In a ruling last week, the U.S. District Court for the District of Columbia largely sided with the Association of Private Colleges and Universities, which had sued the U.S. Department of Education and Education Secretary Arne Duncan alleging that rules promulgated by the Secretary unfairly discriminate against for-profit institutions.
For-profit colleges have become a popular alternative for students historically underserved by traditional universities. But it’s no secret that the Obama Administration has been supportive of policies hostile to their growth.
In what looked to be an attempt to curb their expansion, last year, the U.S. Department of Education (DOE) issued new regulations that restricted the amount of debt students in a particular program could incur and restricted access to federal aid if a program’s default rate on student loans was too high.
The court ruled that the DOE’s debt repayment rules—and, by extension, its debt-to-income ratio regulation—were “arbitrary and capricious.”
As the opinion notes, Title IV of the Higher Education Act, which governs the provision of billions of dollars in federal funding for student loans and grants, clearly states that the purpose of the loan program is to “prepare students for gainful employment in a recognized occupation” so that they can make a living and repay their student loans. If students cannot find productive work, “the costs of unpaid loans are borne by taxpayers.”
The DOE interprets this language to mean it has leeway in conditioning federal funds allocated to a school or program on that institution’s ability to prepare students for “gainful employment.”
While the gainful employment language has been in effect in one form or another since 1965, Secretary Duncan added two new “tests” to determine whether schools were meeting that condition: “one test based upon debt-to-income ratios and the other test based upon repayment rates.”
Specifically, if an institution wanted to retain access to federal student aid, the DOE restricted debt-to-income ratios to 12 percent, on average, for students in a given program or school and discretionary-income-to-debt ratios to 30 percent.
The DOE also issued regulations on debt repayment, restricting access to federal student aid to those schools or programs with a debt repayment rate of less than 35 percent. The court concluded that this decision “was not based upon any facts at all…[and] was chosen arbitrarily.”
The court also saw the debt repayment measure and the debt-to-earnings ratio measure “intertwined” and, as a result, ruled that “the entire debt measure rule must therefore be vacated and remanded to the Department.” The Secretary now must decide whether to appeal the district court’s judgment or to revisit the legal issues in the case.
Policymakers are right to be concerned with taxpayers being on the hook for student loan defaults. But the answer isn’t to issue more regulations or further federal intervention into the market. The right approach is to limit federal involvement—whether arbitrary regulations issued by the DOE or more federal subsidies for grants and loans—and allow students to have access to the wide variety of college options that the market will produce when left to innovate and meet students’ needs.