Program Integrity: Gainful Employment, 43616-43708 [2010-17845]

Agencies

• DEPARTMENT OF EDUCATION

[Federal Register Volume 75, Number 142 (Monday, July 26, 2010)]
[Proposed Rules]
[Pages 43616-43708]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-17845]



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Part II





Department of Education





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34 CFR Part 668



Program Integrity: Gainful Employment; Proposed Rule

Federal Register / Vol. 75, No. 142 / Monday, July 26, 2010 / 
Proposed Rules

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DEPARTMENT OF EDUCATION

34 CFR Part 668

RIN 1840-AD04
[Docket ID ED-2010-OPE-0012]


Program Integrity: Gainful Employment

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend the Student Assistance General 
Provisions to establish measures for determining whether certain 
postsecondary educational programs lead to gainful employment in 
recognized occupations, and the conditions under which these 
educational programs remain eligible for the student financial 
assistance programs authorized under title IV of the Higher Education 
Act of 1965, as amended (HEA).

DATES: We must receive your comments on or before September 9, 2010.

ADDRESSES: Submit your comments through the Federal eRulemaking Portal 
or via postal mail, commercial delivery, or hand delivery. We will not 
accept comments by fax or by e-mail. Please submit your comments only 
one time, in order to ensure that we do not receive duplicate copies. 
In addition, please include the Docket ID at the top of your comments.
     Federal eRulemaking Portal. Go to https://www.regulations.gov to submit your comments electronically. Information 
on using Regulations.gov, including instructions for accessing agency 
documents, submitting comments, and viewing the docket, is available on 
the site under ``How To Use This Site.''
     Postal Mail, Commercial Delivery, or Hand Delivery. If you 
mail or deliver your comments about these proposed regulations, address 
them to Jessica Finkel, U.S. Department of Education, 1990 K Street, 
NW., Room 8031, Washington, DC 20006-8502.

    Privacy Note: The Department's policy for comments received from 
members of the public (including those comments submitted by mail, 
commercial delivery, or hand delivery) is to make these submissions 
available for public viewing in their entirety on the Federal 
eRulemaking Portal at https://www.regulations.gov. Therefore, 
commenters should be careful to include in their comments only 
information that they wish to make publicly available on the 
Internet.


FOR FURTHER INFORMATION CONTACT: For general information, John Kolotos 
or Fred Sellers. Telephone: (202) 502-7762 or (202) 502-7502, or via 
the Internet at: John.Kolotos@ed.gov or Fred.Sellers@ed.gov.
    Information regarding the regulatory impact analysis or other data, 
can be found at the following Web site: https://www2.ed.gov/policy/highered/reg/hearulemaking/2009/integrity.html.
    If you use a telecommunications device for the deaf (TDD), call the 
Federal Relay Service (FRS), toll free, at 1-800-877-8339.
    Individuals with disabilities can obtain this document in an 
accessible format (e.g., Braille, large print, audiotape, or computer 
diskette) on request to one of the contact persons listed under FOR 
FURTHER INFORMATION CONTACT.

SUPPLEMENTARY INFORMATION: 

Invitation To Comment

    As outlined in the section of this notice entitled Negotiated 
Rulemaking, significant public participation, through a series of three 
regional hearings and three negotiated rulemaking sessions, occurred in 
developing this notice of proposed rulemaking (NPRM). In accordance 
with the requirements of the Administrative Procedure Act, the 
Department invites you to submit comments regarding these proposed 
regulations on or before September 9, 2010. To ensure that your 
comments have maximum effect in developing the final regulations, we 
urge you to identify clearly the specific section or sections of the 
proposed regulations that each of your comments addresses and to 
arrange your comments in the same order as the proposed regulations.
    We invite you to assist us in complying with the specific 
requirements of Executive Order 12866 and its overall requirement of 
reducing regulatory burden that might result from these proposed 
regulations. Please let us know of any additional opportunities we 
should take to reduce potential costs or increase potential benefits 
while preserving the effective and efficient administration of the 
programs.
    During and after the comment period, you may inspect all public 
comments about these proposed regulations by accessing Regulations.gov. 
You may also inspect the comments, in person, in Room 8031, 1990 K 
Street, NW., Washington, DC, between the hours of 8:30 a.m. and 4 p.m., 
Eastern time, Monday through Friday of each week except Federal 
holidays.

Assistance to Individuals With Disabilities in Reviewing the Rulemaking 
Record

    On request, we will supply an appropriate aid, such as a reader or 
print magnifier, to an individual with a disability who needs 
assistance to review the comments or other documents in the public 
rulemaking record for these proposed regulations. If you want to 
schedule an appointment for this type of aid, please contact one of the 
persons listed under FOR FURTHER INFORMATION CONTACT.

Negotiated Rulemaking

    Section 492 of the HEA requires the Secretary, before publishing 
any proposed regulations for programs authorized by title IV of the 
HEA, to obtain public involvement in the development of the proposed 
regulations. After obtaining advice and recommendations from the 
public, including individuals and representatives of groups involved in 
the Federal student financial assistance programs, the Secretary must 
subject the proposed regulations to a negotiated rulemaking process. 
All proposed regulations that the Department publishes on which the 
negotiators reached consensus must conform to final agreements 
resulting from that process unless the Secretary reopens the process or 
provides a written explanation to the participants stating why the 
Secretary has decided to depart from the agreements. Further 
information on the negotiated rulemaking process can be found at: 
https://www.ed.gov/policy/highered/leg/hea08/.
    On September 9, 2009, the Department published a notice in the 
Federal Register (74 FR 46399) announcing our intent to establish two 
negotiated rulemaking committees to prepare proposed regulations. One 
committee would develop proposed regulations governing foreign 
institutions, including the implementation of the changes made to the 
HEA by the Higher Education Opportunity Act (HEOA), Public Law 110-315, 
that affect foreign institutions. A second committee would develop 
proposed regulations to improve integrity in the title IV, HEA 
programs. The notice requested nominations of individuals for 
membership on the committees who could represent the interests of key 
stakeholder constituencies on each committee.
    Team I--Program Integrity Issues (Team I) met to develop proposed 
regulations during the months of November 2009 through January 2010.
    The Department developed a list of proposed regulatory provisions, 
including provisions based on advice and recommendations submitted by 
individuals and organizations as testimony to the Department in a 
series

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of three public hearings held on the following dates:
     June 15, 2009, at Community College of Denver in Denver, 
CO.
     June 18, 2009, at University of Arkansas in Little Rock, 
AR.
     June 22, 2009 at Community College of Philadelphia in 
Philadelphia, PA.
    In addition, the Department accepted written comments on possible 
regulatory provisions submitted directly to the Department by 
interested parties and organizations. A summary of all oral and written 
comments received is posted as background material in the docket for 
this NPRM. Transcripts of the regional meetings can be accessed at 
https://www2.ed.gov/policy/highered/reg/hearulemaking/2009/negreg-summerfall.html#ph.
    Department staff also identified issues for discussion and 
negotiation.
    At its first meeting, Team I reached agreement on its protocols. 
These protocols provided that for each community identified as having 
interests that were significantly affected by the subject matter of the 
negotiations, the non-Federal negotiators would represent the 
organizations listed after their names in the protocols in the 
negotiated rulemaking process.
    Team I included the following members:
    Rich Williams, U.S. PIRG, and Angela Peoples (alternate), United 
States Student Association, representing students.
    Margaret Reiter, attorney, and Deanne Loonin (alternate), National 
Consumer Law Center, representing consumer advocacy organizations.
    Richard Heath, Anne Arundel Community College, and Joan Zanders 
(alternate), Northern Virginia Community College, representing two-year 
public institutions.
    Phil Asbury, University of North Carolina, Chapel Hill, and Joe 
Pettibon (alternate), Texas A & M University, representing four-year 
public institutions.
    Todd Jones, Association of Independent Colleges and Universities of 
Ohio, and Maureen Budetti (alternate) National Association of 
Independent Colleges and Universities, representing private, nonprofit 
institutions.
    Elaine Neely, Kaplan Higher Education Corp., and David Rhodes, 
(alternate), School of Visual Arts, representing private, for-profit 
institutions.
    Terry Hartle, American Council on Education, and Bob Moran 
(alternate), American Association of State Colleges and Universities, 
representing college presidents.
    David Hawkins, National Association for College Admission 
Counseling, and Amanda Modar (alternate) National Association for 
College Admission Counseling, representing admissions officers.
    Susan Williams, Bridgeport University, and Anne Gross (alternate), 
National Association of College and University Business Officers, 
representing business officers.
    Val Meyers, Michigan State University, and Joan Berkes (alternate), 
National Association of Student Financial Aid Administrators, 
representing financial aid administrators.
    Barbara Brittingham, Commission on Institutions of Higher Education 
of the New England Association of Schools and Colleges, Sharon Tanner 
(1st alternate), National League for Nursing Accreditation Commission, 
and Ralph Wolf (2nd alternate), Western Association of Schools and 
Colleges, representing regional/programmatic accreditors.
    Anthony Mirando, National Accrediting Commission of Cosmetology 
Arts and Sciences, and Michale McComis (alternate), Accrediting 
Commission of Career Schools and Colleges, representing national 
accreditors.
    Jim Simpson, Florida State University, and Susan Lehr (alternate), 
Florida State University, representing work force development.
    Carol Lindsey, Texas Guaranteed Student Loan Corp, and Janet Dodson 
(alternate), National Student Loan Program, representing the lending 
community.
    Chris Young, Wonderlic, Inc., and Dr. David Waldschmidt 
(alternate), Wonderlic, Inc., representing test publishers.
    Dr. Marshall Hill, Nebraska Coordinating Commission for 
Postsecondary Education, and Dr. Kathryn Dodge (alternate), New 
Hampshire Postsecondary Education Commission, representing State higher 
education officials.
    Carney McCullough and Fred Sellers, U.S. Department of Education, 
representing the Federal Government.
    These protocols also provided that, unless agreed to otherwise, 
consensus on all of the amendments in the proposed regulations had to 
be achieved for consensus to be reached on the entire NPRM. Consensus 
means that there must be no dissent by any member.
    During the meetings, Team I reviewed and discussed drafts of 
proposed regulations. At the final meeting in January 2010, Team I did 
not reach consensus on the proposed regulations. The proposed 
regulations in this document focus on the issue of whether certain 
programs lead to gainful employment in recognized occupations. A 
separate NPRM for all of the other Program Integrity issues discussed 
during the meetings was published on June 18, 2010.

Background

    For-profit postsecondary education, along with occupationally 
specific training at other institutions, has long played an important 
role in the nation's system of postsecondary education and training. 
Many of the institutions offering these programs have recently 
pioneered new approaches to enrolling, teaching, and graduating 
students. In recent years, enrollment has grown rapidly, nearly 
tripling to 1.8 million between 2000 and 2008. This trend is promising 
and supports President Obama's goal of leading the world in the 
percentage of college graduates by 2020. The President's goal cannot be 
achieved without a healthy and productive higher education for-profit 
sector.
    However, the programs offered by the for-profit sector must lead to 
measurable outcomes, or those programs will devalue postsecondary 
credentials through oversupply. The Government Accountability Office 
(GAO) had noted this problem in its work dating to the 1990's. 
Specifically, GAO found that occupation-specific training programs that 
lacked a general education component made graduates of for-profit 
institutions less versatile and limited their opportunities for 
employment outside their field. GAO also found that there were labor 
oversupplies when the numbers of expected job openings were compared to 
the corresponding number of postsecondary graduates who completed 
training programs. Oversupply in the labor market results in 
unemployment and a decline in real wages. Generally, the impact is felt 
most significantly by recent graduates and adversely affects their 
ability to support themselves and their families, as well as their 
ability to repay their student loans.
    The Department of Education Organization Act gives the Secretary 
broad responsibility to establish the regulatory requirements necessary 
for appropriately managing the Department and its programs. 
Additionally, under the Higher Education Act of 1965, as amended (HEA), 
the Department has the responsibility to ensure that institutions of 
higher education, including for-profit institutions, meet minimum 
standards if they choose to participate in the title IV, HEA programs 
(Federal student aid programs). For the programs that would

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be subject to these proposed regulations, one of these minimum 
standards is that the programs must lead to gainful employment in a 
recognized occupation.
    Many for-profit institutions derive most of their income from the 
Federal student aid programs. In 2009, the five largest for-profit 
institutions received 77 percent of their revenues from the Federal 
student aid programs. This figure that does not include revenue 
received from certain Federal student loans (not authorized by the HEA) 
that are exempted under the so-called 90/10 rule, or other revenue 
derived from government sources including Federal Veterans' education 
benefits, Federal job training programs, and State student financial 
aid programs. A recent study completed for the Florida legislature 
concluded that for-profit institutions were more expensive for 
taxpayers on a per-student basis due to their high prices and large 
subsidies.
    The proposed standards for institutions participating in the title 
IV, HEA programs are necessary to protect taxpayers against wasteful 
spending on educational programs of little or no value that also lead 
to high indebtedness for students. The proposed standards will also 
protect students who often lack the necessary information to evaluate 
their postsecondary education options and may be mislead by skillful 
marketing, resulting in significant student loan debts without 
meaningful career opportunities. Unlike public or private nonprofit 
institutions, for-profit institutions are legally obligated to make 
profitability for shareholders the overriding objective. Furthermore, 
for-profit institutions may be subject to less oversight by States and 
other entities.
    There are reasons for concern that some students attending for-
profit institutions have not been well served. Student loan debt is 
higher among graduates of for-profit institutions. For example, the 
median debt of a graduate of a two-year for-profit institution is 
$14,000, while most students at community colleges have no student loan 
debt. There are 18 title IV, HEA loan defaults for every 100 graduates 
of for-profit institutions, compared to only 5 title IV, HEA loan 
defaults for every 100 graduates of public institutions. Investigations 
and news reports have also produced anecdotal evidence of low-quality 
programs that leave students with large debts and poor prospects for 
employment. Despite these concerns, these institutions and suspect 
programs have never been required to substantiate their claim that they 
meet the statutory requirement of preparing students for ``gainful 
employment.''

Summary of Proposed Regulations

    Under these proposed regulations, the Department would assess 
whether a program provides training that leads to gainful employment by 
applying two tests: One test based upon debt-to-income ratios and the 
other test based upon repayment rates. Based on the program's 
performance under these tests, the program may be eligible, have 
restricted eligibility, or be ineligible. A program that meets both of 
these tests, or whose debt-to-income ratio is very low, would continue 
to be eligible for title IV, HEA program funds without restrictions, 
while a program that does not meet any of the tests would become 
ineligible. A program that meets only one of the tests would be placed 
in a restricted eligibility status, unless it has a high repayment 
rate.
    Under certain circumstances, the proposed regulations would also 
require an institution to disclose the test results and alert current 
and prospective students that they may difficulty repaying their loans.
    This proposed use of two measures is a balanced approach that gives 
institutions flexibility in how to demonstrate that they prepare 
students for gainful employment. The debt-to-income ratio provides a 
measure of program completers' ability to repay their loans, and the 
proposed targets were set based upon industry practices and expert 
recommendations. The use of discretionary income would recognize that 
borrowers with higher incomes can afford to devote a larger share of 
their income to loan repayments, while the use of annual income would 
benefit programs whose borrowers have lower earnings.
    Under the debt-to-income test, programs whose completers typically 
have annual debt service payments that are 8 percent or less of average 
annual earnings or 20 percent or less of discretionary income would 
continue to qualify, without restrictions, for title IV, HEA program 
funds. Programs whose completers typically face annual debt service 
payments that exceed 12 percent of average annual earnings and 30 
percent of discretionary income may become ineligible.
    Debt service rates have a connection to whether borrowers will 
default on their loans. Borrowers with rates above the 8 percent 
threshold, for example, have a default rate of 10.2 percent, compared 
to a rate of 5.4 percent for those below the threshold.\1\ Borrowers 
with debt rates above the 12 percent threshold, for example, have a 
default rate of 10.9 percent.\2\
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    \1\ Source: U.S. Department of Education, National Center for 
Education Statistics, B&B: 93/03 Baccalaureate and Beyond 
Longitudinal Study.
    \2\ Source: U.S. Department of Education, National Center for 
Education Statistics, B&B: 93/03 Baccalaureate and Beyond 
Longitudinal Study.
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    The repayment rate is a measure of whether program enrollees are 
repaying their loans, regardless of whether they completed the program. 
This measure would provide some assurance to programs that may have 
high debt-to-income ratios for completers but enroll prepared and 
responsible students who understand their financial obligations. 
Programs whose former students have a loan repayment of at least 45 
percent will continue to be eligible. Programs whose former students 
have loan repayment rates below 45 percent but at least 35 percent may 
be placed on restricted status. Programs whose former students have 
loan repayment rates below 35 percent may become ineligible.
    A program that does not satisfy either the debt-to-income ratio or 
the 45 percent rate but has a loan repayment rate of at least 35 
percent would be subject to restrictions and additional oversight by 
the Department.
    The proposed regulations also would require an institution whose 
program does not have a loan repayment rate of at least 45 percent and 
an annual loan payment that is either 20 percent or less of 
discretionary income or 8 percent or less of average annual income, to 
alert current and prospective students that they may have difficulty 
repaying their loans.
    Recognizing the potential impact of the proposed regulations on 
some students seeking a postsecondary education, the proposed 
regulations would provide for a one-year transition period during which 
the Department would limit the number of programs declared ineligible 
to the lowest-performing programs producing no more than five percent 
of completers during the prior award year. Additional programs and 
programs that fail to meet the debt thresholds but fall outside the 
five percent cap during the transition year would be subject to the 
same requirements as programs on a restricted eligibility status.

Significant Proposed Regulations

    We group major issues according to subject, with appropriate 
sections of the proposed regulations referenced in parentheses. We 
discuss other substantive issues under the sections of the proposed 
regulations to which they pertain. Generally, we do not address 
proposed regulatory provisions that are technical or otherwise minor in 
effect.

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Part 668 Student Assistance General Provisions

Gainful Employment in a Recognized Occupation (Sec.  668.7)

    Section 102(b) and (c) of the HEA defines, in part, a proprietary 
institution and a postsecondary vocational institution, respectively, 
as institutions that provide an eligible program of training that 
prepares students for gainful employment in a recognized occupation. 
Section 101(b)(1) of the HEA defines an institution of higher 
education, in part, as any institution that provides not less than a 
one-year program of training that prepares students for gainful 
employment in a recognized occupation.
    The Department's current regulations in Sec. Sec.  
600.4(a)(4)(iii), 600.5(a)(5), and 600.6(a)(4) mirror the statutory 
provisions, and like the statute, do not define or further describe the 
meaning of the phrase ``gainful employment.''

General

    The proposed regulations are intended to address growing concerns 
about unaffordable levels of loan debt for students attending 
postsecondary programs that presumptively provide training that leads 
to gainful employment in a recognized occupation. Under the proposed 
regulatory framework, to determine whether these programs provide 
training that leads to gainful employment, as required by the HEA, the 
Department would take into consideration repayment rates on Federal 
student loans, the relationship between total student loan debt and 
earnings, and in some cases, whether employers endorse program content.
    The Department would consider that a program prepares students for 
gainful employment if the loan debt incurred by the typical student 
attending that program is reasonable. The regulations would establish 
measures of the relationship between loan debt and postcompletion 
employment income (a loan repayment rate and debt-to-income measures 
based on discretionary income and average annual earnings) and set 
reasonable thresholds for each measure. As long as the program 
satisfies the debt thresholds, an institution could continue to offer 
title IV aid to students in the program without additional oversight 
from the Department. Otherwise, the program would either become 
ineligible for title IV, HEA program funds or the institution's ability 
to disburse Federal funds to students attending that program would be 
restricted.
    The trends in earnings, student loan debt, loan defaults, and loan 
repayment that underscore the need for the Secretary to act are 
discussed more fully in Appendix A to this document.

Debt Measures and Thresholds

    Under the loan repayment rate in proposed Sec.  668.7(a), the 
relationship would be reasonable if students who attended the program 
(and are not in a military or in-school deferment status) repay their 
Federal loans at an aggregate rate of at least 45 percent. The rate 
would be based on the total amount of loans repaid divided by the 
original outstanding balance of all loans entering repayment in the 
prior four Federal fiscal years (FFY). A loan would be counted as being 
repaid if the borrower (1) made loan payments during the most recent 
fiscal year that reduced the outstanding principal balance, (2) made 
qualifying payments on the loan under the Public Service Loan 
Forgiveness Program, as provided in 34 CFR 685.219(c), or (3) paid the 
loan in full. Other borrowers who are meeting their legal obligations 
but are not actively repaying their loans, such as those in deferment 
or forbearance, are not considered to be in repayment.
    Based on data available (see Appendix A for more information about 
these data), the following chart shows the Department's estimate of the 
distribution of loan repayment rates by sector of all institutions, not 
only those subject to these regulations, that would satisfy loan 
repayment thresholds of 45 and 35 percent.

                                       Institutional-Level Repayment Rates
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                                                     Number of                     % Between 35-
                     Sector                        institutions   % At least 45%        45%         % Below 35%
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Private for-profit 2-year.......................             565           32.92           23.19           43.89
Private for-profit 4-year or above..............             218           25.23           32.57           42.20
Private for-profit less-than-2-year.............             946           40.70           22.09           37.21
Private nonprofit 2-year........................             156           76.28            9.62           14.10
Private nonprofit 4-year or above...............            1434           78.31           10.53           11.16
Private nonprofit less-than-2-year..............              45           64.44           11.11           24.44
Public 2-year...................................             860           43.14           29.53           27.33
Public 4-year or above..........................             590           74.24           14.92           10.85
Public less-than-2-year.........................             148           74.32           19.59            6.08
                                                 ---------------------------------------------------------------
    Grand Total.................................            4962           56.75           19.21           24.04
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    Because the loan repayment rate considers program completers and 
noncompleters, a low rate may indicate that many noncompleters obtained 
loans they are now unable to repay. Note that this chart gives an 
indication of the rates at which graduates are entering into deferments 
that are not related to military service or returning to postsecondary 
education, entering into forbearances or are simply unwilling or unable 
to pay more than interest accrued on their Federal student loans.
    The number of institutions with very low loan repayment rates, 
particularly in the for-profit sector, is alarmingly high. Based on 
these data, we propose to allow a program with a loan repayment rate as 
low as 35 percent to remain eligible, but may restrict that 
eligibility. Under proposed Sec.  668.7(a) and (e), an institution 
whose program is in a restricted status would have to provide annually 
documentation from employers not affiliated with the institution 
affirming that the curriculum of the program aligns with recognized 
occupations at those employers' businesses and that there are projected 
job vacancies or expected demand for those occupations at those 
businesses. Moreover, the Department would limit the enrollment of 
title IV aid recipients in that program to the average number enrolled 
during the prior three award years. While we believe that these 
restrictions are appropriate considering the poor performance of these 
programs, we seek comment on whether programs with a loan repayment 
rate of less than 45 percent but higher than 35 percent

[[Page 43620]]

should be subject to the loss of title IV, HEA program funds.
    Even with a repayment rate of less than 35 percent, under the 
proposed regulations a program would still be eligible for title IV, 
HEA program funds, without restrictions, as long as the program has an 
acceptable debt-to-income ratio. We seek comment on whether a program 
with a loan repayment rate below a specified threshold should be 
ineligible for title IV, HEA funds, regardless of the debt-to-income 
ratio.
    For the debt-to-income measures in proposed Sec.  668.7(a)(1)(ii) 
and (iii), the relationship would be reasonable if the annual loan 
payment (based on a 10-year repayment plan) of the typical student 
completing the program is 30 percent or less of discretionary income or 
12 percent or less of average annual earnings. The measure would use 
the most current income available of the students who completed the 
program in the most recent three years (three-year period or 3YP). 
However, in cases where an institution could show that the earnings of 
students in a particular program increase substantially after an 
initial employment period, the measure would use the most current 
earnings of students who completed the program four, five, and six 
years prior to the most recent year (i.e., the prior three-year period 
or P3YP). When prior three-year data are used, the relationship would 
be reasonable if the annual loan payment is less than 20 percent of 
discretionary income or less than 8 percent of average annual earnings.
    The proposed debt-to-income measures, one based on discretionary 
income and the other on average annual earnings, are alternatives to 
the loan repayment rate. The debt measure for discretionary income is 
modeled on the Income-Based Repayment (IBR) plan. IBR assumes that 
borrowers with incomes below 150 percent of the poverty guideline are 
unable to make any payment, while those with incomes above that level 
can devote 15 percent of each added dollar of earnings (Congress 
reduced that to 10 percent for new borrowers starting in 2014.) to loan 
payments. While the Federal Government has established policies 
allowing borrowers with financial hardships to reduce payments to 10 or 
15 percent of their discretionary income, those thresholds are not 
appropriate for defining gainful employment. The IBR formula is based 
on research conducted by economists Sandy Baum and Saul Schwartz, who 
recommended 20 percent of discretionary income as the outer boundary of 
manageable student loan debt. This approach is recommended by others 
including Mark Kantrowitz, publisher of Finaid.org. However, we cannot 
rely solely on this approach because any program would fail the debt 
measure if the average earnings of those completing the program were 
below 150 percent of the poverty guideline, regardless of the level of 
debt incurred. To avoid this consequence, we adopted the proposal made 
during negotiated rulemaking that borrowers should not devote more than 
8 percent of annual earnings toward repaying their student loans. This 
percentage has been a fairly common credit-underwriting standard, as 
many lenders typically recommend that student loan installments not 
exceed 8 percent of the borrower's pretax income so that borrowers have 
sufficient funds available to cover taxes, car payments, rent or 
mortgage payments, and household expenses. Other studies have also 
accepted the 8 percent standard, and some State agencies have 
established similar guidelines ranging from 5 percent to 15 percent of 
gross income. These percentages are derived from home mortgage 
underwriting criteria where total household debt should not exceed 38 
to 45 percent of pretax income, with 30 percent being available for 
housing-related debt.
    For these proposed regulations, we have increased the research-
based and industry-used debt-to-income measures by 50 percent (from 20 
to 30 percent of discretionary income, and from 8 to 12 percent of 
annual earnings) to establish thresholds above which it becomes 
unambiguous that a program's debt levels are excessive.

[[Page 43621]]

[GRAPHIC] [TIFF OMITTED] TP26JY10.000

    In prior generations, most graduates repaid their loans within 10 
years of completing college. The standard repayment plan chosen by most 
borrowers remains 10 years. Among bachelor's degree recipients in 1992-
93 who had student loan debt, about three-fourths fully repaid their 
loans in less than 10 years. Those reporting higher incomes were most 
likely to have repaid their loans (even though they had higher average 
debt), indicating that earnings played a role in their ability--or at 
least their willingness--to repay. For many adults, paying off student 
loans is an important milestone. Many borrowers see a tradeoff between 
making student loan payments and other important financial decisions 
such as saving for retirement, buying a home, or saving for their own 
children's education.
    While the Federal Government is providing new options for repaying 
loans over extended periods of time to protect a portion of the 
borrower population from the adverse impact of nonpayment, these 
repayment options should not be the norm.
    All other things being equal, students would be better off without 
student loan debt. The less debt they owe, the more of their income 
they can devote to home purchases, retirement savings, or serving the 
community. Student loan debt must be weighed against the education and 
training (and increased employment income) that higher education can 
provide. To the extent that the education and its accompanying student 
loan debt do not provide the necessary skills to provide increased 
wages and employment, public policy should attempt to minimize or 
eliminate that cost to students and society.
    Excess student debt affects students and society in three 
significant ways: Payment burdens on the borrower; the cost of the loan 
subsidies to taxpayers; and the negative consequences of default (which 
affect borrowers and taxpayers).
    Loan repayments that outweigh the benefits of the education and 
training are an inefficient use of the borrower's resources. If a 
student makes that choice fully informed and using his or her own 
funds, it is not a matter for public policy. But if the availability of 
Federal student aid increases the likelihood that a student will enroll 
at an institution of higher education, the Federal Government should 
consider ways to ensure that student borrowers are not unduly burdened, 
even if they would

[[Page 43622]]

eventually repay the loans. This concern motivates the debt-to-income 
ratio, a measure of the potential individual burden incurred by taking 
out loans, to ensure that students on an individual basis benefit from 
the receipt of Federal funds.
    The second cost is taxpayer subsidies. When a borrower is 
unemployed or is forced because of low income to obtain a forbearance 
or deferment, the Government waives the interest on subsidized Stafford 
and Perkins loans. For example, the cost to the Government of three 
years of deferment is up to 20 percent of the value of the loan. Also, 
borrowers who have low incomes but high debt may reduce their payments 
through income-based or income-contingent repayment programs. These 
programs can either be at little or no cost to the Government or as 
much as the full amount of the loan with interest.
    Deferments and repayment options are important protections for 
borrowers because while higher education generally brings higher 
earnings, there is no guarantee for the individual. Policies that 
assist those with high debt burdens are a critical form of insurance: 
They tell all Americans that the Federal Government will take on the 
potential risk of an education not ``paying off'' for a specific 
individual. However, these policies should not mean that institutions 
should increase the level of risk to the individual student or the 
taxpayer--just as the existence of homeowners insurance does not mean 
builders should make houses more flammable. The insurance is important; 
but public policy must protect against the moral hazard of it being 
seen as a license for providing a worse product to consumers or to 
taxpayers.
    The third cost is default. The Government covers the cost of 
defaults on Federal student loans, $9.2 billion in fiscal year 2009. 
Ultimately this cost is mitigated by the Department's success in 
collection, using such tools as wage garnishment, Federal and State tax 
refund seizure, seizure of any other Federal payment, and Federal court 
actions. Nonetheless, the taxpayer costs can be significant. Based on 
historical collections, the net present value cost of the $9.2 billion 
of loans that defaulted in fiscal year 2009 is estimated at 
approximately $1 billion. This concern--protecting the taxpayer--
motivates the repayment rate measure, which indicates the taxpayer's 
exposure to delayed repayment or default.
    An additional cost of default is the damage to students and their 
family and community. Although the decision to enter into loans is made 
voluntarily by students, a wealth of evidence suggests that many 
individuals lack sufficient information--or may be manipulated with 
false information or assurances--regarding future employment prospects 
and program costs, and thus are unable to properly evaluate their 
eventual ability to repay loans. Former students who default on Federal 
loans cannot receive additional title IV aid for postsecondary 
education. Their credit rating is destroyed, undermining their ability 
to rent a house, get a mortgage, or purchase a car. To the extent they 
can get credit, they pay much higher interest. In some States, they may 
be denied certain occupational licenses. And, increasingly, employers 
consider credit records in their hiring decisions. Furthermore, 
particularly for former students from disadvantaged neighborhoods, the 
stigma of default can send an unfortunate message to others--that 
seeking an education can have disastrous results. Combined with the 
evidence suggesting that individuals may not have the ability to 
evaluate fully the costs and benefits of entering into loans, the 
potential for substantial adverse outcomes motivates the consumer 
protection approach the Department is taking through these proposed 
regulations.
    At all types of institutions, student debt is growing and will 
cause more students to allocate more of their future income toward 
repayment, whether through larger or longer payments. (See Tables A-1 
and A-2 of Appendix A for additional details). Student loan data show 
that this problem is particularly problematic at for-profit 
institutions. For certificate, associate's degree, and bachelor's 
degree programs, debt levels are highest at for-profit institutions.\3\ 
For example, in 2007-08: \4\
---------------------------------------------------------------------------

    \3\ For graduate and professional programs, separate data are 
not available on for-profit colleges. For professional degrees, the 
known debt levels at public and nonprofit institutions could be 
problematic if earnings are not sufficient.
    \4\ National Postsecondary Student Aid Survey, as reported in 
Trends in Student Aid 2009, College Board.
---------------------------------------------------------------------------

     13 percent of baccalaureate recipients from public four-
year institutions carried at least $30,000 of Federal and private 
student loan debt. Among graduates of private nonprofit colleges, 25 
percent had that level of student debt. And at for-profit institutions, 
57 percent of the baccalaureate recipients carried student loan debts 
of $30,000 or more.
     At the associate's degree level, only about five percent 
of public college graduates have debt of $20,000 or more, while 42 
percent of for-profit graduates have debt at those levels.
     For certificate recipients, less than 2 percent at public 
institutions and 11 percent at for-profit institutions have debt of 
$20,000 or more.
    The proposed regulations would lessen the potential for these 
negative consequences by ensuring that programs subject to the gainful 
employment standards actually produce students with sufficient incomes 
(relative to their debt) to make their debt payments.

Calculating the Loan Repayment Rate

    Under proposed Sec.  668.7(b), the Department would calculate the 
loan repayment rate annually using the ratio:
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    The OOPB (original outstanding principal balance) would be the 
amount of the outstanding balance on FFEL and/or Direct loans owed by 
students who attended the program, including capitalized interest, as 
of the date those loans entered repayment. The OOPB of all loans would 
include the FFEL and Direct loans that entered repayment in the four 
preceding Federal fiscal years (FFYs). LPF (loans paid in full) would 
be loans to the program's students that have been paid in full. 
However, the LPF would not include any loans paid through a 
consolidation loan until the consolidation loan is paid in full. The 
OOPB of LPF in the numerator of the ratio would be the total amount of 
OOPB for these loans.
    RPL (reduced principal loan) would be calculated using loans where 
borrower payments during the most recently completed FFY reduced the 
outstanding principal balance of that loan in that year. RPL would also 
include loans for borrowers whose

[[Page 43623]]

payments and employment during that FFY qualify for the Public Service 
Loan Forgiveness program under 34 CFR 685.219(c). The OOPB of RPL in 
the numerator of the ratio would be the total amount of the OOPB for 
these loans.
    Finally, the ratio would not include the OOPB of borrowers on an 
in-school deferment or a military-related deferment status or the OOPB 
of borrowers entering repayment in the final six months of the most 
recent FFY.

Calculating the Debt-to-Income Measures

    Under proposed Sec.  668.7(c), the Department would calculate 
annually the debt-to-income measures for each program to determine 
whether the annual loan payment is less than the discretionary (30 and 
20 percent) and earnings (12 and 8 percent) thresholds using the 
following formulas:
     Annual loan payment < Discretionary threshold * (Average 
Annual Earnings - (1.5 * Poverty Guideline)).
     Annual loan payment < Earnings threshold * Average Annual 
Earnings.
    Both debt measures would examine the annual loan payment of program 
completers in relationship to the average annual earnings of those 
completers to calculate whether a program met the gainful employment 
standard.
    The annual loan payment would be the median loan debt of students 
who completed a program during the three-year period under standard 
repayment terms (i.e., 10-year repayment schedule and the current 
annual interest rate on Federal unsubsidized loans). Loan debt would 
include title IV, HEA program loans, except Parent PLUS loans, and any 
private educational loans or debt obligations arising from 
institutional financing plans. However, it would not include any 
student loan that a student incurred at prior institutions or at 
subsequent institutions unless the other and current institutions are 
under common ownership or control, or are otherwise related entities.
    The Department would calculate the average annual earnings by using 
most currently available actual, average annual earnings, obtained from 
the Social Security Administration (SSA) or another Federal agency, of 
the students who completed the program during the three-year period. 
However, in certain cases, the measure could include the current 
earnings data for students who completed the program for a longer 
employment period (students who completed the program in the fourth, 
fifth, and sixth award years preceding the most recent three-year 
period) if the institution could show that students completing the 
program typically experience a significant increase in earnings after 
the first three years. The institution would have to provide 
information to the Department such as survey results of employers or 
former students, or through other empirical evidence, documenting the 
increased earnings.
    As discussed in the Paperwork Reduction Act portion of this notice, 
institutions will have an opportunity to review and provide comments on 
the collection of new data associated with this provision. Interested 
parties will have an opportunity to provide input into this requirement 
through that process or in response to this notice of proposed 
rulemaking.
    Under proposed Sec.  668.7(a), a program would meet the gainful 
employment standard if the annual loan payment of its students is 30 
percent or less of discretionary income or 12 percent or less of 
average annual earnings of its students. Discretionary income would be 
defined as the difference between average annual income and 150 percent 
of the most current Poverty Guideline for a single person in the 
continental United States (available at https://aspe.hhs.gov/poverty). 
We specifically seek comment on whether the 30 percent threshold for 
the first three years of employment is appropriately rigorous or 
whether the Department should consider using the 20 percent of 
discretionary income or 8 percent of average annual earnings to define 
programs as ineligible. The less restrictive standard is used here 
because, as a general matter, the Department would be assessing the 
programs during a borrower's first three years after leaving the 
postsecondary education institution. In any case, however, where the 
prior three-year period is used, the annual loan payment would have to 
be less than 20 percent of discretionary income or less than 8 percent 
of average annual earnings.

Consequences of Meeting or Not Meeting the Thresholds; Timelines; 
Transition

    Effective July 1, 2012, under proposed Sec.  668.7(d), an 
institution would be required to alert prospective and currently 
enrolled students they may have difficulty in repaying their loans 
under certain circumstances. The institution would have to provide a 
prominent warning in its promotional, enrollment, registration, and 
other materials, including those on its Web site, and to prospective 
students when conducting person-to-person recruiting activities. The 
institution must also provide the most recent debt-to-income ratios and 
the loan repayment rate for that program. An institution must provide 
the warning if the program's repayment rate is less that 45 percent 
and, using 3YP and, if applicable, P3YP, the debt-to-income ratio is 
greater than 8 percent of average annual earnings or 20 percent of 
discretionary income.
    Under proposed Sec.  668.7(a) and (e), the Department would place a 
program on a restricted status if the program's repayment rate is less 
than 45 percent and the program's annual loan payment is more than 20 
percent of discretionary income and more than 8 percent of average 
annual income. For a restricted program, the institution would be 
required to work with employers to assure that the training program is 
meeting their needs, and limit new students enrollments in that program 
to the average enrollment level for the prior three years. These 
restrictions are intended to encourage an institution to improve the 
program to better meet the needs of students and the relevant employers 
identified by the institution.
    Moreover, under proposed Sec.  668.7(a) and (f), if the program 
does not satisfy at least one of the debt thresholds in paragraph 
(a)(1) of this section, effective July 1, 2012, it would not meet the 
gainful employment standard. The Department would notify the 
institution of the program's ineligibility, and new students attending 
the program would not qualify for title IV, HEA program funds. However, 
an institution would be allowed to disburse title IV, HEA program funds 
to current students who began attending the program before it became 
ineligible for the remainder of the award year and for the award year 
following the date of the Department's notice.
    For the award year beginning on July 1, 2012, a program could fail 
to meet one of the measures but still remain eligible. For this 
transition year, the Department would cap the number of programs 
declared ineligible to the lowest-performing programs producing no more 
than five percent of completers during the prior award year, 
eliminating the risk of large and immediate displacement of students. 
Specifically, under proposed Sec.  668.7(f)(2), the Department would 
determine which programs would fall within the five percent cap by:
    (1) Sorting all programs subject to this section by category based 
solely on the credential awarded as determined by the Department (e.g., 
certificate, associate degree, baccalaureate degree, and graduate and 
professional degree) and then within each category, by loan

[[Page 43624]]

repayment rate, from lowest rate to highest rate.
    (2) For each category of programs, beginning with the ineligible 
program with the lowest loan repayment rate, identifying the ineligible 
programs that account for a combined number of students that completed 
the programs in the most recently completed award year that do not 
exceed five percent of the total number of students who completed 
programs in that category.
    For each ineligible program that falls within the five percent 
grouping for each category, the Department would notify the institution 
that the program no longer qualifies as an eligible program. For every 
other ineligible program, the Department would notify the institution 
that it must limit the enrollment of title IV, HEA program recipients 
in that program to the average number of title IV, HEA program 
recipients enrolled during the prior three award years and provide the 
same employer affirmations and debt disclosures that apply to programs 
with low repayment rates and high debt-to-income ratios.

Additional Programs

    Under proposed Sec.  668.7(g), before an institution could offer a 
new program that is eligible for title IV aid, it would apply to have 
the program approved by the Department. As part of its application, the 
institution would need to provide (1) the projected enrollment for the 
program for the next five years for each location of the institution 
that will offer the additional program, (2) documentation from 
employers not affiliated with the institution that the program's 
curriculum aligns with recognized occupations at those employers' 
businesses, and that there are projected job vacancies or expected 
demand for those occupations at those businesses, and (3) if the 
additional program constitutes a substantive change, documentation of 
the approval of the substantive change from its accrediting agency.
    In determining whether to approve the new program, under proposed 
Sec.  668.7(g)(2), the Department could restrict the approval for an 
initial period based on the institution's enrollment projections and 
demonstrated ability to offer programs that lead to gainful employment.
    If the new program constitutes a substantive change based solely on 
program content, it would be subject to the gainful employment measures 
as soon as data on the loan repayment rate and debt measures are 
available. Otherwise, the loan repayment rate and debt measures for the 
new program would be based, in part, on loan data from the 
institution's other programs currently or previously offered that are 
in the same job family. The Bureau of Labor Statistics (BLS) describes 
a job family as a group of occupations based on work performed, skills, 
education, training, and credentials and identifies the SOC code 
(Standard Occupational Classification code) for each occupation in a 
job family at https://www.bls.gov/oes/current/oes_stru.htm.
    The following charts provide in summary form a description of the 
consequences of meeting or not meeting the thresholds as well as the 
Department's proposed timelines.
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Provisional Certification (Sec.  668.13)

    The Department's current regulations in Sec.  668.13(c) identify 
the conditions or reasons for which the Department may provisionally 
certify an institution. We are proposing to amend Sec.  668.13(c)(1) to 
provide that the Department may provisionally certify an institution if 
one or more of its programs becomes restricted or ineligible under the 
gainful employment provisions in proposed Sec.  668.7. The Department 
believes that provisional certification may be warranted in cases where 
an institution fails to take the actions necessary to keep its programs 
in compliance with the gainful employment provisions in Sec.  668.7. 
This failure would be one factor considered by the Department when 
reviewing an institution's application for recertification of its 
program participation agreement.

Hearing Official (Sec.  668.90(a))

    Current Sec.  668.90(a)(3) sets forth the limitations on the 
matters that may be considered, or limitations on decisions that may be 
rendered by hearing officials in proceedings arising under subpart G of 
part 668. Under proposed Sec.  668.90(a)(3)(vii), in a termination 
action against a program for not meeting the standards for gainful 
employment in Sec.  668.7(a), the hearing official would accept as 
accurate the average annual earnings calculated by another Federal 
agency, so long as the other Federal agency provided that calculation 
for the list of program completers identified by the institution and 
accepted by the Department. The hearing official may consider evidence 
from an institution about earnings from its graduates to establish a 
different average annual earnings amount to be used with the debt 
measure, so long as that information is for the same individuals and 
determined to be reliable by the hearing official.
    During the negotiated rulemaking sessions, some non-Federal 
negotiators highlighted the difficulty that institutions could 
encounter in obtaining earnings information from students who completed 
their programs. During these meetings, a separate proposal was 
discussed to use wage information from the Bureau of Labor Statistics 
(BLS) to represent earnings for program graduates. Some of the 
negotiators voiced concerns that the reported salaries might not be 
representative for a number of reasons such as regional variations and 
job classifications and that self-employed individuals might not be 
included in the BLS wage records, (although other information suggested 
that this information was included). Nevertheless, the Department is 
proposing to obtain average annual

[[Page 43629]]

earnings by program from another Federal agency, using actual wage 
information maintained by that Federal agency for a program's students. 
This information is and will be the best information available but, to 
preserve the confidentiality of individuals that may or may not have 
received a Federal benefit, neither the Department nor the institution 
will be able to review the wage information for specific program 
graduates. The Department and the institution will, however, be able to 
ensure that the data includes only those program completers that were 
included in the information provided by the institution under the 
notice of proposed rulemaking published by the Department on June 18, 
2010.
    Since the specific individuals' actual earnings information will 
not be available to the institution or to the Department, the proposed 
regulations limit the discretion of the hearing official to determining 
whether the average annual earnings at issue in a hearing were provided 
by the other Federal agency to the Department for the list of program 
completers identified by the institution and accepted by the 
Department. Since the average annual earnings will be calculated using 
an automated process that matches the program graduates with the wage 
information the other Federal agency is required to maintain, the 
Department believes it is sufficient to limit the review by a hearing 
official to whether the average annual earnings were provided for the 
list of program graduates that were identified by the institution and 
accepted by the Department. The hearing official may consider whether 
the institution can demonstrate that a program is eligible using a 
different amount for the average annual earnings of the program 
graduates with the debt measures for that program, so long as the 
institution demonstrates the average annual earnings information is 
reliable and for the same individuals who completed the program in 
question.

Executive Order 12866

Regulatory Impact Analysis

    Under Executive Order 12866, the Secretary must determine whether 
the regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the OMB. 
Section 3(f) of Executive Order 12866 defines a ``significant 
regulatory action'' as an action likely to result in a rule that may 
(1) have an annual effect on the economy of $100 million or more, or 
adversely affect a sector of the economy, productivity, competition, 
jobs, the environment, public health or safety, or State, local or 
tribal governments or communities in a material way (also referred to 
as an ``economically significant'' rule); (2) create serious 
inconsistency or otherwise interfere with an action taken or planned by 
another agency; (3) materially alter the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raise novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive order.
    Pursuant to the terms of the Executive order, we have determined 
this proposed regulatory action will have an annual effect on the 
economy of more than $100 million. Therefore, this action is 
``economically significant'' and subject to OMB review under section 
3(f)(1) of Executive Order 12866. Notwithstanding this determination, 
we have assessed the potential costs and benefits--both quantitative 
and qualitative--of this regulatory action and have determined that the 
benefits justify the costs.
    The Summary of Effects tables that follow describe the estimated 
impact on programs that would be subject to these proposed regulations 
along with the number of students that would be affected.
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    The preceding table shows the estimated impact when the proposed 
regulations are fully implemented by July 1, 2012. A detailed analysis 
is found in Appendix A to this NPRM.

Paperwork Reduction Act of 1995

    Proposed Sec.  668.7 contains information collection requirements. 
Under the Paperwork Reduction Act of 1995 (44

[[Page 43634]]

U.S.C. 3507(d)), the Department has submitted a copy of this section to 
OMB for its review.
Section 668.7--Gainful Employment in a Recognized Occupation
    The proposed regulations would impose new requirements on certain 
programs that by law must, for purposes of the title IV, HEA programs, 
prepare students for gainful employment in a recognized occupation. For 
public and private nonprofit institutions, a program that does not lead 
to a degree would be subject to the eligibility requirement that the 
program lead to gainful employment in a recognized occupation, while a 
program leading to a degree, including a two-academic-year program 
fully transferable to a baccalaureate degree, would not be subject to 
this eligibility requirement. For proprietary institutions, all 
eligible degree and nondegree programs would be required to lead to 
gainful employment in a recognized occupation, except for a liberal 
arts baccalaureate program under section 102(b)(1)(A)(ii) of the HEA.
    As proposed in Sec.  668.7(a)(3)(viii), in accordance with 
procedures established by the Department for the purposes of 
calculating the loan repayment rate under Sec.  668.7(b), an 
institution must report the CIP codes for all students who attended a 
program at the institution whose FFEL or Direct Loan entered repayment 
in the prior four FFYs. As indicated earlier, there has been tremendous 
growth in occupational programs between 2000 and 2008, averaging 
200,000 new students per year. Based upon data from our institutional 
eligibility and program participation unit within Federal Student Aid, 
the Department estimates the following number of affected institutions 
that offer programs that currently prepare students for gainful 
employment in recognized occupations. The Department estimates there 
are 2,086 proprietary institutions with occupational programs, there 
are 238 private, non-profit institutions with occupational programs, 
and there are 2,139 public institutions with occupational programs.
    The Department estimates that in the first year of reporting CIP 
codes for all students who attended a program whose FFEL and Direct 
Loans entered repayment in the preceding four Federal fiscal years the 
burden would be as follows.
    With respect to the 2,086 proprietary institutions, the Department 
estimates that 376,000 student (47 percent times 800,000) attended 
programs at those institutions during the preceding four FFYs. Of those 
376,000, we estimate that 90 percent or 338,400 had title IV, HEA loans 
that entered repayment. At an average of .08 hours (5 minutes) per 
student to determine and report the CIP code, the Department estimates 
an increase in burden for proprietary institutions of 27,072 hours in 
OMB 1845-NEW4.
    With respect to the 238 private non-profit institutions, the 
Department estimates that 40,000 students (5 percent times 800,000) 
attended programs at those institutions during the preceding four FFYs. 
Of those 40,000, we estimate that 60 percent or 24,000 had title IV, 
HEA loans th