Spotlight for Career Services Professionals, August 3, 2011

by Ed Easterly, Esquire 

As amended, Title IV of the Higher Education Act of 1965 (HEA) provides federal financial assistance to students seeking higher education, and also provides funding to numerous colleges and universities. These financial assistance programs include:

• Federal Pell Grants
• Academic Competitiveness Grants
• National SMART grants
• TEACH Grants
• Federal Subsidized and Unsubsidized Direct Loans
• Federal PLUS Loans
• Federal Supplemental Educational Opportunity Grants
• Federal Perkins Loans 

To be eligible for federal financial assistance under Title IV, a college or university must first fall within the definition of an “institution of higher education.” Therefore, a proprietary institution of higher education must provide an eligible program of training to prepare students for gainful employment in a recognized occupation.  

In 2009, the Department of Education (DOE) published a notice in the Federal Register announcing its intent to establish two negotiated rulemaking committees to prepare proposed regulations under the HEA. This included, but was not limited to, regulations pertaining to the issue of “gainful employment.”  

The DOE published regulations that required institutions with programs that prepare students for gainful employment in a recognized occupation to disclose key performance information about each program on their websites and in promotional materials to prospective students. The required elements include:

• Program cost
• On-time completion rate
• Placement rate
• Median loan debt
• Other information 

This provision went into effect July 1, 2011. The regulations are detailed in a document located at the federal register website.   

The issue that had institutions up in arms was how the DOE planned on judging “gainful employment” in the pending regulations. In July 2010, the DOE issued a Notice of Proposed Rulemaking with regard to the judgment of “gainful employment programs” based upon a student’s ability to pay his or her loans.  

After receiving an unparalleled 90,000 responses, the institutions were provided with a final answer in June 2011, when the DOE issued regulations that established the detailed “debt measures” that “gainful employment” programs will be required to meet in order to remain eligible for Title IV financial assistance. The DOE has stated that the regulations were promulgated to ensure both that 1) students are equipped to secure gainful employment rather than being left with unaffordable debts and poor employment prospects, and that 2) Title IV student aid dollars are well spent.  

It should be noted that the regulations do not focus on an institution as a whole, but on “programs” within the institution. For purposes of the regulations, a “gainful employment program” includes programs such as most offerings at for-profit institutions, with the exception of some liberal arts programs, as well as non-degree programs at public and nonprofit colleges and universities. Under new requirements, institutions will have to show that a given percentage of their graduates have found gainful employment after completing such programs.  

In order to comply with the regulations, a program must meet one of the following measures:

• Repayment rate—At least 35 percent of former students must be current in the repayment of their Federal Direct and Federal Family Education loans. A loan qualifies as being “repaid” if the loan balance is reduced by at least $1 during a calendar year, the loan has been completely paid off by the student, the student-borrower is making payments under a plan, or, in the case of graduate degree programs, the accrued interest has been paid during a calendar year.
• Debt-to-discretionary income ratio—The DOE will focus on whether the annual loan payment for a student does not exceed 30 percent of the typical graduate’s discretionary income. Discretionary income is determined based upon the remainder of the mean or median annual earnings of the program's graduates minus 1.5 times the poverty level and is predicated upon the Social Security Administration database. Further, the “annual loan payment” is based upon an assumed 10-year repayment term and is determined based upon the median loan debt for federal and private loans and institutional financing programs incurred by students who completed the program three and four years earlier. 
• Debt-to-total earnings ratio—An institution is in compliance with the regulations if the annual loan payment for a student does not exceed 12 percent of a typical graduate’s total earnings. The debt-to-total earnings ratio is calculated using the same formula as the debt-to-discretionary earnings ratio set forth above.  

Note that the annual earnings and discretionary income standards will be determined by the DOE using data on program graduates collected by the Social Security Administration.  

If an institution is able to meet these measures, it is in compliance with the regulations. If an institution fails to do so, however, it will be subject to sanctions that increase in severity.  

After an institution fails to meet one of the foregoing measures in a given year, it must provide a warning to enrolled and prospective students that explains the debt measures and discloses the amount by which the program missed passing. The institution is also required to set forth any plans it has for improving the program's performance. The warning must be provided within 30 days after the institution is notified by the DOE that it has failed to comply with the measures and must be provided to current and prospective students either orally or in writing. Accordingly, an institution may comply with this requirement by placing a prominent notice on its website.  

If an institutional program fails to meet the measures for a second time in a three-year period, it must provide a written warning to current and prospective students that their debts may be unaffordable and that the program may lose eligibility for student aid. This requirement is in addition to the penalties suffered after the first failure. Additionally, an institution must inform students of the plan for the program and instruct the students with regard to available resources pertaining to transfer or other educational options.  

An institution’s third failure in a four-year period results in its loss of eligibility for Title IV aid, although there is an appeals process to challenge the DOE calculations. An institution may submit additional information, including data from alternative sources, in an effort to establish compliance.   

While the regulations took effect on July 1, 2011, the first year a program can lose eligibility will be 2015. As such, it is unclear at this time how the regulations will affect programs and institutions as a whole. Nevertheless, it is imperative that institutions begin examining the costs and purposes of each program it offers to ensure it will be in compliance.  

Edward J. Easterly, Esquire, is an attorney in the Labor and Employment Law Department at Tallman, Hudders & Sorrentino, P.C.