Gainful Employment and Innovation

UV Letter - Volume 1, #4

The enactment of the Gainful Employment Regulations ("GER") was heralded by the U.S. Department of Education ("DOE") as a landmark accomplishment in the effort to protect students from predatory practices of for-profit institutions of higher education. Re-interpreting a provision of the Higher Education Act that had been dormant for 46 years, the GER introduced a formula designed to de-authorize higher education programs that burden graduates with a debt load that cannot be serviced by expected earnings from employment.

Attractively simple in concept, the GER is anything but that in construction and application. What was a two word formulation exploded into a 5,500 word regulation requiring 157 pages of explanatory context.

The GER applies to virtually all programs at for-profit institutions while also impacting non-degree programs at not-for-profit and public colleges. Each program that falls under GER must meet at least one of the following three metrics to remain eligible for Title IV funding: (1) a 12% debt-to-total earnings ratio applied to graduates of a program; (2) a 30% debt-to-discretionary income ratio applied to graduates of a program; or (3) a 45% repayment rate test for any person who attended a program. A program that fails these tests three times over a four year period would become ineligible for further participation in Title IV funding, a result that in most instances would lead to closure of the program. Programs failing to meet one or more of these tests are also subject to certain disclosure requirements and warnings to prospective students.

At first blush, GER appears to be another example of the Mu (μ) Factor previously defined in this newsletter (i.e., systemic or regulatory impedances to innovation). That's certainly true if "innovation" is viewed as interchangeable with accessibility. For there's no question that GER will reduce accessibility, particularly for key demographics (adult learners, women, minorities, low income students).

But if we've learned anything from the past few years, it's that too much accessibility (to credit, mortgages, and even higher education) can have significant downside.

So when we think of innovation in higher education, we think of productivity first and foremost. Education is unique among industries in its failure to make any significant productivity gains. While other industries – including health care – have taken advantage of technology, new business and delivery models, education is delivered much the same way it was for our grandparents – K-12 and higher ed. alike. When Governor Perry of Texas talks about the need for a $10,000 bachelor's degree, he is talking about productivity. We need more output (educated workers and citizens) for less input.

The growth of online degree programs over the past decade has been the first major advance in higher education productivity since the advent of the community college. Of course, the vast majority of that growth has occurred in the for-profit sector. Traditional universities haven't focused on productivity for two reasons. First, they are recognized and rewarded based on inputs; the US News rankings include a category on spending per student. Second, up until now, they simply have not had to.

Unfortunately, time's up. The fiscal crisis at the state level is requiring unprecedented focus on productivity for the state-funded institutions that serve 70% of students enrolled in higher education programs.

So will GER prove to be an accelerant or a brake on the innovation that really matters in higher education i.e., productivity?

Turns out it’s a brake - more Mu (μ) - for two specific reasons.

1. While the primary thrust of GER should be to lower tuition of high-priced programs – which would increase productivity – the for-profits that are impacted by GER are caught in a regulatory vise: If they lower tuition, their 90/10 ratios will worsen. So the combination of the new regulation on top of the old regulation is likely to minimize or eliminate any productivity gains resulting from reduced tuition.

2. If GER were applied broadly to public and not-for-profit institutions, it could provide a much needed boost to productivity. Imagine if every liberal arts college in America were subject to GER. Tuition would come down in a hurry and productivity would improve radically. However, these institutions are largely exempt.

In a recent study of the state of the impact of new regulations on innovation in higher education, The Institute for a Competitive Workforce reached conclusions that reflect our concern for regulatory impedances against innovation.

Currently, a number of obstacles prevent innovation from transforming higher education to the degree it has transformed other sectors of the economy. Nearly every federal agency is involved in regulating some aspect of higher education, creating onerous compliance burdens. The financing system at the state and federal levels provides few incentives for colleges to control costs or improve learning outcomes. And the antiquated accreditation system creates significant barriers to entry for new providers and imposes significant costs on existing ones.

The Institute's report goes on to call for an alignment of regulations with the national policy priority of increasing productivity. We can't help but think that if the DOE had started from first principles and prioritized productivity, we might have arrived at a GER that would move productivity forward.

Unfortunately, GER is an example of the Mu Factor in practice; impeding productivity at a time when innovation and additional productivity are most needed.

University Ventures Fund invests in universities and service companies in areas where rising demand and shrinking supply create rapidly growing market and student service opportunities.