May 27, 2015 / 7:43 PM / in 4 years

Judge upholds U.S. 'gainful employment' rules for for-profit colleges

NEW YORK (Reuters) - A U.S. judge on Wednesday threw out a lawsuit filed by a group of for-profit colleges challenging the Obama administration’s new regulations aimed at limiting student debt.

U.S. District Judge Lewis Kaplan in New York upheld the Department of Education’s rules, which require the colleges to demonstrate their graduates earn enough money to repay their loans in order to maintain access to federal financial aid.

“DOE has a strong interest in ensuring that students – who are, after all, the direct (and Congress’ intended) beneficiaries of Title IV federal aid programs – attend schools that prepare them adequately for careers sufficient for them to repay their taxpayer-financed student loans,” Kaplan wrote in a 57-page decision.

The lawsuit was one of two filed in November by the for-profit college sector.

The Association of Proprietary Colleges, which represents 20 schools in New York, brought the New York lawsuit. A similar lawsuit was filed in the District of Columbia by the 1,400-member Association of Private Sector Colleges and Universities, or APSCU, and remains pending.

In a statement, APC Executive Director Donna Stelling-Gurnett said the group was disappointed by the ruling.

“While we agreed with the Department’s goals for this rule from the outset, we remain steadfast in our conviction that this regulation does not achieve those goals,” she said.

Under the new “gainful employment” regulations, which take effect in July, a school can lose federal funding if the estimated annual loan payments for its graduates exceed 20 percent of their discretionary income or 8 percent of their annual earnings.

Kaplan said in his decision that for-profit colleges had shown high student loan default rates and low graduation rates while often spending disproportionate amounts of money on recruiting and marketing. The Obama administration has pressed for years to create stricter industry regulation.

State and federal authorities have also cracked down. In May, Corinthian Colleges Inc, which at one point operated more than 100 campuses, filed for bankruptcy after a string of federal and state investigations of whether it misled students about its finances and job placement rates.

Many for-profit schools are run by publicly traded companies, such as Apollo Education Group Inc and Strayer Education Inc.

A U.S. judge struck down the administration’s first attempt to install gainful employment rules in 2012 after APSCU filed suit, ruling they were too arbitrary.

Sally Stroup, the general counsel for APSCU, said in a statement that its lawsuit in Washington is “very different” from the New York case and that the group “remains confident in its legal position.”

Reporting by Joseph Ax; Editing by Lisa Von Ahn

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