Association of Private Sector Colleges and Universities v. Duncan

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
ASSOCIATION OF PRIVATE
COLLEGES AND UNIVERSITIES,
Plaintiff,
v.
ARNE DUNCAN, in his official capacity
as Secretary of the Department of
Civil Action 11-1314 (RC)
Education,
and
UNITED STATES DEPARTMENT OF
EDUCATION,
Defendants.
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 postsecondary 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 postsecondary 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
2
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,1 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
1
The Senate subcommittee considering the National Vocational Student Loan Insurance
Act noted that “[t]he proposed legislation for vocationally oriented students parallels the
provisions of title IV–B of H.R. 9567 . . . which provided insured reduced-interest-rate loans for
college and university students.” S. Rep. No. 89-758, at 1 (1965). H.R. 9567 became the Higher
Education Act of 1965. When the Senate’s companion measure was first introduced, “[t]he
vocational insured loan program was incorporated in . . . the Higher Education Act of 1965 . . . .”
S. Rep. No. 89-758, at 1 (1965). The House subcommittee then decided “to separate from the
higher education bill the financial aid provisions designed to assist those attending
postsecondary vocational schools.” Id. The Senate followed suit but “adopted as a policy, that
the terms and conditions of the proposed insured and reduced interest loan benefits to the
vocationally oriented student should be placed, to the maximum extent feasible, on the same
basis as equivalent financial assistance afforded the college and university student under H.R.
9567,” id. at 2. The Senate therefore rewrote the House version of the National Vocational
Student Loan Insurance Act to conform it to Title IV of the Higher Education Act. Id.
3
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 postsecondary 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.
4
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.2
2
H.R. Rep. No. 89-308, at 6 (1965) (“The subcommittee was . . . greatly aided in its
efforts by financial data from the New York Higher Education Assistance Corp.,” which
“operates a guaranteed loan program in New York for students attending postsecondary
vocational institutions.” Out of $2 million dollars in guaranteed loans, only $16,320 were in
default. “Needless to say, these default figures are largely unmatched by any other loan program
for any category of student.”); S. Rep. No. 89-758, at 9 (1965) (“The relatively short enrollment
period in most private trade and technical schools coupled with the demonstrated effectiveness
of their placement departments assures the lending agency of a better than average credit risk.”)
(Summary of comments of Mr. J. Warren Davies, president of Lincoln Technical Institute,
Newark, N.J.); id. at 11 (“[T]he . . . material rewards of continued education are such that the
students receiving loans will, in almost every case, be enabled to repay them out of the added
income resulting from their better educational status.”) (Comments of Mr. Lattie M. Upchurch,
Jr., executive vice president of Capitol Radio Engineering Institution, Washington, D.C.).
5
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 “postsecondary
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
6
postsecondary 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 postsecondary 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
7
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
8
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
9
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,3 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
3
The Department did note that “[t]he proposed regulation sets the repayment rate for
ineligibility for gainful employment programs at 35 percent, indicating that slightly more than a
third of recent former students are able to begin paying down their loan principal with money or
through public service. According to the Department’s analysis . . . if this rate were applied to
all public and nonprofit institutions fewer than 18 percent of them would fail to meet the
measure. Of for-profit institutions, 48 percent currently fall below the 35 percent mark.” Id. at
43,662; see also id. at 43,670 (noting that, based on the Department’s analysis, “80 percent of
the public institutions would meet the 35 precent repayment rate requirement, while only 60
percent of the for-profit institutions would meet that test”).
10
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. §
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 ineligible. Finally, schools wishing to offer new gainful employment programs, which
of course would have no data with which to calculate the proposed debt measures, would be
required to apply to have the new program approved by the Department. Id. at 43,624.
After a period of public comment, the Department published three final regulations: the
reporting and disclosure rule, Program Integrity Issues, 75 Fed. Reg. 66,832, 66,835–44,
66,948–49 (Oct. 29, 2010) (promulgating 34 C.F.R. § 668.6), the program approval rule,
Program Integrity: Gainful Employment—New Programs, 75 Fed. Reg. 66,665 (Oct. 29, 2010)
(amending 34 C.F.R. §§ 600.10, 600.20), and the debt measure rule, Program Integrity: Gainful
Employment—Debt Measures, 76 Fed. Reg. 34,386 (June 13, 2011) (promulgating 34 C.F.R. §
668.7). The reporting and disclosure rule required gainful employment programs to report the
information necessary for the Department to calculate the debt measures, 34 C.F.R. § 668.6(a),
and to disclose to prospective students various facts about the program, including the occupation
that the program prepares students to enter, the on-time graduation rate for students completing
11
the program, the tuition and fees charged, and the placement rate and median loan debt for
students completing the program, id. § 668.6(b).
The program approval rule provided that a school “must notify the Secretary at least 90
days before the first day of class when it intends to add an educational program that prepares
students for gainful employment in a recognized occupation.” 34 C.F.R. § 600.10(c)(1). After
providing such notice, the school could proceed to offer the program “unless the Secretary alerts
the institution at least 30 days before the first day of class that the program must be approved for
title IV, HEA purposes.” Id. § 600.20(d)(1)(ii)(B). If the Secretary decided to require program
approval—that is, if the Secretary in his discretion decided to take a closer look at the
program—he would treat the school’s notice as an application for approval and proceed to
evaluate four factors: “(1) [t]he institution’s demonstrated financial responsibility and
administrative capability in operating its existing programs”; “(2) [w]hether the additional
educational program is one of several new programs that will replace similar programs currently
provided by the institution, as opposed to supplementing or expanding the current programs
provided by the institution”; “(3) [w]hether the number of additional educational programs being
added is inconsistent with the institution’s historic program offerings, growth, and operations”;
and “(4) [w]hether the process and determination by the institution to offer an additional
educational program that leads to gainful employment in a recognized occupation is sufficient.”
Id. § 600.20(d)(1)(ii)(E). Any denial of an application would be based on the second, third, and
fourth of those factors, and the Secretary would “explain in the denial how the institution failed
to demonstrate that the program is likely to lead to gainful employment in a recognized
occupation.” Id. § 600.20(d)(1)(ii)(F)(1).
12
The final debt measure rule altered both the thresholds for the various debt measures and
the consequences for failing them. The Department “replac[ed] the proposed two-tiered
approach . . . with a single set of minimum standards. Under this simplified approach, the
Department . . . establish[ed] a minimum standard of 35 percent for the loan repayment rate, and
a maximum standard of 30 percent of discretionary income and 12 percent of annual earnings for
the debt-to-earnings ratios.” Debt Measure Rule, 76 Fed. Reg. at 34,395 (describing 34 C.F.R.
§ 668.7(a)(1)). As it had done in the notice of proposed rulemaking, the Department noted that
“[t]he debt-to-earnings ratios were set after consideration of industry practice and expert
recommendations.” Debt Measure Rule, 76 Fed. Reg. at 34,395. The debt repayment rate was
chosen because it identified “the approximately one quarter of programs” where the fewest
former students were repaying their debts. Id. If a program satisfied any one of those standards,
it would be “considered to provide training that leads to gainful employment in a recognized
occupation.” 34 C.F.R. § 668.7(a)(1). With exceptions not relevant here, a program would be
considered to be failing if “its final debt measures do not meet any of the minimum standards.”
Id. at § 668.7(h). All failing programs would be required to warn their current and prospective
students that the program had failed the debt measures, and to describe any actions that the
institution planned to take to improve its performance. Id. at § 668.7(j)(1). A program that
failed the debt measures in two out of any three years would need to provide additional warnings
to its current and prospective students, including “[a] clear and conspicuous statement that a
student who enrolls or continues in the program should expect to have difficulty repaying his or
her loans.” Id. at § 668.7(j)(2)(i)(D). A program that failed the debt measures in three out of
any four years would lose its Title IV eligibility, id. at § 668.7(i), and the institution could not
13
“seek . . . to reestablish the eligibility of an ineligible program, or to establish the eligibility of a
program that is substantially similar to the ineligible program” for three years. § 668.7(l)(2)(ii).
II. LEGAL STANDARD
“[W]hen a party seeks review of agency action under the APA, the district judge sits as
an appellate tribunal. The ‘entire case’ on review is a question of law,” Am. Bioscience, Inc. v.
Thompson, 269 F.3d 1077, 1083 (D.C. Cir. 2001), and the “complaint, properly read . . . presents
no factual allegations, but rather only arguments about the legal conclusion to be drawn about
the agency action,” Marshall Cnty. Health Care Auth. v. Shalala, 988 F.2d 1221, 1226 (D.C. Cir.
1993); accord Rempfer v. Sharfstein, 583 F.3d 860, 865 (D.C. Cir. 2009); Univ. Med. Ctr. of S.
Nev. v. Shalala, 173 F.3d 438, 440 n. 3 (D.C. Cir. 1999); James Madison Ltd. v. Ludwig, 82 F.3d
1085, 1096 (D.C. Cir. 1996). The district court’s review “is based on the agency record and
limited to determining whether the agency acted arbitrarily or capriciously,” Rempfer, 583 F.3d
at 865, or in violation of another standard set out in 5 U.S.C. § 706.
III. ANALYSIS
The Association challenges the debt measure rule, the reporting and disclosure rule, and
the program approval rule. The court will consider each challenge in turn.
A. The Debt Measure Rule
i. Statutory Authority
The Association first argues that the debt measure rule is “in excess of statutory . . .
authority.” 5 U.S.C. § 706(2)(C). Such arguments are “reviewed under the well-known
Chevron framework.” Ass’n of Private Sector Colls. & Univs. v. Duncan, 2012 WL 1992003, at
*9; see Chevron U.S.A. v. Natural Res. Def. Council, 467 U.S. 837, 842–43 (1984). “Under that
14
framework, ‘[i]f the intent of Congress is clear, . . . [a court] must give effect to the
unambiguously expressed intent of Congress.’” TNA Merchant Projects, Inc. v. FERC, 616 F.3d
588, 591 (D.C. Cir. 2010) (quoting Chevron U.S.A. v. Natural Res. Def. Council, 467 U.S. 837,
842–43 (1984)) (alterations in TNA). “But ‘if the statute is silent or ambiguous with respect to
the specific issue,’ the court must uphold the agency’s interpretation as long as it is reasonable.”
Id. (quoting Chevron, 467 U.S. at 843); see also Nat’l Cable & Telecomm. v. FCC, 567 F.3d
659, 663 (D.C. Cir. 2009) (“If the statute is ambiguous enough to permit the agency’s
interpretation . . . [a court must] defer to that interpretation so long as it is reasonable.”).
The Association argues that “gainful employment” unambiguously means “a job that
pays,” and that the Department’s attempt to define the phrase in terms of debt and income
therefore exceeds its statutory authority. The Association points to contemporary dictionaries,
which define “gainful” as “productive of gain” or “providing an income.” See, e.g., WEBSTER’S
THIRD NEW INTERNATIONAL DICTIONARY 768 (3d ed. 1964). It also notes that the phrase
“gainful employment” is used many times in Title 20, see 20 U.S.C. §§ 1036(e)(1)(B)(ii),
1134c(a), 1135c(d)(2), 1140(1)(B), 1140g(d)(3)(D), 1161g(d)(5)(B), 2208(a), 4706(a),
5605(a)(2)(B)—and each of those uses, the Association argues, means “a job that pays.” Finally,
the Association points to the Education Amendments of 1972, which altered the Vocational
Education Act of 1963 to provide that employment as a volunteer fireman would be gainful
employment for certain purposes. Pub L. No. 92-318, § 202(b), 86 Stat. 235, 325 (1972)
(codified at 20 U.S.C. § 1248(1) (Supp. II 1972) (covering “program[s] designed to prepare
individuals for gainful employment (including volunteer firemen)”). The Association argues that
this amendment demonstrates the plain meaning of “gainful employment,” since without the
15
amendment volunteer work would not have been considered gainful. See S. Rep. No. 92-346, at
75 (1971) (noting that the amendment was necessary because “these firemen serve on a
volunteer basis, without compensation” and so “are not gainfully employed as firemen and
therefore their training cannot be considered fundable vocational education”). Conversely, the
Association argues, paid work—any paid work—is gainful employment.
The Department replies that Congress did not provide a precise definition of what it
means to “prepare students for gainful employment in a recognized occupation.” 20 U.S.C. §§
1001(b)(1), 1002(b)(1)(A)(i), (c)(1)(A). The Department cites to many contemporary
dictionaries that define “gainful” as “profitable” or “lucrative,” thereby implying (the
Department argues) an excess of returns over expenses. See, e.g., BLACK’S LAW DICTIONARY
807 (4th ed. 1951); WEBSTER’S NEW INTERNATIONAL DICTIONARY 1026 (2d ed. 1958); NEW
STANDARD DICTIONARY 1000 (Funk & Wagnalls Co. 1946). It also argues that the operative
statutory phrase is not simply “gainful employment” but rather “gainful employment in a
recognized occupation,” and suggests that the fuller phrase connotes employment in an
established occupation—and therefore, presumably, a decently paying one. It further argues that
“gainful employment” means something different in the context of fellowships for graduate
study, for example, the recipients or which are generally barred from such employment, see, e.g.,
20 U.S.C. § 1036(e)(1)(B)(ii), than in the context of training for entrance into a recognized
occupation. The Department therefore concludes that the phrase “gainful employment in a
recognized occupation” is ambiguous and that in enacting it Congress delegated interpretive
authority to the Department, whose interpretation ought therefore to be evaluated under step two
of the Chevron analysis.
16
The court agrees. There is no unambiguous meaning of what makes employment
“gainful”: the phrase need not mean “any job that pays.” “Gainful employment” does not
unambiguously encompass work for minimal gain, nor does it necessarily describe the gross
profits from a given activity rather than the net gains derived therefrom. Moreover—and more
importantly—the relevant statutory command is that a given program “prepare students for
gainful employment in a recognized occupation.” The Department’s regulations are an attempt
to assess whether certain programs in fact provide such preparation. See, e.g., Debt Measure
Rule, 76 Fed. Reg. at 34,395 (“The Department [established the debt measures] with the goal of
identifying programs that are failing to prepare students for gainful employment in a recognized
occupation . . . .”). The real question, then, is not how much gain is enough but rather how much
preparation is enough. The Department has attempted to answer that question by reference to the
economic success of a program’s former students. The statute does not “unambiguously
foreclose[] the agency’s interpretation,” Nat’l Cable, 567 F.3d at 663, because it does not tell
the Department how to determine which programs actually prepare their students and which
programs do not. “The power of an administrative agency to administer a congressionally
created . . . program necessarily requires the formulation of policy and the making of rules to fill
any gap left, implicitly or explicitly, by Congress.” Chevron, 467 U.S. at 843 (quoting Morton v.
Ruiz, 415 U.S. 199, 231 (1974)) (ellipses in original). The means of determining whether a
program “prepare[s] students for gainful employment in a recognized occupation” is a
considerable gap, which the Department has promulgated rules to fill. The court therefore turns
to the question of whether the Department has done so reasonably.
17
The Association musters many arguments that the Department has adopted an
unreasonable interpretation. First, the Association argues that the gainful employment
regulations transform the statutory requirement that certain programs “prepare students for
gainful employment” into a requirement that preparation in fact “lead to gainful employment.”
34 C.F.R. § 668.7(a)(1) (emphasis added). The Association notes that many factors—including
individual choice and market demand—affect a former student’s job prospects. It further argues
that the Department has impermissibly transformed an institutional requirement—that
institutions provide “an eligible program of training,” 20 U.S.C. §§ 1002(b)(1)(A),
(c)(1)(A)—into an evaluation of each offered program. Next, the Association contends that the
Department’s interpretation is foreclosed by the statutory cohort default rate test, 20 U.S.C.
§ 1085(a), which bars institutions with high student default rates from participating in certain
Title IV programs. The Association then argues that the debt measure rule is an “elephant in a
mousehole”—a policy change so large that Congress could not have meant to authorize it in the
statutory language on which the Department relies. It also contends that the regulation frustrates
Congress’s intention in enacting the Higher Education Act by favoring programs that prepare
students for high-paying jobs. Finally, the Association argues that the Department’s
interpretation is unreasonable because it may produce absurd results in certain circumstances,
such as when schools in different states offer identical programs and place graduates into the
same sorts of jobs, but one program fails the debt measures because its local wage rate is lower.
The Court considers each of these arguments in turn.
Although the Association rightly notes that the Higher Education Act only requires that
certain programs prepare students for gainful employment and not that they guarantee it, the
18
adequacy of a program’s preparation is difficult to measure—and it is reasonable to consider
students’ success in the job market as an indication of whether those students were, in fact,
adequately prepared. If “a program of training to prepare students for gainful employment,” 20
U.S.C. § 1088(b)(1)(A)(i), does not in fact lead to jobs for any of its students, it is reasonable to
conclude that those students were not truly prepared. Moreover, a program-by-program
evaluation of the sort that the Department has established in its gainful employment regulations
is not foreclosed by the statutory formula that an institution becomes eligible by providing “an
eligible program of training,” 20 U.S.C. §§ 1002(b)(1)(A), (c)(1)(A). The debt measure rule
acknowledges that institutions subject to this requirement must “offer at least one eligible
program . . . in order for the institution to be eligible.” Debt Measure Rule, 76 Fed. Reg. at
34,392. Each program must therefore be evaluated for eligibility, and it is reasonable for the
Department to conclude (as it has) that Title IV funds may only be used to pursue studies in an
eligible program. Indeed, to read the statute otherwise would allow an institution to receive
federal funding for many ineligible programs simply because the institution also offered at least
one eligible program.
Nor is the Department’s interpretation unreasonable in light of the statutory cohort
default rule. The D.C. Circuit has held that the Department’s authority to establish “reasonable
standards of financial responsibility and appropriate institutional capability,” 20 U.S.C. §
1094(c)(1)(B), empowers it to promulgate a rule that measures an institution’s administrative
capability by reference to its cohort default rate—even though the administrative test differs
significantly from the statutory cohort default rate test. Career Coll. Ass’n v. Riley, 74 F.3d
1265, 1272–75 (D.C. Cir. 1996); compare 34 C.F.R. § 668.16(m)(1)(i) (finding an institution
19
administratively capable if, inter alia, it had a cohort default rate below 25 percent in each of the
three most recent fiscal years) with 20 U.S.C. § 1085(a)(2) (making an institution eligible for
Title IV funding if, inter alia, it had an acceptable cohort default rate in any of the last three
fiscal years). If the statutory cohort default rule does not bar an administrative cohort default
rule, it certainly does not prevent the Department from adopting the debt measures.
The debt measures are a significant regulatory intervention, but they do not suggest that
the Department has found “an elephant in a mousehole.” That phrase entered the lexicon of
administrative law in Whitman v. American Trucking Associations, Inc., 531 U.S. 457 (2001),
when the Supreme Court said that “Congress . . . does not alter the fundamental details of a
regulatory scheme in vague terms or ancillary provisions—it does not, one might say, hide
elephants in mouseholes.” 531 U.S. at 468. The Whitman Court cited to FDA v. Brown &
Williamson Tobacco Corp., 529 U.S. 120 (2000), for that proposition; there, the Court held that
Congress had not delegated to the Food and Drug Administration the authority to regulate
tobacco as a “drug” under the Food, Drug, and Cosmetic Act, 21 U.S.C. § 301 et seq.—a power
that the agency had always disavowed. The Court concluded that “Congress could not have
intended to delegate a decision of such economic and political significance to an agency in so
cryptic a fashion.” 529 U.S. at 160. The Whitman Court also invoked MCI Telecommunications
Corporation v. American Telephone & Telegraph Company, 512 U.S. 218 (1994), to establish
that elephants do not hide in mouseholes. In MCI, the Court held that the Federal
Communications Commission’s statutory authority to “modify any requirement” did not
empower it to alter the requirement underpinning the rate regulation of common carriers. Id. at
231 (“It is highly unlikely that Congress would leave the determination of whether an industry
20
will be entirely, or even substantially, rate-regulated to agency discretion—and even more
unlikely that it would achieve that through such a subtle device as permission to ‘modify’ rate-
filing requirements.”). In Whitman itself, the Court concluded that since the power to consider
costs when setting air quality standards was an “elephant”—that is, a major issue of public
policy—and the statutory command to set those standards with “an adequate margin of safety” a
“mousehole,” it was “implausible that Congress would give to the EPA through these modest
words the power to determine whether implementation costs should moderate national air quality
standards.” Whitman, 531 U.S. at 468.4
Neither the elephant nor the mousehole is present here. Although the Department’s
regulation is significant, it does not approach the scale of the elephantine interventions described
above. Nor is the statutory language the Department invokes especially broad or obscure.
Concerned about inadequate programs and unscrupulous institutions, the Department has gone
looking for rats in ratholes—as the statute empowers it to do.
Finally, the court is unpersuaded by the Association’s argument that the gainful
employment regulation frustrates Congress’s intention by favoring programs that prepare
students for “high-paying jobs.” Program Integrity: Gainful Employment, 75 Fed. Reg. at
43,667. Although the Department printed those words in its notice of proposed rulemaking, the
final regulation only sets minimal earning and debt repayment standards. And the Association’s
argument that the regulation may produce absurd results in certain circumstances is better suited
4
Applying this line of cases, the D.C. Circuit concluded that vague language in the
Gramm-Leach-Bliley Financial Modernization Act, Pub. L. No. 106-102, 113 Stat. 1338 (1999),
did not authorize the Federal Trade Commission to regulate attorneys engaged in the practice of
law. Am. Bar Ass’n v. FTC, 430 F.3d 457, 467–73 (D.C. Cir. 2005).
21
to an as-applied challenge arising out of such circumstances. “To prevail in . . . a facial
challenge” such as this one, a plaintiff “‘must establish that no set of circumstances exists under
which the [regulations] would be valid.’” Ass’n of Private Sector Colls., 2012 WL 1992003, at
*10 (quoting Reno v. Flores, 507 U.S. 292, 301 (1993)) (alteration in original). “[I]t is not
enough for” a plaintiff “to show the [challenged regulations] could be applied unlawfully.” Id.(quoting Sherley v. Sebelius, 644 F.3d 388, 397 (D.C. Cir. 2011)) (alterations in original).
The gainful employment regulations are a reasonable interpretation of an ambiguous
statutory command: that the Department provide Title IV funding only to schools that “prepare
students for gainful employment in a recognized occupation.” The court turns to the
Association’s arguments that those regulations were promulgated in an arbitrary and capricious
manner.
ii. Reasoned Decisionmaking
“To satisfy the APA’s ‘arbitrary and capricious’ standard, an agency must ‘articulate a
satisfactory explanation for its action including a “rational connection between the facts found
and the choice made.”’” Owner-Operator Independent Drivers Ass’n, Inc. v. Federal Motor
Carrier Safety Admin., 494 F.3d 188, 203 (D.C. Cir. 2007) (quoting Motor Vehicle Mfrs. Ass’n v.
State Farm Mut. Ins. Co., 463 U.S. 29, 43 (1983) (quoting Burlington Truck Lines, Inc. v. United
States, 371 U.S. 156, 168 (1962))). “The ‘agency must cogently explain why it has exercised its
discretion in a given manner,’ and that explanation must be ‘sufficient to enable [a court] to
conclude that the [agency’s action] was the product of reasoned decisionmaking.’” Owner-
Operator, 494 F.3d at 203 (quoting State Farm, 463 U.S. at 48, 52).
22
The Association puts forward many arguments that the debt measure rule is arbitrary and
capricious. First, it argues that the rule departs from agency precedent without explanation.
Next, the Association contends that the debt measures are arbitrary because they do not actually
assess whether a program prepares its students for gainful employment in a recognized
occupation and moreover are based on bad data. It further contends that the debt measures are
arbitrarily or unconstitutionally retroactive. The Association argues that the rule is arbitrary in
light of the statutory “90/10 rule” and the Department’s inability to set a program’s tuition. It
contends that the debt repayment test arbitrarily treats loans in deferment or forbearance and
students who have not completed their program, while the debt-to-earnings tests consider an
arbitrarily short window of time. Finally, the Association argues that both the debt repayment
test and the debt-to-earnings tests lack a reasoned basis.
Judicial “review under the APA is highly deferential, but agency action is arbitrary and
capricious if it departs from agency precedent without explanation.” Ramaprakash v. FAA, 346
F.3d 1121, 1124 (D.C. Cir. 2003). The Association argues that the Department has done just
that, locating the agency’s precedent in an administrative adjudication from 1994, see In re
Acad. for Jewish Educ., 1994 WL 1026087 (Dep’t of Educ. Mar. 23, 1994), and a regulation
requiring institutions to “determine the number of students who . . . obtained gainful employment
in the recognized occupation for which they were trained or in a related comparable recognized
occupation.” 34 C.F.R. § 668.8(g)(1)(ii). The administrative adjudication involved the question
of whether a program in Jewish culture prepared its students for gainful employment in a
recognized occupation. The academy that offered the program argued that although it did not
“train [its] students for any specific job” it nonetheless gave them “the basis of a very strong
23
Jewish education and a strong education in Jewish culture” that would prepare them for work in
Jewish institutions. In re Acad. for Jewish Educ., 1994 WL 1026087, at *2. The Department
ruled that because the aim of the program was “assimilation into a particular culture, not
[preparation for] a specific area of employment,” id. at *3, it did not prepare its students for
gainful employment in a recognized occupation. The Department, the Association notes, did not
discuss the debt taken on by those students nor their subsequent earnings nor debt payments.
But that is unsurprising. The administrative law judge did not offer a full definition of what it
meant to prepare a student for gainful employment in a recognized occupation—to the contrary,
he noted that it was “difficult to objectively assess what, per se, prepares one for ‘gainful
employment in a recognized occupation,’” id. at *2—but merely held that such preparation must
be for “a specific area of employment,” id. at *3. The Department has not departed from that
interpretation. Nor is the Department’s regulation requiring schools to report whether individual
students have attained gainful employment counter to its attempt to use the debt measures to
identify programs that offer adequate preparation for such employment.
The Association next argues that the debt measures are arbitrary because they do not
actually assess whether a program prepares its students for gainful employment in a recognized
occupation. Instead, the Association argues, the debt measures merely reflect the underlying
demographics of a program’s student population, or the professional choices that students make
after leaving the program, or the economic conditions in which they make those choices. The
Department considered similar comments when it promulgated the debt measure rule. In
response to commenters’ suggestions that institutions that enrolled more minorities or more
students receiving Pell Grants (a barometer of economic need) would more often fail the debt
24
measures, the Department performed a series of multivariate regression analyses. It concluded
that “there is only a modest relationship between repayment rates and an institution’s student
demographics” because “the percentage of students receiving Pell Grants explains 23 percent of
the total variance in repayment rates.” Debt Measure Rule, 76 Fed. Reg. at 34,462. The
percentage of students that are members of a minority group explained twenty percent of the
total variance in repayment rates. Decl. of Eduardo Ochoa, Ex. A (Dec. 13, 2011).5 The
Department further found “a wide variation in performance on the debt-to-earnings ratio among
programs serving similar groups of students.” Debt Measure Rule, 76 Fed. Reg. at 34,464.
5
Although this is the correct figure, the Department erroneously determined that “[t]he
percentage of the students that are members of a minority group explains 1 percent of the total
variance in repayment rates.” Debt Measure Rule, 76 Fed. Reg. at 34,462. That calculation was
incorrect, see Decl. of Eduardo Ochoa (Dec. 13, 2011), but the rule need not be remanded on that
basis. “Under the APA, courts must take ‘due account’ of ‘the rule of prejudicial error.’”
Gerber v. Norton, 294 F.3d 173, 182 (D.C. Cir. 2002) (quoting 5 U.S.C. § 706). Although
“remand is required ‘when there is substantial doubt that the administrative agency would have
reached the same result it did absent’” the error, in the absence of substantial doubt remand is
unnecessary. Chem. Waste Mgmt., Inc. v. EPA, 976 F.2d 2, 32 (D.C. Cir. 1992) (per curiam)
(quoting Consolidated Gas Supply v. FERC, 606 F.2d 323, 329 (D.C. Cir. 1979)); accord
Wilkinson v. Legal Servs. Corp., 27 F. Supp. 2d 32, 64 (D.D.C. 1998). The Department
determined that although “the percentage of students receiving Pell Grants explains 23 percent of
the total variance in repayment rates,” the “relationship between repayment rates and an
institution’s student demographics” was “modest.” Debt Measure Rule, 76 Fed. Reg. at 34,462.
If twenty-three percent explanatory power was “modest,” then surely the Department would, as
it argues, have found the weaker—and non-additive—relationship between minority group
membership and repayment rates to be modest as well. See Decl. of Eduardo Ochoa at ¶ 11 n.1
(“The percent of total variance figures are not additive. Thus, it would be incorrect to conclude
that minority enrollment and Pell rates together explain 43% of the total variance, even though
Pell rates examined individually explain 23% and minority enrollment examined individually
explains 20%.”).
The Department’s use of a data set from Missouri to fill gaps in its own data was
similarly permissible. When the Department was developing its regulations, it has explained, the
Missouri data set was the besst State database available for certain purposes—there was no
adequate national database—and the “use of the best available data is firmly recognized by the
case law,” even when that data is imperfect. Baystate Medical Ctr. v. Leavitt, 545 F. Supp. 2d
20, 50 (D.D.C. 2008).
25
Many programs serving large numbers of students receiving Pell Grants nonetheless passed the
debt-to-earnings tests as well. Id. at 34,465. The Department’s determination that the debt
measures appropriately measured whether a program prepared its students for gainful
employment in a recognized occupation rather than a program’s demographics was therefore not
arbitrary. Nor was its decision to promulgate tests affected by students’ professional choices
arbitrary: the D.C. Circuit has already rejected that argument in an analogous context. See Ass’n
of Accredited Cosmetology Schools v. Alexander, 979 F.2d 859, 866 (D.C. Cir. 1992) (holding
that it was “clearly rational” for Congress and the Department to “solve the problem of
increasing . . . defaults by eliminating schools evidencing a disproportionately large share of the
defaults” even though such an action would “punish schools for their students’ rates of default”).
Finally, the fact that the debt measures may perform differently at different points in the
economic cycle does not make them arbitrary on their face.
Nor are the debt measures arbitrarily or unconstitutionally retroactive, because they do
not alter “the past legal consequences of past actions.” Nat’l Cable & Telecomm. Ass’n v. FCC,
567 F.3d 659, 670 (D.C. Cir. 2009). “A law is ‘retroactive’ if it ‘“takes away or impairs vested
rights acquired under existing law, or creates a new obligation, imposes a new duty, or attaches a
new disability in respect to transactions or considerations already past.”’” Ass’n of Accredited
Cosmetology Schools, 979 F.2d at 864 (quoting Neild v. District of Columbia, 110 F.2d 246, 254
(D.C. Cir. 1940) (quoting Society for Propagating the Gospel v. Wheeler, 22 F.Cas. 756, 767
(C.C.D.N.H. 1814) (Story, J.))). But “schools have no ‘vested right’ to future eligibility to
participate” in Title IV programs, id., and a regulation is not retroactive “merely because the
facts or requisites upon which its subsequent action depends . . . are drawn from a time
26
antecedent” to its promulgation, id. at 865 (quoting Reynolds v. United States, 292 U.S. 443, 449
(1934)). The debt measures look to the recent performance of a program’s former students in
order to determine whether that program will, in the future, be eligible to receive Title IV funds.
“[T]erminating . . . schools’ future participation in the Title IV . . . programs based on their past
track record . . . cannot amount to retroactive application under Association of Accredited
Cosmetology Schools.” Career Coll. Ass’n v. Riley, 1994 WL 396294, at *5 n.7 (D.D.C. July 19,
1994), aff’d 70 F.3d 637 (D.C. Cir. 1995) (unpublished). Nor are the debt measures secondarily
retroactive. Impermissible secondary retroactivity can arise when a regulation “impair[s] the
future value of a past bargain,” Nat’l Cable, 567 F.3d at 670, by, for instance, altering the value
of a contract or license entered into under a prior regulatory scheme. “Because there were no
prior rules that related to the [gainful employment] regulation[s] at issue in this case, plaintiffs
cannot claim they have incurred any past investment in reliance on any rule.” Career Coll.
Ass’n, 1994 WL 396294, at *5.
The Association argues that the debt measures are arbitrary in light of the statutory
“90/10 rule” and the Department’s inability to set a program’s tuition, and that the debt
repayment test arbitrarily treats loans in deferment or forbearance and students who have not
completed their program, while the debt-to-earnings tests consider an arbitrarily short window of
time. The court rejects those arguments. By statute, proprietary institutions of higher
education—most of whose programs are gainful employment programs—lose their Title IV
eligibility if more than 90% of their revenue comes from Title IV funds for two consecutive
years. 20 U.S.C. § 1094(a)(24). The Department considered the interaction of the debt measures
and this 90/10 rule and reasonably concluded that “it is entirely possible to meet both the 90/10
27
requirements of the existing statute and the final repayment rate thresholds in these final
regulations.” Debt Measure Rule, 76 Fed. Reg. at 34,413. The Association has not presented
any convincing arguments to the contrary. The debt repayment test rationally considers student
loans that are in deferment of forbearance not to be in repayment, explaining that “deferments,
forbearances, and other program benefits are necessary to assist borrowers in loan repayment,
but particularly heavy reliance on these tools among former students of a particular program
raise[s] questions about the performance of that program.” Id. at 34,409. And the Department
rationally concluded that considering a significantly longer earnings window in calculating the
debt-to-income tests could “weaken or sever” the connection between earnings and education.
Id. at 34,419.
Finally, the Association argues that the Department has not provided explanations of
either the loan repayment test or the debt-to-income tests that are sufficient for the court to
conclude that the tests are the product of reasoned decisionmaking. The debt-to-earnings ratios
were established “after consideration of industry practice and expert recommendations.” Debt
Measure Rule, 76 Fed. Reg. at 34,395. Those experts suggested that 20 percent was the
maximum affordable ratio of debt payments to discretionary income, id. at 34,397, and noted
that 8 percent is a commonly used industry standard for a manageable ratio of debt to total
income, id. at 34,398. “[B]ecause a gainful employment program would fail the discretionary
income ratio [test] whenever the income of the students who completed the program was less
than 150 percent of the poverty guideline”—the line above which income begins to be
discretionary—the Department employed the tests in tandem. Id. at 34,397–98. “Programs
whose graduates have low earnings relative to debt would benefit from the calculation based on
28
total income, and programs whose graduates have higher debt loads that are offset by higher
earnings would benefit from the calculation based on discretionary income.” Id. at 34,398.
Having established those baselines, the Department then increased them by 50 percent—to 30
percent of discretionary income and 12 percent of annual earnings—to “provide a tolerance . . .
over the baseline amounts . . . as well as account for former students who completed a program
but who may have left the workforce or are working part-time.” Id. at 34,400.
The debt repayment rate was chosen because it identified “the approximately one quarter
of programs” where the fewest former students were repaying their debts. Id. at 34,395. The
bottom quartile was chosen in an “attempt[] to define a relatively small subset of programs that
could potentially lose eligibility” while also “balanc[ing] that concern against the need to make
the measure a meaningful performance standard.” Id. at 34,397.6 The Department does not
identify any expert studies or industry practices indicating that a repayment rate of 35 percent
would be a “meaningful performance standard,” but rather emphasizes that the number was
chosen because approximately one quarter of gainful employment programs would fail a test set
at that level. See id. at 34,397 (“Setting the threshold for eligibility at 35 percent identified
approximately the lowest-performing quarter of programs.”); id. (“Although we have revised the
methodology for calculating the repayment rate, the 35 percent threshold remains close to the
25th percentile among gainful employment programs.”); id. at 34,399 (noting that “the loan
repayment rate threshold” of “35 percent . . . approximated the 25th percentile of the distribution
of repayment rates”); id. at 34,400 (“For the loan repayment rate, the 35 percent threshold
6
The Department described its development of the proposed debt repayment test in this
way, and noted that “[a] similar approach was taken in developing the repayment rate threshold
in these final regulations.” Debt Measure Rule, 76 Fed. Reg. at 34,397.
29
continues to represent the 25th percentile of repayment rates rounded to the nearest 5 percent
. . . .”).
When an agency “must select some[] necessarily somewhat arbitrary figure” in
establishing bright-line rules, a court “will defer to [its] expertise if it provides substantial
evidence to support its choice and responds to substantial criticism of that figure.” United
Distribution Cos. v. FERC, 88 F.3d 1105, 1141 n.45 (D.C. Cir. 1996). Such rules “generally do
not violate the APA’s deferential arbitrary-and-capricious standard . . . so long as those rules fall
within a zone of reasonableness and are reasonably explained.” Emily’s List v. FEC, 581 F.3d 1,
22 n.20 (D.C. Cir. 2009). “But where an agency has articulated no reasoned basis for its
decision . . . we will not ‘abdicate the judicial duty carefully to “review the record to ascertain
that the agency has made a reasoned decision based on reasonable extrapolations from some
reliable evidence.”’” Tripoli Rocketry Ass’n, Inc. v. ATF, 437 F.3d 75, 83 (D.C. Cir. 2006)
(quoting Am. Mining Cong. v. EPA, 907 F.2d 1179, 1187 (D.C. Cir. 1990) (quoting Natural Res.
Def. Council v. EPA, 902 F.2d 962, 968 (D.C. Cir. 1990) (internal quotation marks omitted))).
The question before the court is whether the Department has provided a reasoned basis for
selecting the debt repayment and debt-to-income standards.
The debt-to-income standards were based upon expert studies and industry
practice—objective criteria upon which the Department could reasonably rely. That some
commenters criticized those standards does not invalidate the rule, but only places a burden on
the Department to respond to that criticism. See United Distribution Cos., 88 F.3d at 1141 n.45.
The Department did so. See 76 Fed. Reg. 34,395–400. The debt to income standards were the
product of a “rational connection between the facts found and the choice made,” State Farm,
30
463 U.S. at 43, and the APA demands no more. The debt repayment standard, by contrast, was
not based upon any facts at all. 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.” Debt
Measure Rule, 76 Fed. Reg. at 34,397. That this explanation could be used to justify any rate at
all demonstrates its arbitrariness. If the Department had chosen to disqualify the bottom ten
percent of programs, or the bottom half, it would have offered the same rationale: the rate chosen
disqualified the percentage of programs that it was intended to disqualify, and to have
disqualified fewer would have made the test too lenient while disqualifying more would have
made the requirement too stringent. This is not reasoned decisionmaking. “As an expert agency,
[the Department’s] job is to make rational and informed decisions on the record before it in order
to achieve the principles set by Congress. Merely . . . picking a compromise figure is not
rational decisionmaking.” Qwest Corp. v. FCC, 258 F.3d 1191, 1202 (10th Cir. 2001). In
setting the debt repayment rate, the Department picked a palatable figure. Because the
Department has not provided a reasonable explanation of that figure, the court must conclude
that it was chosen arbitrarily. See U.S. Air Tour Ass’n v. FAA, 298 F.3d 997, 1019 (D.C. Cir.
2002) (“[I]n the absence of any reasonable justification,” the court “must conclude that this
aspect of the [rule] is arbitrary and capricious. . . .”).
31
The repayment rate test cannot be severed from the other debt measures. “Whether an
administrative agency’s order or regulation is severable, permitting a court to affirm it in part
and reverse it in part, depends on the issuing agency’s intent.” Davis Cty. Solid Waste Mgmt. v.
EPA, 108 F.3d 1454, 1459 (D.C. Cir. 1997) (quoting North Carolina v. FERC, 730 F.2d 790,
795–96 (D.C. Cir. 1984)). That the component parts of a regulation are “intertwined . . . gives
rise to a substantial doubt that a partial affirmance would comport with the [agency’s] intent.”
Telephone & Data Sys., Inc. v. FCC, 19 F.3d 42, 50 (D.C. Cir. 1994). Because the Department
has repeatedly emphasized the ways in which the debt repayment and debt-to-income tests were
designed to work together, see Debt Measure Rule, 76 Fed. Reg. at 34,394–400, the tests are
obviously “intertwined”—and so the court cannot sever one from the others. The entire debt
measure rule must therefore be vacated and remanded to the Department.7 See Harmon v.
7
Because the court vacates and remands the entire regulation, it need not address the
Association’s argument that the debt measures violate the First Amendment by requiring that
programs that fail the debt measure test in two out of three years must disclose that “a student
who enrolls or continues to enroll in the program should expect to have difficulty repaying his or
her student loans.” Debt Measure Rule, 76 Fed. Reg at 34,432. The government may require the
commercial disclosure of “purely factual and uncontroversial information” as long as there is a
rational justification for the means of disclosure and it is intended to prevent consumer
confusion, see Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626, 651 (1985), but the
court doubts that the statement that every student in a program “should expect to have difficulty
repaying his or her student loans” is a purely factual one.
Neither need the court address the Association’s argument that the debt measures violate
the Fifth Amendment by not allowing schools to contest the accuracy of data that could be used
to sanction them. The Fifth Amendment protects against the deprivation of property without due
process of law, but (as discussed above) the D.C. Circuit has held that schools have no “vested
interest” in their ability to receive Title IV funds. Ass’n of Accredited Cosmetology Schools, 979
F.2d at 867. Any property right is necessarily a “vested interest”; courts use the terms
interchangeably. See, e.g., Ganadera Indus., S.A. v. Block, 727 F.2d 1156, 1160 (D.C. Cir. 1984)
(concluding that a party without a “vested right” has “no constitutionally-protected property
interest”). Without a property right in their participation in Title IV programs, schools cannot
press a Fifth Amendment challenge to the regulation of those programs.
32
Thornburgh, 878 F.2d 484, 495 (D.C. Cir. 1989) (“When a court finds that an agency regulation
is invalid in substantial part, and that the invalid portion cannot be severed from the rest of the
rule, its typical response is to vacate the rule and remand to the agency.”) (footnotes omitted).
B. The Reporting and Disclosure Rule
i. Reporting
The court turns to the reporting and disclosure rule. The Association argues that this rule
must also be vacated because it is “centered on” the debt measure rule, see Nat’l Mining Ass’n v.
Dep’t of Interior, 105 F.3d 691, 696 (D.C. Cir. 1997), and because the Higher Education Act
prohibits “the development, implementation, or maintenance of a Federal database of personally
identifiable information on individuals receiving assistance under this chapter” unless that
information “is necessary for the operation of programs authorized by” Title IV (among other
subchapters). 20 U.S.C. § 1015c(a), (b)(1). The regulation requires that institutions report,
among other things, “[i]nformation needed to identify [a] student and the institution the student
attended.” 34 C.F.R. § 668.6(a)(1)(i). The Department argues that the resulting database “is
necessary for the operation of” the debt measures, and that it therefore falls within a statutory
exception to the prohibition on maintaining databases of personally identifiable information. See
20 U.S.C. § 1015c(b)(1). As the debt measures have been vacated, that argument has little
force—and the Department cannot show that the database it would maintain is necessary for the
operation of any other Title IV program.8 The reporting portion of the reporting and disclosure
8
The court further notes that 20 U.S.C. § 1015c(b)(2), which limits such databases to “a
system (or successor system) that . . . was in use by the Secretary . . . as of the day before August
14, 2008” presents a difficult issue that the Department’s interpretation—which would seem to
swallow the exception by allowing the Secretary to fold any new database into an existing
one—does not fully address.
33
rule, 34 C.F.R. § 668.6(a), will therefore be vacated because it is “not in accordance with” 20
U.S.C. § 1015c. See 5 U.S.C. § 706(2)(A).
ii. Disclosure
The disclosure portion of the rule, however, does not run afoul of that statutory
prohibition. See 34 C.F.R. § 668.6(b)–(c). It does not require gainful employment programs to
report information to the Department, but only to disclose it to their prospective students. Those
disclosures must include the occupation that the program prepares students to enter, the on-time
graduation rate for students completing the program, the tuition and fees charged, and the
placement rate and median loan debt for students completing the program. See 34 C.F.R. §
668.6(b). Although the Association again argues that the disclosure requirements are “centered
on” the debt measure rule, see Nat’l Mining Ass’n, 105 F.3d at 696, the Department has 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 (2006); 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.”). The disclosures
mandated here fall comfortably within that regulatory power, and are therefore within the
Department’s authority under the Higher Education Act.
Finally, the disclosure requirements are not arbitrary and capricious. The Association
argues that because the on-time graduation rate disclosure mandated by the reporting and
disclosure rule, see 34 C.F.R. § 668.6(b)(1)(ii), (c), differs significantly from the graduation rate
disclosure required by the Student Right to Know and Campus Security Act of 1990, 20 U.S.C. §
341092, the new disclosure will arbitrarily confuse students. The Student Right to Know Act
requires that schools disclose the completion rate of full-time, first-time undergraduate students
and defines completion as graduation within 150% of the normal time for completion. 20 U.S.C.
§ 1092(a)(1)(L), (a)(3). The reporting and disclosure rule, on the other hand, requires schools to
disclose the on-time completion rate for students in gainful employment programs, defining on-
time completion as graduation from a program within the normal time for completing that
program. 34 C.F.R. § 668.6(b)(1)(ii), (c). It was not arbitrary for the Department to determine
that schools should disclose their on-time completion rates to “all students” considering gainful
employment programs, Reporting and Disclosure Rule, 75 Fed. Reg. at 66,838, rather than
simply first-time, full-time undergraduates (as the Student Right to Know Act limits the
disclosure). Nor was it arbitrary for the Department to determine that those students should be
informed of how many potential peers “completed the program no later than its published
length.” Id. The Department considered and responded to concerns about the interaction of the
new disclosure requirements and the Student Right to Know Act, see id. at 66,838–39, and it is
not this court’s role to second-guess the Department’s policy judgment that the value of the
additional disclosures outweighed the potential confusion that could result from the interaction
of the disclosures.
Nor is the Department’s treatment of students who transfer within an institution arbitrary.
As the Department has explained, in some circumstances there may be an incentive to shift
students between programs to mask the true performance of a particular program. Cf. Debt
Measure Rule, 76 Fed. Reg. at 34,417. The Department therefore decided not to re-start the on-
35
time completion clock for students that change programs within an institution. See Reporting
and Disclosure Rule, 75 Fed. Reg. at 66,839.
iii. Severability
The disclosure requirements are not so intertwined with the reporting requirements as to
raise “a substantial doubt that a partial affirmance would comport with the [agency’s] intent.”
Telephone & Data Sys., 19 F.3d at 50. The Department intended to use the reported data “to
assess the outcomes of programs that lead to gainful employment in a recognized occupation.”
Program Integrity Issues, 75 Fed. Reg. at 34,809 (June 18, 2010). The disclosures, by contrast,
were intended “to better inform prospective students.” Id. Because there is no reason to think
that the Department’s desire to see prospective students better informed about the programs they
are considering was in any way dependant upon its intention to conduct its own assessments of
those programs, the reporting requirements will be severed from the reporting and disclosure
rule. Only the reporting requirements, 34 C.F.R. § 668.6(a), are vacated and remanded to the
Department.
C. The Program Approval Rule
Finally, the Court considers the program approval rule, which requires that institutions
operating gainful employment programs notify the Department and, if the Department so
demands, obtain its approval for new gainful employment programs. 34 C.F.R. §§ 600.10(c),
600.20(d). Such applications would only be denied based on “[w]hether the additional
educational program is one of several new programs that will replace similar programs currently
provided by the institution, as opposed to supplementing or expanding the current programs
provided by the institution,” “[w]hether the number of additional educational programs being
36
added is inconsistent with the institution’s historic program offerings, growth, and operations,”
and “[w]hether the process and determination by the institution to offer an additional educational
program that leads to gainful employment in a recognized occupation is sufficient.” Id. §
600.20(d)(1)(ii)(E). The Association argues that the program approval rule must fall along with
the debt measures and, moreover, that it is affirmatively barred by 20 U.S.C. § 1232a, which
prohibits the Department from exercising “any direction, supervision, or control over the
curriculum, program of instruction, administration, or personnel of any educational institution.”
Because the court accepts the first argument, it need not reach the second, broader one.9
In promulgating the program approval rule, the Department explained that it was:
concerned that some institutions might attempt to circumvent the proposed gainful
employment standards . . . by adding new programs before those standards would
take effect. Although the proposed standards would evaluate most programs based
on past performance, newly offered programs would not be subject to the standards
for several years until they established an operating history. For example, an
institution may seek to offer a significant number of new programs that would not
be evaluated under the new standards for up to five years as a contingency plan in
case its current programs are eliminated or restricted under measures that would be
established in the final gainful employment regulations. We believe that such an
approach by an institution should be examined closely to determine whether those
9
The court notes, however, that the broader argument is not frivolous. The program
approval rule requires any school that wishes to offer a Title IV-eligible gainful employment
program to submit an application to the Secretary, who can wait until a month before the
beginning of class to decide whether he will examine the program more closely. See 34 C.F.R.
§§ 600.10(c)(1), 600.20(d)(1)(ii)(B). If he decides to take a closer look, he can reject an
application because he finds “the process and determination by the institution” to be
“[in]sufficient.” Id. § 600.20(d)(1)(ii)(E)(4). A school submitting a new program for approval
must “[d]escribe . . . how the institution determined the need for the program and how the
program was designed to meet . . . market needs.” Id. § 600.20(d)(2)(i). For the Secretary to
have the power to perform an evaluation of the market demand for every new gainful
employment program brings him dangerously close to exercising “supervision . . . over the . . .
program of instruction . . . of an[] educational institution.” 20 U.S.C. § 1232a. A proposed
revision to the program approval rule would substantially narrow the Secretary’s power. See
Application and Approval Process for New Programs, 76 Fed. Reg. 59,864, 59,877 (Sept. 27,
2011) (proposing amendments to 34 C.F.R. §§ 600.10, 600.20).
37
new programs are substantially different and offer more potential benefits to its
students. With these regulations, the Department intends to mitigate the potential for
this type of response by identifying such circumstances and requiring those new
programs to be approved.
Program Approval Rule, 75 Fed. Reg. at 66,669–70. As the debt measures have been vacated,
the danger that schools would circumvent them can no longer animate the program approval rule.
The Department’s defense of the program approval and its recent proposal to amend it, see
Application and Approval Process for New Programs, 76 Fed. Reg. 59,864 (Sept. 27, 2011),
demonstrate that the current program approval process is truly “centered on” the debt measures;
the program approval rule will therefore be vacated as well. See Nat’l Mining Ass’n, 105 F.3d at
696.
IV. CONCLUSION
The Department has set out to address a serious policy problem, regulating pursuant to a
reasonable interpretation of its statutory authority. But it has failed to provide a reasoned
explanation for a core element of its central regulation. Both that regulation and those that
depend upon it must therefore be vacated. Because the disclosure requirements, 34 C.F.R. §
668.6(b), are not so intertwined with the vacated debt measure, they will remain in effect.
Rudolph Contreras
United States District Judge
Date: June 30, 2012
38