A federal judge on Wednesday denied a challenge to the Obama administration’s rules limiting the amount of debt students can carry in career-training programs, delivering a blow to the beleaguered for-profit college industry.
The decision arrives as for-profit schools are buckling under government lawsuits, regulatory scrutiny and depressed student enrollment. Defenders of the schools say the Obama administration is trying to cripple the industry with rules that will disproportionately impact for-profits.
Now one of the two lawsuits seeking to block the rule from taking effect in July has been shot down, leaving little hope for the other.
Wednesday’s ruling by U.S. District Judge Lewis Kaplan in Manhattan scuttled a bid by the Association of Proprietary Colleges (APC), which represents 20 schools in New York. The trade group sued the government on the grounds that the rule sets arbitrary standards and violates due process because schools could lose federal funding based on how much students earn after graduation – something the schools could not challenge.
Kaplan rejected the argument, writing in a 57-page decision that the Education Department “has a strong interest in ensuring that students – who are, after all, the direct (and Congress’s intended) beneficiaries of federal aid programs – attend schools that prepare them adequately for careers sufficient for them to repay their taxpayer-financed student loans.”
In a statement, Donna Stelling-Gurnett, executive director of APC, said the group was disappointed by Kaplan’s ruling and plans to explore all options.
“While we agreed with the Department’s goals for this rule from the outset, we remain steadfast in our conviction that this regulation does not achieve those goals,” she said. “Despite headlines suggesting otherwise, most proprietary colleges are providing strong programs and producing strong outcomes, and the best interests of their students are worth championing.”
The judgement is a victory for the Education Department, which formulated the rules in 2009 as a way to protect students from winding up with tens of thousands of dollars of debt for a certificate. There were years of contentious debates over the responsibility of for-profit colleges to ensure that graduates of career programs receive “gainful employment.”
The industry lobbied to block the regulations, with the support of many congressional Republicans and some Democrats. The courts eventually got involved in 2012, when a federal judge blocked a key provision, sending the department back to the drawing board.
After some tinkering with the original language, the Education Department issued new rules in October 2014. Under the new rules, the loan payments of a typical graduate at a program cannot exceed 20 percent of discretionary income or 8 percent of total earnings. Programs with graduates whose loan payments equal 20 to 30 percent of discretionary income, or 8 to 12 percent of total annual income, would be placed in a warning zone.
A program would be labeled failing if typical graduates have loan payments that surpass 30 percent of discretionary earnings or 12 percent of annual earnings. Programs that fail in two out of any three consecutive years — or land in the danger zone for four consecutive years — will be ineligible for aid.
“These regulations will hold career colleges accountable for the programs they offer and promote improvements that protect students, benefit consumers and honor taxpayers’ investment,” said Education Department spokeswoman Dorie Nolt. She said the department is pleased the court upheld the regulation. “Every student deserves to graduate from higher education with a degree or certificate that equips them for success.”
Based on the Education Department’s estimates, about 1,400 programs would not pass the accountability standards. The rule covers thousands of programs at for-profit, public and private non-profit colleges.
For years, consumer groups have warned that vulnerable low-income students were leaving for-profit schools with five-figure debt and little to show for it. A 2014 lawsuit filed by the Consumer Financial Protection Bureau against for-profit giant Corinthian Colleges showed the school set tuition and fees as high as $75,000.
Allegations that Corinthian trapped students in predatory loans and lied about the success of its programs ultimately led to a series of government lawsuits, loss of its access to federal funding and bankruptcy.
Kaplan wrote in his decision that some for-profit colleges have “increased their profit margins by setting tuition using sophisticated market strategies designed to maximize revenue without regard to the poor academic and employment outcomes faced by students.”
Attending a two-year for-profit institution costs a student on average four times as much as attending a community college, according to the Education Department. More than 80 percent of students at for-profits borrow, while less than half of students at public institutions do the same. Students at for-profit colleges represent only about 11 percent of the total higher-education population but 44 percent of all federal student loan defaults.
“We’ve said for some time that lawsuits targeting the Administration’s recent gainful employment policy were nothing more than a charade to avoid accountability,” said Rory O’Sullivan, deputy director at Young Invincibles, a consumer advocacy group. “In light of recent closings at poorly performing for-profit programs, we are glad to see a federal judge uphold these critical consumer protections.”
Despite Wednesday’s ruling, officials at the Association of Private Section Colleges and Universities said the group will forge ahead with its lawsuit to block the new rule.
The association’s general counsel Sally Stroup said the group “remains confident in its legal position” and noted that the association “successfully sued to invalidate the predecessor version of the regulation.”
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