by Daniel L. Bennett
The career college sector is engaged in a fierce battle with the Department of Education (ED) over its proposed definition of gainful employment, which would create a debt payment-to-earnings ratio that would effectively cap student debt payments at 8% of expected earnings for career college students. It would do so be using the median debt payment of a program's previous 3 years of graduates in the numerator, and national BLS wage data for the 25th percentile income of the occupation for which the program prepared students to enter in the denominator. Programs with ratios exceeding 8% would be given the boot from the Title IV funding programs. This proposal has been met with extreme opposition from the industry, has been denounced by a Congressman, and was described as severely flawed by financial aid expert Mark Kantrowitz.
While I generally agree that the proposal would be extremely harmful and am fundamentally opposed to this type of implicit government price control, I decided to do some analysis to determine what the actual effects would be on 10 occupations for which the career colleges train students (all of which are on the BLS's list of 30 occupations with the biggest projected growth in employment for the next decade) to enter if the policy was retro-acted a few years. I first looked at the 25th percentile income for these occupation for both 2003 and 2008. I then calculated the max student debt for these occupations, given the ED's proposed definition, assuming a 6.8% fixed interest rate (the current direct lending rate). Then, I adjusted all figures into constant 2008 dollars to account for inflation. The results are in the below chart.
What I find is that, if the 8% ratio was retro-acted, students pursuing 7 of the 10 growing occupations above would not have been able to borrow as much to pay for their training in 2008 as they were able to borrow in 2003, in real inflation-adjusted terms. Students pursuing training in the other 3 occupations would not have much more ability to borrow in 2008 than they did 5 years prior. If any college's graduates were to finish with less real (inflation-adjusted) debt today than they did 5 years ago, then that college deserves a carrot for excellency in cost containment, not a brutal beating with a stick.
Since most students borrow money to pay for the education, limiting the amount that they can borrow also limits the professions that they are able to enter, especially for the lowest income students. It may even shut off routes for people to enter a given profession, as many colleges will be unable to offer training programs at a price that allows them to be in compliance with not only gainful employment, but also the 90/10 and cohort default rate rules, and will ultimately stop offering such programs. While this will likely appease some critics of the industry, the end result will be a reduction of educational options and access for low income and minority students, and a shortage of qualified employees to fill the demands of the labor force. Both results are negatives for the economy.