The U.S. Department of education has implemented a groundbreaking rule that connects federal student aid to the earnings of graduates. This initiative aims to ensure that higher education programs provide a tangible financial benefit to their students. Under this new framework, undergraduate and graduate programs must demonstrate that their graduates earn more than typical high school diploma holders and bachelor’s degree holders, respectively.
Programs that fail to meet these earnings benchmarks for two out of three consecutive years will lose access to federal Direct Loans. Institutions where these low-earning outcome programs dominate enrollment may also face the loss of Pell Grant eligibility. This rule is part of a broader effort to address the rising rates of default and delinquency in the $1.7 trillion federal student loan portfolio.
The Student Tuition and Transparency System (STATS) and Earnings Accountability Rule
The STATS and Earnings Accountability rule applies a uniform standard across all sectors of higher education, from public universities to for-profit certificate schools. The premise is straightforward: undergraduate programs must show that their graduates earn more than working adults with only a high school diploma, while graduate programs must demonstrate that their completers earn more than typical bachelor’s degree holders.
Under Secretary of Education Nicholas Kent emphasized the importance of this rule, stating, “If a program cannot show that it leaves its graduates financially better off than if they had never enrolled, it should not be underwritten by federal taxpayers.” This rule is the third and final rulemaking package authorized by the One Big Beautiful Bill Act, signed by President Trump on July 4, 2026.
How the Earnings Test Works
The earnings test is calculated annually using the median annual earnings of a program’s completers, measured four years after they finish. These earnings are compared against benchmarks tied to workers aged 25 to 34. For undergraduate programs, the comparison is against the median earnings of someone with only a high school diploma, either from the institution’s state or nationally. For graduate programs, the benchmark is a young worker with only a bachelor’s degree.
The Department will run its first calculation in early 2027, covering the 2027–2028 academic year. A program that fails in both 2027 and 2028 could be labeled a low-earning outcome program starting in the 2028–2029 award year, at which point it loses Direct Loan eligibility unless it wins an appeal.
Exemptions and Delays
The final rule includes several exemptions and delays based on public feedback. Institutions that exclusively serve students with documented disabilities are exempt from the program eligibility consequences. Certain career programs, such as cosmetology, barbering, and massage therapy, will see at least a one-year delay to reflect the “No Tax on Tips” policy, which starts with the 2026 tax year.
Impact on Institutions and Students
Losing federal student loans is the first consequence for programs that fail the earnings test. The next step is the potential loss of Pell Grants, which operates at the institution level. A school faces the loss of all Title IV aid, including Pell Grants, if more than half of its Title IV recipients are enrolled in low-earning outcome programs or if more than half of its Title IV dollars flow to those programs.
Schools have options to protect their eligibility. After the first year a program fails, an institution can voluntarily pull that program out of the Direct Loan program for at least five years, shielding it from administrative-capability penalties. Alternatively, a school can run an orderly closure, stopping new enrollment while teaching out current students and keeping financial aid eligibility for the length of the teach-out or three years, whichever is shorter.
Programs Most Impacted
Early estimates from the Department’s Office of the Chief Economist suggest that roughly 6% of programs and about 5% of Title IV students would fail the combined earnings test. The impact is heavily concentrated on for-profit institutions, with about 35% of for-profit programs projected to fail, compared with under 4% at public and nonprofit schools. Certificate programs are the most likely to have issues, with about 29% projected to fail.
The fields with the highest failure rates cluster in personal-service and arts-heavy disciplines, such as culinary services, cosmetology, somatic bodywork, drama and fine arts, religious studies, and alternative and complementary medicine. Geographically, Florida, Louisiana, Tennessee, California, and Idaho show notably higher shares of failing programs than the rest of the country.
What This Means for Students and Families
For families considering a degree or certificate, the most useful change is the enhanced disclosure requirements. Under the STATS collection, institutions must report program-level data, including total cost of attendance, private student loan borrowing, and completion versus withdrawal. This information gives prospective students a clearer understanding of what a program costs and whether its graduates earn a return on investment.
Current students will receive new warnings as well. Schools must notify both enrolled and prospective students when a program is flagged as potentially losing aid eligibility. Additionally, students will be informed about their remaining lifetime Pell eligibility each time a grant is disbursed.
The practical risk for students is disruption. If a program loses Direct Loan eligibility, the college may be forced to shut down the program or block future enrollment, potentially putting the A program that closes leaves students to complete a teach-out or move elsewhere. Colleges also have the option to reduce loan limits starting in the 2026–2027 academic year to prevent future issues.
None of these changes impact the 2026–2027 academic year, but families making multi-year plans should factor in that a program’s federal aid status could change by the 2028–2029 academic year. The Department of Education hopes that tying financial aid to earnings will pressure schools to cut programs that leave graduates financially worse off and to reduce costs over time.
