August 16, 2017

New Gainful Employment proposed rules released:

gainful employmentNew Gainful Employment proposed rules released:

  • Programs must pass the following metrics to maintain federal financial aid eligibility:
    • The estimated annual loan payment of graduates cannot exceed 20 percent of their discretionary earnings or 8 percent of their annual total earnings; and
    • The programmatic cohort default rate cannot exceed 30 percent for 3 consecutive years.
  • The Department did modify 2 variables in the debt-to-earnings calculation:
    • 30 students must complete the program; the previous version only required 10; and
    • The amortization schedule is now 10 years for certificate and associate degree programs, 15 years for bachelor’s and master’s degree programs and 20 years for doctoral and first professional programs; the previous version provided a 10 year period for all programs.
  • Institutions must certify that all gainful employment programs meet applicable accreditation requirements and state or federal licensure standards.
  • Institutions must publicly disclose information about the program costs, debt, and performance of their gainful employment programs so that students can make informed decisions.

 

Link to Proposed Gainful Employment Rules: https://www2.ed.gov/policy/highered/reg/hearulemaking/2012/notice-proposed-rulemaking-march-14-2014.pdf  

Comments

  1. William Blair’s Timo Connors comments on proposed regulations:

    Global Services – Education Services and Technology
    ________________________________________
    Gainful Employment Rules Manageable, but Default Rates Take Center Stage

    • Draft ‘Gainful Employment 2.0’ rules from the Department of Education released on March 14 were largely in line with expectations and remain manageable for all schools.
    • The key variance from Gainful Employment 1.0 is the addition of a ‘Programmatic CDR,’ or pCDR, rate that penalizes high-default-rate schools by introducing default rate standards at the programmatic rather than institutional level. The pCDR calculation will use the same methodology and eligibility thresholds as the current three-year CDRs, but for each program at the institution rather than the entire institution. The introduction of additional variance to default rate calculations means high-default-rate schools will need to place extra emphasis on ensuring student repayment of loans. Operationally, this implies filtering out at-risk students through additional enrollment screens and more financial education for exiting students; default rates are largely correlated with demographic characteristics, not debt loads, so we do not believe this implies price cuts and debt load reductions are a likely response.

    • On the positive side, we believe nearly all schools will fare quite well on debt-to-income standards with the reintroduction of longer amortization periods for debt.

    • We believe the proposed rules will face significant legal and legislative challenges, note that gainful employment data is reported on a multiyear lag with no potential programs ineligible for Title IV loans until 2019 and that schools have three years to ‘cure’ ineligible programs, 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 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.

    • In the near term, we favor stocks that have low default rates and view high-default-rate schools as most at risk for operational changes. Based on the latest available three-year CDR data (for students leaving schools in fiscal 2010), we believe Capella (CPLA $60.83; Outperform), American Public (APEI $33.95; Outperform), Strayer (STRA $45.74; Underperform), Bridgepoint (BPI $14.99; Outperform), and Grand Canyon (LOPE $46.00; Outperform) are best-positioned, while Apollo (APOL $32.10; Market Perform) and ITT (ESI $29.30; Outperform) are most at risk. However, we note that both Apollo and ITT have made significant operational changes (particularly Apollo), including additional enrollment screens, price cuts, and program cuts over the past few years, which should support improvement in future metrics.
    Link to report: Global Services – Education Services and Technology
    ________________________________________
    Gainful Employment Rules Manageable, but Default Rates Take Center Stage

    • Draft ‘Gainful Employment 2.0’ rules from the Department of Education released on March 14 were largely in line with expectations and remain manageable for all schools.
    • The key variance from Gainful Employment 1.0 is the addition of a ‘Programmatic CDR,’ or pCDR, rate that penalizes high-default-rate schools by introducing default rate standards at the programmatic rather than institutional level. The pCDR calculation will use the same methodology and eligibility thresholds as the current three-year CDRs, but for each program at the institution rather than the entire institution. The introduction of additional variance to default rate calculations means high-default-rate schools will need to place extra emphasis on ensuring student repayment of loans. Operationally, this implies filtering out at-risk students through additional enrollment screens and more financial education for exiting students; default rates are largely correlated with demographic characteristics, not debt loads, so we do not believe this implies price cuts and debt load reductions are a likely response.
    • On the positive side, we believe nearly all schools will fare quite well on debt-to-income standards with the reintroduction of longer amortization periods for debt.
    • We believe the proposed rules will face significant legal and legislative challenges, note that gainful employment data is reported on a multiyear lag with no potential programs ineligible for Title IV loans until 2019 and that schools have three years to ‘cure’ ineligible programs, 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 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.
    • In the near term, we favor stocks that have low default rates and view high-default-rate schools as most at risk for operational changes. Based on the latest available three-year CDR data (for students leaving schools in fiscal 2010), we believe Capella (CPLA $60.83; Outperform), American Public (APEI $33.95; Outperform), Strayer (STRA $45.74; Underperform), Bridgepoint (BPI $14.99; Outperform), and Grand Canyon (LOPE $46.00; Outperform) are best-positioned, while Apollo (APOL $32.10; Market Perform) and ITT (ESI $29.30; Outperform) are most at risk. However, we note that both Apollo and ITT have made significant operational changes (particularly Apollo), including additional enrollment screens, price cuts, and program cuts over the past few years, which should support improvement in future metrics.
    Link to Full Report: https://www.rdocs.com/getrdocnologin.asp?p=147251

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