Last week, the U.S. Dept. of Education finally passed a somewhat compromised rule aimed at reining in for-profit colleges by penalizing them if too many of their graduates failed to succeed. But even that flawed rule is too much for a group representing for-profit colleges, which labeled it “arbitrary and irrational” in a lawsuit seeking to block it.

The Association of Private Sector Colleges and Universities filed a 77-page lawsuit [PDF] asking a federal judge to strike down the gainful employment rule that threatens to take away for-profit college’s access to federal student aid if they can’t prove they provide students with adequate tools to find employment.

APSCU claims in the lawsuit – which names Secretary of Education Arne Duncan as a co-defendant – that the rule is “unlawful, arbitrary and irrational and will needlessly harm millions of students who attend private-sector colleges and universities.”

For-profit colleges, which receive about 90% of their funding from student aid, have continually come under scrutiny for failing to demonstrate that students could find gainful employment in the fields in which they had been trained.

The schools have been criticized for failing to provide sufficient education and guidance to students who are then stuck without jobs and without the ability to pay back student loans. In fact, a 2012 Dept. of Education report found that more than 1-in-5 for-profit college graduates default on their student loans.

The suit calls into question the Department’s central feature of the regulation – a test to determine if a school has provided adequate tools for students to find employment – saying it “lacked reasoned basis.”

“The Department has since conceded that there was no reasoned basis for its loan repayment rate test, admitting that it ‘has found no expert studies or industry practice,’ nor any other alternative support or arguments in support of a threshold,” the suit states.

Under the new rules [PDF], for-profit colleges will be at risk of losing their federal aid should a typical graduate’s annual loan repayments exceed 20% of their discretionary income, or 8% of their total earnings.

Discretionary income is defined as above 150% of the poverty line and applies to what can be put towards non-necessities.

So for example, say the typical recent graduate of a career education program earns $25,000. That student would need to average annual student loan payments less than $2,000, or the school would be at risk for losing federal financial aid.

According to the government, about 1,400 programs serving more than 840,000 students would not pass the new accountability standards set forth in the finalized rules, but ASPCU says those finding are unsubstantiated.

The complaint alleges that the Department’s rule-making process was marred by “well-substantiated allegations of bias and misconduct that led several Members of Congress to accuse the Department of bad faith.”

ASPCU argues that the rule would do more to hurt the very students it seeks to protect by unfairly targeting colleges that cater low-income, demographically diverse students.

“The regulations impose massive disincentives on private sector schools that currently seek to educate low-income, minority, and other traditionally underserved student populations, because, as an historical matter, those demographics are widely recognized as most at risk of failing the Department’s arbitrary test,” the complaint states. “Thus, instead of increasing the availability of higher education, the Department’s regulations will limit educational opportunities for traditionally underserved groups—leaving those students with diminished access to higher education and potentially causing them to forgo postsecondary education altogether.”

The group also argues that the rule exceeds the Education Department’s authority, isn’t a product of “reasoned decision making” and violates college officials’ free speech by compelling them to “utter non-factual and highly controversial statements.”

Attempts to stop the new regulations from taking effect next July 1 come with little surprise, as previous gainful employment rules were met with fierce opposition from for-profit college interest groups.

In fact, in 2011 ASPCU successfully challenged the original rule with a court agreeing with the group’s argument that one of the standards in the rule didn’t show whether for-profits had prepared students for the workforce.

[via Bloomberg]

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