October 17, 2021

Draft Gainful Employment Data Noisy, as Expected

gainful employmentViewpoint: Draft “Gainful Employment 2.0” data from the Department of Education (ED)
released on December 11 was predictably noisy for the private sector colleges, but we
continue to believe that the final rules are likely to be significantly weakened and will
face significant legal and legislative challenges. In addition, we note that gainful
employment data is reported on a multiyear lag, and believe that significant changes to
improve student ROI made by private sector schools over the past few years will greatly
improve regulatory metrics over time. While we continue to expect heightened
regulatory scrutiny of the sector, a gradually narrowing range of potential negative
regulatory outcomes should support multiple expansion for the postsecondary stocks in
the coming years.
Key Points (supporting data tables located at the end of this note):
• Individual institutions were not identified, but ED’s data indicated that 13% of all
programs would fail the proposed metrics and an additional 7% of all programs
would be caught in the debt to income “caution zone,” requiring debt-to-income
improvement. This compares unfavorably with the 6% of all programs that
would have failed under the 2011 final rule (“Gainful Employment 1.0”).
• Six percent of programs would fail the debt-to-income standards, the same as in
the 2011 rule.

Fourteen percent of all programs would fail (exceed the 30% default threshold)
the recently introduced program-level cohort default rate (pCDR) metric. We
note that 8.3% of the failing programs belong to not-for-profit colleges (for
which certificate programs are subject to gainful employment regulations). Notfor-
profit colleges account for 17.1% of the total population of reported default
rates, so the proportion of failing programs is roughly half of that of private
sector colleges, but still meaningful enough to ring alarm bells among
constituents of not-for-profit colleges who, to this point, have largely viewed
gainful employment as a “for-profit issue” only. We believe pCDR will ultimately
be an out for schools (included as an “or” rather than “and” metric in the final
• The concept of a repayment rate threshold, introduced before the last set of
hearings, was eliminated in this draft. We believe providing quantitative support
for the “right” level of repayment will prove challenging for ED, particularly in
light of ED-approved programs like loan forbearance, deferment, hardship, or
income-based repayment, which encourage students to delay or reduce loan
payments. We are uncertain if a repayment threshold will be included in the final
rule, but if so, believe this will also be an “or” metric.

Recapping the Gainful Employment Process
On December 11, ED released a third draft of gainful employment rules for this fall’s negotiated rulemaking (NegReg) sessions.
The first three-day session began Monday, September 9, with a panel of experts discussing draft rules; the second three-day
session began November 18; and the third (and likely final) one-day session will take place on December 13.
• The previous iteration of the rule, finalized in 2011, was challenged by an industry group and vacated in 2012 by a
federal judge who found the metrics “arbitrary,” so ED was forced to start the process over. If no consensus is reached
by the panel, ED will move forward with new rules, which would likely go into effect in 2015, potentially eliminating
Title IV student loan eligibility for programs at some schools in 2019 and beyond.
• The draft language, though very similar to the prior rule, appears more onerous for the sector this time around;
however, we note that the initially proposed rules from the previous gainful employment NegReg were watered down
significantly in the final language, with debt-to-income ceilings rising from 8% to 12% and repayment floors falling
from 45% to 35%, for example.
• In particular, the use of “and” rather than “or” forces the schools to pass all metrics, not just one; the re-introduction
of a “caution zone” for programs close to failing; the elimination of an extended debt amortization schedule for
bachelor’s and graduate programs; and the elimination of a transition period in which generally higher BLS incomes
could be substituted for actual earnings are negative changes for the schools in the space. The table at the end of this
note offers the details on the new rule and the schools’ debt-to-income and CDR exposures.

The schools have already begun adapting to potential rules by freezing or cutting tuitions or the number of credits
required for graduation as well as reducing exposures to low-salary fields like criminal justice or certain fine arts
studies, while also screening out unprepared students who are more likely to default or not repay loans. As a result,
we believe regulatory metrics will likely improve in the years leading up to the instatement of any potential rules.
• We believe the political climate has shifted significantly since the gainful employment NegReg process began in 2009,
and believe there is more political support for the private sector schools, particularly among Republicans, who now
view further ED regulations as anti-business. Although NegReg remains a nonlegislative process, Congress controls
funding for ED, and we believe the rules are significantly more likely to be softened than toughened following this fall’s
sessions and the ensuing public comment period. We also note that the schools successfully appealed the prior rules
and are likely to appeal again, so it could be a lengthy process to put the rules in place (if they are put in place at all).


Timo Connor, CFA

William Blair & Company, L.L.C.

link to report

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