All schools of higher education will face stricter requirements proving certain certificate programs lead to better employment opportunities for graduates under a finalized federal rule.
If they can’t prove their worth, the schools lose access to federal student aid.
The Biden administration this week reinstated a stricter gainful employment rule, toughening one accountability metric and adding a new one to better gauge a school’s ability to improve their students’ earnings potential after graduation. The rule applies to certificate programs at all institutions, including public and private nonprofit colleges.
Additionally, all schools will have to provide prospective students with a new financial value transparency framework that outlines the actual costs to get a degree from that institution and the financial outcomes students can expect.
The moves are part of the Biden administration’s latest efforts to rein in costs in higher education and aims to protect hundreds of thousands of young Americans from going into unaffordable debt. The finalized rules build on proposals Biden announced previously.
"We are fixing a broken system and making sure that students know, before they take out loans, when college programs have a history of leaving graduates with high debts, low earnings, and poor career prospects," Education Secretary Miguel Cardona said in a press release. "The Biden-Harris administration believes that when students invest in higher education, they should get a solid return on their investment and a greater shot at the American dream."
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Gainful employment rule
Under the enhanced gainful employment rule, a school needs to pass two accountability metrics: the debt-earnings rate and the earnings premium test.
The first metric requires schools to show that their graduates’ median yearly debt payments are equal to or less than 8% of their median annual earnings or equal to or less than 20% of their discretionary earnings.
Under the second metric — the earnings premium test — a school must show that at least half of its graduates have higher earnings than a high school graduate between the ages of 25 and 34 in the school’s state.
Schools that fail at least one metric would be required to warn students that the program is at risk of losing access to federal aid. If a school fails to meet the requirements on the same metric twice in three years, it would lose access to federal financial aid.
Since Biden took office, student borrower advocates have asked the administration to reinstate the gainful employment rule enacted under the Obama administration that the Trump administration later rescinded.
"There is no 'zone' like there was in the Obama proposal, where schools between ratios would have a fiction of surviving," Mark Kantrowitz, author and student loan expert, told Yahoo Finance. "Biden’s comparison of average income with that of a high school graduate is new as well as the financial value transparency framework."
The Department of Education estimated about 1,700 programs that enroll nearly 700,000 students each year will fail at least one of the two metrics in a single year, accounting for one-quarter of all enrollment in gainful employment programs.
Borrower advocates praised much of the finalized rule.
"The finalized gainful employment rule is a major step towards enacting more front-end protections to ensure students aren’t being taken advantage of by predatory schools and programs," Aaron Ament, president of Student Defense, said in a statement. "We’re glad to see a high school earnings benchmark included in the final rule, which we supported during the negotiated rulemaking process. We’re eager to see this rule move towards final implementation and urge the Department of Education to enact these regulations as quickly as possible."
Still, some noted the rule provided loopholes for some colleges. For instance, the gainful earnings rule only applies to certificate programs and leaves out accountability for associate's degrees and bachelor's degrees, Kantrowitz said.
"It would be better if they applied to all colleges, but Congress would need to change the law to enable this to ensure that traditional colleges do not get a free pass on ensuring that their students have a reasonable amount of debt after graduation," he said.
Financial value transparency rule
The finalized rules also include a financial value transparency framework rule that gives students and families detailed information about what they are likely to pay out-of-pocket for programs, how much debt they can expect to take on, and how much money students are likely to earn after graduation.
The new reporting requirements for schools include costs of attendance, like tuition and fees, books, and supplies, as well as non-federal grant aid, and typical borrowing amounts for both private and federal loans.
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This information will be publicly available to students on a website run by the Department of Education.
"Each year, billions of taxpayer dollars go to career-training programs that produce little value for their students, leaving too many Americans stuck in low-wage jobs, often with debt, and vulnerable to defaulting on their loans," Kelly McManus, vice president of higher education at Arnold Ventures, said. "These accountability regulations, which set the strongest standard for student outcomes of any rule to date, will provide students and borrowers with critical protections and ensure taxpayer dollars aren’t wasted on educational programs that don’t produce real value."
Editor's note: A previous version of this story erroneously stated that the gainful employment rule did not previously apply to all schools. The rule did apply to certificate programs at all schools.
Ronda is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda.
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