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Administration’s Higher Education Act Rules Get Failing Grade from D.C. Circuit


Judicial Review & Remedies - June 5, 2012 - by Leland E. Beck

The United States Court of Appeals for the District of Columbia Circuit in a lengthy opinion today vacated or remanded significant parts of the Department of Education (DOE)’s signature Higher Education Act (HEA) regulations in Association of Private Sector Colleges and Universities v. Duncan.  The court of appeals reasoned that DOE:

  • failed to provide an adequate explanation of some of the rule’s compensation prohibitions;
  • exceeded the statutory authority in defining applicable “misrepresentations” and in eliminating procedural safeguards; and
  • exceeded the “logical outgrowth” limits in the proposed rule regarding application of State program requirements to “distance learning” schools.

The remand is a major setback for the Administration’s view of fraud in the for-profit higher education sector and its attempts to limit student loan default expenditures.  The detailed opinion breaks no new legal ground under the Administrative Procedure Act (APA) but reiterates many lessons that agencies seem to forget.

Background:  Congress provides more than $150 billion in tuition loan support to higher education students each year, and failure to repay student loans shifts the burden to the Federal government.  Congress authorized to the Secretary to promulgate regulations to implement the Higher Education Act, and DOE, in response to Congressional prodding and past failures, proposed new regulations in 2009 and a final rule in 2010.

DOE’s student loan program regulations applied to the whole spectrum of higher education.  Within these regulations, DOE sought to address, among other things, misrepresentations by, and contingency fee compensation to, recruiters for “for profit” schools – creating high enrollment numbers and student loans, with significant failure rates and inability to repay the loans.

The current loan repayment rate may soon double, which has created another major political debate that heightens the issues in this decision.

Compensation Bars:  The court affirmed the district court decision that the Compensation Regulations do not exceed the HEA authorization and mostly rejected claims that the regulations were not based on reasoned decision-making.  The court, however, remanded two aspects of the Compensation Regulations for want of adequate explanations:

1.      DOE’s elimination of a safe harbor provision for compensation “based upon students successfully completing their educational programs, or one academic year of their educational programs,” was arbitrary and capricious without some better explanation from DOE.  The court found this safe-harbor “perfectly in keeping” with Congressional goal of expanding availability of higher education, while the elimination of the safe harbor could even discourage recruiters from focusing on the most qualified students.  DOE’s “fleeting reference to ‘short-term, accelerated programs’” and isolated examples were insufficient and unsupported by the record.  The court, therefore, remanded to the district court to remand to DOE for an explanation, but does not appear to have vacated this portion of the rule.

2.      DOE failed to address the concern identified by commenters that the Compensation Regulations could have an adverse effect on minority enrollment, particularly a prohibition of raises for such secondary recruiters as coaches and diversity programs managers.  The court noted that the requirement for response to substantive comments was not demanding, but DOE fell just short when it grouped the comments by focusing on an institution’s “President” and “never really answered the questions posed.”  The court’s remand instructs that DOE must better explain its decision to eliminate the safe harbor based on graduation rates, and it must offer a reasoned response to the comments suggesting that the new regulations might adversely affect diversity outreach.

Misrepresentation:  The court of appeals held that the Misrepresentation Regulations exceed the HEA’s limits in three respects: by allowing the Secretary to take enforcement actions against schools without statutory procedural protections; by proscribing misrepresentations of subjects that are not covered by the HEA; and by proscribing statements that are merely confusing.

1.      The HEA specifically provided that DOE could “limit, suspend, or terminate a school’s eligibility to participate” in the program after specific procedural protections were followed, but the regulations impermissibly allowed DOE to revoke agreements and impose limitations without following those procedures.

2.      The HEA specifically authorized DOE to sanction “substantial misrepresentation of the nature of its educational program, its financial charges, or the employability of its graduates,” but the regulations permit sanctions for a broader, more general category of “misrepresentations regarding the eligible institution” as well as enumerated categories, such as the school’s relationship with DOE.

3.      The HEA unambiguously prohibits schools from “substantial misrepresentation” but the regulations went further to include lesser misrepresentations:  “any statement that has the likelihood or tendency to … confuse.”  Here the court vacated the offending provision “insofar as it defines misrepresentation to include true and nondeceitful statements that have only the tendency or likelihood to confuse.

State Authorization Requirements:  DOE’s implementing regulations required that schools meet the requirements of the State in which they operated and that the State have a process for addressing complaints and name that school as authorized to operate in the State.  The court upheld the regulation as to “land-based” schools in a State.

Distance learning (e.g. internet) schools, on the other hand, were not given notice that they would be required to meet the requirements of every State from which they “operated.”  The court upheld the district court’s finding that DOE had failed to provide adequate notice that “distance learning” schools must comply with the requirements of every State in which they “operated,” the term being oblique in that context.  The distance learning schools could not have anticipated that they would be covered by the rule from the proposed rule.  Accordingly, the regulation was not a logical outgrowth of the DOE’s proposed rules and the court affirmed vacature.

Grading the Regulations:  If a failing grade is less than 65%, the D.C. Circuit’s opinion appears to have given DOE a failing grade.  Significant portions of DOE’s bluebook examination were deficient of explanation, exceeded the authority granted, failed to give fair warning, it needs to retake several modules and flunked others.  Grading on a curve against all agencies and all rules, DOE would still get only a “D.”