New Gainful Employment Rules Impact For-Profit and Nonprofit Colleges and Universities

The U.S. Department of Education (Department) issued new Gainful Employment (GE) regulations in September 2023 for the first time since 2014. These program-specific regulations impose important compliance obligations on for-profit and not-for-profit institutions of higher education. Failure to comply could lead to public notices and loss of participation in federal student aid programs. The regulations are codified in the Code of Federal Regulations (CFR) at Title 34, Part 668.

According to the Department, these regulations "establish the most effective set of safeguards ever against unaffordable debt or insufficient earnings for postsecondary students." The Department aims to protect students from graduating without realistic prospects of paying off their student loans. Secretary of Education Dr. Miguel Cardona explained: "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."

What Are the New Rules?

There are two components of the new GE regulations. The Financial Value Transparency (FVT) provisions are intended to increase the quantity and quality of information that students will have before enrollment. The FVT establishes new debt-to-earnings (D/E) performance measures and an earnings premium test that compares earnings of program graduates to the earnings of typical high school graduates. The second component addresses accountability for GE programs – those programs providing training for gainful employment in a recognized occupation or profession – by determining whether they are eligible for continued participation in the Department's federal student aid.

Importantly, the FVT rules apply to all programs eligible for financial aid from the Department. Program performance, as measured by the new formulas, will be posted for public viewing on the Department's website. By contrast, the GE accountability provisions and their consequences for federal aid apply only to GE programs, which include most degree programs at for-profit institutions and some non-degree programs at public and nonprofit institutions.

How Are the Rules Applied?

For each academic program, the D/E metric compares median annual loan payments to the median earnings of its federally aided graduates. For a program to pass, debt payments must be no more than 8 percent of annual earnings or 20 percent of discretionary earnings (defined as annual earnings minus 150 percent of the federal poverty guideline for a single individual, which is about $21,870 in 2023). The earnings premium test measures whether the typical graduate from a program receiving federal aid is earning at least as much as a typical high school graduate between the ages of 25 and 34 in the labor force for the corresponding state (averaging $25,000, with variations by state).

Annual Reporting Obligations

Both for-profit and nonprofit institutions will have annual reporting obligations to the Department. Institutions must disclose the length of each program; total number of individuals enrolled in the most recent award year; total cost of tuition and fees, books, supplies and equipment; percentage of students who received a Direct Loan Program loan, a private loan or both; median loan debt; median earnings; accreditation information; D/E rates; earnings premium measure; and possibly more. The Department will prescribe the form for reporting this information, which will be published on the Department's website starting July 1, 2026.

Institutions must also report to the Department when changing a program's name, instructional classification code, credential level or certification.

Consequences of Noncompliance

Failure to meet the new FVT and GE rules comes with steep consequences. Institutions with programs failing the FVT metrics will be prohibited from enrolling new students in those programs until the students have acknowledged in writing that they have reviewed the FVT information on the Department's website and the institutions have submitted the acknowledgments to the Department. This restriction will be in place until the Department notifies the institution that they have passing D/E rates or after three years, whichever comes sooner.

Consequences under the GE rules are even steeper. They are triggered when a program fails to meet the Department's threshold for D/E ratios or earnings premiums in two out of any three consecutive award years. A program failing these standards becomes ineligible for participation in the Department's student aid programs. When that happens, institutions must issue written warnings to prospective students concerning the program's failing status. Compliance determinations will be sent annually by the Department to all applicable institutions.

Timing

Reporting obligations applicable to all institutions will go into effect on July 1, 2024. The Department expects to publish the first financial outcome rates in early 2025. GE programs that fail the new metrics in the first two years will become ineligible in 2026.

Open Questions

As many commentators and institutions have noted, the value of higher education is more than just graduate earnings, and graduate earnings are determined by many factors, most of which are well beyond the control of colleges and universities. Consequently, the narrow focus on debt-to-earnings in the GE rules can unfairly and unreasonably undermine academic programs that offer substantial value that is difficult to quantify financially. This dissonance raises many compliance questions, including how institutions should allocate limited resources to improve earnings outcomes without compromising academic standards and how the new rules will impact training for professions that emphasize public service but traditionally pay less, such as those for social work and theology.

Implementation of the new rules will put a heavy and costly administrative burden on the Department. It remains to be seen whether Congress and the Department will approve the necessary funding for staffing and technology that implementation will require.

Lastly, it remains to be seen whether the new rules will survive anticipated legal challenges. Since the GE rules were first announced in 2009, it has gone through multiple iterations and met with repeated lawsuits. After a federal court struck down an early version, the rule reappeared in 2014 with updated metrics and has been challenged in court nearly every year thereafter. Institutions should expect similar legal challenges to the 2023 effort.

For more information or questions, please contact the authors or another member of Holland & Knight's Education Team.

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