The Biden administration is likely to reinstitute the Gainful Employment (GE) rule, a federal regulation which aims to kick low-value higher education programs off federal student aid. Critics of GE point out, quite correctly, that the rule is unfair because it exempts degree programs at public and private nonprofit colleges. Some argue that Congress should apply GE to all of higher education. While this would be a step in the right direction, “GE for all” would still fall short of protecting students from low-quality higher education, particularly at the graduate level.
How Gainful Employment tries to hold programs accountable
As currently proposed, GE would subject higher education programs to a two-part test; programs must pass both “prongs” to continue receiving federal funding. One part compares program completers’ earnings to those of the median early-career high school diploma holder in the same state. This provision is more applicable to short-term certificate programs. As I explain in a previous post, the test unfairly penalizes some postsecondary certificate programs that provide their students with a moderately positive return on investment.
But for the degree programs that would be newly subject to GE if Congress applied it to all programs, the second part of the test is the more relevant. To run the second part, the Department of Education estimates degree completers’ annual loan payments, assuming borrowers with bachelor’s and master’s degrees repay over 15 years. For a program to continue receiving federal funding, students’ estimated loan payments must be less than 8% of their median annual earnings.
However, the Biden administration’s version of GE includes an “escape hatch” for high-debt programs such as master’s degrees. The Department of Education also divides estimated annual loan payments by students’ median discretionary income, which is equal to median annual income minus $18,735. If this ratio is below 20%, the program passes the test even if the “standard” payment-to-earnings ratio exceeds 8%.
Most low-quality master’s degrees would survive “GE for all”
Consider the master’s degree in journalism at Columbia University. My estimates of return on investment in higher education figure that students who complete this program are worse off by over $90,000, since the increase in lifetime earnings resulting from this degree is not enough to compensate students for the cost of tuition and time spent out of the labor force. This is a perfect example of a program that taxpayers should no longer fund.
Students in Columbia’s journalism program graduate with median debt of $72,000, which translates to an annual loan payment of $6,771. With median annual earnings of $56,000, the standard payment-to-earnings ratio is 12%, greater than the 8% failing threshold. But the loan payment-to-discretionary earnings ratio is 18%, less than the 20% passing threshold for this metric. This program passes the GE rule despite the fact that the Department of Education estimates loan payments will consume 12% of students’ annual income.
Master’s degrees are among the worst investments in higher education. Two in five master’s degrees leave their students worse off financially, according to my estimates. But thanks partially to the discretionary earnings “escape hatch” in GE, just 6% of master’s degrees would lose their federal funding if GE were applied to all programs.
These facts suggest that an accountability agenda for federally-funded higher education programs must be more than “GE for all.”
Policymakers should address the master’s degree bubble
Master’s degrees are one of the most important contributors to the problems in our student loan system. Graduate degrees account for a rising share of federal student loans. (43% in 2020 versus 33% in 2010) and graduate borrowers are expected to repay a lesser share of their loan obligations than undergraduates. Moreover, enrollment in master’s degree programs is rising as universities exploit loose federal student loan subsidies to make some easy cash. Addressing the student loan crisis must include addressing graduate student lending.
As I argue in a new report, policymakers could make two incremental changes to the GE framework to improve its power to target low-value graduate degrees. First, annual loan payments for master’s degrees should be calculated with an amortization period of 10 years, down from the current 15. This is more justified given the short duration of master’s degree programs; it would also increase estimated annual loan payments and lead more master’s degree programs to fail GE. Second, policymakers should drop the discretionary earnings “escape hatch” and require programs to prove their value on the basis of the standard payment-to-earnings ratio alone. Both of these changes would revoke federal funding for more master’s degrees programs without financial value.
However, a bolder agenda would end the federal role in graduate student lending entirely. The argument for government control of student loans rests on the idea that 18-year-old undergraduates without credit histories would not be able to secure non-usurious education loans on the private market. But this argument does not apply to 20-something graduate students. A fully private market for graduate loans would provide more accountability for low-value master’s degrees, since private lenders would refuse to finance programs where students have little chance of paying back their loans.
More accountability for federally-funded colleges and universities is welcome, but the Biden administration’s proposed Gainful Employment rule is flawed. As it stands now, GE would unfairly penalize trade schools while letting low-quality master’s degree programs off the hook. Policymakers should desire the opposite: we should enable students to pursue high-quality vocational programs but limit subsidies for expensive master’s degrees that feed credential inflation and confer few useful skills. “Gainful Employment for all” is rooted in laudable instincts. But the details need work.