Atlanta College of Medical and Dental Careers, Inc. v. Riley, s. 92-5251

Decision Date12 March 1993
Docket NumberNos. 92-5251,92-5291,s. 92-5251
Citation987 F.2d 821
Parties, 81 Ed. Law Rep. 721 ATLANTA COLLEGE OF MEDICAL AND DENTAL CAREERS, INC., et al., Appellee, v. Richard W. RILEY, Secretary of Education, in his Official Capacity, Appellant. WILFRED AMERICAN EDUCATIONAL CORPORATION, doing business as Wilfred Academy of Hair and Beauty Culture, Plaintiff-Appellee, v. Richard W. RILEY, Secretary of Education, in his Official Capacity, Defendant-Appellant.
CourtU.S. Court of Appeals — District of Columbia Circuit

Robert L. Shapiro, Asst. U.S. Atty., with whom Jay B. Stephens, U.S. Atty., John D. Bates and R. Craig Lawrence, Asst. U.S. Attys., Richard Wyner, Deputy General Counsel and Brian P. Siegel, Attorney, U.S. Dept. of Educ., Washington, DC, were on the brief for the Secretary of Educ Jonathan B. Hill, with whom Michael B. Goldstein, Blain B. Butner, and Karen A. Post, Washington, DC, were on the brief, for appellees Atlanta College of Medical and Dental Careers, Inc., and Louisville College of Medical and Dental Careers, Inc.

Robert B. Funkhouser, New York City, with whom John M. Townsend and William R. Stein, Washington, DC, were on the brief, for Wilfred American Educational Corp.

Ian D. Volner and N. Frank Wiggins, Washington, DC, entered an appearance for amicus curiae Career College Ass'n.

Before WALD, SILBERMAN and D.H. GINSBURG, Circuit Judges.

Opinion for the Court filed by Circuit Judge WALD.

Opinion concurring in the judgment filed by Circuit Judge D.H. GINSBURG.

WALD, Circuit Judge:

In this consolidated appeal, the Secretary of Education ("Secretary") seeks reversal of two district court decisions. Both decisions relate to the Secretary's handling of administrative appeals brought by post-secondary schools seeking to maintain their eligibility to participate in federal student loan programs. In Atlanta College of Medical & Dental Careers, Inc. v. Alexander, 792 F.Supp. 114 (D.D.C.1992), the flagship appeal, the district court vacated the Secretary's determination that two post-secondary schools were no longer eligible to participate in the loan programs. The court found that the Secretary had acted arbitrarily and capriciously, and in violation of the Administrative Procedure Act, by making a successful appeal of the initial ineligibility determination dependent upon producing information to which the schools had no access. In Wilfred American Educational Corp v. Alexander, No. 92-1384, 1992 WL 464232 (D.D.C. July 7, 1992), the district court, relying on Atlanta College, preliminarily enjoined the Secretary from implementing his ineligibility determinations in the case of two other schools. We affirm both decisions.

I.

A. Statutory and Regulatory Framework

Under the Federal Family Education Loan ("FFEL") program (formerly known as the Guaranteed Student Loan program), post-secondary students obtain loans from private lenders to pay for tuition, fees, and living expenses at eligible educational institutions. See 34 C.F.R. § 682.100-.101. Guaranty agencies--private nonprofit or state-run organizations--insure repayment of these loans. See 20 U.S.C. § 1078(b)-(c). The Department of Education ("DOE"), in turn, provides reinsurance to the guaranty agencies. See 20 U.S.C. § 1078(c); 34 C.F.R. § 682.404.

The loan guaranty program works as follows: For Stafford Loans, 1 a student generally begins paying interest, principal, or both on a loan after a six month grace period running from the last date of full- or half-time attendance at a post-secondary institution. See 20 U.S.C. § 1078(b)(1)(E); 34 C.F.R. § 682.209(a)(2)(ii). If a student is delinquent in repaying her loan, DOE regulations require lenders to engage in due diligence or "servicing" activities--pressuring the borrower for repayment--for a 180 day period starting from the later of (1) the day after the borrower misses a payment or (2) 30 days after the borrower enters the repayment period. See 34 C.F.R. § 682.411(a)-(f). If the borrower does not update overdue payments within the 180 days, the loan goes into default, and the lender submits a claim to the guaranty agency. See 34 C.F.R. § 682.411(f). The guaranty agency then reviews the lender's records to assure that the lender has met its servicing obligations before paying the claim. See 34 C.F.R. § 682.406(a)(1) (conditioning payment from DOE to the guaranty agency on the lender's fulfillment of due diligence obligations). If the guaranty agency pays Because, under this scheme, DOE was forced to ante up increasing amounts of money on defaulted loans, Congress passed the Student Loan Default Prevention Initiative Act ("SLDPIA") in 1990. That law sought to reduce the cost of the FFEL program by promptly eliminating from the program schools whose students had chronically high rates of default. The SLDPIA amended the Higher Education Act ("HEA"), 20 U.S.C. § 1070 et seq., so that a school loses its eligibility of its "cohort default rate" ("CDR") for each of the three most recent fiscal years for which data are available exceeds a certain percentage. See 20 U.S.C. § 1085(a)(3)(A). 2 A school's CDR for any fiscal year is essentially the percentage of current and former students entering the repayment period during that fiscal year who default by the end of the next fiscal year. See 20 U.S.C. § 1085(m)(1)(A). 3 The Secretary gets the information necessary to calculate this percentage from the "tape dump," a collection of student loan data provided by the guaranty agencies. The statute also requires that the Secretary, in making the CDR calculation, "shall ... exclude any loans which, due to improper servicing or collection, would result in an inaccurate or incomplete calculation of the cohort default rate." 20 U.S.C. § 1085(m)(1)(B).

                [300 U.S.App.D.C. 160] the claim, it must embark upon its own collection or servicing activities.   See 34 C.F.R. § 682.410(b)(4).   Should those efforts fail, the guaranty agency may seek reimbursement from DOE
                

When the Secretary determines that a school's CDR is above the statutory percentage, the school may appeal the Secretary's decision on only two grounds: the school can attempt to "demonstrate[ ] to the satisfaction of the Secretary that the Secretary's calculation of its cohort default rate is not accurate, and that recalculation would reduce its cohort default rate for any of the three fiscal years below the threshold percentage" or the school can endeavor to show "exceptional mitigating circumstances" that would make its loss of eligibility "inequitable." 20 U.S.C. § 1085(a)(3)(A)(i)-(ii). 4 If, as in these cases, a school desires to appeal on the first ground, i.e., the inaccuracy of the calculation, it must, within 30 days of notification of ineligibility, submit specific relevant data to the guaranty agencies. See 20 U.S.C. § 1085(a)(3)(A); 56 FED.REG. 33332, 33336-7 (1991); id. at 33340 (to be codified at 34 C.F.R. § 668.15(g)(3)). After the guaranty agencies respond, the school must forward the entire package of information to the Secretary, who has 45 days in which to decide the appeal. See 20 U.S.C. § 1085(a)(3)(A); 56 FED.REG. at 33340 (to be codified at 34 C.F.R. § 668.15(g)(4)).

B. Facts of Phillips Appeal

On July 15, 1991, DOE notified Atlanta College of Medical and Dental Careers and Louisville College of Medical and Dental Careers (collectively, the "Phillips schools"), that their CDRs exceeded the 35% statutory threshold for fiscal years The Phillips schools also retained the accounting firm of Coopers & Lybrand ("Coopers") to aid their appeal. From the schools' own records, Coopers determined each student's last date of attendance and, by adding the six month grace period required for Stafford loans, computed the date on which the student's loan presumably would have entered repayment. Coopers then compared each of those projected dates of repayment with the date listed in the tape dump data relied on by DOE. Using this methodology, Coopers reported hundreds of suspected errors in DOE's information on the Phillips schools' students. These errors were of several types. "Error 1" cases were student accounts for which the repayment date as computed by Coopers fell in a different fiscal year than the one listed in the tape dump (if the tape dump put the repayment date in the wrong fiscal year, DOE would have placed the loan in the wrong cohort default period). "Error 2" and "Error 3" cases were student accounts that Coopers had reason to believe received grace periods either shorter or longer than the prescribed period, i.e., where the time between the student's last date of attendance listed in the school's records and the repayment date listed in the tape dump was either more or less than six months. The Phillips schools asserted that lenders' use of incorrect grace periods constituted improper servicing causing defaults and that, under § 1085(m), those loans should be excluded from the schools' CDRs. 5

                [300 U.S.App.D.C. 161] 1987, 1988, and 1989, and that, accordingly, they were ineligible to participate further in the FFEL program.   The Phillips schools' rates exceeded the statutory benchmark by less than 1%--Atlanta College's 1987 rate was 35.0% and Louisville College's 1988 rate was 35.7%.   Accordingly, both schools appealed, claiming that the Secretary's calculation of their CDRs was inaccurate.   Because § 1085(m)(1)(B) requires that the Secretary exclude any loans from the CDR which "due to improper servicing or calculation, would result in an inaccurate or incomplete calculation," the Phillips schools sent off a series of letters to DOE asking how they could demonstrate in their appeals that loans should have been excluded on the basis of improper servicing.   Those letters went unanswered
                

In accordance with DOE regulations, the schools sent the information...

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