For-profit colleges win ruling against Obama regulation

WASHINGTON — A federal judge has struck down a key provision in an Obama administration regulation that would have penalized education programs whose graduates end up with huge debts and low job prospects.

The Education Department’s “gainful employment regulations,” which would have gone into effect Sunday, were designed to prevent career training programs, mainly at for-profit colleges, from leaving students with unaffordable debt and limited employment options.

Critics of for-profit colleges expressed disappointment over the decision.

It “leaves students and taxpayers exposed to unscrupulous schools that seek to swindle them and routinely saddle students with debts they cannot repay,” said Pauline Abernathy, vice president of the Institute for College Access & Success, a nonprofit research organization that seeks to make higher education more available and affordable.

For-profit colleges celebrated the ruling, “which makes it clear that you can’t make random decisions that seek to significantly impact one sector of higher education,” said former Rep. Steve Gunderson (R-Wis.), president of the Assn. of Private Sector Colleges and Universities, the plaintiff in the case.

The rules required career training programs to meet one of three standards: 35% of graduates must be repaying loans; loan payments of typical graduates do not exceed 12% of their total earnings; or loan payments do not exceed 30% of graduates’ discretionary income.

But in his ruling, Judge Rudolph Contreras called the 35% standard “arbitrary and capricious.” He said the department chose that threshold based not on expert research or an industry standard, but because it would result in about a quarter of the career training programs failing.

“It’s an unusual way of thinking,” Gunderson said. “Why would you eliminate 25% of programs offered to students most in need of education and skills?”

The judge upheld the department’s right to require career training programs to inform students about graduation and placement rates, as well as median debt load for students in their programs.

A spokesman for the department could not say whether it would be readjusting regulations or appealing the decision. But he said he was pleased that the judge signaled a need for regulation.

“The court upheld our authority to regulate career college programs while urging a clearer rationale for standards around repayment rates,” Peter Cunningham said in a statement.

The Education Department reviewed 3,695 career training programs at 1,336 public, for-profit and nonprofit schools over two years. It found that 193 programs, all at for-profit institutions, were not meeting any of the gainful employment metrics, according to data released by the department last week.

While the decision affects career training programs at the federal level, California Gov. Jerry Brown still plans to withhold state Cal Grants from students at for-profit colleges that don’t meet state loan repayment and graduation standards. Heald College, which is owned by Corinthian Colleges, is among the institutions where students will be unable to receive Cal Grants this year.

Kent Jenkins, a spokesman for Corinthian Colleges, which has 28 campuses and about 26,000 students in California, said it was troublesome that both federal and state regulations targeted for-profit colleges.

“We understand that all of higher education has to be accountable to students and the public,” he said. “But, if you’re going to have a standard of accountability, it ought to apply to everybody across the board,” not just for-profit career training schools.

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jamie.goldberg@latimes.com