Weakened ‘Gainful Employment’ Rules Released

The final “gainful employment” rules released today by the U.S. Department of Education rely more on requiring schools and colleges that offer these programs to release information about their costs, loan repayment rates and alumni earnings and less on punitive action against the institutions if their programs cost more than they are worth to students.

The long-awaited rules – the first version of the rules was released last July – are significantly weaker than those proposed originally. The final rules tie participation in federal student aid programs to a repayment rate of at least 35 percent and repayment amounts not in excess of 12 percent of a graduate’s total income. And a school or college must fail to meet those conditions for three out of four years before their participation in federal aid programs is curtailed.

The original proposal had a three-tier system of reprisals for failing to meet repayment standards – starting with “probation” for falling below 45 percent repayment and expulsion from the program at 35 percent. The percentage of income required for loan repayment could not exceed 8 percent. The rules apply to all so-called “gainful employment” programs at for-profit, public and nonprofit schools, though for-profit programs are expected to be affected most because of their higher prices.

The rules, which were released before the opening of the U.S. stock markets today, spurred massive upward moves for some publicly traded companies that had lobbied hardest to block them. In early trading, DeVry was up 15 percent, Strayer University was up almost 23 percent and Corinthian Colleges – the company under the most scrutiny by state and federal officials – jumped almost 40 percent before settling back to about 33 percent.

However, between the issuance of the proposed and final rules, the anticipation of what the government might require has caused major changes in the for-profit education sector, where enrollments have dropped sharply, dragging profits down with them. Some schools, such as those operated by Kaplan Higher Education, a Washington Post company, have created programs that allow students to withdraw early from courses without incurring any debt.

Companies, including Education Management Corp. and Kaplan, have included dire predictions of continued declines in enrollment and profits, in quarterly filings with the Securities and Exchange Commission.

And a group of for-profit schools has sued the Government Accountability Office, claiming that their report last August of fraudulent recruitment practices was unprofessional and had caused a 40 percent drop in share prices. The same group, the Coalition for Educational Success, spent $310,000 during the first three months of the year lobbying against any gainful employment rules. For-profits and their allies spent more than $4.5 million in the first three months of 2011 lobbying against the rules.

In a statement accompanying the new rules, Education Secretary Arne Duncan said, “The Department listened carefully to the feedback and thoughtful concerns coming from people on all sides of the issue.” “We worked hard to ensure that the final regulation does the best job of protecting students and taxpayers by targeting the worst-performing schools and supporting schools that do a good job of preparing graduates for success in the workplace,” Duncan said.


But the rules seemed to have satisfied no one completely.

Sen. Tom Harkin (D-Iowa), whose Health, Education, Labor and Pension Committee has spearheaded examination of the for-profits, the large amount of federal loans their students obtain and the high default rates on those loans, called the final rule a modest and important first step to protect students and taxpayers from subprime academic programs that have a demonstrated track record of failure.”

Harkin’s committee has scheduled a hearing on student debt loads from for-profit colleges for next week, which Republicans on the committee have said they will boycott.

Rep. George Miller (D-Calif.), ranking Democrat on the House Education and the Workforce Committee, was more supportive of the rules, saying they “forc[e] programs to improve for the benefit of students, and carefully [target] enforcement on the bad actors.

The Coalition for Education Success hinged its statements on what it termed the “will of Congress,” noting that hundreds of members of the House had voted in the early Republican 2011 budget continuing resolution to strip all funding from enforcement of the rules. Its statement did not address the actual final rules.

On the other hand, the Civil and Human Rights Coalition, which represents more than 100 groups and supports strict gainful employment rules, called the final rule an “important and necessary step for protecting students and taxpayers from being ripped off by unscrupulous career education programs, including those for-profit colleges that are more focused on revenues than providing the level of education that their marketing brochures and recruiters promise.”

The statement, by Nancy Zirkin, executive vice president of the coalition, noted that, “ While the rule does not include many important protections urged by civil rights, student, women’s, labor and consumer organizations, it sends a strong message to many for-profit career education programs to start putting students first.”

The Institute for College Access and Success said the new rule is a “first step,” but then continued: “Unfortunately the final rule will allow many programs that over-charge and under-deliver to continue to receive federal student aid. It also fails to address the recommendations of a broad coalition of student, civil rights, consumer, higher education and college access organizations to strengthen the modest draft rule.”

And the Hispanic Leadership Fund, which joined with the Black Chamber of Commerce to oppose the rules, arguing the new rules will limit access to higher education for blacks and Hispanics, “condemned” the new rules and called on Congress to block them.

Although the new rules have been issued, there are still many controversies surrounding them. Many of the for-profit educational companies that will be covered by the rules have complained about the Education Department’s method of calculating repayment rates, and have claimed that hundreds of thousands of students could be affected.

Because the rules apply to individual gainful employment programs – programs designed to prepare a student for a specific occupation – the Education Department predicted that under the original proposal, no more than 5 percent of programs would be affected by them. For example, a single program of study – such as nursing or surgical technician at a single campus– could be barred from the financial aid program without affecting any other programs at that location or at other locations of the school.  

There are also ongoing investigations, and requests for more investigations, of contacts between Department of Education officials and so-called “short-sellers” before the proposed rules were released.  Short-sellers essentially bet against a stock, counting on its price to drop. The for-profit schools allege that the short-sellers had improper influence in the drafting of the rules.


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