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The Gainful Employment Ruling: Continuing efforts to improve financial literacy for borrowers


Jessica Sondgeroth
University Business, September 2012

Despite Federal District Court Judge Rudolph Contreras’ ruling that negates a primary metric of the U.S. Department of Education’s “gainful employment” regulations, the DOE still has authority to regulate gainful employment programs and schools should continue to look for ways to promote the financial success of their students.
While it remains unknown what will become of the gainful employment regulations, it doesn’t hurt to continue operating as though the gainful employment measures are in effect by strengthening default prevention, financial literacy, counseling and other efforts to reduce borrowing and improve loan repayment.
The Obama administration published the gainful employment metrics last year, amid criticism that some for-profit colleges were piling students with debt in exchange for low-value or incomplete credentials and degrees. The DOE established these regulations to tie an academic program’s eligibility for Title IV federal student aid funds to whether it can “prepare students for gainful employment in a recognized occupation.” The rules were due to be implemented July 1, 2012, with the first set of meaningful metrics to be released during 2013.
The rule included three metrics to evaluate the performance of academic programs. Contreras’ ruling overturns the loan repayment rate, on the basis that the 35 percent repayment rate threshold was too arbitrarily contrived by the DOE as a performance standard for compliance.
“The Department does not identify any expert studies or industry practices indicating that a repayment rate of 35 percent would be a ‘meaningful performance standard,’ but rather emphasizes that the number was chosen because approximately one quarter of gainful employment programs would fail a test set at that level,” Contreras writes in his ruling. “Because one of the debt measures lacks a reasoned basis, that regulation will be vacated as arbitrary and capricious. Because the majority of the related rules cannot stand without the debt measures, they will be vacated, as well.”
The ruling leaves the DOE with the choice to appeal the decision or create new metrics, but it does not overturn its authority to regulate certain programs and institutions to ensure they are preparing students for gainful employment.
“Concerned about inadequate programs and unscrupulous institutions, the Department has gone looking for rats in rat holes [sic.]—as the statute empowers it to do,” Contreras wrote in his ruling.
Institutional leaders would be prudent to continue to address the gainful employment requirements by establishing a default prevention plan, either adopting the DOE’s sample plan (available at or customizing their own. Schools should also engage borrowers, work to better identify at-risk students and improve loan counseling efforts.
Research shows that many factors affect borrowers’ chances of successfully repaying their student loan and avoiding default. These factors include:

  • Borrower characteristics like family income and academic preparedness in high school.
  • In-college variables like student success, counseling and level of loan debt.
  • Post-college variables like employment and income.

While institutions cannot control issues such as unemployment rates and family income, they can improve student loan repayment rates by helping struggling students succeed academically, setting realistic expectations in terms of salary and work goals, and counseling students on smart borrowing, repayment options and avoiding default.

Nine Key Actions

Administrators can take a number of small measures to improve student success after graduation, such as beefing up financial literacy efforts, ensuring enrollment reporting is accurate and sharing student information among different student services departments.
These steps help institutions increase student and borrower success, which will help them meet gainful employment metrics, even if they change due to the court ruling.

  1. Create buy-in. A successful default management plan will require the interest and commitment of the campus administration and other student aid services departments. Developing your plan will mean reaching out to other departments and the administration to inform them of the issue and the consequences of high default rates.
  2. Appoint a default prevention manager. If possible, appoint a member of the financial aid office to handle default prevention. Ideally, this person would serve as a liaison between the financial aid office and other departments, work to track borrowers at risk of defaulting and identify students most likely to default. Other efforts would include promoting campus-wide awareness of default, as well as developing financial literacy programs.
  3. Create a default management team. A default management team should consist of staff from a variety of departments to help ensure that students have access to default prevention resources at the institution. Positioning academic affairs staff and faculty to raise red flags for low grades or poor attendance will give financial aid offices an opportunity to intervene before a student drops out and enters repayment. The registrar’s office could signal a warning when a student failed to enroll or withdrew from classes. Alumni affairs can help locate hard-to-find borrowers.
  4. Partner with outside entities. The aim here is to track borrowers or upgrade the existing campus technology used to track borrowers. Sometimes an upgrade can better allow you to identify borrowers at risk of default and provide assistance.
  5. Innovate your financial aid process. As stated, research showing family income, academic preparedness in high school, and level of loan debt can help in identifying students at risk of default. This research can be used to provide more assistance to students before they borrow. This could include providing additional information about borrowing too much, the choice between private and federal loans, and the consequences of default.
  6. Connecting retention and default prevention. Many times, students at risk of default share the same characteristics of those at risk of dropping out. For large schools with open enrollment policies, this means being realistic about admitted students’ deficiencies and providing support such as tutoring, which offers another opportunity to counsel students and discourage them from dropping out.
  7. Create early alert systems. Early alert systems can also enable a school to provide repayment notifications during the six-month grace period to students who drop out.
  8. Improve communication with borrowers. Schools should collect multiple forms of borrowers’ contact information—phone numbers, email addresses, social networking accounts, and family contact information—and engage the borrower during grace periods and repayment. This portion of the plan should include direct contact with borrowers, whether by phone or through in-person exit or entrance counseling. A 2012 report by Education Sector, “Lowering Student Loan Default Rates” (available at details how a consortium of institutions used a variety of unusual tactics to reach out to delinquent borrowers. The schools sent out perfumed envelopes, colored Easter bunnies and Valentine’s Day hearts, and brightly colored paper with the words “CHECK INSIDE” stamped on the outside to get borrowers’ attention.
  9. Improve financial literacy. Repetition helps retention. Schools should employ financial literacy development as far and wide as possible, using social media, campus events, orientation materials, and perhaps “free pizza” workshops to spread the word. Some schools have even begun incorporating financial literacy in core curricula.

Success Is Possible

Colleges and universities can’t prevent every borrower from defaulting, but they can have a strong influence. While the Education Sector report shows that student demographics can indicate a risk of default, those demographics are not the sole, or even the primary predictor of a school’s default rate.
When institutions work to address default and provide students with financial literacy resources and information, they see results.

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