Gainful Employment Informational Debt Measures Released

The Department of Education (ED) has released to institutions their 2011 Gainful Employment Informational Debt Measures and their 2011 Gainful Employment Loan Medians for Disclosures. The information was electronically placed in the Student Aid Internet Gateway (SAIG) mailbox designated by each institution for gainful employment notification. All institutions should have been able to access their own Gainful Employment Program (GE Program) information by Friday, June 22.

ED made the 2011 Gainful Employment Informational Debt Measures, without the student level information from the GEDRs, available to the public Tuesday morning, June 26. Public access to the 2011 Gainful Employment Debt Measures is available at http://federalstudentaid.ed.gov/datacenter/schooldata.html.

The new data, which cover career training programs at public, for-profit and non-profit schools, shows that 5 percent of these programs—all located at for-profit colleges—do not meet any of three key requirements of the Department's Gainful Employment regulation. These metrics are a "dry run" with no penalties attached, but eventually these for-profit programs could lose access to federal student aid if they cannot improve performance. 

Schools may wish to use this opportunity to ponder the meaning and ramifications of the metrics. Following are some questions and possible answers you might consider preparing in anticipation of discussion in the press and other public venues.

  1. Aren’t all programs supposed to result in gainful employment (GE)? 
  2. Hasn’t “gainful employment” always been defined? 
  3. Why has ED defined gainful employment? 
  4. What is the repayment rate? 
  5. What is the loan repayment rate threshold? 
  6. What are the debt-to-earnings ratios? 
  7. What are satisfactory debt-to-earnings ratios? 
  8. Hasn’t ED been calculating percentages of students who fail to repay their loans for several years? 
  9. Which is more accurate in assessing whether students are repaying their loans, default rates or repayment rates? 
  10. Are gainful employment metrics a measure of the academic program’s quality? 
  11. Does a low repayment rate mean all students who attended the program are having economic difficulty? 
  12. Should students steer clear of programs with low repayment rates?  
  13. Does a high debt-to-earnings ratio mean the program is overpriced? 
  14. What are the penalties if a program does not measure up? 
 

1. Aren’t all programs supposed to result in gainful employment (GE)? 

The full statutory phrase is “prepares students for gainful employment in a recognized occupation.”  Not all programs are designed to result in expertise in a specific occupation.  Degree programs at public and private nonprofit institutions are designed for a broader educational outcome with a concentration in a particular field of study, but do in fact result in higher lifetime earnings.  Any non-degree program, such as programs resulting in certificates, must be designed to lead to gainful employment in a recognized occupation in order to be deemed eligible for federal student aid. These programs are generally less than two years in length, some considerably shorter.

Almost all programs, degree or non-degree and regardless of length, at private for-profit institutions must meet the gainful employment condition in order for students to receive federal student aid.

2. Hasn’t “gainful employment” always been defined? 

No.  Even though the phrase has been used in the law for many decades, Congress never specifically defined it.  Other federal agencies, such as the Social Security Administration and Health and Human Services, use similar phrases and have very general expectations of some level of earned income, but the Department of Education (ED) views the term very differently.  Measures of gainful employment were introduced for the first time in June 2011, and become effective July 1, 2012.

3. Why has ED defined gainful employment? 

The largest source of federal support to postsecondary students is the Direct Loan Program, and some institutions are heavily reliant on this form of federal funding.  To determine whether students are burdened with debt that is beyond their earnings capacity to repay, ED has created a proxy system that attempts to measure how well former students from a given academic program are able to repay their student loans.

4. What is the repayment rate? 

The repayment rate represents the percentage of loan dollars borrowed by students to attend an academic program that are in satisfactory repayment, generally measured 3-4 years after the loans entered repayment.  The rate is calculated by dividing the aggregate amount of loans that are being satisfactorily repaid by the total outstanding balances on all included loans at the time repayment began. Capitalized interest is included in loan dollars borrowed. 

Loans to be included, time periods that can be used, and the definition of satisfactory repayment add considerable complexity. Not all loans that entered repayment are included; for example, loans that are currently in deferment due to military service or because the borrower went back to school are not included.  Not all loans that are in repayment are considered satisfactory for gainful employment purposes; for example, a loan that was in default at any point is not included as satisfactory even if it has been brought current by the time the rate is measured.

For example, the 2012 repayment rate will generally look at loans that entered repayment during the 2008 and 2009 fiscal years, and that were in a satisfactory repayment status during the 2012 fiscal year.  Thus the 2012 rate is calculated based on loans that entered repayment on or after October 1, 2007, through September 30, 2009 (i.e., in either FY 2008 or FY 2009). The rate measures repayment activity on those loans during the period October 1, 2011, through September 30, 2012 (i.e., FY 2012).

5. What is the loan repayment rate threshold? 

The repayment rate threshold is 35%; a program with a rate of 35% or greater is considered to be preparing students for gainful employment. Rates below that percentage are considered unsatisfactory.  The rate is set to take into account such factors as:

  • Variances in earnings unrelated to adequate preparation
  • Borrowers who opt out of work rather than are unable to find work, or who choose to work part-time
  • Borrowers who are unable to work due to conditions other than inadequate preparation

6. What are the debt-to-earnings ratios? 

The debt-to-earnings ratios express an average loan repayment amount as a percentage of actual earnings or a percentage of discretionary income.  This measure seeks to determine whether the program delivers value (as expressed by earnings of program completers) for cost (as expressed by the annual loan repayment amount owed on the median debt of students who completed the program).  There are two ratios: (1) an actual earnings rate and a (2) discretionary income rate.

The earnings rate is calculated by dividing the annual loan repayment by an average of the annual earnings of individuals who completed the program. The average earnings used is the higher of the mean or median annual earnings.

The discretionary income rate is calculated in the same way, except that the amount of annual earnings is reduced by 150 percent of the most current Poverty Guideline for a single person in the continental U.S.

FY 2012 ratios will be based on loan debt of former students who completed the program during the 2008 and 2009 fiscal years, which covers the period October 1, 2007, through September 30, 2009, and their earnings for the 2011 calendar year. If 30 or fewer students completed the program during that period, completers from fiscal years 2006 and 2007 will be added to the calculations. Debt-to-earnings ratios take into account private loan borrowing when that information is known.

These calculations rely on earnings information provided by the Social Security Administration (SSA).  Schools provide ED with lists of students who completed a given academic program, ED provides the list to SSA, and SSA uses its data to calculate mean and median annual earnings. ED then completes the rate calculations as described above. The individual-level data (the earnings of each person on the list of completers) is protected by privacy rules and is not made available to either ED or the school.

This measure of gainful employment is complicated by a number of factors, including borrowing by students for multiple programs or at multiple schools.

7. What are satisfactory debt-to-earnings ratios? 

A program is considered to be preparing students for gainful employment if the annual loan repayment is less than or equal to—

  • 12 percent of annual earnings (actual earnings threshold), or
  • 30 percent of discretionary income (discretionary income threshold).

8. Hasn’t ED been calculating percentages of students who fail to repay their loans for several years? 

Yes, but student loan default rates are very different from gainful employment measures.  The cohort default rate (CDR) expresses the percentage of borrowers who enter repayment within a particular year and then default (fail to repay any loan amount for a certain period of time, despite vigorous collection efforts) within the first two or three years after they enter repayment. Only defaulted loans are counted in this rate.  A high CDR can indicate problems with repayment.

The gainful employment repayment rate looks at total dollars borrowed rather than number of borrowers, and reflects the aggregate amount that is in satisfactory repayment. This is an opposite view from the CDR. Rather than looking at borrowers who fail to repay, the gainful employment metric considers the rate at which borrowers pay down their loans.  A loan does not have to be in default to be considered in an unsuccessful repayment status.  A low repayment rate can indicate problems with repayment. 

9. Which is more accurate in assessing whether students are repaying their loans, default rates or repayment rates? 

Each has a place in evaluating the overall measure of a program’s value. However, it is important to note that in the case of cohort default rates, schools have a six month window to verify the data and provide corrections to ED before they become official and are released to the public. In many instances, this process of data verification has a very meaningful impact on the final metrics. The two measures also reflect data from different years, and exclude loans for different reasons. Cohort default rates are calculated for the school overall, whereas GE measures are calculated for individual academic programs. Default rates are calculated in terms of borrowers, whereas repayment rates look at loan volume. The two measures will also include data for different sets of students.

10. Are gainful employment metrics a measure of the academic program’s quality? 

The GE metrics are one important measure that students and parents should pay attention to as they examine colleges and programs. However, GE data must not be viewed within a silo; factors external to the school, such as the national and local economy, can impact the data. Outside borrowing of private education loans by students, over which the school has little or no control, can also impact the borrower’s ability to repay loans. 

A major shortfall of these metrics is that they pull data from multiple government agencies (Social Security & ED) that cannot be verified by schools. Because of privacy issues related to income data, schools are not provided with some of the underlying data to verify. Thus the accuracy of some of the data used to calculate the metrics cannot be verified or corrected by the school. 

11. Does a low repayment rate mean all students who attended the program are having economic difficulty? 

Repayment rates must be viewed in the context of the percentage of students who borrowed to attend the academic program (if the percentage is low, the profile of students who have difficulty repaying may not be typical of new students coming into the program of study).  If 80% of a program’s attendees borrow and only 50% are in a satisfactory repayment status, that warrants a close look at whether a student should attend that program. If only 20% of students attending the program had to borrow, and 50% are in satisfactory repayment, that’s still a relatively small number of former students having difficulty with student loan debt. 

12. Should students steer clear of programs with low repayment rates? 

Perhaps, but a student considering attendance in any program of study should look at his or her own resources and real need to borrow to determine whether he or she is likely to have difficulty with student loan repayment.  

13. Does a high debt-to-earnings ratio mean the program is overpriced? 

Perhaps; a student should certainly take a close, careful look at his or her own prospects of employment, willingness and ability to move to where relevant jobs are available, and long-term goals. The ratios measures earnings early in graduates’ working careers, so investigating whether earnings are likely to rise with work experience and opportunities for advancement is especially important. Whether a given career field is in a temporary or indefinite slump due to economic conditions might also affect a student’s plans and pathways.

14. What are the penalties if a program does not measure up? 

A program that does not pass at least one of the measures (repayment rate or actual earnings ratio or discretionary income ratio) for 3 of the 4 most recent fiscal years loses eligibility for Title IV funds. Students in that academic program may not receive Title IV student aid, including Pell Grants, Direct Loans, Federal Work-Study, Perkins Loans, Federal Supplemental Educational Opportunity Grants (FSEOG), and TEACH Grants.

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