Judge Upholds ‘Gainful’ Rule

A federal judge on Wednesday dismissed a lawsuit that challenged the U.S. Department of Education’s rewritten “gainful employment” rule, handing a victory to the Obama administration in its longstanding regulatory battle with for-profit colleges.

U.S. District Judge Lewis Kaplan of New York ruled that the Education Department had the legal power to create the controversial rule in the first place and followed proper procedures in in developing its second iteration of the regulations. He also rejected an argument that the regulation -- which cuts off federal aid to career education programs graduating students with high debt loads relative to their earnings -- trampled on for-profit colleges’ constitutional right to due process.

The ruling is the first time a judge has evaluated the Obama administration’s rewrite of the gainful employment rule, after the first version of the regulation was largely invalidated by a federal court in 2012. The current rule is also being challenged by another, separate lawsuit that remains pending.

The gainful employment rule was blocked in 2012 because a judge ruled that the Education Department arbitrarily crafted the threshold for determining how well a program's former students repay their loans.

Following that defeat, the Obama administration last October rewrote the regulation. It dropped the loan repayment metric and instead focused only on whether a program graduates students with high levels of debt compared to their earnings.

The lawsuit dismissed Wednesday was brought by the Association of Proprietary Colleges, which represents 20 for-profit colleges in New York, and which had asked the judge to block the rule.

Donna Stelling-Gurnett, executive director of the Association of Proprietary Colleges, said the group was “disappointed” in the court’s ruling.

“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,” Stelling-Gurnett said in a statement. She didn’t say whether the group planned an appeal but said it would “be looking quite closely at all options.”

Dorie Nolt, press secretary at the Education Department, said in a statement that the department was pleased the court “upheld the gainful employment regulations as reasonable steps to ensure that programs are preparing their students for gainful employment in a recognized occupation."

Legal Reasoning

The for-profit group had made three main arguments: that the rule violated colleges’ constitutional due process rights, exceeded the Education Department’s legal authority and was arbitrarily developed by the department.

On Wednesday, Judge Kaplan, who was appointed to the federal bench by President Bill Clinton, rejected each of those arguments, in turn, and several times had some sharp words for the for-profit college association.

First, he said that for-profit colleges don’t have a “‘vested right’ to continued eligibility to participate” in federal student aid programs. They therefore, he said, do not need to be afforded the same due process protections of, say, someone being denied a job or welfare benefits.

“While for-profit colleges have become heavily reliant on federal student aid, that reliance is of their own creation, not of necessity,” he wrote.

Kaplan similarly rejected the argument that the Education Department went far beyond its authority to regulate in developing the gainful employment regulation and infringed upon the role of state agencies that oversee colleges.

“This argument is quite surprising, but not for its merit,” Kaplan wrote. “It is surprising because it is at best ill-conceived and at worst misleading.”

Further, Kaplan was not persuaded by the for-profit group’s argument that the Education Department deciding to drop the repayment rate metric this time around, after insisting on its importance during the previous court case, was arbitrary.

He wrote that the department’s analysis of several options and decision not to include an unproven metric to replace the repayment rate “shows restraint and careful consideration, not arbitrariness or capriciousness.”

Other Challenges Remain

The ruling does not mean that the gainful employment regulation is in the clear.

A separate lawsuit, filed by the Association of Private Sector Colleges and Universities, the national trade group representing for-profit colleges, remains pending before a different federal district court judge in Washington.

Sally Stroup, the association’s general counsel, said in a statement that the New York case was “very different” from the lawsuit brought by APSCU. The group, she said, “remains confident in its legal position.”

Proponents of tighter rules on for-profit colleges praised the ruling in the New York case and said they hoped it would be followed by the judge in Washington.

“It’s a resounding win for the Department of Education,” said Maura Dundon, senior policy counsel at the Center for Responsible Lending, an advocacy group that studies student loan issues. “It’s a very strong review of both the department’s authority to regulate for-profit colleges the way it has -- using the statutory hook of ‘gainful employment’ to create debt metrics -- as well as the way the department developed the metrics.”

Dundon said that although the decision is not binding on the federal judge who is separately considering the validity of the regulations, Wednesday’s ruling may have some influence in that case.

“I would expect another court to take it under consideration,” she said, adding that the decision quotes heavily from the District of Columbia district court opinion in 2012 that struck down the bulk of the first gainful rule but upheld the department’s authority to write it. “The courts are definitely talking to each other.”

Dennis Cariello, who co-chairs the education group at the law firm Hogan Marren and represents some for-profit colleges, said he didn’t think Wednesday’s decision would have much effect on the other case.

“The concern is whether this ruling will someway influence the DC court,” he said. “It’s an opinion that the court will have to consider in its own decision, but is by no means authoritative.”

The gainful employment rule is set to take effect on July 1, barring other judicial intervention.