MEMO 

To: Interested Negotiators 

From: Maura Dundon and leslie Parrish, Center for Responsible lending 

Date: September 9, 2013 

RE: Rationale for repayment rate accountability metric and threshold for Fall2013 gainful 

employment rulemaking 

The 2011 gainful employment final rule consisted of three accountability metrics that covered 

both graduates and non-completers: (1) a repayment rate, which took into account all attendees 

of a given career education program (both graduates and non-completers) and (2) two debt-to-

. earnings ratios for graduates only. Programs that repeatedly failed all three metrics could 

become ineligible for Federal financial aid. The threshold for failing the repayment rate metric 

was successfully challenged in court, which led to most of the rule being vacated.' 

The Department of Education has re-started the negotiated rulemaking process, and is now 

proposing to drop the repayment rate metric and include only the debt-to-earnings ratios. The 

effect of this change is that non-completers are no longer taken into account. CRL believes it is a 

priority to consider the outcomes of all attendees-in some way-in any gainful employment 

rule. One option would be to again incorporate a repayment rate metric into the Department's 

rulemaking on gainful employment. 

I. Rationale for inclusion of a repayment rate metric 

There is no insurmountable legal barrier to including a repayment rate metric. APSCU v. Duncan 

did not rule that a repayment metric could never be enacted. The decision is limited to narrow 

administrative law grounds about how the Department articulated its rationale for setting the 

repayment rate threshold. In this new rulemaking, the Department needs to provide a more indepth explanation about how the repayment metric and threshold chosen relates to measuring 

gainful employment. 

Under well-established administrative law, the Department need only "articulate a ... rational 

connection between the facts found and the choice made." 2 The court found that the 

Department had not provided the necessary "rational connection" because the Department's 

discussion of the repayment metric only focused on the number of programs that would be 

eliminated by the chosen threshold. This was irrational because it did not connect the 

1 APSCU v. Duncan, 870 F. Supp. 2d 133 (D.D.C. 2012). 

2 td. at 149, 153-154. 

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repayment threshold to the quality of the programs. Instead, the Department was just grading 

on a curve and eliminating the bottom of the class. 

We believe that a repayment metric can be adequately supported by evidence and reason, and 

can serve as a viable way to include non-completers. Nearly half of attendees of for-profit 

colleges do not ultimately complete the program, and most of these students acquire debt that 

they must start repaying.' Nearly a third of these non-completers have cumulative federal loan 

debt that exceeds their annual income, often because they have been unable to find 

employment.• In fact, non-completers are so important that to fail to include them might leave 

the rule vulnerable to legal challenge: a rule not covering non-completers would arbitrarily 

ignore the students most harmed by the conduct in question. 

More broadly, however, the inclusion of a repayment rate can be justified by the concept's wellestablished importance in underwriting and consumer protection to assess whether a borrower 

had an ability to repay a loan. Most federal student loans do not include traditional underwriting 

standards or an ability to repay assessment. Instead, they depend on the notion that ability to 

repay is determined based on the expected returns to education (in terms of income received 

from employment made possible from that education). Thus, ensuring that the program is of 

adequate quality to allow the borrower a career with sufficient income to repay the loan 

essentially serves as underwriting. The repayment rate accountability metric-the extent to 

which outstanding principal can be paid down-serves as an indicator of ability to repay and, 

thus, whether the program is of sufficient quality to allow a student to ultimately have a wellpaying job. 

11. Justifications for setting a pass/fail threshold 

As noted above, the court's concerns in APSCU v. Duncan focused on the arbitrariness of the 

threshold set for the repayment rate, rather than whether this type of metric was appropriate. 

There may be multiple options for setting a pass/fail threshold, such as standards set by banking 

regulators and industry practices in assessing loan portfolios. We discuss each of these concepts 

in turn. 

A. Banking regulator standards 

The repayment rate metric is generally measured as the share of student loans in which the 

principal balance is being reduced over time. Principal will not be reduced if the loan is in default 

or other non-repayment status; or if the borrower is making payments that are too small to 

reduce the principal. This is known as "negative amortization." Student loan debt that does 

3 Nearly half (46%) of students attending for-profit institutions beginning in the 2003-2004 school year had not 

completed their program by 2009. Of these non-<:ompleters, 86% left with Stafford or Perkins loan debt. See Federal 

Loan Debt Burden of Noncompleters (NCES 2013·155), Department of Education (April2013). 

4 1bid. 

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not experience a reduction in the principal balance could be considered analogous to negatively 

amortizing loans in other contexts. The banking regulators have found that negatively 

amortizing loans raise consumer protection concerns. 

• The Office of the Comptroller of the Currency (OCC) has stated specific concerns 

regarding negatively amortizing mortgage loans, As TICAS notes in an August 2013 

memo, the OCC recommended a prohibition on negatively amortizing mortgages in 

2009 and has noted more recently that such loans "benefit neither of the parties [lender 

and borrower] involved in the loan."5 

• In its exam manual on credit cards, the Federal Insurance Deposit Corporation {FDIC} 

notes that the "amortization of principal balances is one of the key factors when 

determining whether. .. lending practices are safe and sound ... The failure of minimum 

payments to sufficiently amortize the debt in a reasonable timeframe not only elevates 

credit quality concerns and consumer protection issues but can understate the level of 

delinquent accounts."6 Relatedly, one of the key features of the CARD Act, which 

reformed many abusive credit card practices, was to ensure that minimum payments 

were of adequate size to pay down a principal balance. 

• The Consumer Financial Protection Bureau {CFPB) has emphasized, in press statements, 

a white paper and its exam manual, concerns related to sustained use of certain loan 

products, such as payday loans. These concerns focus on whether these loans are 

renewed over time-either by paying just the interest and extending the loan term or 

through a series of back-to-back transactions. Turning a short-term loan product into a 

long-term debt trap in which principal is not paid down could raise concerns of unfair, 

deceptive, or abusive acts and practices {UDAAP).7 

These concerns related to negative amortization (or a lack of principal reduction over time) 

suggest a repayment rate threshold of 50% would be appropriate. Below this rate, the majority 

of loan debt could be considered to be negatively amortizing, and thus raising the concerns of 

banking regulators as discussed above. 

5 TICAS' 11Background for the September 9-11 negotiated rulemaking meeting" memo dated August 19, 2013, 

available at http://www .ticas.org/files/pub/TICAS_memo _re_upcoming_neg_reg_issues_Aug_19 _2013.pdf, 

describing DCC November 18, 2009 press release at http://www.occ.gov/news-·issuances/news-releases/2009/nr-occ2009-143.html and May 14, 2003 letter to the Consumer Bankers Association in response to CBA comments on 

private loan modifications at Appendix C. 

6 http://www.fdic.gov/regulations/examinations/credit_card/ch9.html#3sub2 

7 See, for example, Director Cordray's remarks on regulatory risks related to the debt trap here: 

http://www .consumerfina nce.gov /speeches/prepared-remarks-of-richard-cordray-on-the-paydaydap-study-presscall/ and a section of the short-term small dollar loan exam manual at page 169 that describes concerns relating to 

sustained use here: http:/ /files.consumerfina nce.gov /f/201210 _ cfpb_supervision-a nd-examination-manua l-v2.pdf. 

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B. Industry practices 

Another approach might be to assess whether lenders-either in student loans or other 

contexts-employ any thresholds or "rules of thumb" in assessing the performance of a given 

portfolio of loans. There may be thresholds at which lenders face greater capital requirements 

or greater regulator scrutiny for risky origination practices. In addition, because certain student 

loan portfolios have been packaged together and securitized in recent years, it may be 

instructive to look at analyses from the ratings agencies to determine whether certain cut-off 

points for expected performance exist between loan pools of varying quality. If the negotiators 

decide to re-consider inclusion of the repayment rate metric, CRL can look further into these 

possibilities. 

Ill. Other considerations 

The Department's 2013 draft regulations on gainful employment currently require a program to 

routinely pass two debt-to-earnings standards in order to be eligible for Federal financial aid. If 

the Department adds an accountability metric to the two debt-to-earnings metrics proposed, 

this may have the unintentional consequence of making it easier for sub-par programs to remain 

eligible for Federal financial aid if programs still must fail all accountability metrics for this to 

occur. Therefore, negotiators advocating for an additional metric may also want to consider 

whether to require institutions to pass at least one debt-to-earnings metric AND the additional 

metric to retain full eligibility for federal financial aid rather than only cutting off aid for 

programs that repeatedly fail all accountability metrics. 

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