Sarah Sertic enrolled in a for-profit college, the Art Institute of Washington, enticed by their flashy advertisements promising jobs in “the industry.” She later learned that the job prospects proved non-existent. Two years and $18,000 in federal student loan debt later, she couldn’t scrape together the $5,000 she needed to pay her remaining tuition bill or to bring herself to take on more debt. She was forced to drop out just one semester before graduation. Young Invincibles routinely hears of for-profit institutions failing to equip their students with the skills they need to land meaningful employment and repay their student debt. Fortunately, the Department of Education is developing regulations to hold the worst career education programs accountable for student outcomes. The current draft uses two metrics: graduate debt-to-earnings ratios, and default rates of former students. Programs that fail the metrics would no longer receive taxpayer funded financial aid.
While these metrics are important, they do not provide sufficient protection. Debt-to-earnings ratios only cover graduates, meaning programs with high dropout rates can evade the rule. Moreover, schools have learned to “game” default rates by ensuring students defer their loans long enough to avoid sanctions. The schools escape accountability while the students are left with unaffordable debt. To close these loopholes, the Department must add a third metric known as the repayment rate.
The basic idea is to ensure a minimum proportion of former students are actively repaying their loans. Repayment rates penalize programs with high debt loads and few graduates. They are also much more difficult to game than default rate measures because schools cannot push students into deferment or forbearance to dodge responsibility. Together with strengthening the proposed debt-to-earnings ratio and default rate metrics, a repayment rate metric would set a reasonable minimum standard for school performance.
The Department actually had a type of repayment rate measure in a prior draft of the rule, but removed it citing data challenges. It has also expressed concern that the courts nullified a previous repayment rate measure because the Department failed to justify its proposal. These are poor reasons to shy away from protecting students. The Department has reams of data at its disposal and all the courts require is some minimal reason for setting a repayment rate level. We believe there are several options, but discuss our preferred one here.
Young Invincibles proposes a repayment rate threshold set at 45%.* The idea behind what we propose is simple: graduating from college should improve one’s ability to pay back student loans. If a program cannot produce a greater proportion of students who are able to pay back their loans than the proportion of people with only a high school diploma who could potentially pay back loans, then the program is not producing sufficient outcomes for students or taxpayers.
We would base the standard for ability to repay loans on threshold already endorsed by Congress on multiple occasions. Namely, if someone earns more than 1.5 times the federal poverty level, she could be expected to repay something on her student debt.
Of the nearly 11 million of 25-34 year olds who graduated high school, we estimate that approximately 46.2% could potentially afford some level of student loan payments. We also estimate that over 70% of bachelor’s degree graduates ages 25-34 could afford to repay their student loans under the same formula. Taking into account some small limitations in census, the most appropriate metric for career programs is 45%. The Department also identified a similar threshold in an earlier draft of the rule, suggesting it was valid then and is still valid now.
If a for-profit institution is producing a majority of graduates who cannot pay their loan repayments with a degree, that institution does not deserve federal aid. Equipping Americans like Sarah with viable, marketable skills is more important than maintaining the status quo. The Department has all the data and reasons it needs to implement a strong standard. Now all it needs is the will.
* Note there are multiple possible definitions of repayment rate that the Department has used. We recommend they use the repayment rate weighted by original outstanding principal balance as included in the 2011 final rule.