The U.S. Department of Education (Department) developed the Gainful Employment (GE) regulations to address what they felt were too many students enrolling in programs at For-Profit schools that were either dropping before they completed their education or that they were graduating with high debt that they could not repay based on their reported wages. As such, the Department developed the Gainful Employment regulations that evaluate a student’s debt to earnings and debt to discretionary spending. Remember the metrics only apply to Title IV students, cash pay or private loan students are not a part of this process, nor are students who are funded by Parent Plus Loans.
The debt-to-earnings (D/E) rates measure will be used to determine whether a GE program remains eligible for Title IV funds. The D/E rates measure evaluates the amount of debt (tuition and fees and books, equipment, and supplies) students who completed a GE program incurred to attend that program in comparison to those same students’ discretionary and annual earnings upon graduation.
To pass the D/E rates measure, the GE program must have a discretionary income rate less than or equal to 20 percent or an annual earnings rate less than or equal to 8 percent. The regulations also established a zone for GE programs that have a discretionary income rate greater than 20 percent and less than or equal to 30 percent or an annual earnings rate greater than 8 percent and less than or equal to 12 percent. GE programs with a discretionary income rate over 30 percent and an annual earnings rate over 12 percent will fail the D/E rates measure. Under the regulations, a GE program becomes ineligible for Title IV, if it fails the D/E rates measure for two out of three consecutive years, or has a combination of D/E rates that are in the zone or failing for four consecutive years.
How are the rates calculated?
For each award year, the Department will calculate D/E rates as follows:
(1) Discretionary income rate = annual loan payment / (the higher of the mean or median annual earnings – (1.5 x Poverty Guideline)). The Poverty Guideline amount is for the calendar year immediately following the calendar year for which annual earnings are obtained.
(2) Annual earnings rate = annual loan payment / the higher of the mean or median annual earnings.
(3) Annual loan payment = the annual loan payment for a GE program is determined by the median loan debt of the students who completed the program during the cohort period, based on the lesser of the loan debt incurred by each student and the total amount for tuition and fees and books, equipment, and supplies for each student.
(4) Amortizing the median loan debt is done over a 10-year repayment period for certificate programs using an annual interest rate that is the average of the annual interest rates on Federal Direct Unsubsidized Loans that were in effect during the three-year period prior to the end of the cohort period.
In order to help understand the calculations we have provided some important definitions:
Annual earnings – The Department obtains from the Social Security Administration the most currently available mean and median annual earnings of the students who completed the GE program during the cohort period.
Annual Earnings Rate – The percentage of a GE program’s annual loan payment compared to the annual earnings of the students who completed the program.
Cohort Period – The two-year cohort period or the four-year cohort period, as applicable, during which those students who complete a program are identified in order to assess their loan debt and earnings. The Secretary uses the two-year cohort period when the number of students completing the program is 30 or more. The Secretary uses the four-year cohort period when the number of students completing the program is less than 30, but when adding up the students in that four year period is 30 or more.
Discretionary Income Rate – The percentage of a GE program’s annual loan payment compared to the discretionary income of the students who completed the program.
Four-Year Cohort Period – The cohort period covering four consecutive award years that are–
(1) The third, fourth, fifth, and sixth award years prior to the award year for which the D/E rates are calculated. For example, if D/E rates are calculated for award year 2014-2015, the four-year cohort period is award years 2008-2009, 2009-2010, 2010-2011, and 2011-2012;
Poverty Guideline – The Poverty Guideline for a single person in the United States as published by the U.S. Department of Health and Human Services.
Two-year cohort period – The cohort period covering two consecutive award years that are–
(1) The third and fourth award years prior to the award year for which the D/E rates are calculated. For example, if D/E rates are calculated for award year 2014-2015, the two-year cohort period is award years 2010-2011 and 2011-2012.