On July 1, 2012 and July 11, 2012, The New York Times published two articles reporting that Judge Rudolph Contreras of Federal District Court overturned the Department of Education’s “gainful employment” rules aimed at for-profit colleges that leave students with huge debt loads, no credentials, and little chance of employment.
For-profit colleges generally get the bulk of their revenues from federal student aid.Despite for-profit colleges’ students making up more than 10% of the country’s college enrollment, they account for nearly half of all student loan defaults.
Under the new guidelines to remain eligible for federal student aid for-profit colleges and nonprofit career-training programs had to meet one of three tests:
- at least 35 percent of graduates must be repaying their loans;
- the typical graduate’s estimated annual loan payments must not exceed 12 percent of earnings; or
- they must not exceed 30 percent of discretionary income.
Judge Contreras took issue with the first requirement and ruled that the 35% debt-repayment standard had no basis, nor was there an “expert study or industry standard suggested that the rate selected by the department would appropriately measure whether a particular program adequately prepared its students.”Judge Contreras left alone the disclosure portion of the regulations where for-profit and nonprofit career training programs must disclose to students their graduation rate, their placement rate and their students’ median debt load.
Peter Cunningham, a spokesman for the Department of Education stated: “The court clearly upheld our authority to regulate career-college programs while urging a clearer rationale for standards around repayment rates.”
The Department of Education may return to court to with a better explanation of why the 35% threshold is rational or could choose to rewrite the regulations, in an attempt to curb some of the for-profit schools’ unscrupulous behavior.