Department of Education Issues Gainful Employment Rule to Regulate For-Profit Colleges, Industry Immediately Challenges in Court

The U.S. Department of Education under Secretary Arne Duncan published the final “Gainful Employment Rule” on June 13, 2011, establishing that career training programs at for-profit colleges and non-degree programs at all institutions must demonstrate that graduates earn sufficient income to repay their student loans or risk losing access to federal financial aid programs. The regulation required programs to meet at least one of three metrics: more than 35 percent of graduates must be repaying principal on federal loans three years after graduation; typical graduates must have loan payments below 30 percent of discretionary income; or total student debt must be below 12 percent of overall income. The rule represented the Obama Administration’s most significant attempt to impose accountability on the for-profit higher education industry, which had experienced explosive enrollment growth during the 2000s while posting dramatically higher student loan default rates and lower graduation rates than public and nonprofit institutions, leading to concerns that federal student aid was subsidizing predatory programs that left students worse off financially than if they had never enrolled.

The gainful employment requirement originated in the Higher Education Act of 1965, which established federal student aid programs and specified that proprietary (for-profit) institutions would be eligible to participate only if they provided “not less than a one-year program of training to prepare students for gainful employment in a recognized occupation.” This statutory language created a different standard for for-profit institutions than for traditional nonprofit colleges and universities, reflecting Congressional concern that proprietary schools focused on vocational training rather than broad educational missions and should therefore be held accountable for actually preparing students for employment that would justify the investment in education and the assumption of student debt.

However, for more than four decades after the Higher Education Act’s passage, the “gainful employment” requirement was never meaningfully enforced or defined through regulations. For-profit colleges certified that their programs led to gainful employment without any metrics or accountability for graduate employment outcomes or earnings. This regulatory vacuum allowed the for-profit sector to expand dramatically during the 1990s and 2000s, fueled primarily by federal student aid revenue, without meaningful scrutiny of whether programs actually led to employment or whether graduates earned enough to repay their student loans. By 2010, for-profit institutions enrolled only about 11 percent of all postsecondary students but received 19 percent of all federal student aid and accounted for 44 percent of all student loan defaults—a pattern suggesting that for-profit colleges were capturing federal aid while failing to deliver employment outcomes that would enable loan repayment.

The Obama Administration began developing gainful employment regulations in 2009, motivated by mounting evidence of predatory practices at for-profit colleges. A 2010 Government Accountability Office undercover investigation found that all 15 for-profit colleges tested used deceptive or misleading recruiting tactics, including false statements about costs, accreditation, and job placement rates. Data showed that 88 percent of associate degree graduates from for-profit institutions had student debt compared to only 40 percent of community college associate degree graduates, and that for-profit students borrowed significantly larger amounts despite often completing similar programs. Student loan default rates at for-profit colleges ran double or triple the rates at community colleges, indicating that for-profit graduates struggled to find employment sufficient to repay loans even for entry-level vocational credentials.

The Department of Education formed negotiated rulemaking committees in 2009 to develop the gainful employment regulations through a process that included representatives from for-profit colleges, traditional institutions, student advocacy groups, and other stakeholders. The negotiated rulemaking process failed to reach consensus, with for-profit college representatives refusing to agree to any meaningful accountability metrics. The Department proceeded to develop regulations without consensus, issuing proposed rules in 2010 and final rules in June 2011 after reviewing extensive public comments.

The final 2011 gainful employment rule established three alternative tests that programs could meet to maintain federal aid eligibility. Programs would pass if: (1) at least 35 percent of former students were repaying principal on their federal student loans three years after entering repayment; (2) the estimated annual loan payment of a typical graduate did not exceed 30 percent of discretionary income; or (3) the estimated annual loan payment did not exceed 12 percent of total earnings. Programs that failed all three tests for three consecutive years would lose federal aid eligibility. Programs that failed the debt measures but passed the repayment rate test would face disclosure requirements but maintain aid eligibility.

When the Department of Education released initial data applying these metrics to existing programs in January 2017 (delayed implementation due to litigation), the results showed that more than 800 programs failed the debt-to-earnings metrics, and 98 percent of failing programs were at for-profit colleges. The concentrated impact on for-profit institutions reflected the systematic problem that for-profit colleges charged significantly higher tuition than community colleges for similar programs while delivering worse employment outcomes, leaving graduates with unmanageable debt burdens relative to their post-graduation earnings. Many for-profit programs charged $30,000-$50,000 for associate degrees or certificates that community colleges offered for $5,000-$10,000, yet for-profit graduates often earned no more than community college graduates in the same fields, making loan repayment impossible at the higher debt levels.

The for-profit college industry responded to the gainful employment rule with a massive lobbying and litigation campaign. The Association of Private Sector Colleges and Universities (APSCU), the industry’s primary trade association and lobbying group, immediately filed a federal lawsuit challenging the regulations. APSCU argued that the gainful employment rule exceeded the Department of Education’s statutory authority, was arbitrary and capricious, and violated for-profit colleges’ constitutional rights by singling them out for regulation. The lawsuit represented a strategic effort to block accountability regulations through judicial intervention rather than complying with requirements or improving program quality and student outcomes.

In June 2012, federal district court Judge Rudolph Contreras struck down the core debt-to-income ratio provisions of the gainful employment rule, finding that the Department had developed the specific 30 percent and 12 percent thresholds “arbitrarily and capriciously” without sufficient explanation for why those particular numbers rather than other possible thresholds were chosen. However, Judge Contreras explicitly acknowledged that the concept of measuring program quality based on debt-to-earnings ratios was reasonable and within the Department’s authority, and he invited the Department to issue new regulations with better justification for the specific metrics chosen. The ruling represented a partial victory for the for-profit industry in blocking immediate implementation of the 2011 rule, but it preserved the Department’s authority to regulate gainful employment and suggested that properly justified regulations would survive judicial review.

The court’s partial invalidation of the 2011 rule revealed a key challenge in regulating the for-profit education industry: even when regulatory concepts are legally sound and address genuine problems, industry legal challenges can delay or block implementation by identifying technical deficiencies in rulemaking procedures or metric justifications. The for-profit industry’s strategy was not to prove that gainful employment accountability was unnecessary or that their programs actually produced good outcomes, but rather to find procedural or technical grounds to invalidate regulations in court, buying time to continue operating programs that failed to serve students while collecting federal aid revenue. This use of litigation as a delay tactic allowed for-profit colleges to continue enrolling students in failing programs for years while legal challenges proceeded, generating billions in additional federal aid revenue and leaving tens of thousands of additional students with unmanageable debt.

Following the 2012 court decision, the Obama Administration initiated a new negotiated rulemaking process to develop revised gainful employment regulations that would address the court’s concerns. This process lasted through 2013 and 2014, again failing to achieve consensus as for-profit college representatives refused to agree to any accountability measures that would actually affect failing programs. The Department issued revised gainful employment regulations in October 2014, with implementation scheduled to begin in 2015. The revised regulations addressed the court’s criticism by providing more detailed justification for the debt-to-income thresholds and modifying some requirements based on additional data analysis.

The 2014 revised gainful employment rule largely maintained the structure of the 2011 rule but with modifications designed to survive judicial review. Programs would become ineligible for federal aid if graduates’ annual loan payments exceeded 20 percent of discretionary income or 8 percent of total annual earnings in two out of three consecutive years. Programs would face warnings and disclosure requirements if they failed the debt measures in a single year. The rule also required enhanced disclosure of program costs, debt levels, graduation rates, and median earnings to help prospective students make informed decisions. The for-profit industry again challenged the revised rule in court, but this time the regulations survived legal challenges and began to be implemented in 2015.

Data from the first year of 2014 gainful employment rule implementation showed that 803 programs failed the debt-to-earnings metrics, affecting approximately 99,000 students and $1.1 billion in annual federal aid. As in the original 2011 data, the vast majority of failing programs were at for-profit institutions. The data revealed that many for-profit programs left typical graduates with debt payments consuming 25-40 percent of their discretionary income—levels that made loan repayment while meeting basic living expenses virtually impossible and that guaranteed high default rates and long-term financial hardship for graduates.

The gainful employment rule’s journey from concept to implementation illustrated the power of industry lobbying and legal challenges to obstruct consumer protection regulation. The for-profit education industry spent tens of millions of dollars on lobbying during the period from 2009 to 2014 specifically to oppose gainful employment regulations, hired former senior government officials as lobbyists, and funded front groups and astroturf organizations to oppose the regulations while claiming to represent student interests. APSCU hired numerous former Department of Education officials and Congressional staffers as lobbyists, exploiting the revolving door between government and industry to gain access and influence. The industry also made substantial campaign contributions to members of Congress, particularly those serving on education committees, to generate political pressure on the Department of Education to weaken or abandon the regulations.

Despite this massive lobbying effort, the Obama Administration ultimately succeeded in implementing gainful employment accountability, though with a multi-year delay caused by litigation. The regulations began to affect for-profit college behavior even before formal implementation, as schools closed or reformed failing programs to avoid the reputational and financial consequences of being designated as failing the gainful employment tests. Some for-profit colleges reduced tuition for programs that were at risk of failing the debt metrics, demonstrating that the institutions could operate at lower prices when faced with regulatory pressure but chose to charge inflated tuition when able to do so without accountability.

However, the gainful employment rule’s ultimate fate demonstrated the fragility of regulatory protections that depend on executive branch enforcement rather than statutory requirements. When Betsy DeVos became Secretary of Education in the Trump Administration in 2017, she immediately began working to repeal the gainful employment rule despite having no evidence that the regulation was ineffective or that for-profit college quality had improved. In July 2019, the Department of Education formally repealed the gainful employment rule, eliminating all accountability for whether career training programs prepare students for employment with earnings sufficient to repay student loans. The repeal came despite warnings from the Department’s own Inspector General that eliminating gainful employment would leave a regulatory vacuum with no accountability for program quality or student outcomes.

The Congressional Budget Office estimated that repealing the gainful employment regulation alone would cost taxpayers $1.3 billion over ten years in increased student loan defaults from students enrolling in failing programs that would have lost federal aid eligibility under the regulation. This fiscal cost did not include the broader costs to students who would take on debt for credentials that did not lead to employment, nor the costs of reduced workforce productivity from students spending time and money on training that did not actually prepare them for careers.

The for-profit education industry’s successful campaign to first delay and then repeal the gainful employment rule represented a case study in regulatory capture, where a heavily regulated industry uses political influence, lobbying expenditures, legal challenges, and revolving-door hiring to block regulations designed to protect consumers and taxpayers. The industry’s arguments against gainful employment focused on claims that the regulations would reduce access to education for minority and low-income students, but data showed that for-profit colleges primarily harmed minority and low-income students by leaving them with debt from credentials that did not improve earnings, making these students worse off than if they had never enrolled. The real issue was not access to education but access to federal student aid revenue, which for-profit colleges needed to maintain their business model regardless of whether they delivered value to students.

The 2011 gainful employment rule represented the Obama Administration’s recognition that the for-profit higher education industry had built a business model based on capturing federal student aid while systematically failing to deliver educational value or employment outcomes commensurate with the debt students incurred. The rule’s implementation delays, legal challenges, and ultimate repeal demonstrated that even well-designed regulations to protect students and taxpayers face severe obstacles when regulated industries can leverage political influence and legal resources to obstruct enforcement. The cycle of reform during the Obama Administration followed by repeal during the Trump Administration illustrated that consumer protections in for-profit education remain vulnerable to political shifts and industry capture of regulatory agencies.

For students who enrolled in failing for-profit programs during the years when gainful employment regulations were blocked by litigation or repealed by the Trump Administration, the consequences were devastating. Hundreds of thousands of students took on tens of thousands of dollars in debt for credentials that did not lead to employment, defaulted on their loans, suffered credit damage that prevented them from buying homes or cars, and faced decades of wage garnishment and tax refund seizures to collect on debts that should never have been incurred because the programs should never have been eligible for federal aid in the first place. The failure to implement and maintain gainful employment accountability represented a massive transfer of wealth from low-income students and taxpayers to for-profit college executives and shareholders, enabled by regulatory capture and industry obstruction of consumer protection enforcement.