Policy Documents

What is Gainful Employment? What is Affordable Debt?

Mark Kantrowitz –
March 1, 2010

The Higher Education Act of 1965 requires for-profit colleges to provide “an eligible program of training to prepare students for gainful employment in a recognized occupation” but does not currently define gainful employment.

During negotiated rulemaking for Higher Education 2009-10, the US Department of Education proposed defining gainful employment by establishing an 8% debt-service-to-income threshold based on median student debt for recent college graduates with income based either on Bureau of Labor Statistics 25th percentile wage data or actual earnings of the college’s graduates. Loan payments would be based on the standard 10-year repayment plan for the unsubsidized Stafford loan program. For programs that failed to satisfy this standard, the US Department of Education proposed an alternative that requires a loan repayment rate for recent college graduates of 90%. The loan repayment rate measures the percentage of borrowers actively repaying their loans. It is a dual to the default rate, but includes borrowers who are delinquent, in an economic hardship deferment or in forbearance along with borrowers who are in default.

These proposals contain several flaws:

  • The 8% debt-service-to-income threshold is so strict that it would preclude for-profit colleges from offering Bachelor’s degree programs. It would also eliminate many Associate’s degree programs at for-profit colleges. Even non-profit colleges would find it difficult to satisfy this standard if they were subjected to it.
  • The 90% loan repayment rate would be the equivalent of requiring colleges to have a two-year cohort default rate of less than 2.3% for students who graduated. This loan repayment rate is unattainable for most colleges (not just for-profit colleges) as it represents a much harsher standard than the current cohort default rate requirements.
  • The thresholds are based on median debt at graduation, meaning that half the students will have debt above the threshold. Affordability cutoffs should be based on excessive debt, such as cumulative debt above the 90th percentile.
  • The proposed use of Bureau of Labor Statistics wage data is biased toward lower income data and is biased against Bachelor degree programs because of an “averaging down” effect. The use of this data will disproportionately harm minority and female students because a Bachelor’s degree conveys a greater increase in earnings for these students even though the median income is lower than for White and male students. The lack of regional adjustments would discriminate against colleges located in states with lower average income and higher unemployment rates.
  • The proposed linking of programs with specific occupations precludes for-profit colleges from offering programs in the liberal arts or fields of study that are not career-specific.
  • The loan repayment rate calculations count borrowers in income-contingent and income-based repayment as though they are actively repaying their loans even though roughly half are making a zero monthly payment.
  • The proposals would apply the requirements for affordable debt only on graduates from for-profit colleges. If it is Congress’s intent to limit debt by college graduates, similar standards should also be applied to non-profit and public colleges.
  • The debt-service-to-income threshold effectively establishes borrowing limits based on field of study and degree program, but does not give the colleges the controls needed to enforce these limits. Current subregulatory guidance precludes colleges from establishing lower loan limits.

In addition, the proposals focus exclusively on affordable debt for the definition of gainful employment. They fail to consider other reasons for pursuing a college education, such as lower unemployment rates, more job prospects and greater job security. Benchmarking increases in income against median income for high school graduates fails to consider the zero income of someone who is unemployed. Having any job is better than no job, and a college education makes it easier to find a job, not just a better-paying job.

Read the full PDF for more.