Gainful employment rules target federal aid at for-profit schools

New gainful employment rules proposed by the Education Department require for-profit colleges to prove the cost of tuition is worth the investment. Thinkstock photo.

Last week the Education Department released a report showing nearly two-thirds of students who attended for-profit colleges aren’t repaying their federal student loans. The data added spice to the story about proposed changes to “gainful employment” rules that determine a college’s eligibility for federal aid. With rising college costs , the return on investment is being questioned. New gainful employment rules require for-profit colleges to prove that a graduate’s projected income makes student loan debt worthwhile.

Gainful employment rules and student loan repayment rates

Federal are forcing the Education Department to write new gainful employment rules. Its proposal cuts off federal aid to for-profit colleges where less than 45 percent of students repay their loans. In an article about the report, the Los Angeles Times said that the federal student loan repayment rate at for-profit colleges was only 36 percent in 2009. The student loan repayment rate at private nonprofit schools was 56 percent. At state colleges and universities, 54 percent repaid their loans. Losing federal aid would put many for-profit colleges out of business. Some rely on federal student loan funding for nearly 90 percent of their revenue.

For-profit colleges must prove return on investment

Gainful employment rules also consider the total student loan debt and average earnings. The Center for College Affordability reports that eligible for-profit colleges must have graduates with a debt-to-earnings ratio of less than 20 percent of discretionary income or 8 percent of total income. If the college fails these tests, it must disclose its graduates’ debt-to-earnings ratios to prospective students.

For-profit colleges feast at the government trough

The amount of federal aid for-profit colleges get has soared. NPR reports that in 2000, $4 billion in federal student aid went to for-profit colleges. Today they get nearly $27 billion. Students are getting a hard sell from marketing companies branding themselves as colleges. They pay a premium to take courses and borrow money to pay the bill. Upon graduation, often the degree isn’t worth what they paid. They can’t get a job that would enable them to pay back the loan. U.S taxpayers foot the bill

Making college a sound investment

Rising college costs are making Americans battered by the economic downturn wonder if student loan debt for college is worth it. Allison Lynn at MSNBC writes that the issue isn’t whether a person should go to college, but that college should be approached with caution like any other investment. A philosophy degree may not translate into much future income. And experts say people should look at how much in student loans they absolutely need, and how much they can pay out of pocket with a part-time job, family help or savings. Personal finance pundit Suze Orman recommends not taking on more in loans than one expects to make in their first year out of school.