With the recent conclusion of the first negotiated rulemaking session between the U.S. Department of Education (ED) and non-federal negotiators, the action has shifted to smaller working groups that are developing proposals to reshape the draft Gainful Employment (GE) Rule. The working group proposals are being developed in private discussions among the negotiators, and consequently there is little detail on their progress thus far. The goal for the working groups is to provide proposals to ED by September 30, with public release in early October, in order to set the stage for the second and final negotiating session in late October.1 ED has also indicated that it hopes to digest these proposals and circulate its newly revised draft GE Rule in mid-October.

THE SIX WORKING GROUPS

There are six working groups, each focusing on a different subject area. These subjects were selected in a closed session on the final day of the first round of negotiations and then discussed publicly in very broad terms to allow flexibility to each group in addressing its subject. The negotiators also agreed to designate a leader or leaders for each group, but did not otherwise assign members to each group. Thus, any negotiator can participate in any one of the groups.

  • Stronger “Front-End” Review: Leader: Barmak Nassirian, American Association of State Colleges and Universities (AASCU). This group is developing a proposal for an additional ED process to evaluate the eligibility of educational programs subject to the GE Rule that might precede or expand ED’s existing system for reviewing new educational programs. It is not clear if this enhanced review would apply only to new GE programs or, possibly, existing ones. The basic idea appears to be to require institutions to show some evidence (beyond their own assessment) that their programs lead to a clear, defined vocational goal in fields that will pay a salary considered to be “gainful,” possibly based on projected debt-to-earnings rates.
  • Federal Definition of Placement Rate: Leader: Della Justice, Kentucky Attorney General’s Office. This working group is to develop a definition (or possibly multiple definitions) of a placement rate for educational programs under the GE Rule. Under the current system, different state and accrediting agencies use different definitions (and in some cases no definition) for employment placements, which can lead to student confusion. Surprisingly, there was no discussion of ED’s effort just two years ago to address this issue through a special task force. That task force could not find common ground for a uniform definition, suggesting that this will be a very difficult topic.2
  • Revived Loan Repayment Rate (LRR): Leader: Jack Warner, South Dakota Board of Regents. This group is to consider a revised form of the LRR (which measures the performance of students to pay down the principal on their loans in the year under review) as an alternative metric or a first-level metric that could trigger lighter or tougher review of a program’s debt-to-earnings rates. There was some push for topic because an LRR would measure the performance of completers and non-completers, unlike the debt-to-earnings rates that only measure the results for completers. ED expressed pointed concern that this group formulates a solid rationale for whatever threshold it might suggest for an LRR since the federal court largely vacated the GE Rule as previously proposed due to ED’s lack of a rationale for the LRR threshold.
  • Program-Level Cohort Default Rate: Leader: Brian Jones, Strayer University. ED itself suggested this proposal to calculate CDRs for individual educational programs. ED suggested it would follow the same method as for institutional CDRs except that it would work with cohorts as low as 10 borrowers (unlike the minimum of 30 borrowers for institutional CDRs). It is not entirely clear if this new metric would be in addition to the draft debt-to-earnings rates or possibly a substitute for those rates in certain circumstances.
  • Expanded Transition or Correction Periods: Co-Leaders: Belle Whelan, the Commission on Colleges of the Southern Association of Colleges and Schools (SACSCOC), and Marc Jerome, Monroe College. This group will consider an expanded period to put the new rule into effect or additional time for corrective measures for programs with low initial rates. The basic theme is that the rates for the several years will be based on data that is largely fixed (especially for institutions with degree programs), the first measurement period reaches back to students who completed in 2010-12. One key question will be whether the transition period and allowance of a zone status in the draft rule are sufficient to address this problem. This group may also consider whether there should be special provisions that would lighten the burden for exceptional institutions or programs that meet certain other metrics.
  • Student Protections: Leader: Eileen Conner, New York Legal Assistance Group. This group will consider more protections, possibly including financial assurances or reimbursement from institutions, for students who are enrolled in programs that lose eligibility under the GE Rule. This promises to be a difficult issue, but the legal assistance and consumer groups around the negotiating table were insistent that students should not be “the victims” if a program cannot meet the new GE metrics.

ADDITIONAL BACKGROUND ON THE NEG REG DISCUSSION

The first Neg Reg session on the draft new GE Rule was marked by wide and sometimes significant disagreement among the negotiators on the basic purpose of the GE Rule as well as particular terms of the draft rule, which would evaluate the eligibility of many educational programs based on the debt loads and earnings of their graduates. Despite these challenges, the negotiators concluded the first session expressing their intent to seek compromises and to continue to pursue consensus on a new rule.

While the prospects for consensus appear exceptionally dim, we also note that the discussions thus far have not been as acrimonious as prior negotiations on this subject and, in contrast to the 2009-10 negotiations; the proprietary sector is far from isolated in its desires for major changes to the draft rule. In addition, the negotiators have focused on revisions to make the rule “workable.” There has been little, if any, debate up to this point regarding the underlying question of ED’s statutory authority to promulgate such a rule.

The draft GE Rule will apply to virtually all programs at for-profit institutions, as well as many certificate and diploma level programs at public and non-profit institutions. ED’s draft rule set out two “debt-to-earnings” rates that would determine if a program should maintain eligibility for federal student aid funding, would lose eligibility, or should operate under “the zone” designation for a maximum of four years before it must reach a passing rate or lose eligibility. According to very preliminary data that ED released in late August, the new GE Rule would apply to more than 11,000 educational programs at more than 5,000 institutions, with approximately 9% of all programs likely to lose eligibility and 12% to be subject to “the zone” procedures under the new measures.3

The sheer reach and expected impact of the regulation is significant since it means that a large number of institutions in all three sectors would face risk to their programs under these metrics, as well as the burden of complying with the reporting and disclosure requirements and the potential negative publicity that would accompany low rates. With the recently announced White House plans to develop outcome-based measures for all institutions of higher education in the coming years, there is growing concern that the GE metrics could be the opening wedge for similar measures that will apply more broadly to public and non-profit institutions. This created a modicum of common ground across the sectors, but has not seemed to affect certain proponents of a stricter rule, such as the consumer interest groups, state attorney generals, and student representatives.

The Neg Reg process creates odd dynamics because it impels participants to seek unanimity. Majority support for any position is not enough. Unless all 15 negotiators (including ED) can reach agreement on the entire rule, then no negotiator can be sure that his or her particular interests and positions will be reflected in the final rule. Accordingly, after some tough talk and critical statements, Days 2 and 3 of the session also saw some efforts to reach a common ground or punt the difficult issues to the working groups.

The working groups create another wild card in the process of getting to consensus. ED’s proposed draft GE Rule was already a complex 31-page document, with at least 10 key issues for debate. The working groups were created in an effort to find broad agreement on some of those issues. But each working group also has the effect of adding significant input to a new complex issue, so that the stew gets that much thicker.

MORE DETAILED RECAP OF DISCUSSIONS

Here is our more detailed recap of the Neg Reg discussions to date, and the issues now on the table with the smaller working groups.

The Department Sets Bounds on the Continued Negotiations

ED has the curious role of being the most powerful negotiator at the table, but also operating in “listening mode” and attempting to digest the suggestions offered. Ultimately, ED has the responsibility to determine which suggestions offer workable improvements consistent with the statute and ED’s own goals, and develop a revised draft rule for discussion in October. In this role, the ED negotiators were backed by 20-25 staff members taking notes on the critiques and proposals for ED’s further internal review.

In this Neg Reg, ED has found itself declaring that a number of issues and proposals are just off the table. As an ED attorney stated, ED would not entertain suggestions in certain areas so there was no point for the negotiators to use the limited time to discuss them. These rejected proposals included:

  • Allowing students who are enrolled in non-compliant programs to have their federal loans discharged due to the institution’s “false certification.”
  • Making any adjustments to the basic student eligibility formula (regarding cost of attendance) because those are set in the HEA so that ED has no authority to make changes.
  • Requiring any public institution to post a letter of credit as a form of student protection.
  • Setting limits on marketing, advertising or executive compensation in any manner.

The Critics Have the Floor

Perhaps by its very nature, the Neg Reg process provides a platform for critics, whether of the for-profit sector generally or bent on denouncing “bad actors” in the sector. In this case, the consumer groups, current and past state attorneys general, as well as some institutional representatives, were quite vocal in their criticisms. They pressed the point that the draft rule is too lenient in many ways, including setting low thresholds for passing rates, and fails to protect students who they see as being injured by non-compliant programs. The critics stuck to this theme in offering several suggestions. Some go far beyond the scope of the draft rule as circulated by ED, but the first three were assigned to working groups to be developed for further discussion:

  • Add a more substantive “front end review” of GE educational programs to determine if they meet basic eligibility requirements, such as training for a clearly defined occupation4 that generally provides sufficient earnings to workers.
  • As discussed more fully below, add other measurements to assess the value and performance of the program, such as a placement rate and completion rate.
  • Add protections for students who are enrolled in programs that lose eligibility under the new metrics. There was some suggestion, not yet fully developed, that this could include refunds or other financial protections backed by a letter of credit posted by the institution. Others suggested that this should include expanded rights for such students to have their loans discharged but, as noted above, the Department was quick to say that it would not entertain that particular approach.
  • Accelerate the review of GE programs under the new GE metrics because, while the programs are being offered prior to measurement, the students are “the guinea pigs.”
  • Set operational limits on institutions that have programs that have failing or “zone” rates such as caps on executive compensation or payment of dividends, or caps on the amount of money such institutions can spend on advertising or recruiting. ED likewise rejected these alternatives, probably recognizing the legal quagmire that would result.
  • Set higher standards for passing scores (while possibly eliminating or curtailing the zone status) that could be phased in over time.

The Proprietary Sector Finds Some Allies that Share its Concerns

The two representatives from the proprietary sector voiced objections to the basic structure as well as with a number of details of the draft rule. Before discussing those in any detail, it is notable that the for-profit representatives seemed to have some success at finding allies around the table. The community colleges, for instance, shared many of the same concerns, as did the representative of the regional accrediting bodies. The shared concerns ranged over many issues. Here are some of the primary ones discussed around the table.5

  • No Control over Student Borrowing: The representatives of the proprietary sector, community colleges, and regional accrediting agencies were united in their concern that the rule would hold institutions accountable for student borrowing, even though they cannot limit such borrowing, because students’ eligibility for federal loans is determined by the cost of attendance and related formulas in the HEA. All of the institutional negotiators, including both the community colleges and the for-profit institutions, expressed their concern about student over-borrowing and their frustration with being unable to limit a student’s access to federal loan funds. This issue is particularly acute now that ED’s current draft rule eliminated a prior provision that would have allowed institutions an opportunity to limit the educational debt for purposes of the GE formulas to the debt incurred for tuition and fees. Under the draft rule, the formulas would use the totality of educational debt incurred by the applicable graduates, including debt used for living (and any other) expenses.
  • Effective Date and Transition or Improvement Period: There was much discussion that the draft rule, if implemented in the 2015-2016 period as expected, would measure institutions on data for periods long since passed that is thus “cooked,” with no meaningful opportunity for institutions to respond by taking steps to bring their rates under the thresholds. Specifically, if ED calculated the first GE Rates for the 2014-15 and 2015-2016 award years, those rates would actually use educational debt information for students who completed from July 1, 2010 to June 30, 2012, and July 1, 2011 to June 30, 2013, respectively, so that schools could do almost nothing to affect this critical element in the formula. Thus, programs could lose eligibility (based on the two-year test) before the schools can have any impact at all on the debt levels used in the formula.

ED stated that its provision to use debt from a later year during a special transition period as well as the years in which a program can operate in “the zone” should address this concern. ED also argued that institutions have the responsibility to make “continuous improvements” and should have been making such improvements based on the former version of the rule because that rule signaled ED’s intent. This argument was not persuasive to the for-profit negotiators and others. They noted the long lag time between any corrective steps they could take at this time (such as reducing tuition or providing scholarships) and seeing the results of those steps in their GE Rates. The representative from the regional accrediting agencies suggested that ED should only calculate rates based on school and student performance data occurring after the effective date of the rule, which would have the effect of deferring the effective date of the rule for several years or more.

This “retroactive” issue was also complicated by concerns about the quality of the data and preliminary rate information ED released in August, which some institutions questioned as incomplete or inaccurate. There was some suggestion that ED release another set of informational rates, as fully calculated under the new formula, so that the affected institutions have accurate information to assess their status before ED calculates any rates that have a legal effect.

While ED did not signal any flexibility on this subject, this is one of the issues for the working groups that are now developing proposals.

  • Amortization Period: The GE Rule formula requires ED to “presume” an amortization period for the graduates’ educational debt so ED can calculate an annual payment amount to compare to the graduates’ earnings. ED would set a single 10-year amortization period for graduates of all programs, whether they were enrolled in a certificate degree or higher level program. This contrasts with the prior rule that had 10-year, 15-year and 20-year amortization periods depending on the credential level of the program, and therefore resulted in lower expected annual payments for longer programs.

ED explained that its position was based on its internal studies showing that the average actual repayment period for its portfolio of federal student loans is about 12 years. ED did not explain the change from 12 years to 10 years in the draft rule. Further, ED noted that it did not have any data for the average actual repayment period for different types of students (such as Pell-eligible and non-Pell-eligible students, or students in bachelor or master degree programs) that would be most affected by the GE Rule.

This issue appears to be high on the list for further discussion when the negotiators reconvene because of its direct and significant mathematical effect on the way the formula would work: the reduced amortization period in the draft rule would have the mathematical effect of generating a higher debt to earnings ratio than the provisions of the former rule.

The Concerns of the Community Colleges and “Low-Borrowing” Institutions

Given the reach of the GE Rule, potentially affecting programs at thousands of public and non-profit institutions, there was finally concern in those quarters regarding the burdens the rule would create, including onerous reporting and disclosure requirements, the risk to the continued eligibility of some programs at these institutions, and adverse publicity. The community colleges, with several negotiators at the table, were particularly concerned, and they received a fair amount of sympathy since their taxpayer support allows them to charge relatively low tuitions and have relatively few student borrowers. Moreover, they devote less staff time to job placement, with one community college representative stating that his college did not have any placement personnel. Thus, the draft rule is seen as another “unfunded mandate,” imposing costly requirements that the colleges must fund out of their base budgets.

While no proposal has been formulated, a number of individuals expressed support for an exemption for “low-borrowing” institutions. This idea seemed to have traction and we would expect to see a proposal next month. But this idea also raises very significant statutory questions whether it would be consistent with the HEA provision that is the basis for the GE Rule.

ED’S DETERMINATION AND TIMING

If ED and the other 14 negotiators representing various higher education constituencies cannot reach unanimity on a new rule in October, that sets the stage for ED to draft its own proposed rule. In the absence of consensus, ED can consider suggestions made during the sessions, but it is under no obligation to adopt any of them. Thus, despite all of the public discussion and drama, at the end of the day ED always has the option to go forward with the rule it wants.6

In his opening remarks, the new Deputy Undersecretary, Jeff Appel, explained that he has heard comments that its draft rule is both too lenient and too harsh, or that ED should wait for Congress to address this issue in the forthcoming Higher Education Act Reauthorization, but he made clear that ED plans to move ahead with issuing a new GE Rule in 2014.

Under the master calendar that applies to ED regulations, a proposed rule must be issued for public comment and then a final regulation promulgated by November 1st for that regulation to go into effect on the following July 1st. Assuming ED meets that timetable so that the new GE Rule could go in to effect on July 1, 2015, ED’s draft contemplates that the first GE Rates would be published and used to evaluate the eligibility of educational programs in calendar year 2016 (the second half of the 2015-16 academic year). Some negotiators argued for deferring the implementation of any new rule, and that will surely be a priority item for the next round of Neg Reg in October.