Department Of Education Expands Regulatory Authority In The Uncertain And Controversial Area Of Gainful Employment

In terms of legal and regulatory developments with significant consequences for higher education institutions, 2012 is picking up where 2011 left off. In fact, in a speech at the University of Michigan on January 27, 2012, President Obama made clear that higher education regulation will be a key component of his agenda in this election year, and he put institutions "on notice" that, under his plan, they will be held "accountable" to provide better value and performance for their students.1

The President's remarks are in keeping with regulations recently issued by the Department of Education ("DOE"), including regulations that define the term "gainful employment" as that term appears in the Higher Education Act ("HEA").2These regulations create "debt measures" and authorize sanctions against educational programs that do not "lead to gainful employment in a recognized occupation."3 The regulations, which were issued in June 2011 and are set to go into effect on July 1, 2012, apply to "[v]irtually all educational programs" at for-profit colleges and "virtually all non-degree educational programs" at public and nonprofit colleges.4 Notably, the regulations do not apply to any educational programs that lead to a degree at public or nonprofit colleges.5 Although it remains to be seen how courts and other administrative bodies will interpret the gainful employment regulations, the impact of the regulations on the higher education industry has the potential to be great. Indeed, the regulations already have proven to be highly controversial; they not only have stirred much debate but also have led to further inquiry into the underlying rulemaking process and to a second lawsuit against the DOE by the Association of Private Sector Colleges and Universities ("APSCU").6 This Commentary provides both an overview of the gainful employment regulations and an introduction to the developing controversy that surrounds them.

Breakdown of Gainful Employment Regulations

The New Requirements. The new gainful employment regulations state that an educational program "leads to gainful employment in a recognized occupation" if the program satisfies at least one of the following: (1) the program has an annual loan repayment rate of 35 percent or more; (2) the program's debt-to-earnings ratio is 12 percent or less, or its debt-to-discretionary income ratio is 30 percent or less; or (3) the data necessary to compute (1) and (2) are not available to the Secretary.7 The regulations thus create two separate "debt measures":

Loan repayment rate (the percentage of federal loans that have been repaid or are being repaid by a program's former students who have entered repayment);8 and Debt-to-earnings ratios (the relationship between the estimated annual loan payment owed by students who graduated from a program and either the average annual earnings or the discretionary income of those graduates).9

As long as gainful employment programs fulfill one of these measures, they are in compliance with the regulations. On the other hand, if a program fails to satisfy either of the measures, the program is subject to three steps of sanctions:

After the first failure: The institution involved must provide a "debt warning" to enrolled and prospective students that discloses the amount by which the program missed the minimum standards, as well as the program's plans for improvement, and also must establish a three-day waiting period before students can enroll.10 After a second failure within three years: The institution must expand upon the above-described debt warning, informing enrolled and prospective students that they "should expect to have difficulty repaying [their] student loans" and that the program may lose eligibility for Title IV funds, and also must provide those students with information regarding transfer and other educational options.11 After a third failure within four years: The program loses eligibility for Title IV funds and cannot reestablish eligibility for at least three years, although it can choose to operate without Title IV funds.12 Despite the existence of contrary opinions, the DOE maintains that the gainful employment regulations are...