The Biden administration is considering reviving an Obama-era “gainful employment” rule which would tie federal higher education grants and funding to graduates’ earnings.
A new analysis shows that the rule would cut off access to federal grants and loans for 49 percent of institutions covered by the rule. Is a new test in order?
The Urban Institute runs the numbers:
Our calculations show that compared with the debt-to-income test, the high school earnings test would increase the number of failing undergraduate certificate programs by more than fivefold and would establish a standard high enough to render the debt-to-income test unnecessary.
This drastic increase in the number of failing programs could suggest many programs provide too little value for their students or that the high school earnings test is just an unrealistically high bar. In either case, the debt-to-income test no longer serves a purpose if the high school earnings test is enacted.
Are two tests better than one?
Under the debt-to-income test, median annual loan payments for a cohort of graduates cannot exceed 8 percent of their earnings and 20 percent of their earnings above 150 percent of the federal poverty level. The idea is that programs are considered to lead to gainful employment if graduates earn enough to afford their loans.
Under the high school earnings test, median earnings among graduates must exceed the median earnings for a working 25-to-34-year-old with only a high school diploma (or GED) in the state where the program is located. Nationally, median earnings for high school graduates in this age group is $25,569 and ranges from a low of $20,859 in Mississippi to a high of $31,294 in North Dakota.
In theory, the two tests should perform separate but complementary functions. The earnings test ensures that on an absolute level, the program pays off for graduates, while the debt-to-income test would screen for programs where graduates’ earnings exceed high school earnings but where excessive debt levels still make the program financially risky.
Using US Department of Education data on program graduates, we find that the twin tests would not work this way in practice. The high school earnings test sets a much higher bar for programs to clear than the debt-to-income test, making the debt-to-income test redundant.
