Federal Student Loan Reform Proposed

Proposed Changes to Federal Student Loan Program 1
An Examination of proposed regulatory action brought by the Secretary of the
U.S. Department of Education; to address the rapidly increasing aggregate
student loan debt for post-secondary education.
Colter Anderson
University of North Alabama

Table of Contents
Overview ......................................................................................................................................... 3
Implications of Proposed Program ................................................................................................. 5
Potential Impacts to Students and Obligators............................................................................ 5
Challenges to Institutions ........................................................................................................... 6
Macroeconomic Effects .............................................................................................................. 7
Outlook of Proposed Changes ........................................................................................................ 9
Alternative to Proposal ............................................................................................................... 9
Topics for Additional Study........................................................................................................... 11

Overview
A preliminary investigative analysis of proposed regulatory action brought by the
Secretary of the U.S. Department of Education; to address the rapidly increasing
aggregate student loan debt for post-secondary education. The action proposed seeks
changes to the rulemaking by the department of Education as to the eligibility of post-
secondary educational programs, for which qualifying students may receive Federal
Student Aid, authorized under Title IV of the Higher Education Act (HEA) of 1965, as
amended1.
The basis for which this action is proposed, is that a rising number of borrowers
and recipients of Federal aid programs, who have invested in post-secondary
educational programs are finding that their chosen program, historically on average
does not result in sufficient wages to reasonably justify the costs associated with
obtaining a degree or certification, relevant to the same field. Additionally, the total
cost of their chosen program of study, is making the repayment of borrowed funds
unmanageable, given their likely relevant occupation and expected earnings. This
seems to hold true even given a reasonable amount of time2 following graduation.
The U.S. Department of Education aims to establish a gainful employment (GE)
framework3, for educational institutions and the programs they offer, that defines the
requirements to be recognized as a gainful employment program eligible for Title IV,
HEA program funds. Secondarily, a transparency framework that would greatly increase
the quality and availability of information for current and perspective students, parents,
and other parties about each GE program.
Currently, information specific to programs offered by institutions such as probable
occupations and expected average compensation is of limited availability to current and
perspective students. Institutions will be required to report information about each of
1 See ‘Scope and Purpose,’ 34 CFR §668.401.
2 See ‘Two-year period,’ 34 CFR §668.402.
3 See 34 CFR §668.403.

the degree or certification program that it offers to the Department of Education, and
disclose information to current and prospective students about programs offered by
that institution, in order to be considered a gainful employment program eligible for
Title IV funds. The annual and total expected costs of the program and the relevant
occupations post-graduation. As well as the average earnings and average annual debt
payments of past completers 3-4 years post-graduation of each program. Finally, to be
classified as an eligible programeach program must meet defined requirements of a
ratio of: average annual debt payments/average annual earnings, and/or average
annual debt payments/average annual discretionary earnings of program cohorts 3-4
years prior to the current aid year, calculated by the Department of Education based on
SSA and NCES data.
The table below summarizes the Gainful Employment (GE) program qualifying standards
as proposed, as well as the number of programs that would be ineligible for Title IV
funding if the program is adopted based on current data.

Implications of Proposed Program
The impacts of this proposed rule change stand to be significant for a number of parties
including students, parents or guardians, institutions, and the American economy.
Potential Impacts to Students and Obligators
For students, parents, and others who might be responsible for the repayment of
student loans, the proposed changes will increase the amount of important information
that they can use in planning for post-secondary education and subsequent careers
following graduation. This will enable them to make much more informed decisions
about the cost of investing in these GE programs and will allow them to more effectively
weigh the total costs with a more real picture of what their earnings will be following
graduation.
Many students and parents do not consider that many courses of study offered
by educational institutions have very limited marketability; or the occupations for which
they will qualify for following graduation will not provide a gainful income relevant to
the debt incurred pursuing these programs. My family gave me the most valuable
advice and guidance that a young student planning for post-secondary education can
receive. We often discussed my future plans for my collegiate education and relevant
career following graduation, and I was given very insightful guidance through this
process. Many families have the same conversation with their 18-year-old perspective
student, who is considering what actions to take after high school graduation. Many
students unfortunately do not get the same level of quality advice that I was fortunate
to receive, however, the institutional disclosure requirements of this program will
hopefully ameliorate many students’ absence of sagacious guidance.
Effective planning and logical decision-making is of paramount importance. For
this is key to the economic success of these individuals, as the burden of educational
debt will greatly affect their ability to be active contributors in a consumer-driven
economy. Furthermore, unlike most debt should these individuals become unable to

repay debt incurred for educational purposes, in most cases this debt is not
dischargeable in bankruptcy court.4 This can be a significant economic burden on these
individuals for years to come, and will affect their long term economic prosperity.
Challenges to Institutions
For institutions this will create a number of challenges, the first being assembling the
resources necessary to produce the data, and report this to the Department of
Education, students, and prospective students as the proposed legislation requires5.
Institutions will need to identify programs that do not meet the new guidelines for GE
programs, and assess each programto determine the feasibility of making changes to
the program to bring costs to acceptable levels in order to meet these new
requirements.
Should a program not meet the stated requirements, institutions may file a
grievance6 to challenge the program’s eligibility with the Department of Education. This
will increase administrative costs incurred by institutions, by how much is unclear but
these costs stand to be significant, and very well could be contributory to the
exacerbation of the problems that this program aims to solve. Likewise, the added
value that this could create for students and the economy-at-large is uncertain and
essentially incalculable, within an acceptable level of error.
This will place pressure on institutions to refocus several if not many GE
programs to ensure that the program’s main goal is to prepare students for future
careers based on their expected future earnings. This could result in changes to courses
of study, such as eliminating humanities and fine art electives for programs that are
unrelated to core curriculum. Institutions of higher education have often found it ideal
to give students ‘well-rounded’ courses of study; this law could make programs focused
4 (US Department of Education, 2014)
5 See Reporting requirements for GE programs 34 CFR §668.410.
6 See 34 CFR §668.405 and §668.406.

only on core concepts, and remove some of the traditional elective courses that many
persons perceive as valuable.
Moreover, many GE programs could be eliminated entirely forcing institutions to
be much more flexible thus creating potential problems for how to manage faculty that
have been granted tenure, as well as other complex problems. For the programs that
are eliminated, ultimately market forces will dictate which programs are of necessity to
offer, and which ones are inefficient. Some institutions will still be able to offer these
programs through endowments or by demand from wealthy students, who still desire to
study these subject areas, many others will be eliminated.
The key aim of the proposed legislation is not to eliminate programs; rather to
inform students of the costs, and protect them from predatory marketing of programs,
to ensure that they are pursuing degrees and certifications that will result in gainful
employment following graduation.7
Macroeconomic Effects
From a macroeconomic viewpoint, this proposed change seeks to place downward
pressure on the demand for loanable funds for post-secondary education. As the
aggregate amount of student loan obligations now exceeds well over one trillion
dollars8. The total obligations outstanding has risen steadily for the past 30 years and
explosively in the past decade.
Society has developed a social norm of dictating that earning a four-year degree
is the best option for wealth creation, and while this is still true in essence, this cannot
be taken without some caveats. One comparison, of the accompanying data set for the
GE program, found that on average college graduates who earned a four year degree,
earned on average about the same as their peers who did not have a four year degree
when non-completers and obligators in default are added; this grim statistic seriously
7 See ‘Scope and Purpose’34 CFR §668.401.
8 ‘Total Federal Student Loan Obligations Outstanding,’Federal Reserve Bank of New York.

underscores the fact that, the decisions that young Americans make in the months
following high school graduation will most likely determine their economic prosperity,
for the rest of their lives.
We must be very cautious as we consider the macroeconomic impacts when
looking at major changes such as the proposed legislation. There are complex,
unpredictable, and sometimes unique variables that are omnipresent therefore, we
should practice careful consideration in evaluating the pros and cons that are associated
with changes in macroeconomic policy. We must also consider the wealth gap between
the poor and the wealthy, and what might the impacts of any changes of eligibility
requirements of Federal student loans be? Will this positively or negatively affect the
wealth gap? Nevertheless, caution should not metathesize into paralysis of action,
because should no corrective force occur, the current growth in demand for funds is
unsustainable.
Despite governmental interest rate ceilings on federal student loan funds, the
burden of student loan debt is becoming a much more prevalent in the overall
prosperity of the economy. Demand for loanable funds for higher education has
continued to grow rapidly over the past decade, far exceeding wage growth (particularly
for certain courses of study) over the same period9, this has resulted in an increasing
number of students defaulting on student loan obligations nationally10. This problem
will continue to proliferate over the next ten years, and could potentially be the next
financial crisis that faces the American/world economy. However, this crisis would be
more understated than the 2008-2009 crisis; in that there would not be a trigger event,
but rather a longer term, less prevalent stagnation of growth.
9 See Chart Supplement 1.
10 Accordingto the Federal Reserve, CBO, and U.S. Dept. of Education.

Outlook of Proposed Changes
The proposed legislation for changes to the rulemaking that determines eligibility of GE
programs to qualify for application of Title IV, HEA funds, was entered into the Federal
Register as a final draft on March 25, 2014.
After evaluating the components of this proposal as well as examining and
analyzing the data sets that accompanied it; I find that the essential aims are sound in
their theory, and that the Obama Administration along with the Department of
Education have pursued the optimal pathway in attacking the root of the problem that
plagues young adults pursuing economic prosperity or ‘the American Dream.’ However,
I do question whether such a complex and dynamic problem can be corrected by simply
comparing annual debt payments with average annual and discretionary earnings.
For example, a real valuation of a company is not simply calculated by two ratios,
as in the case of this legislation, but by a through in-depth analysis of many factors,
which include intangible benefits and the risk of uncertainty. These values are specific
in each case and subject to significant error, in essence it seems unreasonable to
assume that effective change can be made with such a simplistic and more importantly
sweeping rulemaking.
With so much at stake it seems reckless to expose the next generation of
Americans to the risk of these unvetted changes disparagingly impacting the middle and
lower class. Likewise, failing to act on this issue could and likely will, result in the
repression of young Americans who are striving to build wealth.
Alternative to Proposal
The conclusion of which is this – an alternative method should be offered to the current
proposal using a more complex model of determining which GE programs should be
subject to disqualification, and that each program that does not meet determined
requirements be subject to investigation after which, only after a thorough review, will

be disqualified with due process. Most importantly, the proposed timeline for
implementation of this program is the most critical issue that must be addressed. This
will ease some of the severe burden that institutions will be placed under by the current
proposal, and give the implementation of this program a higher probability of success.
As in the case of Patient Protection and Affordable Care Act (PPACA), we have seen a
recent example of the effects of drastic and rapid macroeconomic policy changes, and
the systematic stress that it can cause, that can result in unforeseen problems that are
harmful to consumers. It is imperative that all issues that could be harmful to the
students that this program seeks to help be investigated before it is initiated – for if we
fail to plan, we plan to fail.

Topics for Additional Study
Questions for additional study on this topic could include: What are the critical factors
to consider? Is there an alternative method for achieving the same goals that reduces
risk exposure? What are specific risks to the success of this program, or how large could
the gains be from these changes? Finally, how critical is timing, and can we afford to
delay acting upon these issues, how much time do we have?

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