New earnings rules from the Department of Education could mean thousands of certificate, undergraduate, and graduate programs nationwide are now at risk of losing federal aid. Schools that fail to look at the reality of their students’ earning potential may face existential risk without careful thought.
With formalized rules handed down at the beginning of July, colleges and universities seeking to access federal financial aid for their students will now find their programs subject to an earnings premium test, thanks to language included in the One Big Beautiful Bill Act.
The new earnings premium test replaces previous Department of Education financial accountability attempts including the Financial Value Transparency and Gainful Employment regulations that had been implemented by previous administrations.
The new earnings premium test will measure graduates’ earnings four years after graduation against benchmarks on a program-by-program basis. For example, for students who completed graduate programs, their earnings four years after graduation will need to exceed the median earnings of undergraduate completers aged 25-34 within the same-field of study.
It’s a simpler calculation, but one that requires significantly more granular data, requiring the Department of Education to work with the IRS to collect cohort tax return information to understand the relative success of students. On a program-by-program basis, the federal government will be able to compare student earnings and determine whether a program will remain eligible for direct loans.
If a program falls below the benchmark in two out of three years, the program will lose direct loan eligibility. If more than 50% of a school’s programs fail, the entire institution may lose access to both direct loans and Pell Grants.
The predicted fail rates for some of these programs is alarming. Right now, the Department of Education estimates that as many as 35% of for-profit programs and 93% of cosmetology undergraduate certificate programs alone could fail.
Given that graduate students will be compared to undergraduate earners in the same field, even very large programs at public and nonprofit schools may be at risk, particularly those in the arts and in lower-paying fields.
For instance, graduate programs in counseling and social work are estimated to have a failure rate of up to 38%. Undergraduate students working in a similar field may earn as much as, if not more than, those with a graduate degree in fields such as healthcare.
New earnings rule clock is ticking
It’s an existential risk for schools and programs of all shapes and sizes—whether public or private, nonprofit or for-profit, and even historically prestigious programs. The way schools and their communities respond to this change will have highly consequential impacts not only on these programs but also on the job market and society as a whole.
The clock is now ticking on schools to figure out how they’ll handle these changes if programs are determined to be low-earning programs. While many schools are considering a wait-and-see approach, the timeline for action is not long.
Schools will know whether their programs have failed the earnings premium test for the first time when they are notified in approximately July 2027. Programs must fail two of three years to be fully disqualified.
For essential programs, schools have another two or three years, depending on the type of program, to either solve their eligibility problems via restructuring, repricing, or reconsidering programs, or figure out alternative financing solutions to keep programs viable.
Large schools may have more flexibility to consider the profitability of their programs as they look at next steps. If a program is profitable for a school or critical for career advancement, such as a social work program, the next two years may be best spent seeking alternative funding sources
Some schools are considering how to expand their own institutional loan programs—though that can be risky, as they bear the burden of potential non-repayment.
Others are appealing to their state legislatures to help close the financing gap. Minnesota and Connecticut, for example, have already established state loan programs in response to the student loan changes from the One Big Beautiful Bill Act..
Power in preparation
The key is preparation. The schools that are working aggressively now have more options in the future. As with any new rule, the implementation is expected to meet challenges, including potential appeals of results.
The new earnings premium test has the potential to be highly consequential for schools. Still, they’re just the latest hurdle for higher education as it deals with declining or stagnating enrollment and a more challenging financial and regulatory environment more broadly.
The schools that weather these changes most successfully will be those that prepare early, assess their options honestly, and make strategic choices before those choices are made for them.
Schools have power in preparation. Looking and thinking ahead may be their only way through.
