Program Integrity: Gainful Employment-Debt Measures

DEPARTMENT OF EDUCATION

34 CFR Part 668

RIN 1840-AD06

[Docket ID ED-2010-OPE-0012]

Program Integrity: Gainful Employment—Debt Measures

AGENCY:

Office of Postsecondary Education, Department of Education.

ACTION:

Final regulations.

SUMMARY:

The Secretary amends the Student Assistance General Provisions regulations to improve disclosure of relevant information and to establish minimal 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:

These regulations are effective July 1, 2012.

FOR FURTHER INFORMATION CONTACT:

John Kolotos or Fred Sellers for general information only.

Telephone:

(202) 502-7805. Any other questions or requests for information regarding these final regulations must be submitted to:

GE-Questions@ed.gov.

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:

Executive Summary

Institutions providing gainful employment programs offer important opportunities to Americans seeking to expand their skills and earn postsecondary degrees and certificates. For-profit institutions offer many quality programs, but in some instances, these programs leave large numbers of students with unaffordable debts and poor employment prospects.

The Department of Education has a particularly strong interest in ensuring that institutions that are heavily reliant on Federal funding promote student academic and career opportunities. These final gainful employment regulations are designed to (1) provide institutions with better metrics and more time to assess their program outcomes and thereby a greater opportunity to improve the performance of their gainful employment programs before those programs lose eligibility for Federal student aid funds, and (2) identify accurately the worst performing gainful employment programs. At the same time, the final regulations require that these federally funded programs meet minimal standards because students and taxpayers have too much at stake to allow otherwise.

The Higher Education Act of 1965, as amended (HEA), has long provided for the extension of financial aid to students attending postsecondary programs that “lead to gainful employment in a recognized occupation,” including nearly all programs at for-profit institutions and certificate programs at public and non-profit institutions. For-profit institutions, in particular, are a diverse, innovative, and fast-growing group of institutions. By pioneering creative course schedules and online programs and serving nontraditional students, many of these institutions have developed impressive, beneficial practices that both public and non-profit institutions might emulate. In recent months, a number of institutions have taken promising steps to improve the value of the programs they offer to students by offering free trial and orientation periods, closing underperforming programs, and investing more in their faculty and curricula. These reforms may serve students well and improve performance as measured under these final regulations.

At the same time, for-profit institutions typically charge higher tuitions for their programs than do their public and non-profit counterparts. They also have higher net prices, a measure of how much students pay after receiving grant aid, such as Federal Pell Grants. As a result, students on average assume more debt to enroll in a program than do their peers who attend public or private, nonprofit institutions.

We also have concerns about recruitment practices and completion rates for particular programs offered by for-profit institutions. The Government Accountability Office (GAO) and other investigators have found evidence of high-pressure and deceptive recruiting practices at for-profit institutions. These recruiting practices may contribute to low graduation rates. First-time students enrolling in four-year institutions in 2004 were only about half as likely to earn any kind of degree or certificate by 2009 if they began their postsecondary education at a for-profit institution than if they began their postsecondary education at a public institution. National Center for Education Statistics, 2004/2009 Beginning Postsecondary Students Longitudinal Study.

Proprietary institutions market their programs to students by emphasizing the value of the program against the cost to the student. This approach is often called the value proposition of the program and is meant to portray to students the value of the specific program offerings to that student's career goals. It is this posture that distinguishes programs “that lead to gainful employment in a recognized occupation” as set forth in the HEA.

These final regulations reflect the Department's policy determination that students are not adequately protected by the Department's current regulatory framework, which focuses on institutional level information. By defining what it means to provide training leading to gainful employment for each program that is eligible to receive title IV, HEA funds, the Department believes that students will be better served and the Department will have improved how it carries out its obligation to ensure program integrity.

Some have argued that cohort default rates, measured at the institutional level, already provide a measure of whether student debt is at appropriate levels. The Department believes that those measures are properly supplemented and complemented by those outlined here. The Department's experience with the CDR is that it operates for particular purposes and that, among other things, it does not identify the harm to students that can come from enrolling in a specific program that leaves them with high education debts and limited job opportunities. An institution's average default rate does not measure the effect of any individual program, and that information alone does not provide a student with a measure of whether he or she will be able to achieve a career goal and pay off loan debt. Moreover, the default rate does not take account of the possibility that many students are struggling to repay their loans, such as those receiving economic hardship deferments or who are in income-based repayment. These are students who are seeing their loans grow, rather than shrink, because their incomes are low and their debts are high. As a result the default rate is a better measurement of the potential loss to taxpayers than of the repayment burden on borrowers.

The Department is adopting in these final regulations a definition of programs that provide training leading

to gainful employment in a recognized occupation in order to provide students with a measure of the particular program they are considering taking. This program-level assessment is further reflected in the way in which we have required disclosures of information and in the care we have taken with regulating the development of new programs once a program has failed to meet the measures in the regulation. The regulations we are adopting will help to protect students by removing eligibility from the worst performing programs that fail the minimum requirements, while providing institutions with incentives to improve the performance of their programs under the measures and create better outcomes for the students enrolled in those programs.

Institutional measures of eligibility often fail to reveal the effects of providing bad outcomes to students in the particular programs that they offer. Most of the revenues of for-profit institutions come from Pell Grants and Federal student loans. The revenues of these institutions are dependent on the number of students they enroll in their programs; they are not otherwise dependent on whether their students graduate, find jobs, and ultimately repay their loans. Thus, if one of these students defaults on her or his loan, the institution's revenues are unlikely to be affected and the blended cohort default rates calculated for an institution tend to mask the harms to students that are coming from only a few bad programs offered at an institution. For students, however, the consequences of an unaffordable loan are severe. For the 2008 cohort year, 46 percent of student loans (weighted by dollars) borrowed by students at two-year for-profit institutions are expected to go into default over the life of the loans, compared to 16 percent of loans borrowed by students across all types of institutions.

Former students who are not gainfully employed and cannot afford to repay their loans face very serious challenges. Discharging Federal student loans in bankruptcy is very rare. The common consequences of default include large fees—collection costs that can add 25 percent to the outstanding loan balance—and interest charges; struggles to rent or buy a home, buy a car, or get a job; collection agency actions, including lawsuits and garnishment of wages; and the loss of tax refunds and even Social Security benefits. Moreover, borrowers in default are no longer entitled to any deferments or forbearances and may be ineligible for any additional student aid until they have reestablished a good repayment history.

Consistent with the HEA's requirements, to be eligible to participate in the title IV, HEA programs, certain institutions must provide an eligible program leading to gainful employment in a recognized occupation. The Department's goals in promulgating these regulations are to ensure that (1) students who enroll in these programs do not have to face these difficult challenges, because they are equipped to secure gainful employment rather than being left with unaffordable debts and poor employment prospects, and (2) the Federal investment of title IV, HEA student aid dollars is well spent.

The Department began its efforts in this area with regulations designed to help students make informed choices about postsecondary education programs in 2009 by conducting a series of public hearings and negotiated rulemaking sessions. It published two notices of proposed rulemaking (NPRMs) in 2010. The Department's proposed regulations emphasized the use of disclosure mechanisms to provide students and the public with critical information about the performance of gainful employment programs. On October 29, 2010, the Department published regulations (75 FR 66832) (Program Integrity Issues final regulations) requiring institutions with programs that prepare students for gainful employment in a recognized occupation to disclose key performance information about each program on their Web site and in promotional materials to prospective students. The required elements include the program cost, on-time completion rate, placement rate, median loan debt, and other information for programs that prepare students for gainful employment in recognized occupations.

Since publishing the final regulations, the Department has published in the

Federal Register

on April 13, 2011, a draft disclosure template for public comment (76 FR 20635). The Department intends to finalize this disclosure template by the fall of 2011 so that it is available for use by institutions by July 1, 2012. The disclosure template will automate the process by which institutions can prepare the required disclosures and will include links to provide the appropriate Web sites of other institutions offering the same program that participate in the title IV, HEA student aid programs, thus allowing students to compare similar programs. With this template, and consistent with section 4 of Executive Order 13563, the Department is thus attempting to foster informed decisions and to improve the operation of the market through “disclosure requirements as well as provision of information to the public in a form that is clear and intelligible.”

The Program Integrity Issues final regulations also included significant new regulations that we designed to protect consumers from misleading or overly aggressive recruiting practices, and to clarify State oversight responsibilities. These regulations took significant steps to curbing fraud and abuse in the Federal student aid programs by strengthening existing requirements that are designed to protect students and taxpayers. Among these changes were the strengthening of our misrepresentation regulations to provide the Department greater authority to take action against institutions engaging in deceptive advertising, marketing, and sales practices. The regulations also eliminate “safe harbors” that allowed questionable recruitment practices that often included institutions paying incentive compensation to recruiters. Too often this type of compensation leads to overly aggressive recruiting practices that encouraged students to take out loans they could not afford or enroll in programs for which they were unqualified or in which it was unlikely they could succeed. Additionally, the Program Integrity Issues final regulations took a needed step toward ensuring that States are taking necessary steps to ensure the appropriate oversight of the postsecondary education being provided by institutions by establishing minimum steps that States must take to meet their important responsibility under the HEA to protect students, including for institutions that offer distance or correspondence education.

These final regulations, Gainful Employment—Debt Measures, reflect a number of significant changes and improvements from the July 26, 2010 NPRM in response to public comments. The changes and improvements are designed to provide a better measure of whether a program provides training that will lead to gainful employment in a recognized occupation. They reflect alterations from the proposed regulations designed to (1) Provide better program information to students, (2) identify the worst performing programs, and (3) create appropriate flexibility and provide institutions the opportunity to improve their programs before losing title IV, HEA program eligibility. These changes are also designed to minimize the costs for regulated institutions, while providing

considerable benefits both to students at regulated institutions and to taxpayers.

The regulations emphasize the importance of disclosing program information and take several further steps to promote informed decisions. Thus, under the final regulations, institutions must disclose to the public, and the Secretary may also disseminate to the public, information about how each of an institution's programs are performing under the debt measures that we are establishing in these final regulations. The Department is considering additional steps to promote the comparison of programs and to facilitate access to this information. In keeping with the emphasis on disclosure, the regulations also provide that during the first two years that a program fails the debt measures, the institution must provide warnings to students. To promote informed student choice, these warnings must be provided to students sufficiently in advance of enrolling to permit the student time to consider whether to enroll in the program.

While increasing the level of disclosure is critical, the Department recognizes that information alone is unlikely fully to promote the goals of the HEA and to ensure that programs provide training that leads to gainful employment in a recognized occupation. Students enrolling in a postsecondary program often have limited background information about a program and little or no experience choosing among postsecondary programs. High-pressure sales tactics by institutions may also make it difficult for individuals to choose carefully among programs. Therefore, the Department is setting minimum standards to measure whether programs are providing training that leads to gainful employment in a recognized occupation.

To provide an additional layer of protection for students and taxpayers, the Department is defining a set of measures that identifies the lowest performing programs by focusing on the ability of students to repay their student loans. Under these measures, a program is now considered to lead to gainful employment if it has a repayment rate of at least 35 percent or its annual loan payment under the debt-to-earnings ratios is 12 percent or less of annual earnings or 30 percent or less of discretionary income. Under the regulations, only after failing both debt measures for three out of four fiscal years does a program lose eligibility. These regulations set minimum standards and are designed to provide flexibility, specifically allowing programs an opportunity to improve their performance before losing title IV, HEA program eligibility. The Department believes that these measures will improve the operation of free markets by identifying the poorest performing programs and strengthening institutions' incentive to provide an affordable quality education.

Background of Rulemaking Proceedings

On September 9, 2009, the Secretary announced the Department's intent to establish two negotiated rulemaking committees to develop proposed regulations under title IV of the HEA through a notice in the

Federal Register

(74 FR 46399). The Secretary established one committee to develop proposed regulations governing foreign schools and another committee to develop proposed regulations to improve integrity in the title IV, HEA programs. Team I—Program Integrity Issues (Team I) met to develop proposed regulations during the months of November 2009 through January 2010; however, no consensus on the proposed regulations was reached during the negotiations. After Team I's negotiations concluded, the Department published two NPRMs.

On June 18, 2010, the Secretary published the first NPRM in the

Federal Register

(75 FR 34806) (June 18, 2010 NPRM) proposing to strengthen and improve the administration of programs authorized under title IV of the HEA. With regard to gainful employment, the June 18, 2010 NPRM included proposals covering several technical, reporting, and disclosure issues. The June 18, 2010 NPRM reserved for a second NPRM the remaining gainful employment issues, which addressed the extent to which certain educational programs lead to gainful employment and the conditions under which those programs remain eligible for title IV, HEA program funds.

On July 26, 2010, the Secretary published a second NPRM for gainful employment issues in the

Federal Register

(75 FR 43616) (July 26, 2010 NPRM). In the July 26, 2010 NPRM, the Secretary proposed to—

• Establish debt thresholds based on debt-to-income and repayment rate measures that a program at an institution would need to meet in order to demonstrate that it provides training that leads to gainful employment in a recognized occupation and consequently to remain eligible for title IV, HEA funds;

• Establish a tiered eligibility system under which a program may have unrestricted eligibility, may have restricted eligibility, or may become ineligible to participate in the title IV, HEA programs;

• Establish consequences for a program with a restricted eligibility status, including requirements to provide debt warning disclosures to current and prospective students that they may have difficulty repaying loans obtained for attending the program; employer affirmations that the program curriculum is appropriately aligned with recognized occupations at the employers' businesses and that there is a demand for those occupations; and limits on enrollment of title IV, HEA program recipients in that program;

• Provide that a program becomes ineligible if it does not meet at least one of the debt thresholds for one award year;

• Specify that the institution may not disburse any title IV, HEA program funds to students who subsequently begin attending a program determined to be ineligible, but may disburse title IV, HEA program funds to 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 Secretary's notice that the program is ineligible;

• Establish a transition year in which the Secretary would cap the number of programs that would be classified as ineligible for the first year after the regulations take effect;

• Add a definition of

The Classification of Instructional Programs (CIP);

• Permit the Secretary to place on provisional certification an institution that has one or more of its programs determined to be subject to the eligibility limitations or determined ineligible under the gainful employment provisions; and

• Establish that in a termination action against a program for not meeting the gainful employment standards, the hearing official would accept, as accurate, earnings information for students that was obtained by the Department from another Federal agency, but would consider alternate earnings data as long as that data was reliable for the same students.

The Department reviewed the comments from both the June 18, 2010 NPRM and the July 26, 2010 NPRM and divided the final regulations into three separate documents. On October 29, 2010, the Secretary published both the first and second sets of final regulations in the

Federal Register

(75 FR 66832 and 75 FR 66665) (Program Integrity Issues and Gainful Employment/New Programs final regulations, respectively) with effective dates, generally, of July 1, 2011.

The Program Integrity Issues final regulations (75 FR 66832)—

• Clarified that only certificate or credentialed nondegree programs of at least one academic year that are offered by a public or nonprofit institution of higher education are gainful employment programs;

• Updated the definition of the term

recognized occupation

to reflect current usage;

• Established requirements for institutions to submit information on students who attend or complete programs that prepare students for gainful employment in recognized occupations; and

• Established requirements for institutions to submit information on students who attend or complete programs that prepare students for gainful employment in recognized occupations; and

• Established requirements for institutions to disclose on their Web site and in promotional materials to prospective students, the on-time graduation rate for students completing a program, placement rate, median loan debt, program costs, and any other information the Secretary provided to the institution about the program.

The Gainful Employment/New Programs final regulations (75 FR 66665)—

• Established a process under which an institution applies to the Secretary for approval to offer additional educational programs that lead to gainful employment in a recognized occupation.

These final regulations, Gainful Employment—Debt Measures, comprise the third set of regulations and reflect a number of significant changes from the proposed regulations in response to public comments. We received over 90,000 comments in response to the July 26, 2010 NPRM. These included tens of thousands of comments supporting our proposals and tens of thousands opposing them. Subsequent to our issuance of the Gainful Employment/New Programs final regulations, we also met with more than 100 individuals and organizations to permit these individuals and entities to clarify their comments in person. The Department extended its work on the regulations by six additional months to consider fully these comments. Consistent with Executive Order 13563, the result of this unprecedented public engagement is stronger regulations that (1) Are based on careful consideration of both the costs and benefits (both quantitative and qualitative) of the regulations; (2) incorporate many suggestions to allow flexible approaches for the regulated entities; and (3) balance the concerns of those on both sides of the “gainful employment” issue.

The final regulations will:

• Give all programs

three years to improve

their performance. The Department will begin by giving institutions data to help them identify and improve their failing programs and to help current and prospective students make informed choices. The first programs could lose eligibility based upon their performance under the debt measures calculated for fiscal year (FY) 2014 and released in 2015, rather than FY 2012 as proposed.

• Target only the worst performing failing programs by:

(1) Permitting an institution to maintain a program's title IV, HEA program eligibility until the program fails both the debt-to-earnings ratios and repayment rate measures for

three out of four FYs,

similar to the multi-year measures used to assess cohort default rates (CDRs) at an institution;

(2) Limiting the number of programs that will lose eligibility based on the debt measures calculated for only FY 2014 under § 668.7(k) to the

worst performing 5 percent of programs

(weighted by enrollment); and

(3) Eliminating enrollment restrictions that the Department had proposed in the July 26, 2010 NPRM to apply to all programs with repayment rates below 45 percent and an annual loan payment that is more than 20 percent of discretionary income or 8 percent of annual earnings.

• Improve the repayment rate and debt-to-earnings ratios measures based on extensive public comment by:

(1) Revising the measures such that a program is now considered to lead to gainful employment if it has a repayment rate of at least 35 percent or its annual loan payment under the debt-to-earnings ratios is 12 percent or less of annual earnings or 30 percent or less of discretionary income;

(2) Allowing institutions to demonstrate that their programs meet the debt-to-earnings ratios with alternative reliable earnings information, including use of State data, survey data, or Bureau of Labor Statistics (BLS) data during a transitional period;

(3) Measuring performance in years three and four of repayment, rather than years one through four, to examine more typical years in the life cycle of a loan (with a provision to use years three through six where necessary to ensure that more than 30 borrowers or completers are included in the measurement and additional adjustments to address the needs of programs that are improving their performance, graduate programs, and medical and dental programs);

(4) Measuring debt burdens based on an assumption that loans are repaid over 10 to 20 years depending on the level of degree, rather than 10 years for all programs as was originally proposed. Loan debt will be amortized over 10 years for undergraduate or post-baccalaureate certificate and associate's degree programs, 15 years for bachelor's and master's degree programs, and 20 years for programs that lead to a doctoral or first-professional degree;

(5) Limiting debt in the debt-to-earnings ratio calculation to tuition and fee charges for a specific educational program, if this information is provided by the institution, thereby providing programs relief for loans taken for indirect educational costs, including living expenses;

(6) Providing that borrowers who meet their obligations under income-sensitive repayment plans are considered to be successfully repaying their loans even if their payments are smaller than accrued interest, so long as the program at issue does not have unusually large numbers of students in those categories; and

(7) Providing that a program is considered to satisfy the debt measures if the number of students who completed the program or the number of borrowers whose loans entered repayment during the relevant four-year period is 30 or fewer.

• Improve the disclosure of information about programs by:

(1) Providing in § 668.7(g)(6) that the Secretary may disseminate the final debt measures and information about, or related to, the debt measures to the public in any time, manner, and form, including publishing information that will allow the public to ascertain how well programs perform under the debt measures and other appropriate objective metrics. The Department is considering appropriate ways to provide these metrics and other key indicators to facilitate access to the information and the comparison of programs;

(2) Requiring that an institution with a failing program that does not meet the minimum standards specified in the regulations must provide warnings to enrolled and prospective students;

(3) Requiring that the debt warnings for prospective students must be provided at the time the student first contacts the institution to request information about the program. The institution may not enroll the student until three days after the debt warnings are first provided to the student. If more than 30 days pass from the date the debt

warnings are first provided to the student and the date the student seeks to enroll in the program, the institution must provide the debt warnings again and may not enroll the student until three days after the debt warnings are most recently provided to the student; and

(4) Requiring an institution to disclose the repayment rate and the debt-to-earnings ratio (based on total earnings) of its gainful employment programs.

• Establish restrictions on reestablishing eligibility of ineligible programs, new programs that are substantially similar to an ineligible program, and failing programs that are voluntarily discontinued by the institution.

In sum, the Department has revised these regulations to promote disclosure, to encourage institutions to improve their occupational programs, and to provide more time for this improvement before revoking eligibility. The Department believes that institutions will strengthen their educational programs to meet these higher standards, and relatively few programs will fail. Programs that offer a rewarding education at an affordable price will prosper, and institutions will continue to innovate to serve students and taxpayers.

Implementation Date of These Regulations

Section 482(c) of the HEA requires that regulations affecting programs under title IV of the HEA be published in final form by November 1 prior to the start of the award year (July 1) to which they apply. However, that section also permits the Secretary to designate any regulation as one that an entity subject to the regulation may choose to implement earlier and to specify the conditions under which the entity may implement the provisions early.

The Secretary has not designated any of the provisions in these final regulations for early implementation. Therefore these final regulations are effective July 1, 2012.

Commitment to Continuing Retrospective Review

As discussed further under the heading

Executive Orders 12866 and 13563,

consistent with Executive Order 13563's emphasis on measuring “actual results” and on retrospective review of regulations, the Department intends to monitor the implementation of these regulations carefully, consider new data as they become available to ensure against unintended adverse consequences, and reconsider relevant issues if the evidence warrants. We recognize that, despite the Department's diligent efforts and extensive public input, there are limitations in the best available data and there remains some uncertainty about the impact of these final regulations, such as the number of programs that will be identified as ineligible.

In early 2012, the Department will calculate and share with institutions, for informational purposes only, performance data for programs subject to these regulations. Thus, institutions and the Department will have preliminary information about the performance of particular programs a full year before any programs could be labeled failing and three years before any programs could lose eligibility. This implementation schedule will allow the Department ample time to consider relevant evidence and data and to examine the performance of programs under the regulations. This collection of data, in conjunction with the agency's intention to evaluate the outcomes of these regulations, is consistent both with Executive Order 13563 and the Office of Information and Regulatory Affairs' February 2, 2011 memorandum (OMB M-11-19) on Executive Order 13563, which emphasizes the importance of “empirical testing of the effects of rules both in advance and retrospectively,” and which encourages future regulations to be “designed and written in ways that facilitate evaluation of their consequences and thus promote retrospective analyses.” The Department will continue to explore the effects of the regulations. Among other things, the Department will examine the type and number of programs determined to be failing and ineligible, and it will consider whether these final regulations should be reconsidered or amended in furtherance of its goals of protecting students and taxpayers against educational programs that leave students with unaffordable debts and poor employment prospects.

Analysis of Comments and Changes

As indicated earlier, over 90,000 parties submitted comments on the July 26, 2010 NPRM. Many of these comments were substantially similar. We have reviewed all of the comments. Generally, we do not address minor, nonsubstantive changes, recommended changes that the law does not authorize the Secretary to make, or comments pertaining to operational processes.

General

Comment Process

Comment:

The Department received over 90,000 comments on the July 26, 2010 NPRM. Of those comments, approximately 25 percent were in support of our proposed regulations and approximately 75 percent were opposed. We received comments from numerous categories of individuals, including students, families, employees of institutions of higher education, school presidents, congressional and other governmental leaders, advocacy groups, State and local associations, trade associations, and businesses. The comments received varied in content and length from extremely short responses to complex and lengthy economic and legal analyses. The vast majority of the comments, however, were similar, largely duplicative, and apparently generated through petition drives and letter-writing campaigns. Generally, these commenters did not provide any specific recommendations beyond general support of or opposition to the proposed regulations. Many of the commenters—both those in support of, and in opposition to, specific provisions—indicated that they supported the goals and intent behind the proposed regulations. Specifically, commenters across all sectors of higher education as well as the student and consumer advocacy groups believed that the goal of ensuring student loan debt is affordable is an admirable one.

Some of the commenters did not express substantive comments on the proposed regulations or their effects. For instance, a number of the commenters, particularly those from students, simply said “No,” or asked that the Department not “take away my student loans.”

Supporters of the proposed regulations praised the Department's transparency and commitment to improving the integrity of the title IV, HEA student aid programs. Some commenters praised the amount of information and data that the Department released with the NPRM and subsequently on the Department's Web site. Other commenters believed that the Department had taken appropriate steps to gather public input and to craft regulations that protect students by regulating programs that claim to prepare students for gainful employment, yet leave students with large amounts of debt and unprepared for employment in recognized occupations. These commenters suggested that the proposed regulations would help to ensure that employers can hire well-qualified employees and that taxpayer dollars are spent wisely and effectively. Some of the commenters believed that the proposed regulations provide for much-needed enforcement authority.

Commenters who opposed the proposed regulations believed that the proposed regulations would have a number of unintended effects and suggested that the regulations would produce results counter to the President's economic and educational goals. These commenters also stated that the proposed regulations would be overly burdensome and discriminatory; represent an overreaching of the Department's authority; unfairly punish institutions for students' choices after graduating; disproportionately affect at-risk and underserved populations of students; and limit the growth of, and innovation in, new programs. The commenters recommended that the Department address these concerns by delaying the implementation of the regulations, considering alternatives to the debt-to-earnings and repayment rate metrics, and exempting certain types of institutions or programs from compliance with the regulations. While making a number of suggestions and recommendations, the commenters generally expressed a desire to work with the Department to provide additional information and insight to craft metrics that they believed would achieve the intended result of reducing student loan debt and helping students to obtain gainful employment.

Discussion:

The Department appreciates the numerous comments we received in support of the proposed regulations as well as those we received that expressed concerns about them. Specific issues raised by the commenters are addressed in the relevant topical discussions. These comments were instrumental in identifying ways the Department could design final regulations that provide benefits to students, minimize costs to regulated institutions, and provide institutions with greater flexibility to achieve regulatory compliance.

Changes:

Changes made in response to the commenters' specific concerns are addressed in the relevant topical discussions.

Timing of Implementation

Comment:

Some commenters urged the Department to implement these regulations as early as possible, arguing that students, consumers, and taxpayers need protection now and cannot afford to wait for these regulations to go into effect a few years in the future. Some of these commenters noted that putting provisions into effect, perhaps in a transitional form, would spur institutions with poorly performing programs to invest in program improvements and student services, such as career counseling and job placement assistance, to improve student outcomes.

Some commenters asked the Department to delay the implementation of the regulations for a number of reasons. Some asked for the Department to delay implementation until the results of a forthcoming GAO study on proprietary schools are available. Other commenters requested a delay to allow Congress time to debate and pass a law on the definition of “gainful employment.” These commenters argued that Congress, not the Department, appropriately has this authority. Some of the commenters also suggested a delay to allow time to see the effect of the additional disclosures and reporting requirements under the final regulations that will take effect July 1, 2011 (75 FR 66833-66975). Some commenters requested a delay until Congress acts to provide authority to institutions to limit loan funds to institutional charges.

Commenters requested that the Department apply the metrics only to students who enroll after the final regulations are published. These commenters argued that schools should not be held accountable for an outcome that was not defined at the time the students attended the program and that it would be unfair to judge schools on metrics that they could have influenced at the time, when the quality of the programs and the outcomes for the students may be improving. Commenters noted that the Department should delay enforcing the regulations so programs have an opportunity to improve, and that programs that are improving may not be able to satisfy the metrics immediately given that the metrics measure outcomes from students who graduated in past years.

A few commenters asked the Department to provide draft metrics to institutions before their programs would be subject to sanctions. The commenters encouraged the Department to use the new, three-year CDR as a model for how any new metrics on gainful employment could be phased in over time. They further stated that delayed implementation would give schools time to improve their programs and debt counseling advice to meet the metrics as well as time to discontinue programs that are not meeting the metrics.

Some commenters requested further actions within the negotiated rulemaking process. Commenters requested that the Department issue these regulations as an interim final rule so that the public would have an opportunity to submit additional comments and, perhaps, to permit further modifications to the regulations based on those comments. Other commenters recommended that the Department extend the 45-day public comment period to allow a full analysis of the breadth and complexity of the proposed regulations. They further suggested that the Department would benefit from further information from institutions on the details involved with compliance before implementation. A few commenters requested that the Department engage in another round of negotiated rulemaking so that participants could focus solely on an appropriate definition of gainful employment. These commenters believed that more analysis and discussion of the proposed regulations are needed before they become final.

Some commenters suggested that the gainful employment metrics should apply no earlier than July 1, 2014, and sanctions for ineligible programs should apply on or after July 1, 2016, arguing that these timeframes would give institutions an adequate opportunity to comply with the new requirements.

Discussion:

We appreciate the concerns of the commenters who urged the Department to implement these regulations as early as possible. However, based on the concerns of other commenters, we believe it is desirable to extend the implementation schedule of these final regulations. In that regard, we agree that institutions should have the opportunity to improve program performance against the metrics before being subject to significant sanctions. The adjustments to the regulations reflecting these changes are discussed more fully under the relevant topical discussions.

We do not agree with commenters that we should delay implementing the final regulations until a third party takes some action such as waiting for a GAO study to be available. We have already undertaken extensive efforts to analyze the impact of these regulations and gather public comments. We also believe the need to remove poorly performing programs is too great to wait for third-party actions.

We do not agree that further actions need to be taken within the rulemaking process such as issuing interim final regulations, providing an additional comment period, or renegotiating the proposed regulations. Given the Department's extensive efforts to solicit and respond to comments from the public, including public hearings, three sessions of negotiations, additional meetings with interested parties, and the over 90,000 comments received, we do not believe it is necessary to reopen the rulemaking process and delay publishing these final regulations.

Changes:

Changes made in response to the commenters' specific concerns are addressed in the relevant topical discussions.

Legal Authority

Comments:

A number of commenters objected to the proposed regulations in whole or in part, claiming that no changes to the HEA require the Secretary to define the term “gainful employment,” and that the term cannot now be defined since Congress left it undisturbed during its periodic reauthorizations of the HEA. Some commenters expressed the view that the framework of detailed requirements under the HEA programs that includes institutional measures using cohort default rates, disclosure requirements for institutions, restrictions on student loan borrowing, and other financial aid requirements prevents the Department from adopting debt measures to determine the eligibility for these programs. Other commenters noted that it was unfair for the Department to propose these requirements for some programs and not others. Some commenters suggested that the phrase “to prepare students for gainful employment” is unambiguous and therefore not subject to further definition. Some commenters claimed that the Department has previously defined the term “gainful employment in a recognized occupation” in the context of conducting administrative hearings and argued that the Department did not adequately explain in the July 26, 2010 NPRM why it was departing from its prior use of that term.

Discussion:

The Department has broad authority to promulgate regulations to implement programs established by statute. Under section 414 of the Department of Education Organization Act, 20 U.S.C. 3474, “[t]he Secretary is authorized to prescribe such rules and regulations as the Secretary determines necessary or appropriate to administer and manage the functions of the Secretary or the Department.” Similarly, section 410 of the General Education Provisions Act, 20 U.S.C. 1221e-3, provides that the Secretary may “make, promulgate, issue, rescind, and amend rules and regulations” for Department programs, including the Federal student aid programs.

The eligibility of programs leading to gainful employment in a recognized occupation is addressed in sections 101, 102 and 481(b) of the HEA. Section 481(b) of the HEA defines “eligible program” to include a program that offers at least a defined minimum quantity of instruction that “provides a program of training to prepare students for gainful employment in a recognized profession.” The HEA in section 102(a) defines an “institution of higher education for purposes of the student assistance programs” and provides further in section 102(b), that proprietary institutions of higher education, with limited exception, “provide[] an eligible program of training to prepare students for gainful employment in a recognized occupation.” Similar requirements exist in section 101(b)(1) for public and private non-profit institutions of higher education providing programs at least one year in length, and section 102(c) provides similar requirements for public and private non-profit postsecondary vocational institutions.

Under section 102(b) of the HEA, programs offered at for-profit institutions are only eligible for title IV, HEA funds if they offer programs that “prepare students for gainful employment in a recognized occupation.” Such an institution is required to offer at least one eligible program leading to gainful employment in a recognized occupation in order for the institution to be eligible.

This structure for eligibility at the program level and the institutional level is longstanding and has been retained through many amendments to the HEA. Indeed, as recently as the enactment of the Higher Education Opportunity Act of 2008 (HEOA) (Pub. L. 110-315), Congress retained this distinct treatment of programs by exempting liberal arts baccalaureate programs offered at some for-profit institutions from the requirement to provide gainful employment in a recognized occupation.

The HEA establishes eligibility requirements for certain programs based upon the program length and the type of institution offering the program, including such programs that lead to gainful employment in a recognized occupation. Other requirements apply to certain types of institutions offering eligible programs, such as providing disclosures about revenue, and limiting the percentage of revenue that can be received from title IV, HEA programs. Other requirements apply to all eligible institutions, such as submitting annual financial statements and compliance audits, and meeting eligibility requirements based upon the loan cohort default rate calculated for an institution. None of these requirements, viewed alone or together, constitutes a framework that prohibits the Department from establishing the debt measures in these regulations to determine eligibility for programs required to provide training leading to gainful employment in a recognized occupation.

The legislative history of the gainful employment requirement bears directly on the issues now emerging in the data. Congress was concerned that the availability of Federal student aid, particularly in the form of loans for some types of programs and institutions might lead to students taking on more debt than is reasonable given the earnings that could be expected. Congress extended loan eligibility beyond traditional degrees at traditional institutions after considering testimony regarding the connection between the expected earnings of the graduates and the debt burden they would incur from this training. A Senate Report quotes extensively from testimony provided by University of Iowa professor Dr. Kenneth B. Hoyt, who testified on behalf of the American Personnel and Guidance Association:

It seems evident that, in terms of this sample of students, sufficient numbers were working for sufficient wages so as to make the concept of student loans to be [repaid] following graduation a reasonable approach to take. * * * I have found no reason to believe that such funds are not needed, that their availability would be unjustified in terms of benefits accruing to both these students and to society in general, nor that they would represent a poor financial risk. Sen. Rep. No. 758, 89th Cong., First Sess. (1965) at 3745, 3748.

Congress cited the same affirmation from an industry spokesman, Lattie Upchurch, Jr., of Capitol Radio Engineering Institution, Washington, DC, who testified that “the purely material rewards of continued education are such that the students receiving loans will, in almost every case, be enabled to repay them out of the added income resulting from their better educational status.” Id. at 3752.

These final regulations address harms to students that have been identified by the GAO, and were identified in the public hearings and in comments submitted in response to the proposed regulations, namely that program completers are unable to obtain jobs for which they received training. The regulations are also designed to address concerns about high levels of loan debt for students enrolled in postsecondary educational programs that, to qualify for participation in the title IV, HEA programs, must provide training that leads to gainful employment in a recognized occupation. These regulations are of particular importance because significant advances in electronic reporting and analysis now allow the Department to collect accurate and timely data that could not have

been utilized in the past. These analyses will provide the Department, students, and the institutions offering these programs with information about how well the programs are performing under the measures.

With respect to the general claims from some commenters that the terms “gainful employment” and “gainful employment in a recognized occupation” are unambiguous and cannot be defined in regulation, it is clear from the thousands of comments we received that the terms “gainful employment” and “gainful employment in a recognized occupation” are subject to many different views and interpretations. Thus, these regulations represent a reasonable interpretation of those terms and do so in a way that responds to many of the concerns raised in the comments. Adopting a definition now gives meaning to an undefined statutory term, thereby fulfilling the Department's duty to enforce the provisions of the HEA in a clear and meaningful way. And, although the term has been used to refer to applicable programs in the context of administrative hearings at the Department, that use does not limit the Department's use of its statutory authority to create a regulatory definition through the negotiated rulemaking procedures established under the HEA.

With respect to claims that the Department should wait for Congress to legislate before regulating, it is important to note that the original efforts by the Department to address concerns about defaults in the Federal student loan programs were realized using the Secretary's general authority to regulate under section 414 of the Department of Education Organization Act. While Congress ultimately enacted the Omnibus Budget Reconciliation Act of 1990 (Pub. L. 101-508), which provides statutory authority for much of the cohort default rate provisions in effect today, the Secretary's authority was nonetheless appropriately used to issue regulations in this area to require, for example, teach-out arrangements for private institutions.

Changes:

None.

Comment:

Some commenters suggested that the proposed definition of gainful employment would be unlawful because it would constitute placing price controls on offering gainful employment programs.

Discussion:

We disagree that these regulations would constitute price controls for gainful employment programs. The debt measures and eligibility thresholds provide institutions with multiple ways to manage their programs to improve performance.

Changes:

None.

Thresholds for the Debt Measures (§ 668.7(a)(1))

General

Comment:

Commenters expressed concerned that low-income and minority students, many of whom are Federal Pell Grant recipients, could be harmed by the proposed loan repayment rate and debt-to-income thresholds. These commenters noted that Federal Pell Grant recipients are likely to need to borrow the maximum amount of title IV, HEA loan funds and may have more difficulty repaying their loans than students who incur smaller levels of debt. As a result, according to the commenters, the schools these students attend may not be able to meet the debt measures and could be forced to close or limit their enrollment to exclude these students.

Some of the commenters cited research by Mark Kantrowitz of FinAid.org and FastWeb.com that they believed showed that institutions with 50 percent or more Federal Pell Grant recipients are unlikely to satisfy the proposed 35 percent loan repayment rate threshold, and institutions with 40 percent or more of Federal Pell Grant recipients are unlikely to satisfy the proposed 45 percent loan repayment rate threshold. Similarly, other commenters cited studies indicating that minority students earn less than their white counterparts. For low-income students, the commenters concluded that student access to higher education would be adversely affected because the proposed thresholds would act as a disincentive to institutions to admit these students. The commenters suggested that, given these concerns, the Department should allow lower repayment rates and debt-to-earnings ratios for institutions based on the demographics of the institution's student body and its success rate in graduating minority students. Other commenters recommended that the Department implement a sliding scale repayment rate based on the number of Federal Pell Grant recipients at an institution. Under this approach, institutions with a larger percentage of Federal Pell Grant recipients would be subject to a lower threshold for the loan repayment rate. Commenters suggested that, alternatively, the loan repayment rates of Federal Pell Grant recipients could be evaluated separately from the loan repayment rates of non-Federal Pell Grant recipients, with a lower threshold established for Federal Pell Grant recipients. Commenters also noted that some of these same issues apply to institutions and programs dominated by women, because careers dominated by women tend to be lower-paying and many women take maternity leave or work part-time and these circumstances would lead to lower repayment rates and earnings for women.

One commenter noted that the Department's repayment rate data, when viewed across all sectors of the education industry, show that institutions with lower repayment rates serve high-risk students. The commenter argued that if the data demonstrate anything, it is that “at-risk” students (working adults with family commitments and no parental support, or students from lower socioeconomic backgrounds who are more susceptible to forces that might cause them to leave or take a break from school) have more difficulty repaying their student loans or are more inclined to use alternative methods to repay their loans, regardless of the type of school they attended.

Discussion:

The Department does not agree that the thresholds should be adjusted to reflect the demographics or economic status of the students enrolled in gainful employment programs. Students are not well served by enrolling in programs that leave them with debts they cannot afford to repay, regardless of their background. Moreover, as illustrated in the

Student Demographics

section of the RIA, there are institutions and programs achieving strong results with students from disadvantaged backgrounds, and many programs serving even the most disadvantaged students are performing well under the debt measures.

Changes:

None.

Comment:

Some commenters stated that because the loan repayment rate was established outside the negotiated rulemaking process, it lacked transparency and the breadth of input from stakeholders and the public that would have assured its quality and relevancy.

Discussion:

The loan repayment rate was discussed during the negotiated rulemaking sessions in the context of whether borrowers who attended a program were repaying their loans. The issue summaries used for the rulemaking sessions describing the repayment rate were published at that time on the Department's Web site and are available at

http://www2.ed.gov/policy/highered/reg/hearulemaking/2009/integrity.html

. The negotiating committee did not reach consensus on proposed regulations (see 74 FR 43617). As a result the Department was not bound to any of the draft regulations for

the issues in the manner those issues were discussed with the committee. Consequently, the Department chose to propose a dollar-based repayment rate instead of the borrower-based repayment rate discussed by the committee. As opposed to a borrower-based calculation where all borrowers have the same impact on the repayment rate regardless of their debt loads, the proposed dollar-based calculation rewards, or gives more weight to, borrowers with higher debt loads that repay their loans. For example:

Borrowers A and B completed a program with $12,000 and $15,000, respectively, in loan debt. Borrowers C, D, and E withdrew from the program with loan debts of $3,000, $4,000, and $6,000, respectively. Under the proposed repayment rate, all loan debt incurred by borrowers who attended the program would be included in the denominator ($40,000) of the ratio. Presuming that program graduates are more likely to repay their loans, i.e., that Borrower A will repay the $12,000 debt and Borrower B will repay the $15,000 debt, but Borrowers C, D, and E will not repay their debts, the sum of Borrowers A and B's loans would be in the numerator, resulting in a 67.5 percent repayment rate ($27,000/$40,000). Under a borrower-based calculation, the repayment rate would be 40 percent (two out of the five borrowers were repaying their loans).

Changes:

None.

Threshold for the Loan Repayment Rate and Debt-to-Earnings Ratios

Comment:

Some commenters expressed concern that there was no reasoned basis to support the Department's selection of 45 percent and 35 percent as the repayment rate thresholds for determining, in part, if programs are fully eligible, restricted, or ineligible to participate in the title IV, HEA programs. The commenters believed that this approach was simply a way for the Department to try to close as many private sector schools as possible by adjusting the thresholds based on the market's ability to absorb displaced students from private sector schools.

On the other hand, some commenters opined that the proposed loan repayment rate needed to be strengthened, and recommended that the Department increase the threshold for each tier by at least 10 percentage points. Consequently, a program would have to achieve a repayment rate of at least 55 percent to remain fully eligible for title IV, HEA funds. Other commenters recommended a threshold of 50 percent for the loan repayment rate. Some commenters suggested that programs with repayment rates below 25 or 35 percent should lose eligibility. The commenters believed that it is important to recognize that the proposed thresholds are likely to overstate actual repayment rates because the proposed repayment rate excludes both private loans and parent PLUS loans and many students and families may have accrued substantial amounts of these types of debt for which repayment is not being measured. The commenters noted that in 2008-09, these two forms of debt accounted for 20 percent of all postsecondary education loans. The commenters believed that these circumstances demonstrated both the need to increase the repayment rate thresholds and the importance of including private loans in the debt-to-earnings measure.

Other commenters believed that no changes should be made in the proposed thresholds. Others argued that if a program satisfied the debt-to-earnings threshold, then it should be eligible for title IV, HEA funds. These commenters believed the loan repayment rate metric would not be a quality test of the program's results.

Another commenter argued that the proposed standards for the loan repayment rate were not strict enough for “low-value programs,” which the commenter identified as programs where the percentage increase of post-graduate income is less than the program's debt-to-earnings ratio as a percentage of annual earnings for the program's graduates. The commenter recommended that the Department require a low-value program to maintain a 65 percent loan repayment rate in order for the program to maintain full eligibility.

A number of commenters noted that the mean repayment rate for all institutions is 48 percent and that an overwhelming majority of minority-serving institutions and community colleges, as well as many urban public and independent colleges and universities, would fail to meet the 45 percent repayment rate threshold if adopted by the Department. The commenters questioned the use of this standard of quality that almost one-half of all colleges would fail to meet. In addition, the commenters believed that repayment rates are influenced by a number of factors that have no relation to the quality of the educational program.

Some commenters believed that the Department did not justify its proposal that a program must have an annual loan payment of 8 percent or less of average annual earnings in order to meet the debt thresholds. The commenters suggested that the average annual earnings threshold should be adjusted from eight to at least 12 percent, which would be less than half of the expected upper level of spending on housing and more accurately reflect the role of education in a person's life.

Alternatively, commenters suggested the Department adopt a 10 percent threshold, pointing to the GAO study “Monitoring Aid Greater Than Federally Defined Need Could Help Address Student Loan Indebtedness” (GAO-03-508). The study indicated that 10 percent of first-year income is the generally agreed-upon standard for student loan repayment and that the Department itself established a performance indicator of maintaining borrower indebtedness and average borrower payments for Federal student loans at less than 10 percent of borrower income in the first repayment year in the Department's “FY 2002 Performance and Accountability Report” (see page 165,

http://www2.ed.gov/about/reports/annual/2002report/index.html

).

Some commenters noted that Sandy Baum and Saul Schwartz, economists upon whose 2006 study “How Much Debt is Too Much? Defining Benchmarks for Manageable Student Debt” the Department relied for the discretionary earnings threshold in proposed § 668.7(a)(1)(ii) and (iii) and (a)(2)(ii), have criticized the 8 percent metric as not necessarily applicable to higher education loans because the 8 percent threshold (1) Reflects a lender's standard of borrowing, (2) is unrelated to individual borrowers' credit scores or their economic situations, (3) reflects a standard for potential homeowners rather than for recent college graduates who generally have a greater ability and willingness to maintain higher debt loads, and (4) does not account for borrowers' potential to earn a higher income in the future. Commenters emphasized that Baum and Schwartz believe that using the difference between the front-end and back-end ratios historically used in the mortgage industry as a benchmark for manageable student loan borrowing has no particular merit or justification.

Commenters also stated that the 8 percent debt-to-earnings threshold is not supported by any standard economic analysis of educational investment decisions. According to the commenters, such an analysis does not imply a limit on annual debt payment related to annual earnings, but uses a cost-benefit model that includes the gains to earnings resulting from education. The commenters believed the Department should recognize that

borrowing for education costs is different than borrowing for a home mortgage because education tends to cause earnings to increase. As a result, the commenters believed the Department should increase the threshold. For example, a commenter suggested that a 12 percent threshold would be more reasonable.

Some commenters did not agree with the Department's rationale for proposing that a program's annual loan payment may be as high as 30 percent of discretionary income under § 668.7(a)(1)(ii). The commenters argued that the Department should simply adopt the recommendations made by Sandy Baum and Saul Schwartz in the 2006 College Board study that annual student debt should not exceed 20 percent of discretionary income. The commenters believed that the average annual earnings threshold needed to be strengthened noting that allowing a threshold of up to 8 percent only for student loan debt already fails to account for a student's other debts, but allowing up to 12 percent is clearly without a sound rationale and should be eliminated from the regulations after a phase-in period. The commenters also noted that a student's debt is likely to be understated because the same interest rate used for calculating the annual debt service for Federal unsubsidized loans would also be used to calculate the debt service of private education loans which are used more by students attending for-profit institutions. For these reasons, the commenters argued that the Department should avoid using any threshold higher than 8 percent of annual earnings or 20 percent of discretionary income.

Discussion:

In view of these comments, the Department is replacing the proposed two-tiered approach that would establish upper and lower thresholds for the debt measures with a single set of minimum standards. Under this simplified approach, the Department is establishing a minimum standard of 35 percent for the loan repayment rate, and a maximum standard of 30 percent of discretionary income and 12 percent of annual earnings for the debt-to-earnings ratios.

The Department set these thresholds with the goal of identifying programs that are failing to prepare students for gainful employment in a recognized occupation, as demonstrated by the prevalence of unaffordable debts and poor employment prospects among their former students. In recognition of the seriousness of steps to revoke eligibility, the Department is defining standards that identify the most clearly problematic programs.

The debt-to-earnings ratios were set after consideration of industry practice and expert recommendations. The ratios identify only programs where the majority of graduates have debt-to-earnings ratios that exceed recommended levels by 50 percent. Consistent with the views expressed in the literature, it allows programs to demonstrate that their debt is affordable based upon either total earnings or discretionary income. The combination of these measures also recognizes that borrowers can afford to contribute a greater share of their income to debt service as their incomes rise.

The repayment rate measure demonstrates that former students are, in fact, struggling to repay their loans. It identifies the approximately one-quarter of programs where 65 percent of former students attempting to repay their loans are nonetheless seeing their loan balances continue to grow.

As shown in Table A, approximately 26 percent of programs across all sectors with more than 30 borrowers in a four-year period fall below the 35 percent threshold based on one year of repayment rate data. The public two-year sector has the highest concentration of programs below the threshold, with 9.2 percent of programs falling below the threshold. These numbers are higher than the actual number of programs we expect to fall below the repayment rate threshold because they may not fully account for the treatment of borrowers who are eligible for Public Service Loan Forgiveness (PSLF) or in alternative repayment plans that allow payments that are equal to or less than accrued interest, or an institution's potential responses to the regulations, such as investments in debt counseling, which could raise programs' rates before the first official rates for FY 2012 are calculated in 2013. Moreover, the repayment rate distribution presented in Table A shows that two-fifths of programs with repayment rates below the 35 percent threshold were within 5 percentage points of meeting the threshold. Once the aforementioned factors are taken into account, the loan repayment rate for numerous programs would likely increase to over the 35 percent threshold, thereby meeting the repayment rate measure.

ER13JN11.010

Chart 1 shows the distribution of repayment rates across all types of institutions. The mean repayment rate for all of these programs, using the loan repayment rate specified in these final regulations, is 51 percent. The mean repayment rate for these programs at public institutions is 49 percent, 60 percent at private, non-profit institutions, and 43 percent at private, for-profit institutions.

ER13JN11.011

In developing the lower limit of the repayment rate in the July 26, 2010 NPRM, we attempted to define a relatively small subset of programs that could potentially lose eligibility. At the same time, we balanced that concern against the need to make the measure a meaningful performance standard. The programs within the lower boundary are, by definition, the worst performing when measured against both the repayment rate and debt-to-earnings ratios. Setting the threshold for eligibility at 35 percent identified approximately the lowest-performing quarter of programs.

A similar approach was taken in developing the repayment rate threshold for these final regulations. Although we have revised the methodology for calculating the repayment rate, the 35 percent threshold remains close to the 25th percentile among gainful employment programs. Table B shows frequency statistics associated with the new repayment rate measure across all institutional types.

ER13JN11.012

With regard to the study by the College Board, economists Sandy Baum and Saul Schwartz preferred a debt-service approach based on discretionary income rather than total income. The authors argued that a percentage based on total income does not answer the question of how much students can borrow without having difficulties repaying their loans because the percentage of income that borrowers can reasonably be expected to devote to repaying their loans increases with income. However, the authors did not suggest that 20 percent is a reasonable debt-service ratio for typical borrowers. The authors suggested that the maximum affordable debt-service ratio is approximately 20 percent. In the July 26, 2010 NPRM, we adopted this suggestion as the primary measurement of affordable debt at most income levels.

However, because a gainful employment program would fail the discretionary income ratio whenever the

income of the students who completed the program was less than 150 percent of the poverty guideline, we proposed a second debt-to-earnings ratio where the annual loan payment would not exceed 8 percent of total income. As noted in the July 26, 2010 NPRM (see 75 FR 43620) and the Baum and Schwartz study, 8 percent is a commonly used standard for evaluating manageable debt levels. Under this “best of both worlds” approach, programs could satisfy the proposed debt-to-earnings ratios in one of two ways. Programs whose graduates have low earnings relative to debt would benefit from the calculation based on total income, and programs whose graduates have higher debt loads that are offset by higher earnings would benefit from the calculation based on discretionary income.

Chart 2 represents the interaction between the two debt measures and how programs could retain eligibility under either measure. Table C provides the data underlying Chart 2 and indicates the maximum median loan debt a program may have so that the monthly payment falls under the final debt threshold.

ER13JN11.013

For the loan repayment rate, the Department proposed a threshold of 45 percent for full, unrestricted eligibility.

This represented the mean repayment rate among institutions from all sectors (the actual repayment mean was 48 percent which was rounded down to 45 percent to establish the threshold).

The 20 percent discretionary income threshold, 8 percent total income threshold, and 45 percent repayment rate threshold in the proposed regulations established reasonable debt levels. Raising the baseline thresholds for the debt-to-earnings ratios by 50 percent set the boundary above which it could become increasingly more difficult for a borrower to make loan payments. In reducing the loan repayment rate threshold to 35 percent, which approximated the 25th percentile of the distribution of repayment rates, we set the boundary below which programs could potentially become ineligible for title IV, HEA funds. So, under the July 26, 2010 NPRM, programs that scored in between the baseline and lower thresholds would continue to qualify for title IV, HEA funds, but would be subject to restrictions.

Under the framework established in these final regulations, the Department shifts from focusing on programs that have problematic debt levels (programs subject to restrictions) to targeting the lowest-performing programs (programs where the annual loan payment exceeds 30 percent of discretionary income and 12 percent of annual earnings and repayment rates less than 35 percent). By adopting the more lenient thresholds for the debt-to-earnings ratios, we provide a tolerance of 50 percent over the baseline amounts to identify the lowest performing programs, as well as account for former students who completed a program but who may have left the workforce voluntarily or are working part-time. For the loan repayment rate, the 35 percent threshold continues to represent the 25th percentile of repayment rates rounded down to the nearest 5 percent, which in our view, allows for a minimally acceptable outcome where nearly two-thirds of borrowers would not be making payments sufficient to reduce by at least one dollar the outstanding balance of the loans they incurred for enrolling in a program. In addition, because a program now either passes or fails the minimum standards, unlike the approach in the July 26, 2010 NPRM we are not placing any restrictions on passing programs.

As discussed in more detail elsewhere in this preamble, under these final regulations, there will be some programs for which the Department will not have the data necessary to calculate the debt measures. Accordingly, we are clarifying that a program is considered to provide training that leads to gainful employment in a recognized occupation if the data needed to determine whether the program meets the minimum standards are not available to the Secretary.

With regard to the comment on “low-value programs,” although we find the commenter's suggestion intriguing, the relationship between the variables (post-graduate income compared to the results of the debt-to-earnings ratio) do not provide a clear basis for setting the repayment rate at 65 percent. In any case, the suggested approach would add significant complexity and uncertainty, as institutions would not know what threshold their programs are expected to meet until they have determined their performance on the other threshold. More significantly, we are not convinced this approach would be better at identifying the poorest performing programs.

Changes:

Section 668.7(a)(1) has been revised to establish minimum standards for a gainful employment program. The program satisfies the standards if its loan repayment rate is at least 35 percent, or the program's annual loan payment is less than or equal to 30 percent of discretionary income or 12 percent of annual earnings. Section 668.7(a)(1) also has been revised to state that a program is considered to meet the minimum standards if the data needed to determine whether a program satisfies those standards are not available to the Secretary.

Definitions

Definitions of “Program” (Proposed § 668.7(a)(3)(i)); Final § 668.7(a)(2)(i))

Comments:

Commenters considered the definition of the term

program

to be too vague and requested additional guidance. For example, commenters questioned whether, under the proposed regulations, a program would contain multiple degree levels, whether the Department would evaluate a program at the institutional or branch level, and whether a program could include multiple areas or concentrations of study. Similarly, other commenters noted that because program performance varies greatly by campus location, the measures should be made at the campus level, and successful campuses would thus not be negatively affected by the regulations.

Discussion:

We agree that the definition of the term

program

should be clarified. To properly track programs or associate the program with its debt measures, we identify a program by a unique combination of the institution's six-digit OPEID number, the program's six-digit CIP code, and credential level. For this purpose, the credential levels are undergraduate certificate, associate's degree, bachelor's degree, post-baccalaureate certificate, master's degree, doctoral degree, and first-professional degree.

Under this definition, a program with a unique identifier that is offered by an institution at its main campus or at any of its locations is considered the same program for the purposes of the reporting and disclosure requirements in § 668.6 and the gainful employment program requirements in § 668.7. In addition, with regard to whether a program could include multiple areas or concentrations of study, we believe the definition's use of CIP codes alleviates this concern as the CIP code evaluation would take into account those issues. We remind institutions that they are responsible for accurately assigning CIP codes to programs in their reporting to the National Center for Educational Statistics (NCES) under section 487(a)(17) of the HEA. The inaccurate assignment of CIP codes may adversely affect the institution's participation in the title IV, HEA programs. The Secretary would consider a CIP code inaccurately assigned if the Secretary determines that the program best conforms to the description of another CIP code.

The Department does not agree that the debt measures should apply at a campus level when a single institution has multiple locations. In these circumstances, a student may attend courses for his or her program at more than one location or take additional courses online. Even if a program may be attended, in its entirety, at individual locations of an institution, the program is essentially the same program at all of the locations of the institution. We believe that it would be difficult and arbitrary to attempt to distinguish among the various gradations in patterns of student attendance. Additionally, even though there may be some variation between locations, such as those resulting from locations in different States subject to different State licensure requirements for a particular career, we do not believe such variation justifies attempting to distinguish a program's performance based on being offered at multiple locations. Moreover, in many cases, dividing programs by location would make it more difficult to reliably assess performance due to the fact that many institutions may have a small number of students in a particular location.

Changes:

In § 668.7(a)(2), we have revised the definition of

program

as described in this discussion.

Comments:

Commenters did not believe the CIP code format is sufficiently granular to adequately distinguish among programs. The commenters noted that currently there are a number of gainful employment programs that share the same CIP code. For example, in the context of new and emerging health care fields, multiple programs may be designated in the “general” or “other” subcategories. The commenters believed that, because the CIP codes are not scheduled to be updated until 2020, they will rapidly become obsolete but will still be used to assess program performance.

Discussion:

We believe that using the CIP codes is sufficient to identify a program, particularly when used in combination with the institution's OPEID and credential level as provided under the definition of

program.

We believe this coding convention greatly mitigates any concern related to the available codes under the CIP. We do not view the decennial updating of the CIP to be an impediment to the use of

these codes because new fields of study may also use more generic CIP codes until the next update of the CIP codes. However, if the CIP codes prove inadequate to reflect the diversity of offerings at the postsecondary level, the coding can be revised to reflect the greater depth required before 2020. In addition, through our oversight of institutional reporting under the Integrated Postsecondary Education Data System (IPEDS) completions survey, we can make adjustments to the CIP code categories more frequently to ensure that they appropriately reflect the programs being offered by institutions.

Changes:

None.

Comment:

One commenter stated that 59 percent of cosmetology schools, many of which offer only one program, were at risk of losing eligibility based on the data contained in the document on cumulative four-year institutional repayment rates that the Department released after issuing the July 26, 2010 NPRM. According to the commenter, these schools could lose eligibility because of the limited number of borrowers who make up the school's cohort and the impact that a single or relatively small number of borrowers can have on the school's repayment rate. The commenter noted that for schools with one or a limited number of program offerings, the loss of one program would result in the loss of the institution. The commenter recommended that the Department provide for very limited exemptions from the annual loan repayment rates for institutions with a small number of borrowers in repayment and consider instead basing the threshold on four-year cohorts of 120 students or less, consistent with the low-volume treatment for CDRs.

Discussion:

The HEA identifies those programs that must provide training that leads to gainful employment in a recognized occupation in order to receive title IV, HEA funds. The statute makes no exception for an institution with only one program; accordingly, we cannot exempt institutions offering only one program from the debt measures. However, we are providing in these final regulations an exemption for a program with a small number of borrowers or completers because debt measures based on a few students completing the program or repaying their loans may not accurately reflect the program's performance.

In general, under these regulations, and as described in further detail under the heading,

Definitions of “Three-Year Period (3YP)” and “Prior Three-Year Period (P3YP)” (Proposed § 668.7(a)(3)(iii) and (iv)),

we will assess programs based on two years of performance against both debt measures. When a program has fewer than 30 borrowers or program completers in the two-year period, however, we will assess the program's performance across a four-year period. We also are revising the regulations to provide that programs that have fewer than 30 borrowers or program completers in the four-year period are considered to meet the debt measures due to the difficulty in reliably assessing the performance of programs with small numbers of students.

In addition, because the Social Security Administration (SSA) will attempt to match the identity data of the students included in a two- or four-year period to the identity data that it maintains, any mismatches may result in SSA not including students in its calculation of the mean and median earnings for a program. Consequently, there may be cases where more than 30 students completed a program, but SSA calculates the mean and median earnings for the program based on 30 or fewer students. For these cases, as discussed more fully under the heading,

Draft debt measures and data corrections (§ 668.7(e)), Final debt measures (§ 668.7(f)), and Alternative earnings (§ 668.7(g)),

the Department will use the mean and median earnings provided by SSA to calculate the debt-to-earnings ratios for the program, but where SSA is unable to provide earnings data for one or more students, the Department may adjust the median loan debt for the program based on the number of students that SSA excluded in calculating the mean and median earnings. SSA may not calculate the mean and median earnings for a program if the number of students excluded falls below a threshold established by SSA. In these cases, the Department will consider the program to have satisfied the debt measures.

Finally, we are revising the regulations to provide that programs with a median loan debt of zero are meeting the measures. This clarification is a logical extension of the debt measures since programs with a median loan debt of zero are not placing any debt burden on the majority of their students.

Changes:

We have revised § 668.7(a)(2) to establish the term

four-year period

(4YP), which is defined as the period covering four consecutive FYs that occur on the third, fourth, fifth, and sixth FYs (4YP) prior to the most recently completed FY for which the debt measures are calculated. For a program whose students are required to complete a medical or dental internship or residency, as identified by an institution, the four-year period (4YP-R) covers the sixth, seventh, eighth, and ninth FYs (4YP-R) prior to the most recently completed FY for which the debt measures are calculated. We note that debt measures for programs using the 4YP-R will not be calculated until data covering those years are available. The definition of

four-year period

also provides that a required medical or dental internship or residency is a supervised training program that requires the student to hold a degree as a doctor of medicine or osteopathy, or a doctor of dental science; leads to a degree or certificate awarded by an institution of higher education, a hospital, or a health-care facility that offers post-graduate training; and must be completed before the borrower may be licensed by the State and board certified for professional practice or service.

In addition, we have revised § 668.7(d) to provide that the debt-to-earnings ratios for a small program are calculated using the 4YP or the 4YP-R if 30 or fewer students completed a program during the 2YP or the 2YP-R, respectively. Similarly, the 4YP or the 4YP-R is used for the loan repayment rate, if the corresponding 2YP or 2YP-R represents 30 or fewer borrowers whose loans entered repayment during the 2YP or the 2YP-R, respectively.

The revised regulations in § 668.7(d) provide that, in determining whether the 2YP or the 2YP-R represents 30 or fewer students or borrowers, we remove from the applicable two-year period any student or loan for a borrower that meets the exclusion criteria under § 668.7(b)(4) or (c)(5). Under those sections, we do not include a student or loan for a borrower in the two- or four-year periods used to calculate the debt measures if the Department has information that (1) for the loan repayment rate, one or more of the borrower's loans were in an in-school or a military-related deferment status or, for the debt-to-earnings ratios, the student's loans were in a military-related deferment status at any time during the calendar year for which the Department obtains earnings data from SSA, (2) for both measures, the student died, (3) for both measures, one or more of the borrower's loans were assigned or transferred to the Department that are being considered for discharge as a result of the total and permanent disability of the borrower, or were discharged on that basis under 34 CFR 682.402(c) or 34 CFR 685.212(b), or (4) for the debt-to-earnings ratios, the student was enrolled in any other

eligible program at the institution or at another institution during the calendar year for which the Secretary obtains earnings information under § 668.7(c)(3).

We also have revised § 668.7(d)(2)(i) to provide that a program satisfies the debt measures if SSA does not provide the mean and median earnings for the program. In addition, the final regulations provide that if the median student loan debt of a program is equal to zero, the program would meet the debt measures.

Graduate Programs

Comment:

Some commenters recommended that the Department exempt graduate programs from the gainful employment requirements because graduate students are sufficiently sophisticated to determine whether they can afford the education they seek and how much debt to incur. The commenters also noted that many graduate students are already employed and pose little risk of nonpayment, but have extremely high loan limits available to them, making them more likely to consolidate their loans, repay their loans under income-sensitive repayment plans, and incur what may be significant unpaid accrued interest that is subject to capitalization. Other commenters expressed concern that graduate students in a program would be likely to consolidate loans from the graduate program with loans from their undergraduate programs, and as a result the graduate program could find it harder to meet the repayment rate threshold if it enrolls students who enter with significant amounts of student loan debt. Alternatively, some commenters recommended that the Department limit the amount of debt counted in calculating the repayment rate to the amount used to pay tuition and fees for the program if the Department chooses not to exempt graduate programs. The commenters believe this approach would ensure that institutions are not improperly penalized for decisions made by students to borrow excessively, including incurring private loan debt, which may result in the institution being unable to continue to offer the graduate program of study.

Discussion:

The HEA identifies those programs that must provide training that leads to gainful employment in a recognized occupation in order to receive title IV, HEA funds. These include graduate programs; therefore, we do not have a legal basis to categorically exempt these programs from the statutory requirements. However, some distinctions are recognized based upon the characteristics of those programs, such as the use of an extended repayment period in the calculation of the debt to earnings ratio. Based on the comments noting that students attending graduate programs may have different expectations about how long it will take to repay their loans due to the increased costs associated with those programs, we have extended the repayment period for certain of those programs to up to 20 years for the purposes of calculating the annual loan payment for the debt-to-earnings ratios. In addition, we recognize that many graduate students have outstanding student loans from prior postsecondary programs. When calculating the repayment rate for post-baccalaureate programs, we will consider a borrower with a consolidation loan to be successfully repaying his or her loans if the outstanding balance does not increase over the course of the most recently completed FY.

Changes:

See changes discussed under the heading,

Loan Amortization,

and under the heading,

Loan Repayment Rate Calculation.

Definitions of “Three-Year Period (3YP)” and “Prior Three-Year Period (P3YP)” (Proposed § 668.7(a)(3)(iii) and (iv))

Comments:

Commenters disagreed with the Department's proposed regulations to use starting salary data for the “earnings” portion of the debt-to-earnings ratio calculation. They were concerned that 3YP data do not take into account the lifelong benefit of higher education and the fact that graduates will earn more money as they gain experience and responsibility. Commenters recommended that the Department eliminate the 3YP and P3YP distinctions and replace these two independent benchmarks with a single benchmark based upon income data for a six-year period.

A number of commenters indicated that it is impossible for medical and dental residents to satisfy the proposed gainful employment standards, under the proposed P3YP. According to the commenters, the proposed P3YP fails to account for the fact that most, but not all, medical and dental residents will undertake employment during years 4, 5, and 6 following graduation at entry level salaries. For example, it takes a minimum of three years of a residency before a medical doctor can become eligible for full licensure and able to practice medicine without supervision in all fifty States. Residencies in categorical subspecialties, such as neurology, anesthesia, or cardiology, can take up to eight years.

Along the same lines, commenters representing several medical and dental schools, and related residency programs that award postgraduate certificates, noted that the proposed repayment rate regulations failed to consider the nature of medical and dental training and required residency periods. Because the residency periods may be for three to eight years following medical and dental school graduation, the proposed repayment rate for these programs would be lower than it should be. The commenters stated that the compensation of medical residents is so small that it is not a recognized occupation according to the BLS and that medical school graduates are not gainfully employed until after they complete their medical residencies. Consequently, it could take several years for a physician or surgeon to achieve a median salary level. As a result, many medical school graduates opt for income-contingent, income-based, or extended repayment plans and consolidate their loans, leading to significant amounts of capitalized interest. The commenters stated that under the proposed repayment rate formula, the majority of U.S. medical schools would fail to meet the 45 percent repayment rate standard. Therefore, the commenters urged the Department to exempt from the regulations medical school programs and postdoctoral dental residency certificate programs.

Another commenter recommended that the Department allow institutions to base the loan repayment rate on either the four most recent Federal FYs or the prior set of four FYs (i.e., years 5 through 8) in order to better reflect earnings after graduation. The commenter offered that institutions choosing the prior four-year period should be required to comply with the stricter 45 percent repayment rate threshold. The commenter also noted that this approach could provide an option for schools during economic recessions when external factors can result in artificially reduced loan repayment rates.

Discussion:

The Department proposed in § 668.7(a)(1)(ii) and (iii) to use the most current earnings available of the students who completed the program in a 3YP to calculate debt-to-earnings ratios. If an institution could show that the earnings of students in a particular program increase substantially after an initial employment period, the Department would use the P3YP. As discussed more fully under the heading,

Earnings of program completers,

those calculations have been modified to use two-year periods. This change to a two-

year period will allow an institution to show improvement in a program's performance in a shorter cycle. Under the proposed framework, approximately one-third of the students who are included in the 3YP would have completed a program or entered repayment during a particular year, whereas under these final regulations approximately one-half of the students in the 2YP will represent a single year. Accordingly, the current debt measures for a program will not be affected by former students in the program for more than a two-year period.

The Department agrees that the performance of programs whose graduates are required to complete medical or dental internships and residencies before they can begin professional practice should be measured at a later point in repayment than borrowers who would be expected to obtain gainful employment immediately after leaving a program. Although borrowers earn money and enter repayment, in a sense, the internships and residencies are a continuation of the educational program. As long as an institution identifies these programs, we will calculate the repayment rate based on the two-year cohort of borrowers who first entered repayment on their loans in the sixth and seventh years prior to the year the repayment rate is calculated rather than the third and fourth years used for all other borrowers. The debt-to-earnings ratios for these programs will be calculated based on the two-year cohort of borrowers who completed the program in the sixth and seventh years prior to the year the debt-to-earnings ratios are calculated. In order to be clear about those medical or dental internship or residency programs for which the 2YP-R (as well as the 4YP-R) would apply, we are providing in the definitions of

two-year period

and

four-year period

that a required medical or dental internship or residence is a supervised training program that contains three elements. First, the program must require the student to hold a degree as a doctor of medicine or osteopathy, or a doctor of dental science. Second, the program must lead to a degree or certificate awarded by an institution of higher education, a hospital, or a health-care facility that offers post-graduate training. Third, the program must be completed before the borrower may be licensed by the State and board certified for professional practice or service.

To provide an alternative for institutions that take immediate steps to improve a program's loan repayment rate during the initial three-year evaluation period, we will calculate the repayment rate based on the most recent two-year period, the two-year period alternate (2YP-A), which includes loans for borrowers who entered repayment during the first and second FYs prior to the most recently completed FY. We believe this provision parallels the alternative earnings approach described elsewhere in this preamble under which an institution may use alternative earnings data to recalculate the debt-to-earnings ratios for a failing program. Unlike that approach, however, the Department will automatically calculate the loan repayment rate for a program based on the 2YP and the 2YP-A (provided that the 2YP-A represents more than 30 borrowers whose loans entered repayment) for the covered two-year period and use the higher of those rates to determine whether the program satisfies the 35 percent repayment rate standard. Because it is intended to recognize rapidly improving programs during a transition period, the 2YP-A is available for repayment rates calculated for FYs 2012, 2013, and 2014 only.

Changes:

Proposed § 668.7(a)(3)(iii) and (iv) defining a 3YP and P3YP have been removed. In their place, we have added a definition of

two-year period

in § 668.7(a)(2)(iv). Under this definition, for most programs, a

two-year period

is the period covering two consecutive FYs that occur on the third and fourth FYs (2YP) prior to the most recently completed FY for which the debt measures are calculated. For example, if the most recently completed FY is 2012, the 2YP is FYs 2008 and 2009. For a program whose students are required to complete a medical or dental internship or residency, as identified by an institution, a

two-year period

is the period covered by the sixth and seventh FYs (2YP-R) prior to the most recently completed FY for which the debt measures are calculated. For example, if the most recently completed FY is 2012, the 2YP-R is FYs 2005 and 2006.

We also have provided in the definition of

two-year period

that a required medical or dental internship or residency is a supervised training program that requires the student to hold a degree as a doctor of medicine or osteopathy, or a doctor of dental science; leads to a degree or certificate awarded by an institution of higher education, a hospital, or a health-care facility that offers post-graduate training; and must be completed before the borrower may be licensed by the State and board certified for professional practice or service.

Finally, for FYs 2012, 2013, and 2014, the

two-year period

(2YP-A) is the period covered by the first and second FYs prior to the most recently completed FY for which the loan repayment rate is calculated. For example, if the most recently completed FY is 2012, the 2YP-A is FYs 2010 and 2011.

Restricted Programs (Proposed §§ 668.7(a)(2) and 668.7(e)); Failing Programs and Ineligible Programs (Final § 668.7(h) and (i))

Restricted Programs and Enrollment Limits

Comment:

Some commenters objected to proposed § 668.7(e)(3), which would limit enrollment of title IV, HEA recipients in a restricted program to the average number enrolled during the prior three award years. The commenters believed that these growth restrictions, coupled with the employer affirmations in proposed § 668.7(e)(1), would result in the Department, rather than the market, controlling how many students are trained for a particular profession. The commenters argued that the Department would be exercising power over the job market, even though it is not equipped to assess the needs of the job market. According to these commenters, an analysis of whether a job market is growing, contracting, or otherwise changing requires consideration of many complex and interrelated factors, and that this analysis is beyond the Department's expertise in the educational sector. In addition, the commenters opined that the proposed regulations would have the effect of regulating job markets, not debt levels or whether a program prepares its students to earn an income. The commenters noted that a short-term oversupply of potential employees in a certain field could cause a program to become restricted, regardless of whether the program adequately trained its students for employment in that field.

Some commenters argued that title IV, HEA funds are not intended to be used only for a program that prepares a student for an occupation that is in demand at the time the student enters the program. Another commenter concluded that because restricted programs would likely have a significant number of Pell Grant students, limiting the number of title IV, HEA eligible students who can enroll in those programs would impede President Obama's 2020 higher education goal, because these are the types of students that institutions need to educate to meet that goal. In view of this consequence, this commenter suggested that the Department eliminate the proposed growth restriction and employer verification requirements and only

require institutions to make debt disclosure warnings to students in the institutions' promotional materials for these programs.

Some commenters recommended that the Department limit enrollment for a restricted program to the number of students enrolled during the previous award year. The commenters noted that under proposed § 668.7(e)(3), limiting enrollment to the average number of title IV, HEA eligible students enrolled during the last three award years could result in reducing enrollment. If a program has been growing over the last three years, the average enrollment for the three-year period would be lower than the highest enrollment for the most recent year. For example, if a program had an enrollment of 10 in year 1, 20 in year 2, and 30 in year 3, the average enrollment for all three years would be 20. The average enrollment would be 10 fewer than the highest enrollment for the three-year period.

Similarly, other commenters believed that reducing the number of title IV, HEA eligible students in a restricted program would likely cause institutions to scale back resources. They noted, however, that restricting enrollment to the most current award year level would drive improvement while still limiting growth. The commenters believed that this approach would avoid any diminishing of program quality that would otherwise occur when programs that could meet the debt thresholds are forced to scale back resources.

On the other hand, some commenters noted that the proposed average-enrollment approach might not reflect historic norms for a program experiencing rapid enrollment growth during the past three years and that a baseline reflecting growth in just those years might not provide an effective limitation. The commenters recommended that the Department place stricter enrollment limitations on restricted programs.

Commenters supporting the proposal to restrict enrollment argued that the restriction should be limited in duration. The commenters were concerned that institutions with large programs could continue to enroll title IV, HEA eligible students indefinitely without improving quality. Commenters also noted that nothing would prevent institutions from enrolling non-title IV students in restricted programs, thus allowing those programs to continue to grow. The commenters noted that many institutions enroll large numbers of borrowers who receive taxpayer-funded assistance from other government-funded educational programs such as the G.I. Bill. One of the commenters stated that according to the Department of Veterans Affairs, eight of the top 10 colleges with the most VA-funded students are for-profit institutions. In view of these concerns, the commenters recommended that the Department (1) require that a program on restricted status must improve in order to continue receiving Federal student aid, and (2) make the program ineligible if it is in a restricted status for three consecutive years.

In addition, commenters had several questions concerning the criteria the Department would use in determining how to count enrolled students for purposes of the enrollment restrictions.

Discussion:

See the following discussion.

Ineligible Programs

Comment:

Commenters expressed concern that the proposed regulations did not include a “grandfather” provision allowing students attending programs deemed ineligible to complete their program of study. The commenters believed that students enrolled in associate's and bachelor's degree programs should be permitted to attend the ineligible program and continue to receive title IV, HEA funds for longer than the one additional year proposed in the regulations. Commenters suggested alternative time periods including allowing a student to continue to receive title IV, HEA funds (1) until he or she completes the program, (2) up to the published length of the program, or (3) up to one and one-half times the length of the program. The commenters believed these periods were appropriate as long as the student is continuously enrolled and complies with satisfactory academic progress standards.

Another commenter contended that requiring a student in an ineligible program to rely on transferring to another institution to complete his or her degree or credential would result in substantial burdens for students, including disrupting the student's academic progress, adjusting to a new learning environment, and potentially having difficulties in the job market, including, but not limited to, having to explain to employers the reason for changing colleges midstream. The commenter argued that this limitation on student eligibility would not serve the Department's underlying policy goals because it would require students to decide among what the commenter believed to be three unappealing choices: (1) Remain in the program without title IV, HEA program assistance (but with a continued ability to obtain private educational loans at higher interest rates); (2) transfer to another program (with the accompanying negative consequences); or (3) leave the program without a credential but with student loan debt.

To help ensure that students in an ineligible program have adequate alternative options for obtaining a postsecondary education, other commenters suggested that the Department place an ineligible program on a probationary status for the first and second years after the year the program has been determined to be ineligible. The program would lose its eligibility for title IV, HEA funds only if it failed to meet the gainful employment standards for a third successive year. The commenters offered that, under this approach, the Department could require an institution to submit a plan to bring the program into compliance with the gainful employment standards, which would result in the institution having a reasonable amount of time to make needed adjustments. Similarly, other commenters recommended that in cases where more than 50 percent of an institution's students are enrolled in a particular program, the Department should not impose sanctions unless the program fails to meet the threshold requirements for three consecutive years.

Another commenter was concerned that a significant number of students enrolled in ineligible programs would not have meaningful access to more appropriate alternative educational opportunities and that there would not be the capacity to accommodate students from programs that fail the debt measures. The commenter opined that the Department should work with Congress to develop a transition plan to increase postsecondary capacity to address the needs of current and prospective students displaced when their program becomes ineligible under the regulations. The plan, according to the commenter, could include new investments in a range of programs that are currently authorized under the Higher Education Opportunity Act of 2008 (Pub. L. 110-315) (HEOA) but have never been funded, including the “Program to Increase College Persistence and Success;” the “Bridges from Jobs to Careers” grant program; and the “Business Workforce Partnerships for Job Skill Training in High Growth Occupation or Industries” grant program. In addition, the commenter believed that the Department should consider developing regulations or guidance to help ease student transitions between postsecondary institutions and other Federal training and employment programs, building on

successful State and local “career pathways” models that enable low-income and other at-risk individuals to acquire the skills they need for well-paying jobs and careers.

Other commenters believed that students who are unable or choose not to complete an ineligible program, or who are unable to or choose not to transfer to another program within the same institution, should have their Federal student loan debts discharged so that they have the opportunity to move on without penalty. The commenters noted that FFEL and Direct Loans may be discharged under the closed-school provisions of the title IV regulations. Another commenter suggested using the false certification provisions as the basis for discharging loans for students enrolled in ineligible programs. Other commenters believed that incurring loan debt for attending an ineligible program should be an allowable defense to collection for a student who is later unable to make loan payments.

Another commenter believed that the Department should give an institution an opportunity to lower tuition instead of making the program immediately ineligible. The commenter described a program designed for speakers of the Spanish language where a student takes automobile mechanics classes that are taught every day in the Spanish language for four hours, and then takes two hours of English as a Second Language on the same day. The commenter stated that the program is highly effective, but because it costs more than the institution's traditional programs it may become ineligible for title IV, HEA funds under the proposed metrics.

Commenters were also concerned that the proposed regulations did not specify when and under what standards an institution could apply to have an ineligible program regain its eligibility. The commenters recommended that the Department allow the institution to apply to regain eligibility for a program one full award year after the program became ineligible and determine whether the program regains its eligibility under the standards proposed for new programs.

Other commenters believed that no penalties should be imposed on a program for failing to meet a metric until after an institution is notified and provided with an opportunity to take corrective action. The commenters suggested that the Department allow the institution to bring the ineligible program into compliance during at least the same period of time that a student would be allowed to continue to receive title IV, HEA program funds for attending that program.

A commenter asked the Department to clarify how a student would be affected if a program is determined to be ineligible during the course of the student's studies. The commenter also questioned how the proposal disallowing the award of title IV, HEA program funds to students who begin attending an ineligible program after a specified date relates to a situation where a student has taken a leave of absence and the student resumes attending the program after the program became ineligible.

Discussion:

As discussed under the heading,

Thresholds for the Debt Measures (§ 668.7(a)(1)),

we have simplified the regulations by establishing a single set of minimum standards that are applied over at least a three year period. Under the simplified approach, a program either passes or fails the minimum standards. Consistent with the general emphasis on disclosure and appropriate incentives, the debt warnings provided students during this extended period will play an important role.

Because the debt warnings in these final regulations are more extensive than the requirements proposed in the July 26, 2010 NPRM and the Department is seeking to focus the sanctions on the lowest-performing programs, we believe it is no longer appropriate to limit enrollment or place other restrictions on a gainful employment program.

We agree with commenters that institutions should be allowed some time to improve a program before it becomes ineligible for title IV, HEA funds, and we have therefore adopted the suggestion made by some of the commenters that a program not be subject to sanction for a three-year period. In § 668.7(h), we are providing that a failing program is one that does not satisfy at least one of the minimum standards for a FY. Under § 668.7(i), a failing program becomes ineligible if it fails the minimum standards for three out of the last four most recently completed FYs. If and when that occurs, the Department notifies the institution that the program is ineligible on this basis and that the institution may no longer disburse title IV, HEA funds to students enrolled in that program except as permitted using the procedures in § 668.26(d).

Using an extended period of three out of four FYs of failing the measures to make a program ineligible will provide greater flexibility and offer a measure of protection to programs that generally pass at least one of the measures but have an isolated and perhaps unusual year in which the program fails both debt measures. This change simultaneously responds to some of the concerns identified in the comments about the possibility that merely one year of failing the measures would result in a program becoming ineligible under the proposed regulations. In particular, this approach significantly reduces the chances that random variations in the caliber of a specific student cohort could put a program at risk of losing its eligibility for title IV, HEA funds. A good program could have a bad year, but it is far less likely that a good program could have three bad years out of four years. Extending the period of measurement to three out of four years allows for a more accurate reflection of typical performance.

Moreover, the approach helps to control for recessions and other variations in the labor market that could make it difficult for students (including those graduating from programs performing well on the measures) to get jobs. The average recession in the post-World War II period lasted for 11 months. See

http://www.nber.org/cycles/US_Business_Cycle_Expansions_and_Contractions_20100920.pdf.

In recent recoveries the unemployment rate has remained elevated for longer than the official recessionary period. With a longer observation period of three out of four years, programs will be less at risk of being judged by business cycle conditions that are out of their control.

At the same time, if the regulations had been altered to require two consecutive years of failing both measures for a program to lose eligibility, it is likely that some programs might not respond quickly enough to make relevant improvements. Using a period of three out of four consecutive FYs to determine a program's eligibility will also have the advantage of preventing a program that generally fails both measures from remaining eligible by simply passing one of the debt measures in one year. This extended period provides an opportunity for the institution to make a sustained assessment of the program's performance under both debt measures. This approach also provides an institution with time to make improvements to the program and evaluate whether it would be better to discontinue the program voluntarily.

As discussed more fully under the heading,

Debt warning disclosures (§ 668.7(j)),

because prospective and currently enrolled students face added risks for enrolling or continuing in failing programs, an institution must inform students of those risks and of the

options available to those students for continuing their education. The information provided to students through the debt warnings must address the questions of how long an institution may disburse funds to students enrolled in failing and ineligible programs and how students would be affected when a program becomes ineligible while they are enrolled. We believe that creating required disclosures of information to students while a program is failing and using a longer period to determine if a program is ineligible is better for students than allowing currently enrolled students in a program that loses eligibility to continue receiving Federal student aid funds.

With regard to the suggestions that the Department discharge the loans for students who are unable or unwilling to complete a failing program or transfer to another program, we note that the current loan discharge provisions are statutory and do not apply in these circumstances. Accordingly, a change in the law would be required to adopt these suggestions.

In response to the question of how an institution can reinstate the title IV eligibility of a program that becomes ineligible under these regulations, the institution must comply with the requirements under § 668.7(l). These provisions, discussed under the heading,

Additional Programs (proposed § 668.7(g)(2) and (3); Restrictions for ineligible and voluntarily discontinued failing programs (final § 668.7(l)),

describe the process by which an institution can reestablish the eligibility of an ineligible program or a failing program that the institution voluntarily discontinued, or establish the eligibility of a program substantially similar to an ineligible program.

Regarding the commenters' concern that a significant number of students enrolled in ineligible programs would not have meaningful access to more appropriate alternative educational opportunities and there would not be the capacity to accommodate students from programs that fail the debt measures, past experience with student loan default rates suggests that educational opportunities can continue to expand even if large numbers of institutions lose student aid eligibility. Pursuant to the Omnibus Budget Reconciliation Act of 1990, between 1991 and 1996, we eliminated approximately 1,148 schools from our student loan programs based on three consecutive years of unacceptably high default rates. Table D uses data from the National Postsecondary Student Aid Study (NPSAS) to show student enrollment between 1991 and 1996 by various characteristics. Over the course of this six-year period, schools that remained eligible for Stafford loans appear to have been able to accommodate the number of students who once attended, or otherwise would have attended, schools that lost eligibility.

ER13JN11.014

As can be seen in Table D, overall undergraduate enrollment increased by some 400,000 in this timeframe, while enrollment at for-profit institutions declined by approximately one-third. In this case, the students appear to have increased their attendance at community colleges, by approximately 1.25 million students, as well as at public four-year universities.

The Department recognizes that the higher education landscape has changed since the early 1990s, with strong growth in for-profit institutions and innovations in online and distance learning options that allow for enrollment to expand at lower marginal costs. Therefore, we expect that the distribution of students leaving programs that fail the debt measures will differ from the situation in the 1990s, with a larger share of students expected to remain at institutions within the for-profit sector by moving to successful programs that increase enrollment in response to increased demand created by the closure of ineligible programs.

We appreciate comments suggesting that the Department work with Congress to develop a transition plan to increase postsecondary capacity to address the needs of potentially displaced students by funding programs authorized but not funded under the HEOA or to develop regulations to help ease student transitions between postsecondary institutions and other Federal training and employment programs. Congressional action would be required for these actions to occur.

The President's 2020 higher education goal is the guiding star for the Department. All of our efforts are directed to developing higher education strategies that support institutions in their efforts to better serve students and prospective students, particularly those who are from disadvantaged backgrounds, minority students, students with disabilities, working adults, and others that are at risk. However, the purposes of the 2020 goal will not be achieved by allowing institutions to continue offering low-performing programs that upon completion leave students with large debts and poor employment prospects.

These regulations have been developed specifically to provide opportunities for institutions to improve the gainful employment programs they are providing. Today, the effective programs must compete with ineffective programs. These regulations will first provide feedback to institutions so that they can improve programs against the debt measures. These regulations then provide a significant period of time for institutions to re-assess and re-design marginally effective programs. Further, the regulations would require institutions to provide prospective students and families with meaningful consumer information that includes these debt measures. Finally, and only after three years of failing all three debt measures within a four-year period, programs become ineligible. This approach balances the competing forces of costs and benefits associated with regulatory change to provide a path to improving gainful employment programs that will move us towards meeting our national college completion goals, while giving institutions the flexibility they need to continue generating quality, innovative education programs.

The final regulations are intended to strengthen programs, not cause them to close, and institutions are already acting to improve the performance of their programs. The likely result is not only better outcomes in terms of the debt measures but also, as described in the RIA, increased retention, in and graduation from, gainful employment programs. And if the institutions that are currently offering poor performing gainful employment programs fail to make the necessary improvements, we have no doubt that other for-profit providers—particularly those that are offering one of the many effective programs today—will fill the gap left by the termination of programs that fail three out of four FYs. The gainful employment regulations are a step toward achieving the President's 2020 goal.

With respect to the comments asking for clarification about how a student would be affected if a program is determined to be ineligible while the student was on a leave of absence, the institution will need to follow the procedures under § 668.26(d), regarding disbursement of funds after a program loses eligibility.

Changes:

We have removed the thresholds and conditions that would have applied to restricted programs under proposed § 668.7(a)(2) and (e). In § 668.7(h), we specify that, starting with the debt measures calculated for FY 2012, a program fails for a FY if it does not meet any of the minimum standards.

In new § 668.7(i) we provide that, starting with the debt measures calculated for FY 2012, a program will become ineligible if it fails all of the debt measures for three out of the four most recent FYs.

Loan Repayment Rate (§ 668.7(b))

Loan Repayment Rate Calculation

Comment:

Commenters argued that the definition of “repayment” as it relates to the repayment rate ignores students who are actively repaying their loans because the recognized repayment is limited to payments that reduce loan principal during a given FY. The commenters pointed out that this approach omits borrowers from the numerator of the repayment rate who are in good standing in repaying their loans, including some borrowers repaying under income-based, income-contingent, or graduated repayment plans. While the treatment is different in each of these payment plans, each can permit monthly payments that are equal to or less than accrued interest. In other words, under those plans, a borrower can be making reduced payments that leave interest unpaid. As a result, the loan amount outstanding does not decrease between the beginning and end of the FY. The commenters argued that because these repayment plans are attractive to borrowers who consolidate loans from multiple lenders, and to borrowers with loans from both undergraduate and graduate programs, institutions should not be penalized in the repayment rate calculation for borrowers who choose these plans. The commenters believed that institutions would be penalized by borrower choices beyond their control, particularly since those plans are promoted by the Department as a means of responsible borrower debt management.

Discussion:

In the July 26, 2010 NPRM, the Department proposed considering students making payments under the income-contingent repayment (ICR) and income-based repayment (IBR) plans to be successfully repaying their loans if they were paying more than the interest accruing on their loans, or if they were working in fields that made them eligible for PSLF. The Department recognizes that some borrowers are meeting their obligations under the IBR and ICR plans but are not paying enough to reduce the outstanding balance on their loans. Considering all of these students to be successfully repaying their loans would create a loophole that would allow high repayment rates for programs based solely on enrollment in IBR and ICR, no matter how large the debts and how low the earnings of the programs' graduates. These plans are intended to help borrowers in financial distress; however, an educational program generating large numbers of borrowers in financial distress raises troubling

questions about the affordability of those debts. Therefore, we have struck a balance in these final regulations that recognizes the legitimate use of the ICR, IBR, and other plans that provide for scheduled payments that are equal to or less than the interest accruing on the loan but maintains protections against excessive reliance on these plans among a particular program's former students.

The Department is replacing the term Reduced Principal Loan (RPL) with the term Payments-Made Loan (PML) to clarify that under the revised methodology for calculating the repayment rate, payments made on a loan include not only those payments that reduce the outstanding balance but also payments made under certain repayment plans, or for certain consolidation loans, payments that do not reduce the outstanding balance. Under these final regulations, PML includes the loans of borrowers who are repaying under all of the FFEL and Direct Loan repayment plans, including repayment under the IBR and ICR plans. The Original Outstanding Principal Balance (OOPB) on loans of borrowers included in the applicable two- or four-year period who make payments during the most recently completed FY that reduce the loan amount to an amount that is less than the total outstanding balance of the loan at the beginning of that FY, will now be included in the numerator of the repayment rate. The final regulations clarify that loans that have defaulted in the past, including consolidation loans composed of at least one defaulted loan, are excluded from the numerator of the calculation, i.e., from the Loans Paid in Full (LPF) and the PML. To be consistent with the definition of PML, we are also clarifying that LPF do not include loans that have been in default.

When calculating the repayment rate for post-baccalaureate certificate, master's degree, doctoral degree, or first-professional degree programs, we will consider a borrower with a consolidation loan to be successfully repaying his or her loans if the outstanding balance does not increase over the course of the most recently completed FY.

For borrowers repaying under the IBR, ICR, and other plans that provide for scheduled payments that are equal to or less than the interest that accrues on the loan, the OOPB of loans for borrowers making scheduled payments under those plans that are equal to or less than the interest that accrues on the loan during the FY will be included, on a limited basis, as OOPB of PML in the numerator of the repayment rate. This approach will also benefit programs whose borrowers may be repaying their loans under these plans during and shortly after completing required medical or dental internships and residencies. However, to ensure that borrowers in gainful employment programs are thoughtfully counseled into entering the repayment plans that best meet their needs and do not have to rely excessively on the IBR or ICR plans because their programs leave them unable to secure sufficient employment to repay their loans, the Department is limiting the dollar amount of loans in negative amortization or for which the borrower is paying accrued interest only that will be included in the numerator as OOPB of PML to no more than 3 percent of the total amount of OOPB in the denominator of the ratio (percent limitation). This percent limitation is based on available data on a program's borrowers who are making scheduled payments under these repayment plans.

For the loans associated with a particular institution for which the Department has actual data on borrower repayment plans and scheduled payment amounts, that data will be used to calculate the amount to be included in the OOPB of PML. If the amount calculated is higher than the percent limitation, only the amount of the percent limitation will be included in the OOPB of PML.

The Department has information on the repayment plans and scheduled payments for Direct Loans and FFEL loans held by the Department. However, the Department does not currently collect information about the repayment plans and scheduled payments amounts on FFEL loans that it does not hold. The Department is developing plans to collect this information on loans that it does not hold. Until the Department determines that there is sufficiently complete data on program borrowers with scheduled payments that are equal to or less than accruing interest, the Department will include in the numerator 3 percent of the OOPB in the denominator of the ratio for all programs.

When applying the percent limitation on the dollar amount of the interest-only or negative amortization loans, the Department may adjust the limitation by publishing a notice in the

Federal Register

. The adjusted limitation may not be lower than the percent limitation specified in § 668.7(b)(3)(i)(C)(

1

) or higher than the estimated percentage of all outstanding Federal student loan dollars that are interest-only or negative amortization loans.

To establish this limitation, the loan servicing systems were queried to determine the value of the loans entering repayment on or after October 1, 2003 that were in a repayment plan that allowed a scheduled payment equal to or less than accruing interest. That query identified 1.1 percent of loans in this status. We will not treat interest-only or negative amortization loans unfavorably in the repayment rate calculation so long as they do not represent a disproportionate share of borrowers. The limit on the percentage of these loans that would count positively in the numerator of the repayment rate calculation was based on this 1.1 percent figure and adjusted up to 3 percent to provide some flexibility with regard to using repayment plans that allow a scheduled payment equal to or less than accruing interest, but to dissuade excessive use of these plans.

The regulations continue to recognize in the repayment rate borrowers who are full-time employees of public service organizations and who are working to qualify for PSLF under 34 CFR 685.219(c). The Department is developing an employer certification form that should be available by early 2012 and will allow borrowers, as frequently as annually, to document that they are engaged in PSLF qualifying employment. The OOPB of loans for borrowers who are in the process of qualifying for PSLF will be included in the numerator of the repayment rate as part of the OOPB of PML if the borrower submits a PSLF employment certification form to the Department that demonstrates that the borrower is engaged in qualifying employment and the borrower made qualifying payments on the loan during the most recently completed FY.

Changes:

Section 668.7(b)(3) has been revised by replacing Reduced Principal Loan (RPL) in the numerator of the repayment rate ratio with Payments-Made Loans (PML). PML only includes loans that have never been in default or, in the case of a Federal Consolidation Loan or a Direct Consolidation Loan, neither the consolidation loan nor the underlying loan or loans have ever been in default.

PML includes a limited amount of the OOPB of loans in which a borrower is making scheduled payments under IBR, ICR, or other repayment plans that are equal to or less than the interest that accrues on the loan. Section 668.7(b)(3) clarifies the treatment of Federal Consolidation Loans or Direct Consolidation Loans (consolidation loans) of a borrower who is repaying loans related to a gainful employment program when the borrower is reducing the outstanding balance of the consolidation loan to an amount that is less than the outstanding balance of the

consolidation loan at the beginning of that FY. Section 668.7(b)(3) also clarifies that if the program is a post-baccalaureate certificate, master's degree, doctoral degree, or first-professional degree program, PML includes the total outstanding balance of a Federal or Direct Consolidation Loan that at the end of the most recently completed FY is less than or equal to the total outstanding balance of the consolidation loan at the beginning of the FY, and that the outstanding balance of a consolidation loan includes any unpaid accrued interest that has not been capitalized. Section 668.7(b)(3) specifies the documentation on which the Department will rely to include a borrower in the process of qualifying for PSLF in the loan repayment rate.

The definition of Loans Paid in Full (LPF) has been revised to clarify that these are loans that have never been in default or, in the case of a Federal Consolidation Loan or a Direct Consolidation Loan, neither the consolidation loan nor the underlying loan or loans have ever been in default.

Comment:

Some commenters recommended that the Department apply the repayment rate only to those students who graduate or complete a program. The commenters argued that if the repayment rate is used as a proxy for determining whether the program prepares students for gainful employment (i.e., whether graduates have received the capabilities needed to succeed in the particular occupation), the relevant group measured should be those who successfully complete the program. The commenters believed that if students who fail to complete the program are included in the calculation, the Department would be merely rewriting the CDR provision. One of the commenters stated that measuring institutions based on former students who are not paying their loans is not a fair metric. The commenter stated that only those students who have maximum earnings potential because they completed the full program should be measured.

Discussion:

The Department disagrees with the commenters that the repayment rate should focus only on program completers. The Department believes that in order to determine whether a program is succeeding in its mission of preparing students for gainful employment using title IV, HEA funds, it is important to examine the level of success of all enrollees in the program. Programs that experience a high number of drop outs and withdrawals leaving students with no employment skills and student loan debt they have insufficient means to repay cannot be said to be preparing students for gainful employment. Although we agree that students who complete the program have a better chance of repaying their student loans, we believe that including both program completers and noncompleters in the repayment rate calculation provides a more comprehensive picture of the program's overall success. Additionally, students enrolled in certain programs may not be required to receive the program's academic credential in order to secure employment or advance in their career field, and as a result, may be repaying their student loans. Regarding the comment about CDR, we explain the differences between the repayment rate and CDR under the heading,

Use of the cohort default rate as an alternate measure.

Changes:

None.

Comment:

Commenters questioned the logic of including in the numerator of the repayment rate only those loans that were paid in full or whose principal balance was reduced during the FY. The commenters believed that institutions should not be penalized for the Federal government's policy decision to issue loans that are not credit based; offer borrowers flexible repayment plans; and promote deferments, forbearances, and loan consolidation to borrowers in repayment. The commenters recommended that the Department consider a loan to be in repayment for purposes of the repayment rate calculation if the borrower has made at least four payments during the most recent FY. Although the commenters welcomed as a positive first step the Department's decision to exclude from the repayment rate borrowers who are in an in-school or military-related deferment status, they argued that borrowers who have valid reasons for requesting deferment or forbearance, such as unemployment, maternity leave, disability, elder care, or economic hardship, should be given equal consideration. The commenters believed that a deferment or forbearance granted to a borrower who leaves the workforce for a period of time to care for children or a sick parent, or to undergo a medical procedure, is as legitimate as an in-school deferment that primarily benefits students at two and four-year public and non-profit institutions, and middle class students enrolled in graduate programs. Consequently, the commenters recommended that the Department either exclude from the repayment calculation all loans for which deferment or forbearance is pending or enact strict standards for issuing deferments and forbearances.

Discussion:

We disagree with the notion that an institution should be shielded from Federal policy decisions regarding the student loan programs. The Department makes available its Federal student loan programs regulations to institutions before the institution agrees to participate in the title IV, HEA programs. Moreover, we believe the institution should be held accountable for how it delivers programs intended to provide gainful employment, particularly when most of its former student borrowers have to rely on economic hardship deferments, forbearances, and other means to avoid defaulting on their loans or managing life circumstances. To be sure, deferments, forbearances, and other program benefits are necessary to assist borrowers in loan repayment, but particularly heavy reliance on these tools among former students of a particular program raise questions about the performance of that program.

Concerning the request to enact stricter standards for deferment or forbearance, any such changes are outside the scope of the proposals we included in the July 26, 2010 NPRM and therefore we are not addressing them here.

With regard to the request that the Department exclude from the repayment calculation all loans for which deferment or forbearance is pending, we are excluding in these final regulations loans that are in deferment status for reasons that are clearly unrelated to whether a program prepares students for gainful employment. Specifically, we exclude from the repayment rate calculation loans that were in an in-school or military-related deferment status during any part of the FY, loans that were discharged as a result of the death of the borrower under 34 CFR 682.402(b) or 34 CFR 685.212(a), and loans that were assigned or transferred to the Department that we are considering discharging, or were discharged, on the basis of the total and permanent disability of the borrower. However, we are not excluding from the repayment calculation all loans for which deferment or forbearance is pending because we believe that if an institution provides a program that leads to borrowers securing gainful employment at sufficient salary levels to repay their student loans, the program will be able to meet the repayment rate threshold of 35 percent even if individual borrowers' life circumstances (e.g., needing to provide elder care or taking maternity leave) result in some of them using available deferment and forbearance benefits. Thus, the availability of deferment and

forbearance will not prevent a program from meeting the minimum loan repayment rate standards. Moreover, because the volume and frequency with which former students of a program use deferments and forbearances may be an indicator of program success in preparing students for gainful employment, we are not excluding all borrowers in deferment.

With regard to the comment that a loan should be counted in the numerator of the repayment rate if a borrower makes four payments in a FY, we believe that making only four payments in a FY would indicate strongly that the borrower does not have the capacity to repay the loan. Therefore, it would be inappropriate to include the loan in the numerator of the loan repayment rate.

Changes:

Section 668.7(b) has been revised to exclude from the repayment rate calculation loans that were in an in-school or military-related deferment status during any part of the FY, loans that were discharged as a result of the death of the borrower under 34 CFR 682.402(b) or 34 CFR 685.212(a), and loans that were assigned or transferred to the Department that we are considering discharging, or were discharged, on the basis of the total and permanent disability of the borrower.

Treatment of Borrowers Carrying Forward Accrued Unpaid Interest

Comment:

One commenter, whose analysis and recommendations were cited by numerous commenters, pointed out that although accrued interest is generally capitalized when a borrower first enters repayment, there are circumstances under which accrued unpaid interest remains outstanding and is not capitalized. Under these circumstances, due to the manner in which loan payments are applied (borrower payments are applied first to collection charges and late fees, next to accrued but unpaid interest, and finally to principal), the commenter concluded that there was an interest-related problem and called it the “persistence of interest.” The commenter noted that in these circumstances, under the proposed regulations, a borrower making full monthly payments (i.e., payments that exceed the new interest that accrues each month on the loan) would not be counted in the numerator of the repayment rate because the borrower's payments would be applied to accrued, unpaid interest. According to the commenter, the treatment of these loans as nonperforming loans in the repayment rate calculation not only yields a lower repayment rate, but is also based on the past status of the loan. The commenter also pointed out that even if outstanding accrued interest is capitalized and added to principal, the interest-related problem continues to exist unless the capitalization takes place at the beginning of the FY. The commenter further stated that if the capitalization takes place during the course of the FY, it will appear to increase the principal balance when compared to the principal balance at the beginning of the FY, even if the borrower made payments that reduced loan principal prior to the capitalization.

The commenter also noted that there are many instances in which accrued outstanding interest stems from a past loan status, such as a brief deferment or forbearance period, that may leave the loan in a nonperforming status for purposes of the repayment rate for a significant period of time into the future. To address the “persistence of interest” factor in the repayment rate calculation, the commenter recommended that the Department modify the regulations to provide that the calculation be based on a comparison of the sum of the principal balance and the accrued unpaid interest on the loan at the beginning and the end of the given FY rather than on a comparison of the outstanding principal balance. The commenter supported the proposed approach of excluding from the numerator of the repayment rate borrowers' loans in deferment or forbearance status and loans for which borrowers are paying a scheduled $0 monthly payment or a payment that is less than the new accruing interest under the IBR and ICR plans.

Discussion:

To determine whether a borrower's OOPB should be included in the numerator of the repayment rate, the Department will determine whether the total outstanding balance of a borrower's loan at the end of the FY for which the rate is being calculated is less than the total outstanding balance of the loan at the beginning of that FY, and the outstanding balance of a borrower's loan, at both the beginning and the end of the FY, will include any outstanding unpaid accrued interest that has not been capitalized. We believe that by including any outstanding unpaid accrued interest that has not been capitalized in the beginning year total outstanding balance of the loan, a borrower who makes full scheduled monthly payments on a loan that are greater than accruing interest will be able to show a reduced total outstanding balance for the loan by the end of the FY, even if interest is not capitalized or is capitalized at some point during the year.

Changes:

The new term “Payments-Made Loans” (PML) in § 668.7(b)(3) specifies that the outstanding balance of a loan used in calculating the repayment rate includes any unpaid accrued interest that has not been capitalized.

Treatment of Consolidation Loans

Comment:

Commenters objected to the Department's decision to view loans repaid through the consolidation process as not being paid-in-full until the consolidation loan is paid in full. The commenters noted that the Department has historically treated consolidation loans as a positive step for a borrower to take in managing student loan debt and stated that the Department was contradicting this position by treating consolidation loans unfavorably in the loan repayment calculation. These commenters noted that there is not sufficient data from the National Student Loan Data System (NSLDS) that would allow an institution to track repayment of a consolidation loan and recommended that such loans be treated positively in the repayment rate calculation (i.e., treated as in repayment) until the data is available to prove otherwise.

Other commenters questioned § 668.7(b)(2)(i) of the proposed regulations, which provides that a “consolidation loan is not counted [in the numerator] as paid in full.” The commenters stated that it was unclear whether the repayment rate calculations would properly segregate consolidation loans according to source institution. The commenters believed that if the repayment rate calculation fails to properly attribute the underlying loans repaid through the consolidation for a borrower who consolidates during a given FY, the borrower's principal balance at the end of the FY will be greater than the principal balance at the beginning of that FY. The commenters believe this situation will also result in an institution not receiving credit in the numerator of the repayment rate for payments the borrower made on loan principal in the same FY in which the borrower consolidated the loan. To address this issue, the commenters recommended that the Department develop an acceptable and transparent method for determining the amount of a consolidation loan that is attributable to a particular program.

Another commenter recommended that any consolidation loan on which a borrower has made scheduled payments, including principal and interest, during the immediate prior calendar year should be treated as a reduced principal loan in the repayment rate calculation.

Discussion:

Loan consolidation in the Federal student loan programs is a refinancing mechanism that allows a borrower to aggregate a number of loans to secure one repayment source, to extend the maximum available repayment period, and to reduce the monthly payment amount. The underlying loans are effectively refinanced through the consolidation process. Although the Department agrees that loan consolidation may be a positive step for a borrower, it does not represent payment by the borrower of the loans consolidated. The loans paid off through the consolidation process are reflected dollar-for-dollar in the new consolidation loan debt. We see no basis for treating a consolidation loan payoff as successful borrower repayment, or LPF, for purposes of the repayment rate.

The Department has a long history under the CDR process of successfully tracking loans that were in default and then repaid through consolidation and including those loans in the appropriate institution's CDR. For the repayment rate calculation, the Department has enhanced its capacity to look back through multiple consolidation loans and to assign loans repaid through consolidation to a program at an institution. Although a consolidation loan is not considered LPF until the entire consolidation loan is repaid, the OOPB of the underlying loans attributable to a gainful employment program is included in the numerator (i.e., PML of OOPB) if the borrower makes payments that reduce the total outstanding balance of the consolidation loan by the end of the FY under review.

As part of the data correction process contained in these final regulations, and discussed more fully under the heading,

Data access and review,

we will provide access to the NSLDS data underlying the repayment rates, including the information associated with consolidation loans. As a result, institutions will be able to request corrections to the assignment of borrowers and loan amounts, including the portion of consolidation loans, used to calculate a program's repayment rate.

Changes:

Section 668.7(b)(1)(iii) has been added to specify that for consolidation loans, the OOPB is the OOPB of the FFEL and Direct Loans attributable to a borrower's attendance in the program. We have added § 668.7(b)(1)(iii) and revised § 668.7(b)(3)(i)(A) to clarify that if certain consolidation loan payments are made, the OOPB of the underlying loans attributable to a gainful employment program will be included in the numerator of the repayment rate.

Use of the Cohort Default Rate as an Alternate Measure

Comment:

One commenter recommended that the Department eliminate the loan repayment rate and replace it with the CDR. Alternatively, the commenter suggested that the repayment rate be modified to count positively in the numerator all borrowers who are not delinquent in repaying their loans, including those that use various program benefits such as consolidation, forbearance, and deferment.

Some of the commenters requested that the Department clarify the definition of a reduced principal loan in the regulations. The commenters indicated that it was unclear whether a student would need to make more than one payment that reduces principal in the FY to be considered to have a reduced outstanding principal balance.

Discussion:

The Department does not believe that the CDR is an appropriate measure of whether the students who attended a program are gainfully employed. The CDR is an institutional rate that only measures the number of an institution's borrowers who fail to make payments on a loan for an extended period of time. The CDR only includes a small group of the borrowers during a limited time period, and counts many of those borrowers as successes even if they are struggling to repay their loans. Borrowers using reduced payment plans may be seeing their loans grow rather than shrink because their incomes are low and their debts are high. As a result, the CDR is a better measure of potential loss to taxpayers than of the repayment burden on students.

Students attending programs leading to gainful employment in a recognized occupation often do so because they have been told that they will be able to secure employment that will allow them to pay off their debts. The Department's experience with the CDR and other institutional measures is that they may mask an under-performing program and obscure for students, the Department, and institutions the harm that can result from enrolling in a specific program. An institution's CDR may therefore be a misleading measure of an individual program's success in providing students with sufficient income to pay off education loan debt.

The repayment rate is intended to operate at the program level and track the loan repayment by borrowers formerly enrolled in specific programs, not simply those who reach a certain level of delinquency or who default. Gainful employment should allow the borrower to make all the scheduled payments on the loan during the given FY under review, not simply make intermittent payments.

Regarding the commenter's question about clarifying the term “reduced principal loan,” as previously discussed, we have replaced the term “reduced principal loan” with the term “payments-made loan”. The reduction of the borrower's total outstanding balance between the beginning and end of the FY can be as little as one cent in order for the OOPB of the loan to be included in the numerator of the program repayment rate. The outstanding balance of a loan includes any unpaid accrued interest that has not been capitalized.

Changes:

None.

Control Over Student Borrowing

Comment:

Many commenters stated that student overborrowing and related repayment difficulties, as reflected in repayment rates, are related to a program's inability to limit student borrowing. The commenters objected to the Federal requirement that a school offer students the maximum loan amount for which they are eligible even when the program believes that a student may have difficulty repaying the loans and wishes to recommend a lesser loan amount. The commenters believe that if they are required to offer the maximum loan amount to any student who meets the admission requirements and maintains satisfactory academic progress, they should not be held accountable for excessive borrowing and a borrower's failure to repay. Some of these commenters questioned the need for students to receive loan funds in excess of direct tuition and fee costs and requested authority to adopt institutional policies of limiting annual loan limits to direct costs. The commenters did not believe an institution's programs should be adversely impacted by debt a student chooses to take on for discretionary expenses. Several of these same commenters recommended that a school's regulatory authority under the Federal Perkins Loan program to consider a borrower's “willingness to repay” a loan before making a Perkins loan to a student should be applied to Direct Loan

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