What's Up At the Negotiated Rulemaking Sessions in DC?

With round 3 of negotiated rulemaking on Program Integrity expected to wrap up by mid-day tomorrow (Friday), I thought I would summarize what had happened so far this week.  Recall that the two most controversial issues coming in related to the issue of "gainful employment" and incentive compensation: 

Here is how the week unfolded: 

• Day 1 (Monday) focused on eligibility for federal aid at institutions that are "preparing students for gainful employment in a recognized occupation."  As reported by Inside Higher Ed, the Department of Education is proposing a "rule would require that the annual debt repayment load for recent graduates of vocational programs and most for-profit offerings be no more than 8 percent of the salary of a recent graduate working in the field for which a program had prepared a student.
  • Just for reference, if recent graduates earned an average salary of $30,000, in order for them to fit within this 8% target, they would have to average less than $17,500 in debt (assuming unsubsidized Stafford at 6.8% interest rate) or $19,300 for subsidized Stafford (at 2010-11 interest rate of 4.5%).  
  • The draft of this proposal included three other means for institutions to be eligible under this gainful employment definition: 
    
    • Having actual earnings of graduates (rather than Bureau of Labor Statistics) reduce the ratio below 8%
    • Showing that former students are not repaying loans with deferrals or forbearances
    • Achieving 70% completion rate and 70% placement rate
  • Arguments for/against the proposal
    • For:  Need to keep student debt levels down
    • Against:  Attempt to set price controls, will lead to litigation, labor intensive to collect relevant data, department doesn't have necessary authority
  • Where it was left at end of the day (from Inside Higher Ed):  "Department officials decided to keep the 8 percent rule in place, one telling the panel that the department would never suggest a regulation that "we don’t think we have the legal authority to do." The department did, though, offer a bit of a concession, proposing that it would take on many of the responsibilities of calculating and carrying out the rule."
  • NASFAA News on one objection of the negotiators:  "However, many nonfederal negotiators were highly critical of the Department's proposal and highlighted many potential issues with the draft language. Many negotiators noted that these new requirements would cause costly administrative burdens for institutions and could drive up the cost of attendance for students. Department officials tried to assure these negotiators that the proposal would only affect program eligibility at a few institutions according to their initial analysis of the data. But those opposed to the proposal countered by arguing that if the new requirements would only catch a few institutions, then the costs would far outweigh the benefits."

• Day 2 (Tuesday) saw an alternative proposal to incentive compensation was presented (the Department had recommended eliminating all twelve of the safe harbors that had been instituted in 2002)
  • From Inside Higher Ed
    
    • The alternative proposal said in part that "compensation adjustments should be merit-based, the groups agreed, but not on the number of students brought in."
    • After a morning of revisions...  "The most substantive difference between the two drafts -- and a possible sticking point among negotiators -- was the proposed elimination by the department of a declaration that “merit-based adjustments may consider performance against institutional goals, such as total enrollment, completion or graduation, but shall be primarily based on qualitative factors as determined by the institution.”
    • Just to add more confusion to the process:  "Both drafts of the proposal eliminated all 12 safe harbors, and negotiators debated whether that would create the impression that those specific practices were categorically permissible or impermissible."

• From NASFAA News:  "Department staff reviewed the sub-group's proposal over the course of the day and returned with a counterproposal that incorporates many of the sub-group's suggestions. During the ensuing discussion, there was some confusion whether a failure to mention an activity in proposed regulations that was previously a "safe harbor" means that that activity is permissible or not. At the end of the day, there was clear progress on incentive compensation, but the discussion will be continued."

• Day Three (Wednesday) saw the department provide a revision to measurement of their gainful employment eligibility requirement which didn't play well on Wall Street, as the stock prices of for-profit educators fell (from Wall Street Journal):  

"Shares of for-profit education companies declined after the U.S. Department of Education late Wednesday released new draft language for its proposed "gainful employment" regulation.  Wall Street has paid close attention to such revisions amid a broad DOE review of higher education regulations, particularly how the department measures gainful employment--a student's ability to gain vocational skills to find and keep a job following graduation.

Under the new proposal, which was distributed by hand in the form of paper copies at Wednesday's meeting, the government eliminated the employment alternative, in which it previously called for schools to have 70% job placement and 70% program completion rates for its students. It also revised the proposed loan repayment alternatives, asking that schools' loan repayments from students who have graduated now be 90% or better. The new plan excludes students who've dropped out.  The DOE's prior proposal asked schools to have loan repayments of 75% for all students enrolled."

Meanwhile, BusinessWeek weighed in today, highlighting how the stock prices of for-profit educators have declined this week as the negotiated rulemaking sessions indicated that the department wasn't backing down on their "gainful employment" proposals.  BW also indicated the long period of uncertainty that is likely to follow after the sessions end tomorrow:

"Since final language on new rules won't be published for some time -- likely November, according to Deutsche Bank analyst Paul Ginocchio -- uncertainty over the regulations could weigh on for-profit education shares for months."

Reuters noted that the for-profits with longer-term programs would feel the brunt of these new regulations:

"The proposed changes would affect more of the longer-term programs such as bachelor or graduate courses offered by companies like ITT Educational Services Inc (ESI.N), Signal Hill's Trace Urdan said.

Students in these longer programs tend to rack up higher student loan balances, increasing the prospects of default and putting the schools in danger of becoming ineligible to receive money for more federal loans.

"If the companies cannot meet the alternatives (suggested by the government) they would need to be much more selective about the students that they enroll in order to improve their loan default rate metric," Urdan said, adding that the companies could also reduce the price of the programs.

Let's see what happens tomorrow...there has been some conjecture that there could possibly be an another round of rulemaking.