Federal District Court Strikes Down Department of Education’s “Gainful Employment” Requirement for Proprietary Colleges

Summary: Under the Department of Education’s “debt measure rule” in its “gainful employment” regulations, a for-profit postsecondary school will (as the culmination of an escalating series of sanctions) fail to qualify for federal financial aid for its students if, subject to certain transition rules, it does not satisfy any of the three following tests with respect to its former students in any three out of four consecutive years:

• At least 35 percent of former students must be current in their loan repayments or have repaid their loans in full;
• On average, student loan repayments may not constitute more than 30 percent of the borrower’s discretionary income; and
• On average, student loan repayments may not constitute more than 12 percent of the borrower’s total income.

The District Court held that the first standard was arbitrary and capricious, and invalidated the entirety of the gainful employment regulation (other than a reporting requirement).