During long winded negotiated rulemaking for Higher Education, the US DOE proposed defining gainful employment by establishing a 8% debt to income threshold (debt to income is also commonly used for mortgage limits) based on median student debt for recent college graduates with income based either on Bureau of Labor Statistics 25th percentile wage data or actual college graduate earnings. Loan payments would be based on the standard repayment plan (10 years) for the unsubsidized Stafford loan program. For programs that failed to satisfy this standard, the US Department of Education proposed an alternative that requires a loan repayment rate for recent college graduates of 90%. The loan repayment rate measures the percentage of borrowers actively repaying their loans/ and not defaulting. It is a dual to the default rate, but also includes borrowers who are delinquent, in an economic hardship deferment or in forbearance along with borrowers who are in default.
Mark Kantrowitz has written a piece that’s worthwhile reading. Click the link below to view Marks piece:
http://www.finaid.org/educators/20100301gainfulemployment.pdf
In his January 2010 State of the Union Address, President Barack Obama saw this issue as important enough to address, saying, “No one should go broke because they chose to go to college.” The Department of Education’s draft language to support this initiative proposes an annual loan payback cap at no more than eight percent of the student’s gross income, as determined by average salaries in the industry.
The first thing to notice with respect to this issue is that it does apply to all students. From the College Board: Among 2007-08 bachelor’s degree recipients, 34% graduated with no education debt, but 10% had borrowed $40,000 or more. The median debt for all bachelor’s degree recipients was $11,000 and the median for the two-thirds who borrowed was $20,000. However, the concern does apply more to for-profits than to other institutional types. Again, from the College Board: Among students who earned bachelor’s degrees at public four-year colleges and universities in 2007-08, 38% graduated with no education debt and 6% graduated with debt greater than $40,000. Among those who earned their bachelor’s degrees at for-profit institutions, only 4% had no education debt, while 24% had borrowed $40,000 or more.
Graduates of for-profit institutions are more likely to acquire debt that graduates of public institutions with private colleges falling in the middle. There are many reasons for this differential. Some reasons link to the tuition and fees, some are artifacts of the student population, and some reasons relate to the time-to-degree financial advantages offered by for-profits. However, some reasons are related to the overselling voiced in Goodman’s article and need to be addressed. The question is how they should be addressed.
There are many jobs, many tuition prices, and many student loan options. Some fare better than others in terms of payback ratios. We estimate that more than half of extant undergraduate two-year and four-year degrees would make the cap. That said, it is abundantly clear that private not-for-profit universities would have as much difficulty meeting the 8% rule as would the for-profits the rule is intended to control.
I am not criticizing degrees for which there are few job or no degree-relevant job prospects. Neither am I criticizing the institutions that offer them. (I have one or two such degrees myself.)
I am recommending that all institutions of higher education provide the transparency necessary for prospective students to make fully informed choices. At present, this information is not available for any institution, for-profit, public, or private, and virtually all schools have vigorously resisted requirements to provide it.
http://www.intered.com/higheredbriefing/2010/3/16/transparency-would-benefit-career-community-colleges.html
Of course, the Department of Education has no intention that this principle should be applied equitably to all institutions of higher education. Their idea is that for-profit institutions should operate under strict ROI tests while public and private colleges should have no responsibility for producing a defined return-on-investment for students. Not-for-profit colleges should be free not only to offer degrees for which there are no jobs but should be free to obfuscate this fact. The Department’s ethics are deplorable and should be recognized as such.
Here are two 20 year examples illustrating the validity of Mark Kantrowitz’s suggestion that the amortization needs to be 20 years.
Example A – Physical Therapist Assistant. Using College Board values, a PTA pays a career school $28,000 to earn the two-year associate degree and enter the profession. The Department of Labor estimates the average salary for PTAs at $46,000; it will be lower for recent graduates, say, $38,000 (-17%). Under the eight percent cap, the permissible monthly loan payback is $253. Student loan options vary widely but an unsubsidized 20-year loan at 6.0% interest results in a $201 monthly payment. (Fails with a 10 year amortization.)
Example B – High School Teacher. Using College Board values, a secondary school teacher pays a private college $105,092 for a four-year bachelor’s degree and enters the profession. (In reality, most public and private schools drag the process out to an average of over five years for a four-year degree.) The Department of Labor estimates the salary at $56,000 but it will be lower for entry level, say, $46,500 (-17%). Under the eight percent cap, the permissible monthly loan payback is $310. A subsidized loan for 20 years at 4.5% results in a $665 monthly payment. (Fails even more with a 10 year amortization.)
These examples are not necessarily typical but illustrate the bad logic of the Department in going after the for-profits. Those in the industry seem to be taking the bad ethics for granted and moving on to practical issues. I think this is a mistake.
We don’t agree with Kantrowitz’s assessment that BLS wage data trends to the low side of this distribution. We do in-depth research on this in specific markets every day and find, in allied health for example, that they are spot on.
I have a question on the statistics. From your article, the numbers from the college board are showing that there is a higher default rate from graduates of for-profit colleges. What I would like to know is not the percentages but the dollar amounts that are defaulted from public versus for-profit. Because there is a larger number of graduates from public colleges, I would think that there would be a greater dollar amount that is lost from those graduates.