The "gainful employment" rule won’t make students better off by decimating the for-profit sector

At the end of October, the Department of Education released its much-awaited “gainful employment” rule. It is supposed to fix (or at least lessen) the problem that many students who pursue vocational training with federal student aid money wind up without a job that pays well enough for them to cover their loans.

As I’ll explain, the rule won’t solve that problem, but would instead only limit the range of choice for students.

The Higher Education Act of 1965 allows students to use federal grants and loans to enroll in programs that are supposed to prepare them “for gainful employment in a recognized occupation.” Numerous for-profit colleges and training institutes were started to take advantage of the lucrative opportunity to teach young people the skills they need for such jobs as dental assistant, graphic designer, pharmacy technician and cosmetologist.

At present, the federal government gives about $6 billion in Pell grants and lends about $22 billion annually for students to attend these schools.

Few politicians paid any attention to those schools until the last few years, when students who borrowed substantial amounts for college (non-profit and for-profit alike) have had great difficulty finding employment that pays well. Once the “student debt crisis” became national news, however, politicians and regulators zeroed in on the for-profit sector.

Senator Tom Harkin of Iowa, chairman of the Senate Committee on Health, Education, Labor and Pensions led the attack with hearings that began in 2010 and culminated in a scathing report issued in July 2012. That report highlighted the reprehensible tactics that some of the for-profit schools used to lure in students and cash their federal grants and loans. Many of the students never graduated, but even those who did had trouble finding “gainful employment.”

The Department of Education promulgated a “gainful employment” rule that was meant to weed out schools that were performing badly and leaving students in debt trouble, but a federal judge struck that rule down in 2012 on the grounds that its cut off points between school success and school failure were arbitrary.

Department bureaucrats kept working on a revision that would withstand legal challenges and get rid of “failing schools.”

Under its new rule, the Department will evaluate occupational schools by comparing the earnings of graduates with their loan payments. A school is considered failing if average graduate loan payments are above 30 percent of their discretionary earnings or above 12 percent of their annual earnings. So even if quite a few students do find good jobs after graduating, the school fails if graduates on average have a debt to income ratio that is deemed too high.

Secretary of Education Arne Duncan explained the theory behind the rule, saying, “Too many of these programs fail to provide students with the training they need while burying them in debt they cannot repay.” The trouble with that allegation is twofold.

First, the Department has no knowledge regarding the quality of the training students receive, but merely infers that if a substantial number of students aren’t finding jobs that pay well, it must be due to a failure of the school. But the training students need for various occupations is quite standardized; if some students manage to find good work in the fields they’ve trained for while others don’t, that doesn’t prove that the school’s program was deficient.

Second, it isn’t the case that schools “bury” their students in debt. Students are not compelled to borrow for these programs, and many of those who do borrow are able to handle their repayments once they find steady employment.

And that brings us to the real problem: There are now far too few opportunities for graduates of these career colleges—and indeed, all colleges and universities—to find the kind of full-time, entry-level jobs that used to be common for young Americans, college graduates or not. 

The essence of the “student debt crisis” has nothing to do with the cost or quality of career education. It has everything to do with the sharp decline in good, first-rung-on-the-ladder jobs for young people. As this recent New York Fed study shows, the labor market for young Americans is much worse than for older, experienced workers.

Furthermore, even when jobs are available, most are just part-time, owing to Obamacare’s employer mandate, a point that Dr. Scott Gottlieb makes in this Forbes article.

In short, the Department of Education intends to punish the weakest schools in the for-profit sector for the shambles the Obama administration has made of the job market for young people. According to Education Department estimates, if the rule were currently in place, about 1,400 programs would fail, affecting more than 800,000 students.

Let us suppose that some or all of those programs eventually “fail” and thus lose eligibility for further government funds. Then what? Most of the students who would otherwise have attended them will enroll in one of the remaining career training programs (in some cases, a less convenient one, causing them added expense they can ill-afford).

If and when students complete their program, they might still encounter the same bad labor market conditions we have today. Unable to earn much, their high debt-to-income ratios will then imperil the schools they attended. Consequently, we would see the steady whittling away of the for-profit sector, which might actually be the true point of this approach. As Professor Richard Vedder has written, “many of those pushing for stringent gainful employment rules believe that it is wrong or immoral to ‘profit’ from education.” Just so.

We are seeing this rule now for two reasons: the Obama administration is staffed with people hostile to for-profit business and the administration’s economic policies have made good jobs for young Americans so scarce.

The “gainful employment” rule won’t help students. It would only reduce their options in training programs. This convoluted, arbitrary, Rube Goldbergesque regulation would accomplish nothing worthwhile.

My opposition to the rule, however, does not mean that I like the status quo. I oppose it for several reasons.

Federal policy dangles lots of easy money in front of nearly all young Americans, encouraging them to enroll in college or occupational training now and worry about the costs later. Michael Poliakoff of American Council of Trustees and Alumni accurately calls this “an attractive nuisance” that lures many young people into bad decisions, both at for-profit and non-profit schools.

Our policy also subsidizes employers, who are able to reduce or eliminate employee training costs that should, and formerly did, fall upon them. Without federal money going to students, companies would choose either to do job training themselves, or contract for it with schools competing for that business – the standard “make or buy” decision. Either way, the result would be greater efficiency.

Finally, it subsidizes schools, enabling them to charge higher tuition. A useful illustration of how much college costs are thus inflated is found in this NBER paper, in which the authors conclude that for-profit training schools that enroll students who are eligible for federal aid charge 78 percent higher tuitions than similar schools that are not eligible. “The dollar value of the premium,” they write, “is about equal to the amount of grant aid and loan subsidy received by students.”

Federal student aid is the cause of the inefficiency and distorted incentives that plague our higher education system, all the way from career colleges to elite universities. Rather than trying to deal with the numerous problems it causes by imposing futile and meddlesome regulations, we should get the government out of the student aid business.