Down But Not Out

WASHINGTON -- A stinging court loss has stirred up a heap of confusion about the fate of the U.S. Department of Education’s “gainful employment” regulations, the first results of which were released just a week ago. And while the decision is a victory for the for-profit sector, revised gainful employment rules could affect more programs at for-profits than the standards that were invalidated Saturday by a federal judge.

Gainful employment, enacted last year, measures the loan repayment rates and debt loads of graduates of vocational programs, mostly at for-profits. Roughly 5 percent of academic programs at for-profits failed all three of the minimum benchmarks, according to last week’s release of the first batch of data related to the rules. Those findings were only informational, however, with final rates due out next year and the punishment of removal of federal aid eligibility not kicking in until 2015.

But on Saturday, Rudolph Contreras, a judge with the U.S. District Court in D.C., struck down the rules, having found that the department failed to adequately justify the 35 percent loan repayment rate it set as one of the three thresholds (which means more than 35 percent of a program’s graduates must be repaying their loans).

Unlike the two other tests, which are based on debt-to-income ratios, the judge wrote that the department had not based the repayment rate on expert studies or industry standards. "The debt repayment standard, by contrast, was not based upon any facts at all.”

That finding of arbitrariness took down the whole process, because the judge found that the three measures were “intertwined.” Gainful employment’s reporting requirements were also struck down.

The decision was clearly a win for the Association of Private Sector Colleges and Universities, the primary for-profit trade group, which had filed the legal challenge to the standards. But it comes with plenty of uncertainty.

For starters, the judge ruled that the department was within its authority to address the “serious policy problem” of underperforming vocational education programs that saddle graduates with debt and limited job prospects. And the ruling supports much of the department’s decision-making process. As a result, the court's decision seems to clear a path for an appeal, by in essence saying that the rules could stand if the feds had done their homework to back up the loan repayment rate.

“The court upheld our authority and spoke to the need for the regulations but basically thinks a clearer rationale is needed for the 35 percent repayment rate,” Peter Cunningham, a department spokesman, said in an e-mail.

Cunningham said the department had not yet determined whether it will pursue an appeal or re-regulate by bringing gainful employment back in the coming months for another negotiated rulemaking session.

One approach would be for the department to just drop the loan repayment rate. It is unclear if that is legally possible, observers said. But if so, it could cause for-profits some headaches.

Mark Kantrowitz, an expert on financial aid and publisher of Finaid.org, ran the numbers from gainful employment’s first batch of data and found that more than twice as many programs at for-profits would run afoul of the rules if the loan repayment rate were to be nixed. That’s because colleges would face penalties if a program failed all three tests, meaning that without the loan repayment rate, they would have one fewer chance to pass.

“If the loan repayment rate were discarded, 10.6 percent of programs at for-profit colleges would fail the gainful employment rule,” Kantrowitz wrote. “Thus the court decision may ultimately turn into a pyrrhic victory for the for-profit colleges.”

However, it may be difficult legally for the department to drop one of its tests, in part because of the intertwined nature of three standards, which the judge already noted.

For-profits might also have a legitimate beef about fairness if the department dropped the test, said Carlo Salerno, a former analyst with the Government Accountability Office and a director of ESM Chaperone, a student loan data analysis firm. That’s because loan repayment is the only measure on which colleges could actually have influence, by encouraging repayment among graduates. Colleges can’t control the jobs their graduates get, Salerno said, which makes it impossible to affect debt-to-income ratios.

Loan repayment is the one area where colleges can “actually improve their outcomes,” he said.

Another Battle?

Both for-profits and their critics will watch the department’s next move closely. And it's likely that gainful employment won't be resolved until after the results of this fall's election.

Supporters of the regulations hope the department will either appeal the decision or push forward with supporting evidence for the loan repayment rate. They argue the court supported the overarching idea behind the regulations, and that the final rules, which had been softened after a long battle with for-profits, were far from overly restrictive.

For example, the 35 percent loan repayment rate is an “embarrassingly low number,” wrote Kevin Carey, director of the education policy program at the New America Foundation, on one of the group’s blogs. “Could any credible person explain the public policy rationale for allowing programs to access federal financial aid when graduates are twice as likely to be in non-repayment as otherwise? I think not.”

For-profits, however, say it’s time to move forward.

Steve Gunderson, president and CEO of the Association of Private Sector Colleges and Universities, yesterday sent a letter to Arne Duncan, the secretary of education, in which he said for-profits were seeking a “new partnership” with the department.

“My personal hope, and that of our members, is that the era of litigation is over,” he wrote, “and the era of public-private partnerships in putting people to work in good jobs with good incomes is ahead.”

Gunderson also said the association has asked its members to review any programs that did not meet the first round of gainful employment findings. If those programs do not meet the “test of market demand and a student’s professional opportunities,” the association will encourage members to either revise those programs or cut them.

Whatever path the department chooses, sources say it expended a great deal of political capital in the bruising fight over gainful employment. It won’t be easy to fire that up again, particularly after the departure of most of the department officials who led the effort, including Robert Shireman and James Kvaal.

Meanwhile, for-profits face continuing challenges at the state level.

Critics of for-profits point to California as an emerging example of strong policies aimed their way. Last week state lawmakers there passed legislation that would make it harder for students at for-profits to quality for Cal Grants, the state’s generous financial aid program, based in part on much stricter loan default rates than the federal gainful employment rules. The California law also slashed in half the maximum grant award amount that can be used at a for-profit.

The new Cal Grant rules are an “interesting contrast," said Amy Laitinen, a deputy director for higher education at the New America Foundation, and a former department official. “California can be a good example.”