On June 28, 2017, the D.C. District Court issued its opinion and order in the matter of the American Association of Cosmetology Schools (“AACS”) v. the U.S. Department of Education. AACS challenged the Department’s Gainful Employment (“GE”) metrics (discussed extensively on REGucation in the past; see “Clarifying the Status of Gainful Employment”) as they specifically related to its member cosmetology schools. The court granted AACS’ motion for summary judgment but denied its motion for a preliminary injunction.

As of the publication of this post, all schools are still required to comply with the standard GE disclosure requirements by July 1, and all schools, save AACS member institutions, are still required to comply with the student warning requirements by July 1.

The opinion

Under the current GE rule, the Department calculates debt-to-earnings ratios (“D/E ratios”) for each GE program a school offers. To determine the earnings component of the D/E ratio, the Department uses income data obtained from the Social Security Administration (“SSA”). In its lawsuit, AACS argued that for some GE programs, such as cosmetology, graduates regularly underreport their income due to high levels of cash-based and self-employment-based earnings, including tips. Consequently, the SSA earnings data obtained for those programs is not accurate, and underrepresents the value of the programming offered by cosmetology schools (as measured by the D/E ratio).

In its opinion, the District Court largely agreed with AACS, finding that the Department did not adequately address how underreported income would be treated when calculating the D/E ratios for programs like cosmetology. The Department argued that the availability of an “alternate earnings appeal process” justified the use of the SSA earnings, as it affords schools an opportunity to address the problem of underreported income by using alternate earnings data collected from a state data system or through a survey.

The court, however, concluded that the Department was relying on the faulty assumption that schools would be able to effectively use the alternate-earnings appeal process. And evaluating the process, the court held that the standards that must be satisfied for a school to produce an acceptable alternate-earnings appeal are unwieldy. The court observed that the Department had not taken the time to “weigh data accuracy against feasibility of compliance,” and noted that AACS has produced evidence showing that “cosmetology schools are simply unable to mount appeals because of the onerous regulatory prerequisites to doing so.” Ultimately, the court held that the Department “acted arbitrarily and capriciously with respect to the problem of underreporting,” in violation of the Administrative Procedures Act.

The order

Because it concluded that the Department’s efforts to address underreporting were insufficient, the court determined that it “must now fashion a remedy.” To that end, the court issued an order providing that:

  • The Department must reopen the alternate-earnings appeal process for any AACS members schools that failed to timely submit a notice of intent to file an alternate earnings appeal;
  • The Department must reasonably extend the deadline for AACS member schools to file alternate-earnings appeals;
  • AACS member schools that failed to timely submit a notice of intent to file an alternate-earnings appeal must not be required to make GE student warnings until the revised deadlines have passed; and
  • AACS member schools that file alternate-earnings appeals are not required to survey all graduates in their program cohort, include the earnings of all graduates in their program cohort, or adhere to any requirement that a particular number or percentage of graduates respond to the survey.

The court explained that this order should create for AACS member schools “broader, more feasible options to challenge their D/E rates before they become final.” The court further suggested that pursuant to the order, the Department would “decide, on a case-by-case basis, what modicum of evidence is enough to overcome the presumption in favor of using SSA data for each particular program.”

Takeaways

We offer three takeaway thoughts regarding the court’s opinion and order:

  • First and foremost, the court’s order only extends to AACS member schools. Any school that is not an AACS member school, cosmetology or otherwise, is not covered.
  • AACS schools should watch closely for feedback from the Department regarding revised alternate earnings appeal timelines, standards, and processes. It is entirely unclear, for example, how the Department will go about managing the “case-by-case” determinations referenced in the court’s opinion.
  • All schools with GE programs should watch very closely for reaction from the Department. The current administration has expressed dissatisfaction with the GE rule, having recently announced its intent to revisit the rule through a new negotiated rulemaking. Although the court’s order only extends to AACS schools, it is conceivable that the Department would consider implementing a revised process for all cosmetology programs, or take even broader action.