The Awful New Rules on ‘Gainful Employment’

uphoen.jpgThe Gettysburg Address is just over 300 words long, while the Declaration of Independence is 1,137 and entire U.S. Constitution is 4,400 words. But the Obama Administration’s new rules pertaining to “gainful employment,” applicable to many higher-education institutions, including virtually all “for-profit” ones, run about 185,000 words and 841 pages, slightly longer than the Bible’s New Testament. Never have so many words been uttered to achieve so little, cause so much anxiety and destroy so much wealth, only to ultimately signify nothing.

These regulations are, simply speaking, awful, further cause to reduce the federal role in higher education. People who lose billions annually running a postal monopoly and cannot even provide decent Internet access to a poorly conceived health-care system certainly should not be trusted with regulating the creation and dissemination of high levels of knowledge.

Subsidizing Failure

To be sure, the intent is good. Many students borrow billions of dollars, go to school, and fail to graduate and/or obtain good jobs, ending up deep in debt, often defaulting on their loans. Continually lending money to students at institutions where most students don’t succeed is not a smart idea. However, rather than prohibit loans to students at some schools, it is more efficient to incentivize the schools to alter their behavior so as to exclude marginal students. Specifically, colleges should have some “skin in the game,” facing financial consequences when only few students succeed. Indeed, in a perfect world, the feds would exit the student loan business, replacing it with private entrepreneurs making loans or buying equity in future student earnings, thereby ending the need for “gainful employment” regulation.

That said, I find the new rules very bad on at least four grounds:

  1. Overwhelmingly most important, they are targeted against for-profit schools, and leave totally unscathed the bulk of nonprofit higher education, so they are unfair and discriminatory;
  2. The major problem is not the colleges or their students, but rather the government itself for imposing inappropriate lending terms that encourage millions to attend college who do not belong;
  3.  The rules are designed to hurt the very providers who most faithfully promote the Obama administration’s professed goal of increasing college attendance and participation;
  4. The definition of “gainful employment” is far too stringent.

 A Path to Crummy Jobs

The gainful employment rules apply only to vocationally oriented programs, including career colleges (which are for-profit) and some community colleges. But why not scrutinize students majoring in, for example, sociology, from Wayne State University? If the goal of these regulations is to keep the government from wasting money, why subsidize every student in every major at every university in programs where students mostly end up not graduating, or get crummy jobs?  The reality is only 10 percent of students graduate in four years at Wayne State, and over twice as many default on loans as graduate in that time span. Why is not Wayne State subject to the same gainful employment criteria as the for-profit University of Phoenix?

Moreover, while dropouts and loan defaults are high at many for-profits, when one corrects for the socioeconomic and academic characteristics of the students, the findings are decidedly more mixed. For example, the for-profits have roughly double the proportion of African-American students as do other institutions, and black students disproportionately come from low-income homes with high incidence of college attrition. Recent National Clearinghouse data show the six-year completion rate for students in two-year for-profit institutions, 62.4 percent, is higher than for two-year public schools (39.9 percent).

Weakening the Non-Profits

The discriminatory regulatory treatment of for-profits has succeeded in seriously weakening them financially. While the Dow-Jones Industrial Average has doubled since Inauguration Day 2009, most for-profit higher education stocks have tanked -industry leader Apollo Corporation (University of Phoenix) stock, for example is down over 60 percent in the same period, with most prominent companies down 30 to 90 percent.

I happen to disagree fundamentally with the “college for all” approach of the Obama Administration, but if you are going to pursue it, why attack the very providers who most aggressively are trying to help meet your goals? The for-profits disproportionately enroll poor first-generation students, and who are members of minorities. Moreover, accounted for properly (including state subsidies for public schools, taxes paid by for-profits, etc.), the for-profits use fewer of society’s resources per student.

Finally, the actual criteria used to define “gainful employment” are too stringent. For example, it is expected that no borrower should have to repay more than 12 percent of total income (20 to 30 percent of so-called discretionary income).  Thus someone earning $35,000 a year with $4,800 annual loan repayments exceeds this number, and is considered not gainfully employed, whereas I would think that a $400 monthly loan obligation ($4,800 annually) is within the realm of reasonable for someone with that income. If the individual in question went from a $20,000 job before going to school to a $35,000 job with a $4,800 loan commitment after college, that person has advanced considerably -yet the proposed rules say he/she is not “gainfully employed.”

I am with Senator (and former university president) Lamar Alexander, who opined recently that we need to rewrite the Higher Education Act of 1965 from scratch. Indeed, let’s repeal it, and then reinstate any truly beneficial provisions in a new law.  We need to radically rethink federal provision of aid to students. But as long as the current system exists, let’s at least work to have a level playing field.


  • Richard Vedder

    Richard Vedder is Distinguished Professor of Economics Emeritus at Ohio University, a Senior Fellow at the Independent Institute, and a board member of the National Association of Scholars.

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