An Obama-era Rule to Protect Student Debtors

One of Barack Obama’s administration’s most significant actions against the for-profit college industry was instituting a gainful employment rule in 2014. Despite a $16-million-plus lobbying effort by the industry — aided by now-senior Biden adviser Anita Dunn — that succeeded in watering down the rule, the regulation cracked down on predatory advertising practices by for-profits and set standards to cut off programs from federal aid that didn’t prepare students for “gainful employment” after graduation. (The rule had been first issued in 2011 but faced multiple legal challenges and was reissued in 2014.)

In order to demonstrate they prepared students for gainful employment, schools had to prove that their graduates were finding jobs adequate to pay off their debt, by publishing data on the ratio between the debt and earnings of their graduates. Schools that didn’t meet the debt-to-earnings ratio set by the gainful employment rule would be cut off from federal aid.

For-profits are statutorily limited from receiving more than 90 percent of their revenue from the federal loan program, but hundreds of schools toe this line, so losing access to the loan program is effectively a death sentence.

The first and only set of gainful employment data required by the rule was published in 2017, and showed that 803 programs, nearly 10 percent of all those covered by the regulation, failed to meet the standards, and an additional 14 percent were on the verge of failing. While for-profits constitute about a third of career and certificate programs, nearly 98 percent of the failing programs were for-profits.

Some schools shut down failing programs preemptively after the data release. But no schools were ever cut off from aid due to the data, however, because when Donald Trump took office in 2017, his Department of Education largely stopped enforcing the rule. In 2019, education secretary Betsy DeVos repealed the rule altogether.

The Biden administration has indicated in court filings and on its regulatory agenda since 2021 that it intends to write its own version of the gainful employment rule. But so far, no such rule has been proposed.

Delay as a Lobbying Army Pressures the White House

Earlier this year, the Education Department held three “negotiated rulemaking” sessions involving representatives from higher education institutions, students, borrowers, and other stakeholders to discuss a new gainful employment rule. The idea behind the sessions was that if stakeholders are involved in drafting a proposed rule, they are less likely to bombard it with legal challenges down the road.

At the conclusion of the rulemaking sessions, the stakeholder for career and certificate programs refused to back the Education Department’s proposed rule, which would be similar to the Biden regulation but would also require graduates from career and certificate programs to earn more on average than comparable young people who only had high school diplomas.

Without consensus, the Education Department could have just proposed its own version of the rule.

But on June 21, the department indicated in its rulemaking calendar it was pushing back the timeline for proposing the new rule by eight months, meaning it wouldn’t be finalized until July 2024 at the earliest, and schools wouldn’t be impacted by it until 2026 or 2027.

That delay came as the for-profit college industry was spending $2.7 million on lobbying in the first half of 2022 alone.

While for-profit colleges account for only a third of all career and certificate programs, these institutions account for a disproportionate share of student debt and defaults, and their graduates report lower wages than those from public and nonprofit colleges.

The American Association of Colleges of Osteopathic Medicine, the for-profit higher education providers American Public Education, Inc, Apollo Education Group, Zovio Inc, and NUC University, as well as the nonprofit Vanderbilt University, all reported lobbying directly on gainful employment in 2022.

NUC University and the University of Phoenix, an Apollo subsidiary, are both part of a recent settlement with the Education Department to cancel at least $6 billion in student debt for graduates for 153 programs that the department says defrauded students.

The for-profit college industry’s main lobbying group has spent $380,000 in the first half of this year and reported directly lobbying the Education Department and the White House.

But it’s not just the for-profits who have delayed the rule. “One of the key problems is that there’s no buy-in from the other schools,” said Johnson Tyler, director of the Consumer Rights Unit at South Brooklyn Legal Services, who was also on the rulemaking committee:

The private nonprofits and the community colleges see it as a huge waste of their time and their administrative capacity to sort and create all this data and comply with any prospective rule. And that’s on top of the for-profit lobby.

Biden’s student debt cancellation announcement included a vague allusion to a new Education Department plan to “publish an annual list of colleges that leave students with unmanageable debt so that students can avoid these programs” — but he did not say how “unmanageable debt” would be defined or what, if anything, would happen to colleges on the list.

Such a list is, in effect, what a gainful employment rule would create, except the regulation would go a step further and make all schools on the list ineligible for the federal loan program, which would likely cause them to shutter.

The Education Department declined to comment on the reasons for the gainful employment rule delays or on the specifics of Biden’s proposed list of colleges that generate unmanageable debt.

“A Questionable Use of Resources”

Meanwhile, the Biden administration is currently fighting two lawsuits that allege that DeVos’s 2019 repeal of the Obama rule was illegal.

In 2020 American Federation of Teachers, the California Federation of Teachers, and two individual teachers sued DeVos, arguing the repeal was illegal. Nineteen state attorneys general filed a separate lawsuit fighting the repeal.

Biden’s Justice Department has defended DeVos’s repeal of the rule in the lawsuits, arguing that his administration would prefer to write its own version of the rule rather than reinstate the Obama-era rule.

Given the new eight-month rulemaking delay, the plaintiffs in the American Federation of Teachers lawsuit — which includes just two individual teachers — are now asking the court to reconsider its May 10 decision to suspend the suit against DeVos while a new rule is drafted.

They are pushing the judge to allow the case to be heard on its merits, giving them the chance to argue in favor of the Obama rule being reinstated while a new one is supposedly written.

“Although Plaintiffs’ prior briefing stated that no new Gainful Employment Rule could take effect until July 2023, failing to publish a proposal until 2023 means that the best-case scenario effective date has now been pushed to July 2024,” the plaintiffs wrote in a July 1 brief.

The plaintiffs added that in the extra year the department has tacked onto the rulemaking process, more than one million students could enter programs that wouldn’t meet gainful employment standards.

Hannah Story Brown, a researcher at the government watchdog Revolving Door Project, said:

It’s certainly a questionable use of resources for the Education Department and their DOJ lawyers to spend years opposing the solution that plaintiffs initially proposed — remand with vacatur, aka temporarily restoring the old rule while drafting an updated version of it — while arguing that their limited resources makes implementing the old rule burdensome. [The Education Department] shouldn’t complain about resources while it is being forced to discharge billions of dollars to students who were trapped in programs that shouldn’t still be eligible for federal funding in the first place.

Biden’s Justice Department recently noted in the joint status report that the lawsuit should remain on hold. “As the regulatory agenda indicates, the Department is engaged in a number of rulemakings at various stages and continues to make progress in these efforts, including in its rulemaking on Gainful Employment,” Justice Department lawyers wrote.

On August 29, the California district court judge handling the case held a hearing on the joint status report. The judge is expected to issue a decision soon on how the case should proceed.