Association of Accredited Cosmetology Schools v. Alexander, 91-5332

• Decision Date: 24 November 1992
• Docket Number: No. 91-5332,91-5332
• Citation: 979 F.2d 859
• Parties: , 78 Ed. Law Rep. 686 ASSOCIATION OF ACCREDITED COSMETOLOGY SCHOOLS, Appellant, v. Lamar ALEXANDER, Secretary, United States Department of Education. District of Columbia Circuit
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 859

979 F.2d 859

298 U.S.App.D.C. 310, 78 Ed. Law Rep. 686

ASSOCIATION OF ACCREDITED COSMETOLOGY SCHOOLS, Appellant, v. Lamar ALEXANDER, Secretary, United States Department of Education.

No. 91-5332.

United States Court of Appeals,District of Columbia Circuit.

Argued Oct. 23, 1992.

Decided Nov. 24, 1992.

[298 U.S.App.D.C. 311] Appeal from the United States District Court for the District of Columbia, No. 91-2220.

Thomas Hylden, with whom Leonard C. Greenebaum and Robert D. Lystad, Washington, D.C., were on the brief, for appellant.

Douglas A. Wickham, Asst. U.S. Atty., with whom Jay B. Stephens, U.S. Atty., and John D. Bates and R. Craig Lawrence, Asst. U.S. Attys., Washington, D.C., were on the brief, for appellee.

Before: WALD, SENTELLE, and RANDOLPH, Circuit Judges.

Opinion for the Court filed by Circuit Judge SENTELLE.

SENTELLE, Circuit Judge:

In this case, the Association of Accredited Cosmetology Schools ("AACS") challenges the constitutionality of the Student Loan Default Prevention Initiative Act, 20 U.S.C. § 1085(a) (1988 Supp. II), and the implementing regulations, 56 Fed.Reg. 33,332, 33,338 (1991) (to be codified at 34 C.F.R. § 668.15(f)-(i) (1992)). AACS also challenges the regulations under the Administrative Procedure Act ("APA"), 5 U.S.C. § 551 et seq. (1988). The District Court upheld the Act and the regulations, Association of Accredited Cosmetology Schools v. Alexander, 774 F.Supp. 655 (D.D.C.1991), and AACS now appeals. Finding no error in the District Court's decision, we affirm.

I.

Under Title IV of the Higher Education Act of 1965 ("HEA"), 20 U.S.C. § 1070 et seq. (1988), students may obtain "Guaranteed Student Loans" ("GSLs") to pay their post-secondary tuition and expenses. Schools wishing to participate in the GSL program must apply to the Department of Education ("Department") for certification as "eligible institutions" under the HEA. As one might expect, such certification depends on the schools' satisfaction of several statutory and regulatory requirements. If a school's application is approved, the school must sign a contract with the Department called a "Program Participation Agreement." In signing the Agreement, the school agrees, inter alia, "to comply with all the relevant program statutes and regulations governing the operation of each Title IV, HEA Program in which it participates." Program Participation Agreement, at 2. The school also agrees that the Agreement "automatically terminates ... [o]n the date the institution no longer qualifies as an eligible institution." Id. at 6. Once both parties have signed the Program Participation Agreement, participating lenders are authorized to make GSLs to the school's students. 20 U.S.C. § 1071; 34 C.F.R. § 682.100 (1990). State or non-profit agencies guarantee the repayment of the GSLs. 20 U.S.C. § 1078(b)-(c). The Department, in turn, "reinsures" the guarantee agencies, 20 U.S.C. § 1078(c); 34 C.F.R. § 682.404, meaning that it will pay off a defaulted loan with federal funds after specified collection efforts have proven futile. 34 C.F.R. §§ 682.410(b)-.411 (1990).

Unfortunately, the Department found itself having to pay off an ever-increasing number of defaulted loans. Between 1983 and 1989, the number of GSL defaults increased by 338%--four times the growth in GSL loan volume during the same period. See Abuses in Federal Student Aid Programs, S.Rep. No. 58, 102d Cong., 1st Sess. Convinced that the Department's efforts to prod schools to reduce their students' default rates had been ineffective, Congress enacted (as part of the Omnibus Budget Reconciliation Act of 1990, Pub.L. No. 101-508, 104 Stat. 1388) the Student Loan Default Prevention Initiative Act ("Act"), 20 U.S.C. § 1085(a) (1988 Supp. II). The Act, which became effective on July 1, 1991, amended the HEA's definition of "eligible institutions" to provide, in relevant part, as follows:

                [298 U.S.App.D.C. 312] 1 (1991) (hereinafter, "Senate Report ").   These defaults, which had cost the federal government more than $2 billion by fiscal year 1989, U.S. DEP'T OF EDUC., FY 1989 GUARANTEED STUDENT LOAN PROGRAMS DATA BOOK 72, were disproportionately attributable to "proprietary" (for-profit) trade schools, whose students had a 50.6% default rate--almost twice the national average.   Id. at 62.   There was also well-documented evidence of GSL fraud by some proprietary schools;  for example, certain schools realized enormous profits by increasing tuition without cost-justification, soon after qualifying for the GSL program.   See Senate Report at 8-9
                

(A) An institution whose cohort default rate is equal to or greater than the threshold percentage specified in subparagraph (B) for each of the three most recent fiscal years for which data are available shall not be eligible to participate in a program under this part for the fiscal year for which the determination is made and for the two succeeding fiscal years....

(B) For purposes of determinations under subparagraph (A), the threshold percentage is--

(i) 35 percent for fiscal year 1991 and 1992; and

(ii) 30 percent for any succeeding fiscal year.

20 U.S.C. § 1085(a)(3). The very next year, while this suit was pending before the District Court, Congress amended the Act to reduce the threshold for terminating schools with excessive cohort default rates ("CDRs"). See Higher Education Amendments of 1992, Pub.L. No. 102-325, 106 Stat. 448 (lowering the Act's 30% CDR threshold for FYs after 1993 to 25%), amending 20 U.S.C. § 1085(a).

In plain terms, the CDR approximates the rate at which students entering repayment in a given fiscal year default in that same year. In legalese, the CDR is defined as follows:

[F]or any fiscal year in which 30 or more current and former students at the institution enter repayment on loans under section 1078 or 1078-1 of this title received for attendance at the institution, the percentage of those current and former students who enter repayment on such loans received for attendance at that institution in that fiscal year who default before the end of the following fiscal year.... For any fiscal year in which less than 30 of the institution's current and former students enter repayment, the term "cohort default rate" means the average of the rate calculated under the preceding sentence for the 3 most recent fiscal years.

20 U.S.C. § 1085(m). From this definition, it follows that a school's CDR for a given fiscal year cannot be calculated until two years later. The CDR for a given fiscal year is calculated according to the number of students who default by the end of the next fiscal year. Schools then compile that information and submit it to the Department. Only then, two years later, is the Department in a position to calculate the CDR.

After the Act became effective, the Department promulgated implementing regulations. These regulations provide, so far as pertinent here, that

(1) Except as [otherwise] provided ..., an institution loses its eligibility to participate in the GSL programs if the Secretary determines that the institution's cohort default rate, for each of the three most recent fiscal years for which the Secretary has determined the institution's rate, is equal to or greater than the applicable threshold rates.

(2) For purposes of the determinations made under paragraph (f)(1) of this section, the threshold rates are-- (i) 35 percent for each of fiscal years 1991 and 1992; and

(ii) 30 percent for fiscal year 1993 and all subsequent fiscal years.

56 Fed.Reg. 33,332, 33,338-39 (1991) (to be codified at 34 C.F.R. § 668.15(f)(1)-(2)).

The regulations further provide that termination for excessive CDRs becomes effective eight days after official notice from the Secretary and persists for the remainder of the fiscal year in which the school was terminated and for "the two subsequent fiscal years." Id. at 33,339 (to be codified at 34 C.F.R. § 668.15(f)(3)(i)-(ii)). The sole exception is where a school has filed an administrative appeal, in which case the termination does not take effect until the Secretary has ruled on the appeal. Id. at 33,338 (to be codified at 34 C.F.R. § 668.15(f)(7)(2)). At the end of the two-year period of ineligibility, the school may regain its eligibility by reapplying for certification as an eligible institution. Id. (to be codified at 34 C.F.R. § 668.15(f)(4)(ii)).

Shortly before these regulations became final on September 2, 1991, the Department began investigating schools to determine whether their CDRs exceeded the new thresholds. This investigation revealed that numerous members of AACS had excessive CDRs. The Department promptly notified at least twenty-three of them that unless they showed that it had erred in concluding that their CDRs exceeded the new thresholds or that "exceptional mitigating circumstances" existed, they would be declared ineligible for the GSL program. If terminated, member schools stand to lose 25-47% of their revenues, which will force many to go out of business. AACS, on behalf of its 482-member proprietary schools of cosmetology, therefore filed this suit against Lamar Alexander, the Secretary of Education, challenging the legality of the Act and the regulations promulgated thereunder.

AACS argued before the District Court that the regulations are "arbitrary or capricious" within the meaning of the APA because they (1) retroactively upset, without clear authorization by Congress, member schools' vested right to continued GSL eligibility, and (2) make the applicable default rate depend entirely on the time the Secretary chooses to investigate a given school. AACS further argued that the Act and the regulations violate the Due Process Clause, both procedurally and substantively, and abrogate cosmetology schools' contractual rights under their Program Participation Agreements. Unpersuaded, the District Court granted the Secretary's motion for summary judgment, thereby upholding the Act and the Secretary's...