The court granted summary judgment to AACS on the basis that the earnings appeal component of the rule was too strictly constructed and thus arbitrary and capricious.

On June 28, 2017, the U.S. District Court for the District of Columbia ruled in favor of the American Association of Cosmetology Schools (AACS) in a case challenging the U.S. Department of Education’s “Gainful Employment Rule.”(Duane Morris LLP serves as counsel to AACS in this litigation.) Read the memorandum and the opinion.

The Gainful Employment Rule measures postsecondary programs based on the percentage of the graduates’ reported income relative to their debt. The resulting debt-to-earnings rates are then used to determine a program’s continued eligibility for participation in federal student aid programs. AACS challenged the legality of the rule as applied to cosmetology schools on the basis that the earnings data used in the rule does not fully capture all of a graduate’s income, leading to faulty program measurement.

The court granted summary judgment to AACS on the basis that the earnings appeal component of the rule was too strictly constructed and thus arbitrary and capricious. Specifically, the court found that the Department failed to establish a basis for the appeal data requirements, did not provide evidence of the relationship between the data requirements and the accuracy of such data, and failed to weigh data accuracy against the feasibility of compliance.

Specifically, the remedy issued by the court by order to the Department:

  • Prohibits the Department from enforcing a requirement that AACS member schools must obtain at least a 50-percent response rate from graduate surveys of actual earnings before they can use that data in alternate earnings appeals;
  • Requires the Department to provide AACS members with additional flexibility as to the students whose alternate earnings are measured in the appeal and strikes from the rule any other “requirement that a particular number or percentage of students respond to institutional surveys for alternate earnings appeals”;
  • Mandates that the Department reopen the alternate earnings appeal process for any AACS member schools who failed to timely submit notice of intent to file an alternate earnings appeal;
  • Instructs the Department to reasonably extend the deadline for AACS member schools to file alternate earning appeals; and
  • Prohibits the Department from requiring AACS member schools who failed to timely submit notice of intent to file an alternate earnings appeal to post warnings until the new deadline for alternate earnings appeal has passed.

As written, the court order extends relief only to AACS member schools. As of the issuance of this release, it remains uncertain whether and when the Department will issue a notice or other guidance in response to the court ruling.

It is important to recognize that the ruling does not change the obligation of institutions subject to the Gainful Employment Rule to post the 2017 GE Disclosure Template provided in Electronic Announcement #103 by July 1, 2017.