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.
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:
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.
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:
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:
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
So, let's return to our example from Any Local Community College.
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).
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.
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.
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.
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.
Publication Date: 6/9/2011