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Court Strikes Down "Gainful Employment" Repayment Rate that Was Embarrassingly Low to Begin With

Published:  July 2, 2012

Last year the Obama administration implemented "gainful employment" regulations designed to identify higher education programs, primarily in the for-profit sector, that load students up with debt in exchange for low-value credentials and degrees. The trade association representing for-profits promptly filed a lawsuit, and won a significant court victory yesterday when a federal District Court Judge ruled that the U.S. Department of Education failed to justify one part of the regulations. Because the part in question is intertwined with the regulations as a whole, implementation of "gainful" is now on hold. The U.S. Department of Education will need to appeal the decision and/or craft new regulations. But it's important to keep in mind what the decision did and did not say – and to remember how disassociated this debate can become from common-sense notions of success in higher education.

Significantly, the judge rejected most of the broad attacks on "gainful." The Department does, he said, have the authority to interpret the phrase "gainful employment" and craft regulations accordingly. "Concerned about inadequate programs and unscrupulous institutions," he wrote, "the Department has gone looking for rats in ratholes—as the statute empowers it to do.” So this is not a question of whether the federal government can regulate higher education this way – only how. 

Where the Department fell short, according to the judge, was in justifiying one prong of the three-prong test used to evaluate job-focused higher education programs. Under the rules, programs are evaluated on three measures: a debt-to-earning ratio (that is, how big your loans are compared to how much money you're making), a debt-to-discretionary-earnings ratio, and a loan repayment rate. The first two measures were valid, he said, because the Department had presented research backing up the specific thresholds they chose. The 35 percent repayment rate threshold, by contrast, was essentially chosen as a number that would land on some Goldilocks middle ground between identifying too many and too few programs. This is arbitrary, according to the judge, and since the three measures work together in determining eligibility for financial aid, the whole regulatory apparatus is suspended.

Before talking about what's next, let's pause for a moment and consider that number. Thirty-five percent?  The for-profit industry's trade group is standing up in front of the world and saying it can't live with a rule that excludes programs from federal financial aid only if two-thirds of students are failing to pay loans back and–emphasis, and–the program also fails both debt-to-income measures, for three out of four years. Thirty-five percent is an embarrassingly low number. The problem with requiring a research basis for a repayment rate threshold is that "embarrassingly low" isn't a concept that can be proven empirically. It relies on the informed, expert judgement of the U.S. Department of Education.

But think of it this way: Does there exist, somewhere in the realm of logic and reason, a cogent argument for a threshold below 35 percent? Could any credible person explain the public policy rationale for allowing programs to access federal financial aid when graduates are twice as likely to be in non-repayment as otherwise? I think not. And that's why the Obama Administration can't use this setback as an excuse for backing down from a worthy fight. Obviously, the decision must be appealed in court. But there are many other things that may or may not happen besides. The Department can move aggressively to fix and improve the regulations, or it can dilly-dally and allow them to die a slow death. Some of the original champions of "gainful" don't work for the administration any more, and it remains to be seen whether their successors are willing to do the right thing and bear the political heat that will inevitably come from standing up on behalf of students.

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