On March 14th, the Department of Education (DOE) issued a notice of proposed rulemaking (the “Proposed Rule”), which would establish measures for determining whether certain postsecondary educational programs prepare students for gainful employment in a recognized occupation (“GE Programs”), and the conditions under which these educational programs remain eligible under the federal student aid programs authorized by Title IV of the Higher Education Act of 1965, as amended, 20 U.S.C. §§ 1070 et seq.The Proposed Rule would apply the new standards for determining eligibility to all GE Programs, but it is likely to have a particularly large impact on for-profit education programs.

The impetus for the Proposed Rule is growing concern about student debt levels, specifically those for GE Programs at for-profit schools. In order to address these perceived problems, the Proposed Rule would require that GE Programs meet standards that demonstrate that the GE Program adequately prepares students for “gainful employment.” While the Proposed Rule would apply to all GE Programs, the focus of the new standards is targeted at the for-profit sector.

The overall structure of the Proposed Rule is very similar to the draft version released by the DOE in December 2013. This was not the DOE’s first attempt to establish standards for GE Programs. On October 29, 2010 and June 13, 2011, DOE published its first final regulations on gainful employment.2 However, in 2012, the D.C. Circuit invalidated some of these gainful employment regulations on the grounds that these regulations were arbitrary. While the court held that the metric for a minimum loan repayment rate was arbitrarily determined, the court also found that it was within the DOE’s authority to define what it means to prepare students for gainful employment and to require education institutions to report and disclose relevant information about their GE Programs.3

The Proposed Rule employs a two-pronged approach by establishing a transparency framework and an accountability framework.

Transparency Framework

To improve the transparency of the prospects of an institution’s GE Programs, the Proposed Rule would require that institutions publicly disclose information about the program’s costs, debt, and the performance of their GE Programs so that students can make informed decisions. Institutions would have to disclose this information related to their GE Programs to the Secretary of the DOE. In addition, institutions would be required to disclose the relevant information through a disclosure template to be developed by the Secretary of the DOE.

Accountability Framework

Among other things, the accountability framework creates a certification process by which an institution would establish a GE Program’s eligibility for Title IV funds, as well as a process by which DOE would determine whether a GE Program should remain eligible. The certification process would require that institutions certify that all of their GE Programs meet applicable accreditation requirements and state or federal licensure standards.

To remain eligible for federal student aid programs, all GE Programs would then have to satisfy two measures: (1) a debt-to-earnings (D/E) rates measure; and (2) a program cohort default rate (pCDR) measure. GE Programs that fail to satisfy both of these measures would have to improve within a certain period of time, or would lose program eligibility for federal student aid.

D/E Rates Measure

Under the Proposed Rule, the D/E rates measure would evaluate the amount of debt students who completed a GE Program incurred to attend that program in comparison to those same students’ discretionary and annual earnings after completing the program.

In general, the annual earnings rate would be calculated as a percentage rate of a GE Program’s annual loan payment to the average annual earnings of the GE Program’s graduates. Similarly, the discretionary income rate would be the rate of a GE Program’s annual loan payment to the average annual earnings of the GE Program’s graduates, minus a multiple of the federal poverty guideline.4

The Proposed Rule would also establish standards by which a GE Program would be assessed to determine whether it passes or fails the D/E rates measure or is “in the zone.” In order to pass the D/E rates measure, the GE Program must have either (1) a discretionary income rate less than or equal to 20%, or (2) an annual earnings rate less than or equal to 8%.

The Proposed Rule would also establish a zone for GE Programs that have a discretionary income rate between 20% and 30% or an annual earnings rate between 8% and 12%. GE Programs with a discretionary income rate over 30% and an annual earnings rate over 12% would fail the D/E rates measure.

A GE Program would become ineligible for federal student aid programs if it failed the D/E rates measure for two out of three consecutive years, or if it had a combination of D/E rates measures that are in the zone described above or failing for four consecutive years.

pCDR Measure

The Proposed Rule would also establish the pCDR measure. The pCDR measure would evaluate the default rate of former students enrolled in a GE Program, regardless of whether they completed the program. A GE Program would lose its eligibility if it has a pCDR of 30% or greater for three consecutive fiscal years.

Sanctions and Implementation

The Proposed Rule provides for various sanctions. For a GE Program that is at risk of becoming ineligible for federal student aid programs because of its failure to satisfy the rate measurements described above, the institution would be required to provide a written warning of this fact to enrolled students and also include the warning on the GE Program’s disclosure template required by the new transparency framework described above. If a GE Program became ineligible for federal student aid programs, the institution would not be able to reestablish eligibility for three calendar years.

Comments to the Proposed Rule will be due 60 days after publication in the Federal Register. In order for the regulations to take effect by July 2015, the final version would have to be published no later than October 30, 2014. If this timeline were followed, institutions would then be subject to the Proposed Rule’s sanctions in 2016.