For-Profit Colleges Sue Uncle Sam,|Saying New Regulations Are Unfair

WASHINGTON (CN) - For-profit colleges sued the U.S. Secretary of Education to try to stop fraud-protection regulations from taking effect. The federal lawsuit from the Career College Association dba the Association of Private Sector Colleges and Universities comes after more than 100 lawsuits around the country accused for-profit colleges of fraudulently marketing substandard programs, and defrauding students and government loan programs, and a withering report from the Government Accountability Office.

The Association of Private Sector Colleges and Universities, or APSCU, sued the Department of Education to challenge the new rules that, among other things, define "substantial misrepresentation" and how to subject schools to "severe penalties" when their admissions offices play fast and loose with the facts.

The new rules, which are to take effect July 1, will also prohibit merit-based pay for recruiters and change state authorization procedures for online schools.

The APSCU claims that in adopting the regulations the Department of Education violated the Higher Education Act and the Administrative Procedures Act.

Under current regulations, schools that have made a "substantial misrepresentation" could face sanctions, including revocation of its eligibility for financial aid and civil penalties, but the Higher Education Act dictates that the Department of Education can levy sanctions only after "reasonable notice and opportunity for a hearing," the plaintiff schools say.

They claim that these "safeguards" will be eliminated under the new rules.

"The misrepresentation regulations will permit the Secretary to impose potentially severe sanctions without first holding a hearing, adhering to the procedural requirements set forth in current regulations, or fully taking into account the accused institution's opposing arguments," according to the complaint.

It adds: "The misrepresentation regulations significantly expand the definition of 'misrepresentation' to include statements that are neither inherently nor actually misleading, but instead merely have a 'tendency' to confuse."

(The 2010 GAO report noted that all 15 of the for-profit schools investigated by Congress "made deceptive or otherwise questionable statements to GAO's undercover applicants.")

The APSCU says its members enroll more than 1.5 million students "who are underserved by conventional public and nonprofit schools."

The APSCU claims the Department of Education's regulations are "unlawful" and "beyond the Department's authority" and "arbitrary and capricious."

"APSCU has filed this lawsuit to prevent these unlawful regulations from harming students and the schools that serve them," according to the complaint.

The APSCU claims the regulations will unfairly dictate how they pay their admissions people and employees who make Title IV student aid decisions. The regulations will prohibit merit-based pay, which violates the Higher Education Act, and will hinder private colleges' ability to hire competent student recruiters, according to the complaint.

The schools say there is a difference between crooked recruiters lying to prospective students to drive up enrollment and employees who are fairly compensated for the academic achievement and job placement success of their students.

"Prohibiting graduation-based payments does not disincentivize harmful over-recruiting; it prohibits schools from incentivizing the recruitment of successful, qualified students who do not add to the school's cohort default rate, which is precisely the type of behavior and outcomes the statutory prohibition was intended to encourage," the schools claim.

The complaint adds: "The compensation regulations fail to give regulated parties any guidance as to how they may safely - without regulatory or legal risk - compensate employees engaged in recruiting, admissions, and financial aid and senior management with responsibility over those activities."

The APSCU also complaint that the new rules will force online schools to get authorization "from every state in which their students live, which will prove to be costly and difficult."

"As applied to those cross-border educational programs, the state authorization regulations impose a particularly severe and unnecessary burden on interstate commerce and threaten a reduction in the educational opportunities available to students," the complaint states.

The APSCU claims that minorities, single parents and low-income folks account for a large sector of students at for-profit colleges. The for-profit colleges made similar claims in full-page ads in major newspapers, including The New York Times, after the GAO report made headlines.

More than 100 lawsuits around the country, including a dozen class actions, have accused for-profit colleges of lying about their accreditation, their job placement records, the qualifications of their teachers, the cost of tuition, and of defrauding students and the government of financial aid.

But in sticking up for its schools, the APSCU claims that the "new regulations take aim at private sector schools' ability to offer their highly effective services to these students."

The APSCU seeks a declaration that the Department of Education and Secretary Arne Duncan violated the Administrative Procedures Act by hastily adopting the regulations without "significant discussion." And it wants implementation of the new regulations enjoined as violations of the Higher Education Act.

The APSCU is represented by Douglas Cox with Gibson Dunn.

Here is a link to an Aug. 16, 2010 Courthouse News report on one class action against a for-profit chain college, which came as the GAO investigation was making headlines.

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