In an opinion released Tuesday, the U.S. District Court for the District of Columbia ruled the Education Department has the right to demand that schools show their graduates make enough money to repay their student loans. The Education Department announced its plan last fall as a way of weeding out fraudulent colleges that were targeting low-income students because of their ability to receive federal student loans, grants and military benefits.
Under the new rules, which go into effect July 1, a program has to show that the estimated annual loan payment of a typical graduate does not exceed 20 per cent of his or her discretionary income or 8 per cent of total earnings. The administration said about 99 per cent of the training programs that will be affected come from the for-profit sector, although affected career training programs can come from certificate programs elsewhere in higher education.
Programs that don't pass the new "gainful employment" standards risk losing access to federal money.
The Association of Private Sector Colleges and Universities, a trade group representing 1,400 for-profit colleges, sued to stop the rules from taking effect on July 1. APSCU argued that the regulations were at odds with existing law, and that the administration had arbitrarily and unfairly devised them as a way to rein in for-profit colleges.
In his opinion, U.S. District Judge John Bates dismissed the industry group's argument entirely, ruling that each piece of the regulation should remain intact.
"Of course, the association might not agree with the department's explanations," he wrote at one point in the 37-page ruling. "But that alone does not make them irrational, arbitrary, or capricious."
APSCU General Counsel Sally Stroup said in a statement the trade group is disappointed in the court decision and considering its options.
"Indeed, as numerous commentators have observed, the primary impact of the regulation will be to deprive hundreds of thousands of students of access to higher education," Stroup wrote. "That is inconsistent with the congressional plan under the Higher Education Act, unlawful and bad policy."
Education Secretary Arne Duncan called the ruling a "win" for students and taxpayers, and urged lawmakers to stop fighting against the regulations.
"Every student who enrolls in college of any kind deserves a fair shot at a degree or credential that equips them for success," he said in a statement. "We'll continue to fight until that's a reality."
The for-profit industry has among the highest student loan default rates and lowest graduation rates in higher education, and now the government is looking at footing the bill in what has become a major consumer bailout. Earlier this month, Duncan said the government would make it easier for students who attended the now-defunct Corinthian Colleges to erase their debt.
About $3.6 billion in federal loans has been given to these students since 2010. That potentially puts the taxpayer on the hook for that amount, although officials say it's unlikely that every loan will qualify for relief.
The latest rule was the administration's second attempt at ensuring student loans go to programs that help people find jobs. The first rule was blocked by a judge in 2012 that said the regulations were too arbitrary.