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Gainful Employment Summary Part 2 of 3: Debt-to-Earnings Measures

Final regulations soon to be officially published 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 second of three summarizing the new gainful employment regulations. Part one introduces the final rule and details one of the three measures: repayment rate. This article (part two) details the two debt-to-earnings ratios. Part three will discuss penalties for failing the measures.

As noted in part one of this series, new regulations released by the Department of Education (ED) in prepublication format last week establish three standards, or measures, all related to student loan borrowing, by which gainful employment will be gauged, effective July 1, 2012:

  • Annual loan repayment rate, which assesses whether the FFEL and Direct Loan debt incurred by a particular cohort of borrowers to attend the program is being repaid at a rate that implies gainful employment. The repayment rate must be at least 35 percent.
  • Discretionary income threshold, which determines whether the annual repayment required on loan debt attributable to the academic program by those who completed the program is reasonable compared to their discretionary income. The program’s annual loan payment may be no greater than 30 percent of discretionary income.
  • Actual earnings threshold, which establishes whether the annual repayment required on loan debt attributable to the academic program by those who completed the program is reasonable when compared to their actual annual earnings. The program’s annual loan payment may be no greater than 12 percent of annual earnings.

An academic program that passes any one standard is considered to be preparing students for gainful employment. A program that fails all three standards for a given year is considered to have failed to demonstrate that it meets the gainful employment condition of program eligibility for that year. A program that fails all three standards for three years out of four loses Title IV eligibility. 

All three standards collectively are known as debt measures. The discretionary income and actual earnings thresholds are together referred to as the debt-to-earnings ratios. Where the repayment rate examines outstanding FFELP and Direct loans borrowed by all program attendees regardless of whether they completed the program, the debt-to-earnings ratios considers only program completers, but takes into account loan debt resulting from private education loans and debt obligations arising from institutional financing plans as well as FFELP and Direct loans.

See part one of this series of articles for general information and definitions related to the gainful employment debt measures, and for a description of the repayment rate.

Debt-to-earnings ratios

The debt-to-earnings ratios examine the income earned during the calendar year preceding the most recently completed fiscal year (FY), by former students who completed the academic program during an earlier specified period of time. (If the measures are being calculated for FY 2012, the earnings year is calendar year 2011.) Those earnings are compared to an assumed annual payment for the average loan debt incurred by students in the program. For each FY, the Department of Education (ED) calculates the debt-to-earnings ratios using the two formulas described below.

Discretionary income rate: 

 

Annual loan payment based on median loan debt 
Higher of Mean or Median Annual Earnings – (1.5 * Poverty Guideline)  

Earnings rate:  

Annual loan payment based on median loan debt 
Higher of Mean or Median Annual Earnings  

As can be seen in the first ratio above, “discretionary income” means the difference between the mean or median annual earnings and 150 percent of the most current Poverty Guideline for a single person in the continental U.S. The Poverty Guidelines are published annually by the U.S. Department of Health and Human Services (HHS) and are available at http://aspe.hhs.gov/poverty.

“Mean” is the kind of average we most commonly understand: add together all the values in a list and divide by the number of items that were added.

“Median” is the kind of average that looks at the middle value in a list that has been arranged in order of value, e.g., lowest to highest. The lowest and highest values cancel each other out until you arrive at the median value.

For example, consider the following set of 7 numbers:  1, 1, 2, 3, 3, 4, 5.

    The mean average is 2.7 (1+1+2+3+3 +4+5 = 19/7=2.7).
    The median average is 3 (first 1 cancels the 5, second 1 cancels the 4, 2 cancels the second 3).

The debt-to-earnings ratios use median loan debt to determine the annual loan payment for the program of study, and the higher of the mean or median annual earnings to determine the ratio. However, by way of shortcut, the regulation considers programs with a median loan debt of zero to be meeting the measures, since programs with a median loan debt of zero are not placing any debt burden on the majority of their students.

In the preamble to the final rule, ED explains that use of the higher of the mean or median annual earnings is designed in part to address suggestions made in response to the proposed rules (upon which the final rules are based) to somehow adjust the debt measures to account for high unemployment or underemployment: “All things equal, the value of mean or median earnings is distribution dependent.  In a prosperous economy where fewer people are unemployed and earnings are generally higher, average earnings are likely to be higher than median earnings.  Conversely, during an economic downturn where more people are unemployed and earnings are depressed or stagnant, median earnings are likely to be higher than average earnings.”

If either ratio is equal to or lower than the corresponding threshold, the program is considered to be providing training that prepares students for gainful employment. Thus, the program’s annual loan payment must be less than or equal to:

  • 30 percent of discretionary income; or 
  • 12 percent of annual earnings.

Cohort of Program Completers

As noted above, the debt-to-earnings ratios examine the income earned during the calendar year preceding the most recently completed fiscal year by former students who completed the program during an earlier specified period of time. 

ED will assess programs based on two years of performance, unless a program has fewer than 30 program completers in the two-year period. In that case, the program’s performance will be assessed across a four-year period.  Programs that have fewer than 30 program completers in the four-year period are considered to meet the debt measures due to the difficulty in reliably assessing the performance of programs with small numbers of students.

Generally, most programs will use a cohort of former students who completed the program in the two-year period (referred to as the 2YP) consisting of the third and fourth fiscal years prior to the fiscal year for which the debt measures are calculated. For example, if the debt measures are being calculated for FY 2012, the 2YP consists of fiscal years 2008 and 2009. That is, the earnings during 2012 of students who completed the program from October 1, 2007, through September 30, 2009, are used to assess whether the debt accrued by those students to attend the program is reasonable.

If students in the program of study are required to complete a medical or dental internship or residency, the cohort of students is taken from the sixth and seventh fiscal years prior to the fiscal year for which the measures are being calculated. This two-year period is referred to as the 2YP-R. For FY 2012, that would be fiscal years 2005 and 2006.

See the first article in this series for details on the 4-year periods (4YP or 4YP-R) used when the two-year cohort contains fewer than 30 completers.

ED excludes former students from the cohort if:

  • One or more of the student’s loans were in a military-related deferment status at any time during the calendar year for which earnings are determined; 
  • The student died; 
  • One or more of the student’s loans were assigned or transferred to ED and are being considered for discharge as a result of the total and permanent disability of the student, or were discharged on that basis; or 
  • The student was enrolled in any other eligible program at the institution or at another institution during the calendar year for which earnings are determined.

Note that the cohort includes all program completers regardless of whether they received Title IV student assistance. The list of students in the cohort is derived from information provided by the school in response to reporting requirements in section 668.6 of the General Provisions regulations (slated to go into effect July 1, 2011, with first reports due October 1, 2011).

Annual earnings

ED obtains from the Social Security Administration (SSA), or another Federal agency, the most currently available mean and median annual earnings of the students who completed the program during the 2YP, the 2YP-R, the 4YP, or the 4YP-R, as applicable. ED provides the list of former students in the cohort to SSA; SSA returns data concerning the mean and median annual earnings for those former students. ED then calculates the debt-to-earnings ratios using the higher of the mean or median annual earnings.

Although institutions may preview, and petition to change, the list of former students whose earnings will be used, an institution may not challenge the accuracy of the mean or median annual earnings ED obtains from SSA to calculate the draft debt-to-earnings ratios for the program. However, if SSA cannot provide the mean and median earnings, the program is considered to satisfy the debt measures.

In response to concerns expressed in public comments to the proposed rule, ED explains in the preamble to the final rule that SSA has earnings information for sole proprietors and independent contractors as well as wage earners. SSA defines a person's earnings for a taxable year as the sum of pay for services as an employee plus all net earnings from self-employment (minus any net loss from self-employment).  Earnings include:

Most wages from employment covered by Social Security;

  • All cash pay for agricultural and domestic work, even if it is not considered "wages";
  • Cash tips which equal or exceed $20 a month from work for an employer;
  • All pay for work not covered by Social Security if the work is done in the United States, including work for Federal, State, and local units of government; and
  • All net earnings from self-employment, including those not covered by Social Security.

Because SSA data privacy requirements restrict access to earnings on an individual basis, SSA will provide ED only with the mean and median earnings figures based on all program completers. ED accepts SSA information as reliable. Because neither the institution nor ED has access to the earnings information for those individuals, the process for correcting errors is limited to ensuring that the institution provided an accurate list of program completers, that the list of program completers was accurate when it was provided to SSA, and that the calculation by SSA was made for those individuals.

Annual loan payment

The annual loan payment (i.e., the numerator of the fractions for both ratios) is derived by first determining the median loan debt of the academic program, and then, using the current annual interest rate on Federal Direct Unsubsidized Loans, calculating the annual loan payment based on: 

  • A 10-year repayment schedule for a program that leads to an undergraduate or post-baccalaureate certificate or to an associate’s degree; 
  • A 15-year repayment schedule for a program that leads to a bachelor’s or master’s degree; or 
  • A 20-year repayment schedule for a program that leads to a doctoral or first-professional degree

Loan debt for this purpose includes FFEL and Direct loans, including capitalized interest owed by the student for attendance in the academic program, plus any private education loans or debt obligations arising from institutional financing plans. The school reports financing plan debt and, to the extent the institution is aware, private loans for each student under 668.6 of the General Provisions regulations (slated to go into effect July 1, 2011). Parent PLUS or TEACH Grant-related loans are excluded.

ED does not include any loan debt incurred by the student for attendance in programs at another institution, but may make exceptions when the institutions are under common ownership or control.

ED attributes all the loan debt incurred by the student for attendance in programs at the institution to the highest credentialed gainful employment program subsequently completed by the student at the institution. A chart in the preamble to the final regulations gives details. Essentially, if the student was enrolled in a lower credentialed program at the same school, any loan debt from that lower program is used in the debt-to-earnings ratios for the higher credentialed gainful employment program, instead of the lower program.

In response to concerns regarding over-borrowing for indirect costs over which schools have little or no control, including incurring private loan debt, ED has decided to hold schools accountable only for debt incurred to pay actual educational expenses and not for excess amounts used for living and other expenses. Thus, for each student, ED will use the lower of the amount of tuition and fees charged or the total loan debt incurred for purposes of calculating the median loan debt for the program.  However, because some programs would not benefit from limiting loan debt, reporting the amount charged is optional for the institution.

Alternative Earnings

For programs that fail all debt measures, an institution can demonstrate compliance with a debt-to-earnings ratio by using earnings from sources other than SSA, including a State-sponsored data system, an institutional survey conducted in accordance with NCES standards, or, for FYs 2012, 2013, and 2014 only, the Bureau of Labor Statistics (BLS). The regulation details how the alternative earnings process works.

The preamble to the final rule contains additional details and explanations. Appropriate institutional personnel should read that information carefully.

The final article in this series will describe the penalties associated with failing to demonstrate that the program results in gainful employment as measured by at least one of the three standards.

Continue to Part 3 or return to Part 1 

 

Publication Date: 6/10/2011


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