Federal Court Throws Out ‘For-Profit’ College Rules

In a setback to the Obama administration and in a big win for the for-profit education industry, a Federal judge ruled that the main portion of the new rules governing which job-training programs qualify for federal student aid funds was illegal. Judge Rudolph Contreras of the Federal District Court in Washington said that so-called "gainful employment" rules were arbitrary and punitive.

The regulations, which were scheduled to go into effect this Sunday, said that job training programs needed to meet one of three standards in order to continue qualifying for government funds: 35% student loan repayment rate, loan payments not to exceed 12% of yearly earnings, or 30% of discretionary income, whichever is lower.

But Judge Contreras ruled that the 35 percent debt-repayment standard had no basis. "No expert study or industry standard suggested that the rate selected by the department would appropriately measure whether a particular program adequately prepared its students," the opinion said. "Instead, the department simply explained that the chosen rate would identify the worst-performing quarter of programs. Why the bottom quarter? Because failing fewer programs would suggest that the test was not ‘meaningful' while failing more would make for too large a ‘subset of programs that could potentially lose eligibility.' "

The judge left standing the disclosure portion of the regulations, under which career-college programs must disclose to students their graduation rate, their placement rate and their students' median debt load.

According to a U.S. Department of Education spokesman, the ruling doesn't mean that the administration is planning to abandon its efforts to regulate the for-profit education industry, and will continue to attempt to limit its access to federal student aid funds which comprise the bulk of its revenues. Instead, drawing on the fact that the judge didn't outright reject the idea behind regulations that are based on loan repayment schedules, the department will be looking at a different way to compute acceptable repayment rates.

When the regulations were issued last year, the for-profit industry protested vigorously. At the same time, consumer groups said that the standards set by the DoE were too loose to be of real service to students. According to the ranking released last week, only about 5% of career training programs would have run afoul of the new rules. If the rules had gone into effect as scheduled, the programs that didn't meet the new standards would have had until 2015 to correct the problem or face being cut off from the government funding spigot.

To lose funding a college would have to fail all three tests in a year for three out of four years. However more than 190 programs at 93 colleges failed all three measures. This represents 5% of for profit programs. The original requirements, relaxed to give concerned colleges more time to apply, would have seen the failing programs figure at 16%.

07 4, 2012
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