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Association of Private Colleges and Universities v. Arne Duncan

June 30, 2012

ASSOCIATION OF PRIVATE COLLEGES AND UNIVERSITIES, PLAINTIFF,
v.
ARNE DUNCAN, IN HIS OFFICIAL CAPACITY AS SECRETARY OF THE DEPARTMENT OF EDUCATION, AND UNITED STATES DEPARTMENT OF EDUCATION, DEFENDANTS.



The opinion of the court was delivered by: Rudolph Contreras United States District Judge

MEMORANDUM OPINION

To be eligible to accept federal funds under Title IV of the Higher Education Act, some institutions of higher education must "prepare students for gainful employment in a recognized occupation." 20 U.S.C. §§ 1001(b)(1), 1002(b)(1)(A)(i), (c)(1)(A). Last year, the Department of Education (the "Department") published a rule that tests compliance with the gainful employment requirement by examining the debt, earnings, and debt repayment of a program's former students. The Association of Private Colleges and Universities (the "Association") has brought suit against the Department and its Secretary to challenge those debt measures and two other related rules. Because one of the debt measures lacks a reasoned basis, that regulation will be vacated as arbitrary and capricious. Because the majority of the related rules cannot stand without the debt measures, they will be vacated as well.

I. BACKGROUND

A. Title IV of the Higher Education Act

Every year, Congress provides billions of dollars through loan and grant programs to help students pay tuition for their post-secondary education. The Department of Education . . . administers these programs, which were established under Title IV of the Higher Education Act of 1965 . . . . Students must repay their federal loans; the costs of unpaid loans are borne by taxpayers.

To participate in Title IV programs -- i.e., to be able to accept federal funds -- a post-secondary institution . . . must satisfy several statutory requirements. These requirements are intended to ensure that participating schools actually prepare their students for employment, such that those students can repay their loans.

Ass'n of Private Sector Colls. & Univs. v. Duncan, 2012 WL 1992003, at *1 (D.C. Cir. June 5, 2012); see also id. at *2 ("[S]chools receive the benefit of accepting tuition payments from students receiving federal financial aid, regardless of whether those students are ultimately able to repay their loans. Therefore, Congress codified statutory requirements in the HEA to ensure against abuse by schools."). The statutory requirement at issue in this case makes that intent explicit, requiring that certain institutions "prepare students for gainful employment in a recognized occupation." 20 U.S.C. §§ 1001(b)(1), 1002(b)(1)(A)(i), (c)(1)(A). For some institutions, that preparation must take the form of an "eligible program of training," id., §§ 1002(b)(1)(A)(i), (c)(1)(A); an "eligible program," in turn, is one which "provides a program of training to prepare students for gainful employment in a recognized profession," id. § 1088(b)(1)(A)(i). These requirements have a long history in the statute, which bears some review.

B. Statutory History

Over three weeks in 1965, Congress enacted the National Vocational Student Loan Insurance Act, Pub. L. No. 89-287, 79 Stat. 1037 (codified at 20 U.S.C. §§ 961--96 (Supp. I 1965)) ("NVSLIA"), and the Higher Education Act, Pub. L. No. 89-329, 79 Stat. 1219 (codified at 20 U.S.C. §§ 1001--107 (Supp. I 1965)) ("HEA"). Both were intended "to encourage States and nonprofit private institutions and organizations to establish adequate loan insurance programs for students in eligible institutions." NVSLIA § 2(a)(1); HEA § 421(a)(1). Because many states did not yet have such programs, each Act also established "a Federal program of student loan insurance for students who do not have reasonable access to a State or private nonprofit program." NVSLIA § 2(a)(2); HEA § 421(a)(2). Under each program, the federal government itself would ensure loans "made to a student who . . . has been accepted for enrollment at an eligible institution." NVSLIA § 8(a)(1); HEA § 427(a)(1). The structures of those programs were quite similar,*fn1 but their definition of "eligible institution" differed. Only "a public or other nonprofit institution" could be eligible under the Higher Education Act. HEA § 435(a)(4). Although that Act was primarily targeted towards institutions awarding bachelor's degrees or granting credit that could be used towards such a degree, see id. § 435(a)(3), nursing schools were also eligible for its loan insurance program, as was "any school which provide[d] not less than a one-year program of training to prepare students for gainful employment in a recognized occupation," id. § 435(a). The National Vocational Student Loan Insurance Act, by contrast, extended eligibility to for-profit schools but limited it to institutions providing "a program of post-secondary vocational or technical education designed to fit individuals for useful employment in recognized occupations." NVSLIA § 17(a).

The House subcommittee considering the National Vocational Student Loan Insurance Act "devoted the majority of its attention to the 'eligible institution' definition . . . ." H.R. Rep. No. 89-308, at 9 (1965). "It was the determined intent [of both the House and Senate subcommittees] that the 'fly-by-night' institutions of the post-World War II era be explicitly eliminated from eligibility." Id.; S. Rep. No. 89-758, at 12 (1965). Both subcommittees heard testimony from Dr. Kenneth B. Hoyt, a professor of education at the University of Iowa who ran "a national research program aimed at studying students who attend a trade, technical, or business school at the post-high-school level." H.R. Rep. No. 89-308, at 3 (1965). They placed considerable weight on Dr. Hoyt's testimony, reprinting his comments at length in otherwise brief reports and emphasizing their influence. Id. ("Dr. Hoyt soon dispelled any doubts the subcommittee may have had about the need for such legislation and about the caliber of student attending a vocational institution."); S. Rep. No. 89-758, at 3 (1965) ("Dr. Hoyt's statement confirmed the committee's estimate of the need for such legislation and of the high caliber of students attending vocational institutions.").

Dr. Hoyt began his discussion of the experiences of students after completing their vocational training by posing two questions: "If loans were made to these kinds of students, is it likely they could repay them following training? Would loan funds pay dividends in terms of benefits accruing from the training students received?" H.R. Rep. No. 89-308, at 4 (1965); S. Rep. No. 89-758, at 7 (1965). He noted that "most of these students do complete their training" but nonetheless "included both those who completed and those who failed to complete training" in his "analyses of posttraining vocational experiences." H.R. Rep. No. 89-308, at 4 (1965); S. Rep. No. 89-758, at 7 (1965). Those analyses indicated that "over 95 percent of those who sought employment found it," and a substantial majority found employment related to their training. H.R. Rep. No. 89-308, at 4--5 (1965); S. Rep. No. 89-758, at 7 (1965). As Dr. Hoyt concluded:

It seems evident that, in terms of this sample of students, sufficient numbers were working for sufficient wages so as to make the concept of student loan [repayment] to be rapid following graduation a reasonable approach to take. . . . [A]ll data presented here support the reasonableness of making loan funds available to students attending trade, technical, and business schools. I have found no reason to believe that such funds . . . would represent a poor financial risk.

H.R. Rep. No. 89-308, at 5--6 (1965); S. Rep. No. 89-758, at 8 (1965) (first alteration in House version). Each subcommittee also emphasized other testimony suggesting that vocational students would be able to repay the loans incurred to gain that training.*fn2

Congress merged the two student loan insurance programs in 1968, but retained their separate definitions of eligibility. Higher Education Amendments of 1968, Pub. L. No. 90-575, § 116(a), 82 Stat. 1014. Any school that had been an "eligible institution" under the Higher Education Act became an "institution of higher education," id. § 116(a)(3), while those that had been eligible under the National Vocational Student Loan Insurance Act became "vocational schools," see id. § 116(a)(4)(B). Both institutions of higher education and vocational schools were now eligible to participate in Title IV programs. See 20 U.S.C. § 1085(a) (1970) ("The term 'eligible institution' means (1) an institution of higher education, [and] (2) a vocational school . . . ."); id. § 1085(b) (defining "institution of higher education"); id. § 1085(c) (defining "vocational school"). As the Higher Education Act evolved over the years, these definitions remained remarkably stable. See 20 U.S.C. § 1085(a)--(c) (Supp. II 1972) (definitions unchanged by Education Amendments of 1972, Pub. L. No. 92-318, 86 Stat. 235); 20 U.S.C. § 1085(a)--(c) (1976) (no relevant amendments made by Education Amendments of 1976, Pub. L. No. 94-482, 90 Stat. 281); 20 U.S.C. § 1085(a)--(c) (Supp. IV 1980) (no relevant amendments made by Education Amendments of 1980, Pub. L. No. 96-374, 94 Stat. 1367); 20 U.S.C. § 1085(a)--(c) (1988) (no relevant amendments made by Higher Education Amendments of 1986, Pub. L. No. 99-498, 100 Stat. 1268).

In 1992, Congress revised and reorganized the definitions, replacing "vocational school" with two new terms-"proprietary institution of higher education" and "post-secondary vocational institution." Higher Education Amendments of 1992, § 481, Pub. L. No. 102-325, 106 Stat. 448 (codified at 20 U.S.C. §§ 1088(b), (c) (1994)). Proprietary institutions of higher education were, by definition, for-profit institutions, 20 U.S.C. § 1088(b)(3) (1994), while post-secondary vocational institutions were public or non-profit, id. § 1088(c)(2) (1994). Both were now required to provide "an eligible program of training to prepare students for gainful employment in a recognized occupation," id. §§ 1088(b)(1), (c)(1) (1994), rather than "a program of post-secondary vocational or technical education designed to fit individuals for useful employment in recognized occupations," 20 U.S.C. § 1085(c)(2) (1988). An eligible program, in turn and as relevant here, was "a program of training to prepare students for gainful employment in a recognized profession." 20 U.S.C. § 1088(e)(1)(A)(i) (1994). Despite some further reorganization of the statute, those definitions remain unchanged. See 20 U.S.C. §§ 1002(b)(1)(A)(i), (c)(1)(A), 1088(b)(1)(A)(i) (Supp. IV 2010).

C. Challenged Regulations

The Secretary enjoys broad authority "to make, promulgate, issue, rescind, and amend rules and regulations governing the manner of operation of, and governing the applicable programs administered by, the Department." 20 U.S.C. § 1221e-3; see also id. § 3474 ("The Secretary is authorized to prescribe such rules and regulations as the Secretary determines necessary or appropriate to administer and manage the functions of the Secretary or the Department."). Before proposing regulations to implement Title IV programs, however, the Secretary must "obtain public involvement in the development" of the regulations, "prepare draft regulations . . . and . . . submit such regulations to a negotiated rulemaking process." 20 U.S.C. § 1098a(a)(1), (b)(1). In 2009, the Department began this process by announcing its intent "to develop proposed regulations to maintain or improve program integrity in the Title IV, HEA programs, relating to topics such as . . . [g]ainful employment in a recognized occupation." Negotiated Rulemaking Committees, 74 Fed. Reg. 24,728, 24,728 (May 26, 2009). After three public hearings, the Department established a negotiating committee. Notice of Negotiated Rulemaking, 74 Fed. Reg. 46,399, 46,399--400 (Sept. 9, 2009). When that committee failed to reach consensus, the Department proposed regulations of its own. As relevant here, the Department proposed reporting and disclosure requirements for gainful employment programs, see Program Integrity Issues, 75 Fed. Reg. 34,806, 34,809, 34,873 (June 18, 2010), and also proposed to "assess whether a program provides training that leads to gainful employment by applying two tests: One test based upon debt-to-income ratios and the other test based upon repayment rates." Program Integrity: Gainful Employment, 75 Fed. Reg. 43,616, 43,618 (July 26, 2010). The court will refer to these tests as the "debt measures."

The Department explained that the proposed debt-to-income ratios, which "provide[] a measure of program completers' ability to repay their loans, . . . were set based upon industry practices and expert recommendations." Id. Under the proposed debt-to-income tests, "programs whose completers typically have annual debt service payments that are 8 percent or less of average annual earnings or 20 percent or less of discretionary income would continue to qualify, without restrictions, for title IV, HEA program funds," while "[p]rograms whose completers typically face annual debt service payments that exceed 12 percent of annual average earnings and 30 percent of discretionary income may become ineligible." Id. The discretionary income portion of the debt-to-income test was "modeled on the Income-Based Repayment (IBR) plan," which "assumes that borrowers with incomes below 150 percent of the poverty guideline are unable to make any payment, while those with incomes above that level can devote 15 percent of each added dollar of earnings . . . to loan payments." Id. at 43,620. That formula, in turn, was "based on research conducted by economists Sandy Baum and Saul Schwartz, who recommended 20 percent of discretionary income as the outer boundary of manageable student loan debt" and was also "recommended by others, including Mark Kantrowitz, publisher of Finaid.org." Id. To rely solely on the discretionary income test portion of the debt-to-income test, however, would mean that "any program would fail the debt measure if the average earnings of those completing the program were below 150 percent of the poverty guideline, regardless of the level of debt incurred." Id. "To avoid this consequence," the Department "adopted the proposal made during negotiated rulemaking that borrowers should not devote more than 8 percent of annual earnings toward repaying their student loans." Id. This figure was "a fairly common credit-underwriting standard," accepted by "[o]ther studies" and within the range of guidelines established by "some State agencies." Id. The Department then "increased the research-based and industry-used debt-to-income measures by 50 percent (from 20 to 30 percent of discretionary income, and from 8 to 12 percent of annual earnings) to establish thresholds above which it becomes unambiguous that a program's debt levels are excessive." Id. Programs that met neither of the more demanding standards could have their Title IV eligibility restricted, while those that met neither of the more lenient standards could face ineligibility.

The debt repayment test, in turn, would "measure . . . whether program enrollees are repaying their loans, regardless of whether they completed the program." Id. at 43,618. A gainful employment program would pass the proposed debt repayment test if "students who attended the program (and are not in a military or in-school deferment status) repay their Federal loans at an aggregate rate of at least 45 percent. . . . A loan would be counted as being repaid if the borrower (1) made loan payments during the most recent fiscal year that reduced the outstanding principal balance, (2) made qualifying payments on the loan under the Public Service Loan Forgiveness Program, as provided in 34 CFR 685.219(c), or (3) paid the loan in full." Id. at 43,619. Borrowers whose loans were in deferment or forbearance would not be considered to be repaying their loans. Id. The Department analyzed how many schools in various sectors "would satisfy loan repayment thresholds of 45 and 35 percent," concluding that "[t]he number of institutions with very low loan repayment rates, particularly in the for-profit sector, is alarmingly high." Id. After its analysis, the Department proposed that programs with a repayment rate of at least forty-five percent would pass the debt repayment test, those with repayment rates lower than forty-five percent but higher than thirty-five percent would face restricted eligibility, and programs with repayment rates below thirty-five percent would face ineligibility. Id. at 43,619--20. The Department did not explain why it had chosen those thresholds,*fn3 although it did indicate that, "[a]t the negotiated rulemaking sessions," it had "suggested a loan repayment rate of 75 percent of all borrowers in a program, and later suggested a rate of 90 percent for completers" but "modified its expectations for loan repayment in light of further research and community input." Id. at 43,692.

A gainful employment program that failed to satisfy the proposed debt measures would face several consequences. If the program's loan repayment rate fell below forty-five percent and it failed to meet the more stringent standard for both debt-to-income measures, it would be required to warn "prospective and currently enrolled students that they may have difficulty repaying loans obtained for attending that program." Id. at 43,639 (proposing 34 C.F.R. ยง 668.7(d)(1)). Programs could also have their Title IV eligibility restricted or revoked. The former would occur whenever a program either had a repayment rate below forty-five percent or failed to meet the more stringent standard for both debt-to-income measures, but either had a repayment rate above thirty-five percent or met the more lenient standard for at least one debt-to-income measure. Programs whose loan repayment rates fell below thirty-five percent and which also failed to meet the more lenient standard for both debt-to-income measures would be declared ...


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