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For-profit schools may soon face tougher employment rules to get financial aid funds

For-profit schools may soon need to prove their programs lead to better employment opportunities for their graduates under new proposed rules from the Education Department.

The rules would require schools to show their graduates are gainfully employed after graduation or have higher earnings than a typical high school graduate without postsecondary education to continue to get federal financial aid funds, among other new standards.

"We cannot turn a blind eye to the college programs that are leaving students with mountains of unaffordable debts," James Kvaal, the undersecretary of education, said in a press release. "The data show that the problem is concentrated at for-profit and career colleges. This package of accountability proposals would create the strongest-ever protections for students and taxpayers against low-value, debt-fueled colleges."

Still the new rule, which aims to protect students who enroll in 1,800 low-performing programs, comes later than advocates had hoped, leaves loopholes for small for-profit schools, and fails to address the needs of students who don’t graduate.

"We cannot continue to allow predatory for-profit schools to line their pockets with taxpayer dollars while these schools get rich and borrowers are left holding the bag," Natalia Abrams, president of the Student Debt Crisis Center (SDCC) told Yahoo Finance. "The Department of Education is the gatekeeper between for-profit colleges and millions of dollars. They must uphold their enforcement and oversight duties to ensure the integrity of our higher education and federal student aid system."

NEW YORK, NY - JUNE 03:  A graduating student's cap declares their future intentions during commencement exercises at City College where First lady Michelle Obama delivered the commencement speech after being presented with an honorary doctorate of humane letters at City College on June 3, 2016 in New York City. This is the final  commencement speech of her tenure as first lady. In her speech Mrs. Obama celebrated City CollegeÕs diverse student body and the struggles that many students endured on the road to graduation.  (Photo by Spencer Platt/Getty Images)
A graduating student's cap declares their future intentions during commencement exercises at City College on June 3, 2016 in New York City. (Photo by Spencer Platt/Getty Images) (Spencer Platt via Getty Images)

New rules

Under the rule, a school needs to show that at least half of its graduates have higher earnings than a high school graduate and that graduates' yearly debt payments are equal to or less than 8% of their annual earnings or equal to or less than 20% of their discretionary earnings.

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 schools fail to meet the requirements on the same metric twice in three years, they would lose access to federal financial aid.

“While borrowers and advocates continue to fight for student debt cancellation and transformative reforms in education, it is crucial not to overlook the pressing need for holding predatory, for-profit education companies accountable,” Cody Hounanian, executive director of the Student Debt Crisis Center (SDCC), told Yahoo Finance. “By imposing consequences on these companies, we discourage the entire industry from engaging in exploitative practices.”

Additionally, the regulation would require the collection of new information on all colleges and programs, including:

  • Costs (including tuition and fees, books, and supplies)

  • Non-Federal grant aid

  • Typical borrowing amounts for both private and Federal loans

  • Earnings

  • Any occupational and licensing requirements, and

  • Licensure exam passage rates, if relevant

This information would be publicly available online on a Department-run website. Students also would need to acknowledge reading these disclosures before getting loans for these programs. The Education Department also would create a watch list of the least financially valuable programs under the proposal.

“The Department’s proposed regulation is an important step toward restoring basic rules of the road for career college programs,” Aaron Ament, president of Student Defense, said in a statement. “It’s a strong proposal, and we’re especially glad to see they strengthened previous versions of the rule.”

Shortcomings in the proposal

(Photo: Getty Creative)
(Photo: Getty Creative) (Camille Tokerud via Getty Images)

Since President Joe 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.

Advocates are disappointed that it took this long for the Education Department to reinstate the gainful employment rule, especially since it doesn’t take effect until next year.

The proposed regulations were published on May 19, 2023 and the public has 30 days to submit comments. Afterward, the Education Department has until November 1, 2023 to finalize the rules. Once finalized, the rules go into effect July 1, 2024.

“While we applaud the Department’s efforts and urge swift completion of the rule-making process, this proposal will not take effect until July 2024 at the earliest,” Ament said. “We also remain concerned that the finalization or implementation of this proposal could be stalled or completely sidelined by legal challenges.”

Another shortcoming to the new proposal is that it leaves out small for-profit schools, said Mark Kantrowitz, author and student loans expert.

“The new regulations give a free pass to small programs with less than 30 borrowers. This is where the bulk of the problems lie,” Kantrowitz told Yahoo Finance. “Metrics applied to small programs lack statistical significance, but such small programs can continue to exist for decades without delivering positive outcomes to their students [and] four-fifths of students are enrolled in such small programs.”

Advocates also point out that the rule’s focus on the debt-to-earnings ratio misses those former students most burdened by student debt.

“The proposed use of discretionary earnings is meaningless," Kantrowitz said. "The real problem with excessive debt lies with borrowers who do not graduate from college, not those who graduate, regardless of what the debt-to-earnings ratios are. Borrowers who drop out of college are four times more likely to default.”

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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