Am. Ass'n of Cosmetology Sch. v. Devos, Civil Action No.: 17-0263 (RC).

Citation258 F.Supp.3d 50
Decision Date28 June 2017
Docket NumberCivil Action No.: 17-0263 (RC).
Parties AMERICAN ASSOCIATION OF COSMETOLOGY SCHOOLS, Plaintiff, v. Elisabeth DEVOS, in her official capacity as Secretary of Education, Defendant.
CourtU.S. District Court — District of Columbia

Edward M. Cramp, Duane Morris LLP, San Diego, CA, Robert Lawrence Shapiro, Duane Morris LLP, Washington, DC, for Plaintiff.

Kathryn L. Wyer, U.S. Department of Justice, Washington, DC, for Defendant.



RUDOLPH CONTRERAS, United States District Judge


In this case, the Court considers whether the Department of Education ("DOE") acted arbitrarily and capriciously with respect to cosmetology schools when it decided to presumptively use earnings data that does not account for unreported income. Although the DOE was justified in using reported income as the presumptive measure of overall income, it arbitrarily and capriciously made rebutting that presumption overly difficult.

In setting standards that determine which proprietary schools' graduates are entitled to federally backed student loans, the DOE looks to the rates at which the schools' graduates are "gainfully employed." To determine whether graduates are gainfully employed, the DOE has adopted a test that compares the graduates' income levels to their levels of debt. To determine the graduates' income, the DOE presumptively uses the Social Security Administration's ("SSA") income data. This data does not account for income that is not reported to the Internal Revenue Service. Schools may appeal the DOE's use of SSA data through "alternate earnings appeals," which, if successful, allow them to use alternate measures of income before the debt-to-earnings rates become final. To submit such an appeal, a school is required to use either state-sponsored data pertaining to over half of its graduates during the relevant timeframe or gather income data on almost all of its graduates through a survey. Schools that fail the debt-to-earnings test for a long enough time lose eligibility for federal loans. Schools at immediate risk of losing federal-loan eligibility are required to warn their students and prospective students that they may be ineligible for student loans in the near future.

During the notice-and-comment period, several commenters argued that use of SSA data would be unfair to, among others, cosmetology programs, because their graduates disproportionately underreport their income due to high levels of cash-based and self-employment-based earnings, including tips. The commenters suggested that the Bureau of Labor Statistics's survey-based data would better account for unreported income.

The DOE rejected the commenters' objection to the data and their proposed solution. In rejecting the objection, the DOE reasoned that graduates who do not report their income are subject to civil and criminal penalties, and noted that the SSA data is only one means of determining income; programs can submit alternate earnings appeals to show the DOE that its graduates' average incomes are actually higher than the SSA data indicates. In rejecting the proposed solution, the DOE noted that the Bureau of Labor Statistics data cannot be tied to particular programs, and thus would undermine the purpose of the regulations—to identify individual programs whose graduates are not gainfully employed.

The American Association of Cosmetology Schools ("AACS") sued under the Administrative Procedure Act, arguing that these responses were unsatisfactory, and thus the DOE arbitrarily and capriciously failed to adequately consider the unreported-income issue when it promulgated the regulations. AACS is a nonprofit association of cosmetology schools, many of which are at risk of failing the DOE's debt-to-earnings test. In fact, at least three schools have already posted warnings to their students, because they could not feasibly appeal their failing grades. Defendant moves for summary judgment on two procedural grounds and on the basis that the regulations were not arbitrary or capricious.

Both of the DOE's procedural arguments concern subject-matter jurisdiction. It first argues that AACS does not challenge final agency action, because none of AACS's member-schools have unsuccessfully appealed their failing debt-to-earnings rates. The DOE also argues that AACS does not have standing to bring this action, because it did not identify any individual member-schools with standing in the complaint. The Court holds that AACS is challenging final agency action, because at least three schools have already had to post warnings, and raising an administrative appeal is not a prerequisite to suit under the APA. The Court further holds that AACS has standing to bring this case, because AACS indeed identified adversely affected members and meets all other requirements to establish associational standing to sue on behalf of its members.

The DOE argues that it did not act arbitrarily and capriciously because it provided a reasoned explanation for its rejection of commenters' concerns about unreported income and their proposed solution. The Court holds that, although the DOE was rational in rejecting the commenters' proposed alternative, it did not adequately address the issue of unreported income. Neither side disputes that SSA data is highly accurate, even though it may be insufficient in certain circumstances. But, as the commenters pointed out—and the government did not dispute—there is a significant problem with this data. Despite the illegality of failing to report earnings to the IRS, many programs' graduates fail to report substantial portions of their income. The DOE proffered two responses to the commenters' problem. First, it argued that civil and criminal penalties deter underreporting. Second, it noted that institutions may submit an alternate earnings appeal to have their graduates' earnings more accurately calculated.

The existence of penalties—which existed when the commenters' data was collected and will continue to exist into the future, absent some added deterrent—is irrelevant to the issue of undercounting income. In comparison, an alternative means of measuring earnings data is responsive to the problem. The DOE justifiably used SSA data as the default measure of earnings, but supplemented that default methodology with an alternate means of determining income. However, by inexplicably requiring high response rates to submit state-sponsored or survey-based alternate earnings calculations, the DOE narrowly circumscribed the alternate-earnings appeal process, making it unfeasible for certain programs to appeal their designations. To remedy the DOE's arbitrary and capricious narrowing of appellate recourse—and to avoid upending the entire administrative scheme—the Court removes barriers to appeal, making it more widely available for programs subject to the regulations.


Congress passed Title IV of the Higher Education Act of 1965 ("HEA") to make postsecondary education more widely available to the general public. See 20 U.S.C. § 1070(a). To broaden the availability of student loans and lower their cost to students, Title IV authorizes the United States government to enter into agreements with postsecondary educational institutions to allow students at their schools to obtain federally guaranteed loans. See id. § 1094. To protect the taxpayer, the government sets certain conditions that participating institutions must meet. See id. ; see also Ass'n of Private Sector Colls. & Univs. v. Duncan (APSCU I) , 681 F.3d 427, 435 (D.C. Cir. 2012) ("[S]chools receive the benefit of accepting tuition payments from students receiving federal financial aid, regardless of whether those students are ultimately able to repay their loans. Therefore, Congress codified statutory requirements in the HEA to ensure against abuse by schools."). Many of those conditions center on the financial success of proprietary institutions' graduates, because such success makes it more likely that the borrower will repay his own loans. See generally 20 U.S.C. § 1094. Under 20 U.S.C. § 1002(b)(1)(A), students at "proprietary institutions of higher education" may receive federal loan assistance only if their school "provides an eligible program of training to prepare students for gainful employment in a recognized occupation." See also Compl. ¶ 8, ECF No. 1 (emphasis added).

From 2009 to 2011, the DOE promulgated regulations defining the term "gainful employment" ("GE") in terms of a debt-to-income test and a debt-repayment test. See Program Integrity: Gainful Employment—Debt Measures, 76 Fed. Reg. 34,386 (June 13, 2011) ; see also Ass'n of Private Colls. & Univs. v. Duncan , 870 F.Supp.2d 133, 153–54 (D.D.C. 2012). This Court determined that parts of that rule were arbitrary and capricious under the Administrative Procedure Act ("APA"). See Ass'n of Private Colleges & Universities , 870 F.Supp.2d at 154, 158.

The DOE again set out to define the term "gainful employment," this time focusing only on program graduates' overall debt compared to their earnings, which it refers to as "D/E" rates. See Program Integrity: Gainful Employment, 79 Fed. Reg. 64,890, 64,891 (Oct. 31, 2014) (to be codified at 34 C.F.R. pt. 600, 668). "The D/E rates measure evaluates the amount of debt (tuition and fees and books, equipment, and supplies) students who completed a GE program incurred to attend that program in comparison to those same students' discretionary and annual earnings after completing the program." Id. ; see also 34 C.F.R. § 668.404.

The GE regulations use two tests to determine whether programs "pass," each of which is designed to determine whether programs' graduates are earning enough income to justify the government's guarantee of their loans. The first test divides the program's...

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