What You Need to Know About Law Schools' Gainful Employment Challenge

This past May, a New York federal judge dismissed a challenge to the Department of Education's "gainful employment rule," clearing the way for government standards that remove eligibility for federal student aid to for-profit career education schools and certificate programs at public and private nonprofit institutions with low post-graduate employment outcomes.

The rule, which went into effect on July 1 of this year, is designed to reveal programs that carry high levels of student debt while yielding relatively subpar job credentials. By restricting or revoking students' eligibility to qualify for federal student aid, it weeds out programs that fail the gainful employment rule's "debt-to-earnings" test: graduates' estimated annual loan payments must be lower than 20 percent of their discretionary income or eight percent of their annual income.

The gainful employment rule aims to protect American students from programs that burden them with crippling debt. It also means programs have some "skin-in-the-game" in their students' employment prospects -- if their students are unable to pay back loans and they lose eligibility for all federal student aid, it could be a death sentence. It's no surprise that there has been a lot of pushback from the for-profit college industry.

Interestingly, one commenter on the final rule recommended exempting all law programs accredited by the American Bar Association because, according to the commenter, "students who complete accredited law programs rarely have difficulty in avoiding default on loans."

The Department of Education responded to that comment by stating it "lacks discretion to exempt other types of programs... including ABA-accredited law schools" and that "the issues of accountability for student outcomes, including excessive student debt, and transparency are as relevant to graduate programs and students as they are to undergraduate programs and students."

Of course, most ABA-accredited law schools are either nonprofit or public colleges or universities, and the current gainful employment rule won't affect them. (Although six proprietary law schools that rely heavily on federal student aid could be.) And even if the gainful employment rule was extended to law schools, the vast majority of law school graduates struggling to pay back their loans will probably enroll in income-driven repayment plans that reduce their payments to 10 to 15 percent of their discretionary income. (To learn more about income-driven repayment plans, download Equal Justice Works' free e-book.) As a result, law schools would still probably pass the debt-to-earnings test.

Nonetheless, law schools may want to proactively respond to the gainful employment rule by figuring out how many of their graduates are relying on income-driven repayment plans and thinking about what it really means if a significant number of their students are relying on these plans to repay their student loans. Income-driven repayment plans are highly protective, offer hopefully affordable payments, and have (taxable) debt forgiveness after 20 or 25 years. However, because of their lower monthly payments, the vast majority of borrowers in these plans will pay more (due to interest accrual) and will also be repaying their plans for a longer period of time than those enrolled in ten-year repayment plans.

Individual law schools or the American Bar Association may want to conduct a longitudinal study assessing the short- and long-term value of a law degree that takes student loan debt, employment, and admissions into account. Another step in the right direction would be providing new law students with the type of debt-to-earnings data the gainful employment rule is based on, to help them better understand the financial risks and rewards of law school.

Ashley Matthews is a Program Manager for Law School Engagement & Advocacy, managing the Student Debt and Student Engagement programs. Prior to joining Equal Justice Works, she worked as Communications Manager for Legal Services Corporation where she helped design strategies to increase congressional awareness of federally funded civil legal aid. She also led the digital content and communications team for PSJD.org, a public service initiative of the National Association for Law Placement (NALP). Ashley received her J.D. from the University of Miami School of Law.