The American Association of Cosmetology Schools (“AACS”) and one of its member schools, Ogle School Management, LLC, have challenged the U.S. Department of Education’s 2023 “gainful employment” rule (“GE Rule”) in a lawsuit in the U.S. District Court for the Northern District of Texas. The DOE has until November 8 to respond.
The lawsuit filed by AACS attacks the GE Rule from several angles, including: - The Department of Education (“Department”) lacks authority under the Higher Education Act to condition a program’s eligibility on debt-to-earnings metrics and an “earnings premium.” This argument benefits from recent decisions by the U.S. Supreme Court overturning the Chevron doctrine and reinforcing the importance of reading statutes closely to determine the outer limits of a federal agency’s authority.
- The GE Rule deprives schools of their right to a hearing before their participation in Title IV programs is limited or terminated. The HEA mandates that the Department provide notice and an opportunity for a hearing before taking an action to terminate or limit a school’s participation in Title IV programs. The GE Rule ignores that obligation and purports to give the Department the authority to terminate a program with no hearing at all.
- The debt-to-earnings and earnings premium tests in the GE Rule are calculated using data that the Department knows to be wrong, at least with respect to cosmetology programs. It is widely known and acknowledged that workers in the cosmetology industry tend to underreport tips and self-employment income at a significantly higher rate than workers in other industries. Even though the Department’s own expert recommended an adjustment to earnings of workers in cosmetology and other “highly tipped” industries, the Department arbitrarily and capriciously refused to make any adjustments at all.
- In its prior gainful employment rules, the Department has always included a mechanism for allowing schools to provide alternate earnings data. The Department’s latest GE Rule abolishes all appeal processes, leaving schools with no opportunity to correct for underreporting or other flaws in earnings data. The Department did not provide a rational reason for abolishing the alternate earnings appeal.
- Despite acknowledging that gender and race affect earnings (i.e., due to wage discrimination, women and minorities are often paid less for the same work), the Department refused to make any adjustments for industries (like cosmetology) with higher-than-average rates of female and minority workers. The Department’s reasoning for refusing any adjustments is based on a flawed regression analysis produced using an unsound methodology.
- The cosmetology industry has a higher percentage of workers who work part-time. It also has a higher percentage of workers who leave the workforce temporarily or permanently relative to the average worker—often women who start families and decide to stay home and/or work less. Even though the Department knew that cosmetology workers work part-time (or stay home) more than average, the Department refused to adjust their “earnings premium” calculation to reflect reality. Instead, the Department will compare the earnings of all cosmetology program graduates (whether they are in the workforce or not) with the earnings of only high school graduates who are actively working or seeking work. Moreover, the Department will not adjust the part-time earnings of cosmetology graduates to produce an “apples-to-apples” comparison against high school graduates who work full-time.
- The Department will use earnings data from 2021 and 2022 in calculating the first set of debt-to-earnings rates and earnings premiums. The cosmetology industry was uniquely impacted more than the average industry by coronavirus-related restrictions and shut-downs. Despite knowing that 1) more women than men stopped working as a result of the coronavirus, 2) salons and studios were more severely impacted by restrictions than non-contact businesses, and 3) cosmetologists’ earnings were artificially low in 2021-22, the Department arbitrarily refused to make any adjustments at all to their calculations, and further refused to simply wait for one to two years so that earnings would rebound to normal levels.
- The Department claims that the effects of the GE Rule are not detrimental to students because there will be plenty of “high quality” alternative programs in which students can enroll if their chosen program loses Title IV eligibility. However, the GE Rule exempts roughly three-quarters of gainful employment programs from any scrutiny whatsoever. Thus, while the Department claims there are thousands of alternative, “high quality” programs available to students, in reality, it has no idea if these alternatives are better, worse, or the same as programs that fail the GE Rule’s tests. Furthermore, the Department assumes without evidence that these “alternative” programs have the capacity to take on tens or hundreds of thousands of students whose programs are shut down as a result of the GE Rule.
- The GE Rule unreasonably targets cosmetology programs more than other gainful employment programs. The Department’s own expert found that, in nine of the ten most popular gainful employment fields, gainful employment programs at non-profit colleges resulted in better financial outcomes for students than gainful employment programs at for-profit colleges. The one exception was cosmetology programs; graduates of for-profit cosmetology programs have better financial outcomes than graduates of non-profit cosmetology programs. Yet, of all the programs that will be terminated from Title IV participation as a result of the GE Rule, for-profit cosmetology programs will suffer the highest rate of terminations. Because the net effect of the GE Rule does not line up with reality, the GE Rule is arbitrary and capricious.
- The effect of the GE Rule will be to restrict, if not eliminate, a school’s ability to teach and a student’s ability to learn. Giving and receiving educational messages are forms of speech protected by the First Amendment. Since the GE Rule relates only to certain subject matters and certain speakers/listeners, it is a “content-based” restriction on speech subject to the “strict scrutiny” under the U.S. Constitution. Almost uniformly, laws and regulations subject to the “strict scrutiny” test fail and are struck down. The GE Rule is no exception.
- The GE Rule requires schools to give “warnings” if a program fails either the debt-to-earnings or earnings premium metric just once. Because schools have no choice in the contents of the warnings or whether to give them in the first place, the warnings are compelled government speech. Such warnings should be considered content-based (and subjected to strict scrutiny). However, even if the warnings are viewed as commercial speech (which is subject to a lesser form of scrutiny), they are still unconstitutional because they are not “uncontroversial” and not “purely factual.”
For more information: AACS Brief Ogle School Management Brief |
