The U.S. Department of Education has unveiled a proposed regulatory framework that would deny federal student loan access to college programs whose graduates fail to out-earn comparable non-graduates. At the heart of the proposal is an earnings accountability measure that compares median graduate wages against benchmark groups, using tax records as the primary data source. This approach is presented as a way to ensure taxpayer funds support programs that demonstrably improve graduates’ economic outcomes, and it would apply uniformly across public universities, private nonprofits, and for-profit institutions.
Framed in a 394-page Notice of Proposed Rulemaking, the plan represents a final piece of the overhaul tied to the One Big Beautiful Bill Act (OBBBA) promoted during the Trump Administration. The Department argues the test is a commonsense safeguard: if a credential fails to deliver higher earnings, federal subsidized borrowing should be withheld. Independent analysis from the American Enterprise Institute, led by Preston Cooper, estimates that roughly 95% of programs would likely pass this new standard.
Table of Contents:
How the earnings test is calculated
The proposal uses an earnings premium test that measures the median income of program completers four years after finishing against a defined comparison group. For undergraduate programs, the comparison group is working adults aged 25–34 who hold only a high school diploma in the state where the program is located; if a program draws fewer than half its students from that state, national figures are substituted. Data come from IRS tax records and include wages, self-employment, and other reported earned income.
For graduate programs, the benchmark shifts to adults aged 25–34 with only a bachelor’s degree. The threshold is set as the lowest of three options: bachelor’s degree holders in the same state, bachelor’s holders in the same field within the state at the 2- or 4-digit CIP level, or bachelor’s holders in the same field nationally. To produce meaningful statistics, a program must have at least 30 completers (with cohort aggregation available) and at least 16 matched earnings records; programs pass if their median income meets or exceeds the threshold.
Consequences for programs and institutions
Under the rule, a program becomes a low-earning outcome program if it fails the earnings premium test in two out of any three consecutive years. Once labeled, the program loses eligibility for federal Direct Loans for a minimum of two years. After that period, a school may seek to reinstate eligibility only if the program did not fail the test in either of the two most recent award years. The Department also includes anti-avoidance measures: institutions cannot regain Direct Loan access for a new program that shares the same 4-digit CIP and overlapping SOC occupational codes as a program that lost eligibility.
The rule provides an alternative for schools to pursue an orderly program closure. If a program fails once but has not yet met the two-in-three failure threshold, a school can voluntarily stop new admissions and wind the program down over the lesser of three years or the program’s regular duration while preserving Direct Loan access for existing students. The goal is to balance consumer protection with the ability for current students to complete without disruption.
When Pell Grants and additional protections kick in
Although an individual program initially loses only Direct Loan access, a broader institutional trigger could put Pell Grants and other Title IV aid at risk. If more than half of an institution’s Title IV students or more than half of its Title IV funding is attributable to low-earning outcome programs in two of three consecutive years, the Department would place the school on provisional status and remove Title IV eligibility for those failing programs, including Pell. This is intended to capture systemic failures rather than isolated program weaknesses.
To improve transparency, the proposal requires schools to alert prospective and current students when a program is at risk of losing Direct Loan access; warnings must be refreshed if a student re-enrolls after a year away. Institutions would also expand reporting into the Department’s Student Tuition and Transparency System (STATS), disclosing program-level tuition, fees, net costs, and earnings outcomes. For Pell-eligible students, campuses must disclose remaining lifetime Pell eligibility and note that funds used in a failing program still count against the limit.
Timeline and implications for families
The rule’s timeline gives families and institutions time to respond. The public comment period runs through May 20, 2026; the Department plans to calculate its first set of performance data in early 2027 and a second set in early 2028. Because the standard requires two failing years within a three-year window, the earliest a program could lose Direct Loan eligibility is the 2028–29 academic year. The AHEAD negotiated rulemaking committee reached consensus on the regulatory text, suggesting limited change before finalization, though public comments could still prompt adjustments.
What to watch and next steps
For prospective students and families, the rule creates an incentive to evaluate program-level outcomes more closely and to check publicly available datasets — including the AEI dataset that maps risk across schools. For institutions, the choice will often be to invest in improving earnings outcomes or to responsibly close programs that do not serve students well. While most programs are expected to pass, the rule aims to reduce taxpayer subsidy of credentials that fail to produce economic gains and to limit disruption by requiring orderly transitions when programs do close.
