(Updates with U.S. response in seventh paragraph.)
July 20 (Bloomberg) -- Rules designed to cut off federal aid to institutions whose students struggle the most to repay government loans were challenged by an organization representing for-profit colleges.
A lawsuit attacking so-called gainful employment measures was filed today in federal court in Washington by the Association of Private Sector Colleges and Universities, or APSCU. The rules set benchmarks that educational programs must meet to remain eligible for government grants and loans, which can constitute as much as 90 percent of their revenue.
For-profit colleges allege the standards “emerged out of a notoriously flawed regulatory process” and are premised upon incomplete and unreliable data that will punish programs for “outcomes achieved by students” before the regulations were adopted.
“By issuing the Gainful Employment regulations, the Department of Education has clearly exceeded its statutory authority,” Brian Moran, the group’s interim president and chief executive officer, said in an e-mailed statement. “Adding complexity not clarity, the department’s unlawful regulations will hurt students and jobs.”
Congress and state attorneys general are investigating education companies’ recruitment practices and use of government aid, which totaled $30 billion last year. The Education Department developed the rules to try to curb loan default rates at for-profit colleges that are twice as high as at public institutions, and three times as high as at private nonprofit colleges.
The regulations seek to ensure that for-profit college graduates get jobs that allow them to repay student loans. The aim is to protect students from “exploitative” college programs that leave them with government-backed debt they can’t repay, the Education Department said.
“Our regulations offer students and taxpayers the protection they deserve,” Justin Hamilton, a spokesman for the Education Department, said in an e-mail. “These student safeguards rest on a sound legal foundation.”
The rules also apply to state and private nonprofit colleges that offer career-training certificates. No more than 1 percent of those programs are expected to lose eligibility, according to the government.
Under the rules, programs would remain eligible for federal aid if they meet at least one of three tests in a given year: at least 35 percent of former students are repaying their loan balance; yearly educational-debt payments of typical graduates account for a maximum of 12 percent of their total income; and those payments account for no more than 30 percent of their discretionary income.
Programs would have to fail all three tests in the same year for three out of four years before losing aid eligibility. The first year that could happen is 2015.
The case is Career College Association v. Duncan, 11-cv- 01314, U.S. District Court, District of Columbia (Washington).
--With assistance from John Lauerman in Boston and John Hechinger in New York. Editors: Stephen Farr, Glenn Holdcraft
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