The U.S. Department of Education is considering a new regulation that would tie a school’s ability to offer federal grants and college loans to proof that its alumni can find gainful employment after graduation.

Colleges and universities that cannot demonstrate that their graduates are "gainfully" employable -- earning enough after graduation to be able to make the monthly payments on their student loans -- would be barred from offering federal financial aid.

Although the proposed regulation -- the so-called "gainful employment rule" -- would apply to all schools that offer federal financial aid, the rule is aimed specifically at curbing complaints about for-profit colleges that provide occupational education and job training at such high costs that their graduates are often left in financial sinkholes, overburdened with student loan debt and holding degrees that may not translate into anything but minimal-paying jobs.

The Department of Education had planned to release the revised draft wording on the gainful employment rule in November, but wanted to spend additional time reviewing the more than 90,000 public comments made when the rule was first proposed in July. The government hopes to implement the rule by July 1, 2012.

Regulators: ‘Gainful Employment’ = Ability to Repay Student Loans

As outlined by the Education Department in the initial draft of the rule, "gainful employment" will be measured in part by the percentage of a school’s graduates whose student loans are in default.

The Education Department already currently considers student loan default rates as a condition for allowing institutions to offer federal financial aid, but the new rule would allow the government to evaluate schools program by program, using student loan default rates specific to each degree program offered, rather than the school’s overall default rate.

Some critics of the proposed regulation question the merits of using student loan defaults as a measure of gainful employment, as opposed to measuring employment more directly through other means. These critics point out that borrowers may default on their student loans for reasons other than unemployment or low earnings, and some schools worry that they’ll be held liable for defaults that are unrelated to employment.

Consumer watchdogs and student advocacy groups, however, maintain that for-profit colleges encourage students to take on more student loan debt than they can reasonably afford, in order to pay the high price tag that for-profit schools slap onto degree programs with limited or low-paying employment prospects.

Further, these groups says for-profit schools may be enrolling students who are not academically qualified for the programs they enter, creating a higher likelihood that those students will drop out of their program, which in turn means a higher likelihood that those student will default on their student loans. (College dropouts, in general, default on their student loans at a higher rate than do those students who complete their degree.)

For-Profit Colleges in Regulatory Crosshairs

Investigating the widespread complaints about the for-profit college industry, a sting operation conducted by the Government Accountability Office this summer sent undercover government agents posing as college applicants to 15 private for-profit schools that rely on federal grants and student loans for 89 percent or more of their revenue.

The undercover agents found that all 15 schools engaged in persistent deceptive and fraudulent practices.

According to the resulting GAO report, staff members at four of the for-profit colleges routinely encouraged applicants to falsify their student loan application data in order to qualify for federal financial aid, and personnel at all 15 schools made deceptive statements to the GAO’s undercover applicants. Deceptive statements included misleading information about the length and cost of the schools’ academic programs and the employment rates of their graduates.

In addition, the GAO found that prospective students were pressured to sign enrollment contracts prior to being able to discuss costs and financial aid with a financial aid counselor.

As the recession drags on, the stakes grow higher for nonprofit and for-profit schools alike. The national unemployment rate remains near 10 percent and policymakers in the nation’s capital are warning that re-establishing an unemployment rate of 5 percent or less could take four or five more years.

Employment rates among new college graduates improved marginally in 2010 compared to 2009, but starting salaries in some cases fell by nearly 10 percent among new hires, and student loan defaults continue to rise.

The Department of Education has not indicated when it will release the revised draft on the proposed gainful employment rule, but with $4 billion in federal Pell Grants and $20 billion in federal student loans at stake, for-profit colleges, which draw as much as 90 percent of their operating revenue from federal financial aid dollars, have more to worry about than most.