Federal judge reverses college ‘gainful employment’ rule

A federal judge has overturned the Department of Education’s ‘gainful employment’ rule designed to protect students from expensive college career programs that leave graduates jobless and mired in debt. 

Eric Schmitt, alumnus of Kaplan University in Iowa, testifying at the Senate Committee on Health, Education, Labor & Pensions. PHOTO SOURCE: help.senate.gov

Despite generally agreeing with the government’s intended goals, U.S. District Court Judge Rudolph Contreras struck down most of the gainful employment regulation because one of the criterion was deemed to be “arbitrary and capricious”.

“The Department has set out to address a serious policy problem…But it has failed to provide a reasoned explanation for a core element of its central regulation,” wrote Contreras in Association of Private Colleges and Universities v. U.S. Department of Education.

The ruling, if upheld, would remove safeguards that hold for-profit colleges and universities accountable for adequately preparing their students for the job market and to prevent student loan defaults that cost taxpayers millions of dollars.

Read more: Student loan delinquency rate climbs above 20%

The gainful employment rule was designed to protect students like Eric Schmitt, who graduated in 2008 with a bachelor’s degree in paralegal studies from Kaplan University in Iowa.

Kaplan’s admissions staff reportedly told Schmitt that students who graduated from the paralegal program had “100% [job] placement” and could expect to earn around $36,000 a year.

“I knew I would take out loans to support my education but since the school advertised its career services programs that gave you the skills you needed to work in the field, I figured it would be worth it,” Schmitt testified at the Senate Committee on Health, Education, Labor & Pensions in June 2011.

Despite earning a 3.17 G.P.A. and proactively pursuing every paralegal job openings in his region, Schmitt was left with no choice but to find temporary work as an “assembly line laborer in a pesticide plant, a flagger for road construction”, and a janitor to meet his $45,000 student loan obligations. But the income he earned was not enough; a portion of Schmitt’s student loan went into default in 2010.

“I cannot say that even once my degree has opened any doors of employment for me. I slowly learned that what most employers thought of Kaplan degrees and graduates…There were stories of graduates who never found work…I’ve since learned that the school counselors have successfully placed statistics that they use to advertise to prospective students,” said Schmitt. “I feel that returning to school to get my degree has put me further away from my goals than before I started my education…The lifetime promise of a college degree has become a lifetime burden.”

Read more: Transcript: Eric Schmitt’s Testimony on “Drowning in Debt: Financial Outcomes of Students at For-Profit Colleges”

To protect students and taxpayers, the Department of Education last year introduced the gainful employment rule to “ensure that participating schools actually prepare their students for employment, such that those students can repay their loans.”

Colleges and universities that don’t meet the gainful employment standards could have their Title IV federal funding restricted or revoked. (Title IV of the Higher Education Act provides federal financial aid – loan or grants – to college students.)

The department would use so-called “debt measures” to assess whether for-profit schools that “receive the benefit of accepting tuition payments from students receiving federal financial aid” are delivering quality career or vocational training programs.

Schools would be ineligible for Title IV funding if:

1) their graduates spend more than 12% of the annual average income or 30% of their discretionary income on their student loan payments;

2) or less than 35% of their graduates are able to repay their student loans. (To put it another way, if 65% of a school’s graduates have their loans in forbearance, deferment or default, then the school would not be eligible for Title IV funding.)

While Contreras found that most of the criteria were reasonable and within the department’s authority to set, he found fault with how the 35% loan repayment rate standard had been decided.

“In setting the debt repayment rate, the Department picked a palatable figure,” Contreras pointed out. “No expert study or industry standard suggested that the rate selected by the Department would appropriately measure whether a particular program adequately prepared its students. Instead, the Department simply explained that the chosen rate would identify the worst-performing quarter of programs. 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.'”

Because the latter criterion was found to have been “chosen arbitrarily”, Contreras struck down the gainful employment rule. However, Contreras did uphold the department’s requirement that colleges disclose to prospective students their on-time graduation rate, tuitions and fees, job placement rate, and the median loan debt for students completing the program.

The Association of Private Colleges and Universities, the industry group that challenged the gainful employment rule, applauded the court’s decision to reverse the “overreaching” regulation.

The Department of Education stated that it is reviewing “legal and policy options” following the decision.

“The court clearly upheld the authority to regulate college career programs, but found that the Department had not provided enough explanation of its debt repayment measure, so it has given the Department an opportunity to address that concern,” according to the Department of Education’s press statement.


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