Key Points From the Fourth Day of Gainful Employment 2.0 Negotiations
The fourth day of negotiations for gainful employment 2.0 offered little news or common
ground from the public- and private-sector college participants, and we expect the
Department of Education to proceed with unilateral action and produce a set of studentloan-
debt-to-income-and-repayment thresholds that will look similar to the first version
of gainful employment, released in 2011 but subsequently struck down by a federal judge
following a private-sector industry appeal.
• Consensus remains unlikely to be reached through negotiation given the wide gap
between the private sector and public college representatives in attendance. Both
sides appeared to be positioning as if they expect the Department of Education (ED)
to proceed on its own in writing a final rule, particularly given the wide variance in
the draft rules proposed thus far and the lack of data and objectivity supporting the
process to date. We believe ED remains committed to releasing a final rule in 2014
that will go into effect in 2015. While it is unlikely that ED will combine gainful
employment rule-making with Higher Education Act (HEA) reauthorization, we
believe private-sector participants (with Republican support) will likely mount both
a legal challenge of the rules as well as a legislative challenge through the HEA
reauthorization process, which began in October but will likely take years to finalize.
• Public college advocates in particular appear more interested in derailing the
negotiating process than reaching a consensus, likely because they view a
unilateral approach to rule-making by ED in the likely event consensus is not
reached through negotiation as a positive scenario for most public colleges.
• Private-sector advocates, realizing their voice is being largely ignored at the
negotiating table, are pushing for a broadening of the rule to include all colleges
and are trying to raise questions on the legitimacy of ED’s major assumptions and
the quality and availability of the data supporting these assumptions. This is the
likely foundation for a formal legal challenge.
• Advocates of community colleges, for which certificate programs are subject to
gainful employment rules, appear to be gradually realizing that these rules could
harm their schools as well, and we expect this realization to become a potential
sticking point for ED in implementing a punitive rule (closing even a few
community college programs would be politically unpopular).
• The major wrinkle in the latest proposals from ED is the reinclusion of student loan
repayment metrics, which were included in the final rule proposed in 2011, but not
in the initial draft rules for gainful employment 2.0, released in August.
November 18, 2013
Based on commentary in the hearings today, we believe ED is now focused on including some form of a default/repayment metric as well as a debt-to-income metric. We note that the repayment test included in the
previous set of rules did not withstand legal review and was the major reason the initial set of rules was overturned,
so we are a bit surprised ED is heading back in this direction and believe it will need to show stronger quantitative
support for the metric to withstand another legal challenge.
• We believe the rules will likely be softened in the final iteration, as they were the first time around, with ED unlikely to
want to go through another extended legal battle with the private-sector colleges. And even though rule-making is not
a legislative process, a take-no-prisoners approach seems unlikely given the administration’s continued focus on
increasing the number of college graduates in the United States and the damage to the private sector that has already
been inflicted by the threat of the rules (enrollment is down 20% to 30% across the sector).
Author: Timo Connor,
William Blair & Company, L.L.C.
Timo Connor, CFA, joined William Blair & Company in 2010 and focuses on education services and technology. Previously, he worked as a fixed-income analyst at Bank of America and BNY Mellon. Mr. Connor received a B.A. in economics from Northwestern University.