Gainful Employment Rule: How It Affects Federal Student Aid

Higher education has long been touted as the path to financial success and stability. But not all college, certificate, and professional programs necessarily lead to employment. A report from the Federal Reserve Bank of New York found that 41.5% of recent college graduates and 34.3% of all college graduates are underemployed, meaning they are working in jobs that don’t typically require a college degree. 

The Department of Education’s modified gainful employment rule aims to bridge the gap between higher education’s promise of gainful employment and the difficult employment reality facing many graduates. Here’s what you need to know about this rule and how it may affect your education. 

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What is the gainful employment rule?

The gainful employment rule is a federal requirement that says for-profit colleges and certificate programs must prepare students for jobs in recognized occupations.

The rule specifically looks at the earnings prospects of federal student loan borrowers. Until recently, the Department of Education (ED) based its judgment of gainful employment on debt-to-earnings ratios. 

Under the debt-to-earnings ratio guidelines, the ED compared the average annual federal student loan payments of a program’s graduates to their average annual earnings — both total earnings and discretionary earnings. If most graduates had student loan payments equal to 12% or less of their total earnings or 20% or less of their discretionary earnings, the program passed. But if most grads paid more than 12% of their total earnings or 30% or more of their discretionary earnings in student loan payments, the program failed.

However, the gainful employment rule will undergo significant changes in 2026 that will affect student loan borrowers and higher education programs.

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How is the rule changing in 2026?

The first major change to the gainful employment rule is the elimination of debt-to-earnings ratios in determining whether a program prepares students for future employment. It has been replaced with a “do no harm” earnings test.

“This is a comparison of earnings by degree level,” explains Mark Kantrowitz, financial aid expert and author of “Who Graduates from College? Who Doesn't?” 

“This framework requires bachelor's degree recipients in a program to have at least as much income as high school graduates, based on median earnings four years after graduation.”

Graduate and professional programs will also follow this do-no-harm earnings test, but degree recipients must earn more income than a working adult with a bachelor’s degree. The ED will compare the median earnings of degree recipients with those of working adults aged 25 to 34, using data from the state where the program is located, or national data, depending on the enrollment of the specific program.

But the earnings test is not the only change to the gainful employment rule. The ED has also specified what happens when a program fails.

“Programs will lose access to the Direct Loan program if they fail to meet the relevant earnings thresholds for two out of three years,” says Kantrowitz.

But the program’s access to the Direct Loan program is not necessarily gone forever. 

“The program must pass the earnings test for at least two years before regaining eligibility,” he explains.

However, losing access to Direct Loans may not be the only penalty a failing program may face.

“If more than half of the college's federal student aid recipients or funds come from failing programs, those programs will also lose Pell Grant eligibility,” explains Kantrowitz.

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Which programs are affected?

Using the debt-to-earnings ratio and the do-no-harm earnings test, the original version of the gainful employment rule primarily affected for-profit institutions. In 2023, the Biden-Harris administration estimated that 58% of for-profit institutions had at least one program that either had a high debt burden or a low-earning employment rate. But 93% of public institutions and 97% of private nonprofit institutions of higher education had no high debt burden or low-earning employment rates.

Eliminating the debt-to-earnings ratio has not changed which programs may be affected by the gainful employment rule, but it has altered the number of programs that will be in trouble. 

“More than a third (35%) of for-profit college programs will fail the earnings tests, along with 4% of public college programs and 3% of private non-profit college programs,” says Kantrowitz.

While fewer programs in total may be affected by the new rules, the changes have real effects on students. 

“Certificate programs will be particularly affected, with 29% of certificate programs failing the earnings test,” says Kantrowitz. “The most common certificate programs that fail the new metrics include culinary arts, cosmetology, and English language and literature, among others.”

For comparison, “6.6% of associate degree programs, 1.2% of bachelor's degree programs, 4% of master's degree programs, 1% of doctoral degree programs, 2.1% of professional degree programs, and 4% of graduate certificate programs” are expected to fail the new earnings test, according to Kantrowitz.

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How could students be impacted?

Students enrolled in a program that fails the gainful employment rule may lose access to federal student aid. That’s because a program that loses access to Title IV funding cannot offer Direct Loans to its currently enrolled students.

If you are enrolled in a program when that happens, you will be unable to take out federal Direct student loans to complete the program until it regains its access to Title IV funding — but this process can take up to two years.

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What should borrowers do before enrolling?

Before you enroll in any program, but especially at a for-profit institution, make sure you understand both the program’s costs and your expectations after graduation. Kantrowitz recommends researching the following outcome measures for each program you consider:

• Graduation rate: How many students successfully complete the program within 5 years?
• Average debt at graduation: How much do most students borrow to complete this program?
• Average earnings after graduation: What kind of income can you reasonably expect to earn? 
• Licensing pass rate (for occupations requiring licensing): Might you need to take the licensing exam multiple times? And will that cost you money each time?
• Job placement: How many graduates are able to find a job in their field within 6 months of graduation?

If you’re not sure where to start researching this information, “much of this data can be found on the College Scorecard website run by the U.S. Department of Education,” says Kantrowitz.

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