June 5 (Bloomberg) -- The Obama administration’s rule barring for-profit colleges from paying recruiters bonuses tied to the number of students they sign up was upheld by a federal appeals court.
The U.S. Court of Appeals in Washington ruled today that U.S. Education Department regulations on the practice, put into effect in 2011, were properly enacted and are consistent with the aims of the Higher Education Act of 1965. At the same time, the court ordered the trial judge to get further explanation from the department of the effect of the rule change on minority recruitment.
The court also questioned whether the department had justified eliminating bonuses for recruiters that are based on students’ successful completion of programs.
The Obama administration proposed the rules as part of a crackdown on for-profit colleges’ recruitment and marketing practices. The U.S. Department of Education, Congress, federal prosecutors and state attorneys general are scrutinizing the institutions, which rely on federal financial aid for as much as 90 percent of their revenue and have higher student-loan default rates than traditional colleges. The industry says it caters to lower-income and minority students overlooked by the higher-education establishment.
The Education Department said tying bonuses to enrollment led for-profit colleges to sign up students who didn’t benefit from their degrees, leaving them with government loans they couldn’t repay.
“We are pleased that the court has largely upheld our regulations to protect students and taxpayers,” Justin Hamilton, an Education Department spokesman, said in an e-mail. Where judges took issue with the rules, the department is “evaluating the appropriate next steps,” he said.
The court sided with the for-profit colleges’ challenge to a regulation requiring that every state where online courses are offered provide separate authorization.
The three-judge panel also said the Education Department’s ban on “misrepresentation” in marketing to students was too broad, in part because it forbids statements that are “merely confusing.”
The court’s ruling gives “significant relief” to for-profit colleges, said Steve Gunderson, president of the Association of Private Sector Colleges and Universities, the Washington-based group that brought the lawsuit.
The trade organization “looks forward to working with the department, to help prepare reasonable regulatory changes that best serve students and lead to positive educational outcomes,” Gunderson said in a statement.
The ruling “is a minor positive for the industry,” said Jarrel Price, an analyst at Washington-based Height Analytics. “It could help rebuild motivation and reinvigorate enrollments across the sector.”
Price said the decision will lower legal risk for educational institutions related to confusing advertising policies. Price doesn’t publish ratings on the sector or on individual companies.
Phoenix-based Apollo Group Inc., owner of the University of Phoenix, the biggest for-profit chain by enrollment, rose 0.8 percent to $32.69 in trading in New York at 4:30 p.m. Pittsburgh-based Education Management Corp., the second-biggest, rose 1 cent to $7.17. Washington Post Co., which owns Kaplan Higher Education, fell 39 cents to $351.24.
The Bloomberg index Sof 13 for-profit education companies rose O.63 percent.
The case is Association of Private Sector Colleges and Universities v. Duncan, 11-5230, U.S. Circuit Court for the District of Columbia (Washington).