Judge's Ruling on 'Gainful Employment' Gives Each Side Something to Cheer

July 02, 2012

A federal judge's weekend ruling vacating a core element of the "gainful employment" rule was hailed on Monday by for-profit college officials as a vindication of their challenge to the controversial rule.

But the decision affirmed the Department of Education's authority to issue the rule, and advocates for tougher regulation wasted no time in calling on the government to respond with new guidelines that would not be rejected for lack of a "reasoned basis."

The "decision issued this weekend leaves students and taxpayers exposed to unscrupulous schools that seek to swindle them and routinely saddle students with debts they cannot repay," said Pauline Abernathy, vice president of the Institute for College Access & Success, in a prepared statement. The organization was among dozens that pushed for even tougher standards than those the department ultimately sought to put into effect.

The rule, which was released in June 2011, applies to most programs at for-profit institutions and nondegree-granting programs at public and nonprofit private institutions. Its intent is to ensure that federal student-aid dollars flowing to those programs are good investments and are helping prepare students for jobs that pay well.

The Association of Private Sector Colleges and Universities sued to overturn the rule. The association contended that the department had exceeded its authority in issuing the rule and had arbitrarily set three key benchmarks in the rule that institutions eventually be required to meet to remain eligible to receive federal student aid.

In his 38-page ruling, Judge Rudolph Contreras of the U.S. District Court for the District of Columbia agreed on the latter point with regard to one of the benchmarks.

The benchmarks, referred to as "debt measures" in the ruling, are measures of the debt, earnings, and debt-repayment rates of a vocational program's former students. Judge Contreras, newly appointed by the Obama administration, held that the debt-repayment benchmark was "arbitrary and capricious" and vacated it because, he said, the department showed no reasoned basis for it.

In a decision the association's lawyers called "a significant victory" for it and the for-profit-college sector, the judge also vacated the other two debt measures and other elements of the rule because they were intertwined.

The ruling was "absolutely the right decision," and it shows "we weren't just being cranky about this or self-interested," said Kent Jenkins, a spokesman for Corinthian Colleges Inc. The company, whose colleges include Everest Institutes, had said that about 7 percent of its more than 600 programs would fail the gainful-employment test and that it had already taken steps to wind down some of the programs, although Mr. Jenkins said the impending gainful-employment rule wasn't the only reason for those moves.

Weighing Next Steps

A spokesman for the Education Department said on Monday that officials there would decide "very shortly" whether to appeal the ruling, develop new regulations, or "do both."

The spokesman, Peter Cunningham, said the gainful-employment rule had already had a positive effect by prompting many colleges "to think about what they were doing" and in some cases prodding them to eliminate programs that weren't providing good value to students.

But data released by the department last week showed "that there were problematic areas," Mr. Cunningham said.

Those data, released for informational purposes only, indicated how colleges' programs were faring against the benchmarks now, several years before any sanctions would apply. About 5 percent of the covered programs, all of them offered by for-profit colleges, failed to meet any of the three key benchmarks.

Steve Gunderson, president and chief executive officer of association that brought the lawsuit, said his group was pleased that "nearly all of the regulation's overreaching elements were vacated" in Judge Contreras's ruling.

While that was the ultimate result, most of the ruling goes in the department's favor. "The gainful-employment regulations are a reasonable interpretation of an ambiguous statutory command: that the department provide Title IV funding only to schools that 'prepare students for gainful employment in a recognized occupation,'" Judge Contreras wrote.

He also found, however, that the debt-repayment rate set by the department was not the product of "reasoned decision making." That measure requires that at least 35 percent of a program's graduates be actively repaying their student loans.

The department has said it set the rate at 35 percent "because approximately one-quarter of gainful-employment programs would fail a test set at that level," Judge Contreras wrote, but it failed to provide a factual basis for why that would be a "meaningful performance standard."

The department could have chosen a percentage under which only one-tenth of the programs would have failed and justified it by the same rationale, he said. Therefore, he accepted the argument that the standard was arbitrary and capricious.

He rejected arguments against other benchmarks that compare program graduates' debt to their earnings. Those "were based upon expert studies and industry practice—objective criteria upon which the department could reasonably rely," Judge Contreras wrote. But because the debt-to-income measures were intertwined with the debt-repayment measure, he said, he had to vacate them too.

Using similar reasoning, he also vacated two other provisions that rely in part on the debt-repayment measure: one that requires institutions seeking to offer a new vocational program to get prior approval from the Education Department, and one that requires institutions to provide data to the department for calculating the debt measures.

The judge allowed to stand another provision that the college association had challenged. That provision, the disclosure rule, requires institutions to disclose to potential students information about a vocational program's costs, the on-time graduation rate for students who have completed the program, and the placement rate and median loan debt for those students.

Correction (8/1/2012, 12:47 p.m.): This article originally misreported the types of colleges and universities that would be subject to the gainful-employment rule. It would apply to most programs at for-profit institutions and nondegree-granting programs at public and nonprofit private institutions. It would not apply to "nondegree-granting vocational programs at both for-profit and nonprofit institutions." The article also misspelled the given name of the federal judge who ruled on the gainful-employment regulations. He is Rudolph Contreras, not Rudolf. The article has been updated to reflect those corrections.