Key Points
- The Department of Education is moving forward with a rule that would cut off federal student loan access for college programs whose graduates earn less than a typical high school graduate (for undergraduate programs) or less than a typical bachelor's degree holder (for graduate programs).
- Programs that fail in two out of three consecutive years lose Direct Loan eligibility for at least two years.
- Institutions where more than half of students or funding comes from failing programs could lose all Title IV aid (including Pell Grants) for those programs.
The U.S. Department of Education is moving forward with a proposed rule that would strip federal student loan eligibility from college programs that consistently fail to boost graduates' earnings above what they'd make without the degree.
The 394-page Notice of Proposed Rulemaking (PDF File) represents the final piece of the Trump Administration's overhaul of student aid under the One Big Beautiful Bill Act (OBBBA).
The proposal arrives as the federal student loan portfolio approaches $1.7 trillion, and it would for the first time apply a uniform earnings accountability standard to programs at every type of institution: public universities, private nonprofits, and for-profit colleges.
"The Trump Administration's proposed accountability framework is grounded in common sense: if postsecondary education programs do not leave graduates better off, taxpayers should not subsidize them," said Under Secretary of Education Nicholas Kent in a statement.
According to a recent analysis by Preston Cooper at the American Enterprise Institute (AEI), 95% of all programs would pass this new test.
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How The New Earnings Test Works
For undergraduate programs, the Department compares the median earnings of graduates (measured four years after completion) against the median earnings of working adults aged 25-34 with only a high school diploma in the state where the school is located. If fewer than 50% of students come from that state, national data is used instead.
For graduate programs, the comparison group shifts to working adults aged 25-34 with only a bachelor's degree. The earnings threshold is the lowest of three benchmarks:
- Bachelor's holders in the same state, or
- Bachelor's holders in the same field of study (at the 2-digit or 4-digit CIP code level) in the same state, or
- Bachelor's holders in the same field nationally
The earnings data comes from the IRS: wages, self-employment income, and other earned income as reported on tax returns.
Programs need at least 30 completers (expandable through cohort aggregation) and at least 16 matched earnings records for the test to be calculated. A program passes if its median graduate earnings equal or exceed the threshold. It fails if earnings fall below it.
What Happens When Programs Fail
A program is classified as a "low-earning outcome program" if it fails the earnings premium test in two out of any three consecutive years. Once classified, the program loses eligibility for federal Direct Loans but not necessarily Pell Grants or other Title IV aid, at least initially.
The period of ineligibility is two years. After that period, a school can seek to re-establish the program's eligibility but only if the program has not continued to fail the earnings test in either of the two most recent award years.
Schools are also blocked from gaming the system by shutting down a failing program and restarting a nearly identical one. Under the proposed rule, an institution cannot establish Direct Loan eligibility for any program sharing the same 4-digit CIP code and overlapping occupational classification (SOC) codes as a program that lost eligibility.
There is one other option for schools: the "orderly program closure" option. If a program fails the earnings test in a single year but hasn't yet been classified as a low-earning outcome program, the school can voluntarily agree to wind down the program over the lesser of three years or the program's full-time duration. During that time, the program keeps Direct Loan access so current students can finish, but the school must stop admitting new students immediately and inform students of their options to transfer.
When Pell Grants Are Also At Risk
While individual programs initially lose only Direct Loan access, the rule includes a broader institutional trigger. If more than half of a school's Title IV students or more than half of its Title IV funding comes from low-earning outcome programs in two out of three consecutive years, the Department would place the institution on provisional status and all of its low-earning outcome programs would lose eligibility for all Title IV aid, including Pell Grants.
This provision is designed to address situations where failing programs aren't isolated issues but reflect a systemic problem at the institution. In practice, this means that students at affected schools could lose access not just to federal loans but to grant aid as well.
Warnings And Transparency Requirements
Schools are required to warn both prospective and currently enrolled students when a program is at risk of losing Direct Loan eligibility. These warnings must be updated if a student re-enrolls more than 12 months after receiving a previous warning.
The rule also adds new Pell Grant disclosure requirements. Institutions must inform Pell-eligible students of their remaining lifetime Pell Grant eligibility and explain that any Pell funds used in a failing program still count against that lifetime limit.
The Department is also expanding its Student Tuition and Transparency System (STATS), which will require institutions to report program-level data including tuition, fees, and financial aid details. This data will feed public-facing disclosures about net program costs and earnings outcomes.
The American Enterprise Institute (AEI) has also put together a dataset that you can search and see if your school is at risk. Check out the data here.
What This Means For Families
For families evaluating college programs right now, this rule won't take effect immediately.
The Department will calculate the first round of performance data in early 2027 and the second in early 2028. Because two consecutive failing years are required, the earliest a program can lose student loan eligibility is the 2028-29 academic year.
The public comment period runs through May 20, 2026, and the Department could make changes before finalizing. That said, the AHEAD negotiated rulemaking committee reached full consensus on the regulatory text, which suggests the framework is unlikely to change substantially.
When it does take effect, the practical impact will depend on what program a student is enrolled in and at what type of school. While 95% of programs are expected to pass, there's a big gap between eligible certificate programs vs. graduate programs.
The rule also creates a strong incentive for schools to either improve underperforming programs or shut them down.
That's good news for future students who might otherwise enroll in a program with poor earnings outcomes. But it could create disruption for students currently enrolled in programs that end up on the chopping block.
Common Questions
What is the Trump Administration's proposed rule on low-earning college programs?
The Department of Education's proposed rule, the third and final implementing the One Big Beautiful Bill Act, would strip federal student loan eligibility from college programs whose graduates fail to out-earn workers without that level of education.
How does the new earnings test for college programs work?
Undergraduate programs must produce graduates who earn more than the median high school graduate in their state, while graduate programs must produce graduates who out-earn the median bachelor's degree holder, measured four years after a student leaves the program.
What happens when a college program fails the earnings test in two out of three years?
The program loses access to federal Direct Loans, and if it represents a large enough share of the institution's Title IV students or revenue, the school can eventually lose Pell Grant eligibility for those programs as well.
When could programs actually start losing federal student loan eligibility, and what does that mean for current and future students?
Sanctions could begin in the 2028-29 academic year for programs that fail in both 2027 and 2028, meaning currently enrolled students may finish under a teach-out provision while prospective students should carefully vet whether their specific program — not just the school's reputation — is at risk before borrowing.
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Editor: Colin Graves
Robert Farrington is the founder of The College Investor and is widely recognized as one of the nation’s leading voices on student loan debt and saving for college. He holds an MBA from UC San Diego Rady School of Management and has spent over 15 years researching, writing, and advising on student loans, 529 plans, financial aid programs, and saving and investing for young professionals.
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