Gainful Employment: Measuring Quality or Measuring Subsidy?

There is much speculation that the Trump administration or the Republican-led Congress will undo the Obama administration’s gainful employment rule. The rule has become something of a signature issue for the Obama higher education legacy, which means any attempt to undo it will be met with fierce resistance. But its defenders should be careful not to overstate the virtues of the rule.

The gainful employment rule took effect in 2015 and applies to all educational programs at for-profit colleges and to certificate programs at public and private nonprofit colleges. It aims to ensure that education programs are worth the investment students and the federal government make in them. If graduates of these programs don’t earn enough to justify the debt they took on, the programs become ineligible for federal student aid. But many have taken this idea a step further and see the gainful employment rule as also measuring the quality of an education program. Programs that cost students more than the earnings bump they gain are low-quality programs, or so the thinking goes.

But there is a big flaw with the idea of gainful employment as a proxy for quality. The rule might actually be measuring the degree to which an education program is subsidized rather than its quality. That is because a program that receives a large public subsidy meant to reduce tuition -- specifically, a direct appropriation from state and local governments -- can graduate students with lower debt, increasing the chances it passes the gainful employment test. But would the program pass if it didn’t receive that subsidy and students had to borrow more? Conversely, do programs at for-profit colleges fail the test solely because they aren’t subsidized with direct appropriations like public community colleges, not because they are low quality? The playing field is tilted but by how much?

We seek to answer these questions in a new report. Specifically, we simulate what students’ debt levels at for-profit institutions might be if these schools were to receive direct appropriations like their public counterparts. We also simulate what might happen to student debt if public institutions lost their direct appropriations and had to compensate for the lost revenue through tuition increases. (We limit our analysis to certificate programs, credentials that certify an individual has acquired the skills to participate in a career, since these are the only credentials for which the gainful employment rule applies to both public and for-profit institutions.)

Currently, 76% of undergraduate certificate programs at for-profit colleges pass the gainful employment rule. After simulating direct appropriations at these schools, the pass rate rises to 93%. Undergraduate certificate programs at public institutions have a pass rate of 100%, so simulating direct appropriations closes two-thirds of the performance gap between the public and for-profit sectors. This suggests that the gainful employment rule is more a measure of subsidy than of quality.

According to our simulation, public institutions would still do fairly well on the gainful employment rule even if they lost their direct appropriations. Currently, 100% of undergraduate certificate programs at public colleges pass the rule, a rate which falls to 93% after removing appropriations. Ironically, that public institutions exhibit high pass rates under our simulation suggests that the programs would still provide a good payoff for students even if state and local policymakers eliminated appropriations for these programs. It’s also possible that the gainful employment rule does not reliably measure that payoff.

Granted, there are still important differences between for-profit and public colleges even after accounting for direct appropriations. For instance, graduates of for-profit colleges tend to have lower earnings than their peers who hail from public schools. Therefore, even if debt levels were the same across both types of institutions, for-profits would still fail the gainful employment rule at higher rates.

Why do for-profit graduates have lower earnings? One reason is the prevalence of cosmetology programs in the for-profit sector. Cosmetology programs at both public and for-profit colleges yield very low earnings for their graduates, but there are far more of them at for-profits. If we exclude cosmetology programs in both sectors from the analysis, 96% of undergraduate certificate programs at for-profits pass the gainful employment rule—leaving only a four percentage-point gap between the for-profit and public sectors.

This exercise shows that a significant portion of programs at for-profit institutions fail the gainful employment rule because they are not subsidized by state and local legislatures—not because they offer a worse-quality education relative to their public counterparts. While the gainful employment rule may be useful to students looking to compare the return on their individual investment in various educational programs, it has virtually no use as a measure of those programs’ true value to society.

Preston Cooper is a research analyst and Jason Delisle is a resident fellow at the American Enterprise Institute.