For-Profit Colleges Score Court Victory Over Obama Administration Rule

The for-profit college industry, long under attack by Obama administration bureaucrats as well as short-sellers like Steve Eisman, scored a big victory yesterday when a federal court in Washington, D.C. rejected new rules that would have made it harder for their students to obtain federal loans.

In a decision dated June 30, U.S. District Judge Rudolph Contreras rejected most of the Education Dept.’s 2010 rules that would have subjected for-profit colleges to three new tests based on the ability of their students to repay their loans. The judge said a test that would have eliminated the bottom 25% of schools from student-loan eligibility was “arbitrary and capricious” because it wasn’t based on any economic studies suggesting students from those schools had a harder time finding jobs.

“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 wrote. “That this explanation could be used to justify any rate at all demonstrates its arbitrariness.”

The decision was a huge victory for the Association of Private Sector Colleges and Universities, which represents mostly vocational schools that prepare students for technical occupations like nursing and electronics. Those schools have come under harsh criticism for encouraging students to take out federally guaranteed loans to prepare for jobs that may not be available when they finish school.

To address these concerns, the Education Dept. in 2009 began the process of drafting new rules that would disqualify schools with higher-than-average default rates on student loans, as well as schools where graduates were left with student loan balances that exceeded their ability to repay. After a study committee was unable to reach consensus, the Obama administration imposed the new rules in 2010.

The judge dismissed most of the for-profit colleges arguments against the new rules, saying it was reasonable for the administration to tie the concept of “gainful employment” specified in the law to ability to repay. ““The real question …is not how much gain is enough but rather how much preparation is enough,” he said. He also rejected the argument that the new rules were an “elephant in a mousehole,” exceeding the Education Dept.’s authority to assess the performance of schools in graduating well-trained students. Under the new rules, schools whose students were left with loan repayments that exceeded 8% of their average annual income or 30% of discretionary income would be in danger of losing funding.

The judge rejected the strict limits on loan repayment levels for the schools as arbitrary, however, saying they were designed only to eliminate the bottom 25%. “If the Department had chosen to disqualify the bottom ten percent of programs, or the bottom half, it would have offered the same rationale,” he said.

Since those rules were integral to the rest of the program, he said, he would strike down the entire regulation except for the new requirement that students be told of their schools’ performance.

The decision is a setback for the Obama administration and might be echoed again as the administration rolls out new regulations on financial products and the environment. The Environmental Protection Agency survived a key test last week, however, when a Washington appeals court upheld the EPA’s strict new rules on global warming gases.

Shares in DeVry, Apollo Group and Corinthian Colleges, all down in recent months, jumped on the news.


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