Washington, D.C. — A new issue brief from the Center for American Progress shows how enforcing the gainful employment rule—a regulation that cuts off aid eligibility for career training programs with high levels of indebtedness relative to earnings—could save taxpayers $1.5 billion in reduced future loan forgiveness costs. And that is based on just one set of gainful employment data; total savings over time would likely be even greater. Overall, reduced loan forgiveness costs are a potentially significant source of savings that has been overlooked in previous attempts to quantify the importance of the rule.
The brief comes as the Trump administration is conducting a review of the gainful employment rule that could lead to attempts at undoing the regulation.
In “How Gainful Employment Reduces the Government’s Loan Forgiveness Costs,” CAP explores the policy interaction between the gainful employment rule and the increasingly popular student loan payment options known as income-driven repayment (IDR). These plans cap a borrower’s payments at a share of their income and forgive any remaining balances after 20 or 25 years in repayment. While IDR is an important safety net for individual borrowers, concerns have arisen lately about the long-term cost of these plans.
This brief shows how gainful employment can be a direct way of controlling potential forgiveness costs for career training programs. Because gainful employment cuts off federal financial aid at programs where the typical graduate’s earnings are too low relative to their debt, the rule would prevent continued loan issuance at places where most graduates are all but guaranteed to need IDR and potentially receive forgiveness down the line.
By analyzing real data on debt and earnings for graduates from career training programs, the brief captures for the first time the extensive taxpayer risk from loan forgiveness produced by programs that do not pass gainful employment. The findings include:
- The typical graduate at all programs that do not pass the gainful employment rule are so over-indebted that they would likely benefit from using IDR.
- Most nonpassing programs would have to raise the average graduate earnings by at least $10,000 in order to avoid needing IDR. Given that typical earnings hover around $18,000 in these programs, that’s a huge raise.
- We project that the median failing program would have a typical graduate that repays $15,000 less to the government on IDR than they would on the standard payment plan that retires debt in equal installments over 10 years.
- Multiplied across the roughly 360,000 students who graduated from a gainful employment program, we very conservatively project that these programs could create $1.5 billion in forgiveness costs to the government. And that’s for one set of data that represents two cohorts of students in most cases.
“Income-driven repayment is a crucial safety net for struggling borrowers,” said CJ Libassi, a policy analyst at CAP and a co-author of the report. “But generous payment plans should not be used to bail out low-quality institutions and programs. The gainful employment rule strikes the right balance between preserving the repayment safety net for borrowers while holding accountable programs that might abuse these options at taxpayers’ expense.”
Click here to read “How Gainful Employment Reduces the Government’s Loan Forgiveness Costs” by Ben Miller and CJ Libassi.
For more information, contact Devon Kearns at [email protected] or 202.741.6290.