Gainful Employment Summary Part 1 of 3: Repayment Rate

5 out of 6 Institutions Will Be Impacted

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 first 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 and part three explains penalties for not complying with the new rules.

General Summary

At public and private nonprofit institutions, programs that do not result in a degree (e.g., certificate programs, whether at the undergraduate or graduate level) must prepare a student for gainful employment in a recognized occupation to be considered eligible for Title IV student assistance. Programs that result in a degree are not subject to the gainful employment stipulation, even if certificates are awarded as part of the degree program. Programs that are at least two years in length and that are fully transferable to a bachelor's degree program are not subject to the gainful employment requirement, nor are teacher certification programs that result in a certificate from the state but no credential from the institution. See Dear Colleague Letter GEN-11-10 and Gainful Employment Electronic Announcement #3 (dated May 20, 2011) for details on programs that are subject to gainful employment expectations as a condition of Title IV eligibility.

The new regulations were released by the Department of Education (ED) in prepublication format last week. They 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%.
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% 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% 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.

There are no intermediary restrictions of eligibility; a program that fails for one or two years retains full eligibility. The final rule differs from the proposed rule in this regard. The final rule is designed to provide schools with a longer period of time and more flexibility to reverse the trend towards failing the standards. Extending the period during which the program would have to fail the standards to three years out of four protects programs from isolated unusually bad years and random variations in the caliber of a specific student cohort, as well as recessions, business cycle conditions that are out of the school's control, and other variations in the labor market. "A good program could have a bad year," says ED. "But it is far less likely that a good program could have three bad years out of four years." Consequently, the first year that a program could lose eligibility under this framework is 2015.

The three measures will use information that must be reported by schools beginning Oct. 1, 2011, as required by final rules that were published last October as part of the Program Integrity package and become effective next month (July 1). Those final rules also included new student consumer information requirements, which also become effective July 1, 2011. The requirements and effective dates of that earlier package of final rules are not changed by this new set of rules.

Repayment Rate

Generally, the annual loan repayment rate for an academic program is the percentage of loans borrowed to attend that program that are in satisfactory repayment three to four years after entering repayment. Rates are to be calculated on a fiscal year (FY) basis. The rate for FY 2012, for example, will be determined based on loans that entered repayment during either FY 2008 or FY 2009. Fiscal years run from Oct. 1 of the previous year through Sept. 30 of the named year, so the FY 2012 rate will represent the percentage, by volume, of loans that entered repayment between Oct. 1, 2007, and Sept. 30, 2009, that were in an acceptable repayment status during the period Oct. 1, 2011, through Sept. 30, 2012. The two years that are used to identify the cohort of loans to which the gainful employment measures are applied for a given fiscal year are referred to as the two-year period (2YP).

For example, Any Local Community College (ALCC) offers a one-year certificate program to prepare students for certain law enforcement careers. During the period Oct. 1, 2007, through Sept. 30, 2009, a total of $120,000 worth of FFEL and Direct loans made to students who attended that program enter repayment for the first time. (It doesn't matter when the loans were made; loans are included in a cohort based on when they entered repayment.) This amount is the total of the outstanding principal balances (including capitalized interest) of each loan in the two-year cohort on the date the loan entered repayment. For a consolidation loan, it is the original outstanding balance of the underlying loan(s) attributable to a borrower's attendance in the academic program under assessment.

Some students begin repaying those loans, some go delinquent and then default, some engage in activities that qualify for deferment, some obtain forbearances or hardship deferments, some have loans discharged for such reasons as disability. The repayment rate standard applicable to FY 2012 takes a look at those loans to see what proportion of that $120,000 was being repaid during the period Oct. 1, 2011, through Sept. 30, 2012. That's four years after repayment began for the loans that entered repayment during FY 2008, and three years after repayment began on loans that entered repayment during FY 2009.

[The FY 2013 repayment rate will look at loans that entered repayment during FY 2009 and FY 2010: 2008 drops away, 2009 stays, and 2010 joins; so loans will affect a program's repayment rate for two years. FY 2009 is used to help determine repayment rates for FY 2012 and 2013.]

Certain loans are excluded from the rate calculation:

Loans that were made to parent borrowers (only student loans are considered);
Unsubsidized Stafford loans (FFEL or Direct) that were converted from TEACH Grants;
Loans that were in a military or in-school deferment at any time during the fiscal year being assessed;
Loans that were discharged due to death or total permanent disability;
Loans that were assigned or transferred to ED for disability discharge consideration.

The final regulations loans exclude from consideration loans that are in deferment status for reasons that are clearly unrelated to whether a program prepares students for gainful employment. Loans that are in an economic hardship deferment or forbearance during the fiscal year, for example, are not excluded.

Suppose for ALCC's law enforcement certificate program, $20,000 worth of loans fall into the exclusions. That leaves $100,000 in the FY 2012 cohort. This amount is called the "original outstanding principal balance," or, because we don't already have enough acronyms in our lives, the OOPB.

Loans that are considered to be in an acceptable repayment status are loans that have never been in default and that:

Have been paid in full;
Were included in a Consolidation loan that has been paid in full; or
Had payments made on them throughout FY 2012, if:

The payments reduced the outstanding loan balance over the course of the fiscal year (that is, the principal balance plus any unpaid accrued interest at the end of the FY is less than the principal balance plus any unpaid accrued interest at the beginning of the FY),
The borrower is in the process of qualifying for Public Service Loan Forgiveness, or
Subject to certain limitations and assumptions, the borrower is in the income-based repayment plan (IBR), income contingent repayment plan (ICR), or any other repayment plan and makes scheduled payments on the loan during the most recently completed FY for an amount that is equal to or less than the interest that accrues on the loan during the FY.

If the loan in question is a consolidation loan that includes a loan attributable to attendance in an undergraduate program subject to the gainful employment requirements, the amount of the underlying loan is considered to be in an acceptable repayment status if the principal balance plus any unpaid accrued interest at the end of the FY is less than the principal balance plus any unpaid accrued interest at the beginning of the FY. (For example, a Consolidation loan has a balance of $20,000 on October 1, 2011. On September 30, 2012, the balance on the loan stands at $19,999. This loan is in satisfactory repayment for the repayment rate calculation.)

However, if the academic program under assessment is a post-baccalaureate, graduate, or professional program, the underlying loan is considered in acceptable repayment if the total outstanding balance at the end of the FY is less than or equal to the outstanding balance at the beginning of the FY.

Inclusion of underlying loans in the acceptable repayment status category is permitted only if neither the Consolidation loan nor the underlying loan or loans have ever been in default.

The total dollar amount of the first two bullets in the acceptable repayment status list above is called the LPF (loans paid in full). The total dollar amount of the loans listed under the third bullet is called the PML (payments-made loans). Again, the amounts used are the outstanding principal balances when the loans originally entered repayment. So, in shorthand, the fraction representing the annual repayment rate is:

OOPB of LPF + OOPB of PML
OOPB

So, let's return to our example from Any Local Community College.

We left ALCC after determining that the OOPB used for the denominator of this fraction for FY 2012 is $100,000. [That's the total amount of outstanding balances on all of the includable loans that entered repayment during the two-year period (2YP) applicable to FY 2012.]
Let's say that the aggregate LPF is $10,000. [That's the original outstanding balance of the loans that entered repayment during the 2YP that have been paid in full.]
Let's say the aggregate PML is $40,000. [That's the original outstanding balance of the loans that entered repayment during the 2YP that were in an acceptable repayment status during FY 2012.]

The FY 2012 repayment rate fraction would be $50,000/$100,000, or 50%. That result would meet the repayment rate standard. Regardless of what the other measures defining gainful employment turn out to be, this program is safe for FY 2012.

Suppose ALCC has another certificate program which is in a particularly depressed occupation. Its repayment rate is only 30% for FY 2012. That program would have to pass one of the debt-to-earnings ratios to avoid failing the gainful employment test. If the program also fails both of the debt-to-earnings ratios, it fails to demonstrate gainful employment for FY 2012. If it fails twice more over the following three years, it will lose eligibility (failing to meet all of the gainful employment tests for three out any four consecutive fiscal years results in loss of Title IV eligibility for the program).

Alternate Periods of Assessment

The final regulations provide some alternatives to the 2YP for determining the OOPB for certain programs and for a transition period as the new gainful employment standards become effective.

2YP: The normal two-year period covers the third and fourth FYs prior to the most recently completed FY for which the debt measures are calculated. For FY 2012, the debt measures are calculated based on loans that entered repayment during FY 2008 and 2009.
2YP-A: As a transition aid, ED will provide an alternative for institutions that take immediate steps to improve a program's loan repayment rate during the initial three-year evaluation period. In addition to the normal calculation, ED will calculate the repayment rate based on the most recent two-year period, referred to as the two-year period alternate (2YP-A). This calculation is based on loans for borrowers who entered repayment during the first and second FYs prior to the most recently completed FY. For FY 2012, the 2YP-A will encompass FY 2010 and FY 2011. ED will use the higher repayment rate (from the 2YP or the 2YP-A) to measure gainful employment. Because it is intended to recognize rapidly improving programs during a transition period, the 2YP-A is available for repayment rates calculated for FYs 2012, 2013, and 2014 only.
2YP-R: For a program whose students are required to complete a medical or dental internship or residency, as identified by an institution, the period used to identify the cohort of loans for measuring gainful employment is shifted to the sixth and seventh FYs prior to the FY for which the debt measures are calculated. This substitute for the 2YP is referred to as the 2YP-R. For FY 2012, the 2YP-R is FYs 2005 and 2006. ED regards internships and residencies as a continuation of the educational program, and so extending the period used to identify the loan cohort represents a truer picture of borrowers' ability to repay. A required medical or dental internship or residency is described in the regulations.

Programs with Small Numbers of Borrowers

When a program has fewer than 30 borrowers in the two-year period, ED will assess the program's performance across a four-year period instead of two years.

4YP: The normal four-year period uses the third, fourth, fifth, and sixth FYs prior to the fiscal year for which the debt measures are calculated. For example, FY 2017, the 4YP will include fiscal years 2011, 2012, 2013, and 2014.
4YP-R: For a program that requires students to complete a medical or dental internship or residency, the four years used to identify the loan cohort will be the sixth, seventh, eighth, and ninth FYs (referred to as the 4YP-R) prior to the fiscal year for which the debt measures are calculated. For example, if the FY under assessment is 2017, the 4YP-R is FYs 2008, 2009, 2010, and 2011.

Programs that have fewer than 30 borrowers 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.

Conclusion

According to ED, the repayment rate measure demonstrates whether former students are, in fact, struggling to repay their loans, and identifies the approximately one-quarter of programs where 65 percent of former students attempting to repay their loans are nonetheless seeing their loan balances continue to grow.

The repayment rate threshold is set low at 35% 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, and so forth.

Where the repayment rate looks at all attendees, the debt-to-earnings measures look at completers. The next article in this series will examine those measures.

Continue to Part 2 or Part 3.

Publication Date: 6/9/2011

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