wait-out period is to provide the institution an incentive and time to take actions needed to improve the program substantially so that it does not fail or become ineligible again. In addition, the break prevents the program’s prior history under the debt measures from being used against the program if it re-establishes eligibility. To prevent institutions from evading the wait-out period by repackaging an ineligible program, the same three-year wait period also applies to any new program that is substantially similar to an ineligible program. A program is substantially similar if it has the same credential level and the same first four digits of the CIP code as an ineligible program of the institution.

Conclusion

As noted at the beginning of this article most schools participating in the Title IV programs offer one or more programs impacted by these regulations. Given the complexity of the new rules and the ramifications not only to the institution’s gainful employment programs but also to the institution as a whole, appropriate personal should carefully read, study, and digest all information in this regulatory package.

Return to Part 2 or Part 1 

 

Publication Date: 6/13/2011


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