UNITED STATES DEPARTMENT OF EDUCATION
WASHINGTON, D.C. 20202
In the Matter of Docket No. 97-108-ST
ALLADDIN BEAUTY COLLEGE # 32,
Student Financial Assistance Proceeding
Peter S. Leyton, Esq., Ritzert & Leyton, P.C., Fairfax, Virginia, for Respondent.
Alexandra Gil-Montero, Esq., Office of the General Counsel, United States
Department of Education, Washington, D.C., for Student Financial Assistance
Frank K. Krueger, Jr., Administrative Judge
Whether Respondent must be terminated from participation in the programs authorized
under Title IV of the Higher Education Act of 1965, as amended, because the Student Financial
Assistance Programs (SFAP), U.S. Department of Education, has made a final determination that
Respondent's cohort default rate under the Federal Family Education Loan (FFEL) Program for
fiscal year 1994 exceeded 40 percent. The answer: yes.
Respondent's cohort default rate for fiscal year 1992 was 35.8 percent; for fiscal year
1993 the rate was 21.4 percent. For fiscal year 1994, the rate jumped to 44.2 percent.
Respondent's pre-published rate for fiscal year 1995 is 40.5 percent. It appears that the final rate
for fiscal year 1995 will actually be 39.3 percent because of two errors in the underlying data
concerning that rate that was recognized by the Texas Guarantee Student Loan Corporation. See
Declaration of Eberle Smith at 3 and attached letter dated June 19, 1997, from Ken Johnson,
Compliance Specialist, Texas Guaranteed Student Loan Corporation. Based on the rate for fiscal
year 1994, SFAP initiated this termination action.
Under 34 C.F.R. § 668.17(b)(1) (1997), a school's participation in the FFEL Program
ends thirty days after notification by the Secretary that its FFEL cohort default rate for each of the
three most recent fiscal years is 25 percent or greater. Other than an informal appeal to the
Secretary, there are no review procedures provided under this provision, which was prescribed by
Congress in 1991 as part of the Student Loan Default Prevention Initiative Act. See 20 U.S.C.A.
§ 1085(a)(2) (Supp. 1997). The Department, pursuant to its rulemaking authority, adopted 34
C.F.R. § 668.17(a)(2) (1997), which provides that the Secretary may initiate a proceeding
under 34 C.F.R. § 668, Subpart G to limit, suspend, or terminate a school's participation in all
Title IV programs if the FFEL cohort default rate of its students exceeds 40 percent for any fiscal
year. While Congress determined that the Department should not guarantee loans to students
attending schools with excessively high cohort default rates for three consecutive fiscal years (the
25 percent rule), the Department expanded that determination to potentially terminate such
schools from all Federal student financial assistance programs for exceeding the threshold rate,
albeit a higher threshold, for any fiscal year (the 40 percent rule).See footnote 11
Since before a school can be terminated from participation in all Title IV programs it is
entitled to a hearing, 20 U.S.C.A. § 1094(c)(1)(F) (Supp. 1997), the Department has provided a
hearing, but reduced the hearing to little more than a perfunctory proceeding. The Department's
regulations, adopted in December 1995, at 34 C.F.R. 668.90(a)(3)(iv) (1997), provide as follows:
In a limitation, suspension, or termination proceeding
commenced on the grounds described in § 668.17(a)(2) [the 40
percent rule] . . . , if the hearing official finds that an institution's
FFEL Program cohort default rate . . . meets the conditions
specified in § 668.17(a)(2) [i.e., exceeds 40 percent for any fiscal
year] . . . for initiation of limitation, suspention, or termination
proceedings, the hearing official also finds that the sanction sought
by the designated department official is warranted, except that the
hearing official finds that no sanction is warranted if the institution
presents clear and convincing evidence demonstrating that the
FFEL Program cohort default rate . . . on which the proposed
action is based is not the final rate determined by the Department
and that the correct rate would result in the institution having an
FFEL Program cohort default rate . . . that is beneath the
thresholds that make the institution subject to limitation,
suspension, or termination action.
This confusing language reduces the hearing to the following procedure: SFAP presents to the
hearing official the necessary documents to prove that it made a determination that the school
had a cohort rate above 40 percent for any given year, and that it is the final rate made by
SFAP under 34 C.F.R. § 668.17. Upon the presentation of this evidence, the school has no
defense and the hearing official must find that the sanction sought by SFAP is warranted. Only
if the SFAP rate is not final may the hearing official entertain any evidence presented by the
school. Even if the SFAP rate is an obvious error, or is not otherwise the correct rate, if it is a
final rate, then the hearing official must order the sanction sought by SFAP.
Respondent argues that the language appearing at the beginning of § 668.90(a)(3)(iv), if
the hearing official finds that an institution's FFEL Program cohort default rate . . . meets the
conditions specified in § 668.17(a)(2), requires that the hearing official make an independent
finding of fact that Respondent's cohort default rate is above 40 percent. To give this language
its literal meaning, as advocated by the Respondent, leads to an absurd result. Under
§ 668.90(a)(3)(iv), the first step specified is for the hearing official to find whether the
institution's cohort default rate meets the conditions specified in § 668.17(a)(2), i.e., the rate
exceeds 40 percent for any given fiscal year. If the hearing official finds that the institution's
actual rate exceeds 40 percent, then the regulation provides that the hearing official must find
that the sanction sought by the designated department official [i.e., SFAP] is warranted, unless
the institution can show that the rate used by SFAP to bring the Subpart G proceeding is not the
final rate, in which case the institution can challenge the SFAP rate and attempt to demonstrate
that its correct rate is 40 percent or below. However, under the first step in the regulation, the
hearing official has already made a finding that the institution's actual rate exceeds 40 percent.
Thus, under a literal reading of the regulation, the hearing official would make a finding that the
actual rate is above 40 percent, presumably hearing evidence from SFAP, followed by rebuttal
evidence from the institution. Then, if the rate used by SFAP to initiate the termination action
was not the final determination, the hearing official would sit through and hear the evidence all
over again. Thus, the regulation cannot be given its literal reading, but must be interpreted in
context. The only way to avoid the absurdity outlined above is to interpret the first step in the
process as restricted to making a finding that the SFAP rate determination exceeds 40 percent.
Application of the 40 percent rule may be unfair under certain circumstances, especially
when juxtaposed with 34 C.F.R. § 668.90(a)(3)(iv) which eliminates any discretion by the
hearing official. Under the 25 percent rule, a school at least has some warning that the default
rate for its students is getting dangerously high, and avoids the possibility that a school will be
terminated from the FFEL program if its rate for the third year falls below the regulatory
threshold. The 40 percent rule, by contrast, provides that a school may be terminated from
participation in the entire Title IV program if its default rate exceeds 40 percent for any year.
Once SFAP makes a final determination and decides to seek termination from all of the Title
IV programs, the hearing official has no discretion but to order termination. In the present case,
Respondent's rate appears to be going below the 40 percent threshold for fiscal year 1995. In
addition, the rule does not allow the Respondent to challenge the final rate determination made
by SFAP. In the present case, Respondent has proffered evidence which challenges the
correctness of the SFAP determination and notes that it would only take seven students to push
the fiscal year 1994 rate down to the 40 percent threshold. SFAP notes that the regulations
provide for an appeal of the SFAP determination, but the appeal is internal to SFAP; there is no
provision made for a review of the final rate determination by a disinterested third party within
the Department, such as a hearing under Subpart G, although the rate can certainly be challenged
in the Federal courts.See footnote 22 Respondent has also proffered evidence of extensive past and present
efforts to reduce the default rate for its students. Under 34 C.F.R. § 668.90(a)(3)(iv), the
proffered evidence is totally irrelevant.See footnote 33
Given the severity of the remedy proposed by SFAP, the small number of defaulted
loans at issue, and the fact that the school appears to have a default rate for fiscal year 1995
below 40 percent, the school should be allowed to challenge the SFAP final determination in a
Subpart G type of hearing. In addition, consideration should be given to a remedy other than
termination, such as limiting the school's participation to the Pell Grant program or suspention
from the FFEL Program, until Respondent's final 1995 cohort default rate is determined.
Consequently, if this decision is appealed to the Secretary, I recommend that the Secretary
remand the case for an evidentiary hearing allowing the Respondent to challenge the correctness
of the SFAP final rate determination, allowing the Respondent to present evidence concerning
past and present efforts it is taking to prevent loan defaults, determining whether those efforts are
effective, and putting into evidence any other factors it believes mitigate in favor of the Secretary
exercising discretion in whether Respondent should be terminated. Such a hearing would be
followed by a recommended decision which I would issue to the Secretary containing my factual
findings and recommendations on whether the Respondent should stay in the Title IV program
and specifying any limitations or conditions on its continued participation.
SFAP has made a final determination that Respondent's FFEL cohort default rate for
fiscal year 1994 was 44.2 percent.
Respondent is terminated from participation in all programs authorized under Title IV of
the Higher Education Act of 1965, as amended.
Dated: December 15, 1997
Frank K. Krueger, Jr.
A copy of the attached initial decision was sent by certified mail, return receipt requested to the
Alexandra Gil-Montero, Esq.
Office of the General Counsel
U.S. Department of Education
600 Independence Avenue, S.W.
Washington, D.C. 20202-2110
Peter S. Leyton, Esq.
Ritzert & Leyton, P.C.
10387 Main Street, Suite 200
Fairfax, Virginia 22030
Footnote: 1 1 SFAP notes that the United States Court of Appeals for the District of Columbia Circuit
upheld the Student Loan Default Prevention Initiative Act and its implementing regulations and,
in so doing, relied on a Congressional determination that schools bear a fair share of the blame
for high default rates. See SFAP's Initial Brief at 4. While Association of Accredited
Cosmetology Schools v. Alexander, 979 F.2d 859 (D.C. Cir. 1992) did indeed uphold the
constitutionality of the regulations implementing the Student Loan Default Prevention Initiative
Act, the regulations upheld did not include the 40 percent rule. The court in Alexander found
that the 25 percent rule was not a denial of substantive due process because Congress determined
that the schools do bear some of the responsibility for high default rates and that Congress
simply refused to take an unusually high credit risk.
We ... reject the notion that Congress's intent was to punish
schools with excessive [cohort default rates]; rather, much like a
private lender, Congress merely refused to reinsure unusually large
Id. at 866. The court expressly declined to rule on the constitutionality of the Department's
appeal procedures. Id. at 862.
Footnote: 2 2 Under the proposed rule published on September 21, 1995, a school with a cohort
default rate above 40 percent could defend itself in a Subpart G proceeding on the basis that the
SFAP final rate was not accurate. 60 Fed. Reg. 49191. The preamble to the proposed
regulation states that a school challenging an SFAP rate determination would have the burden of
proving, by clear and convincing evidence, that the SFAP final rate is not accurate. Id. at 49184.
For inexplicable reasons, this language was deleted from the final regulation. 60 Fed. Reg.
61774 (December 1, 1995).
Footnote: 3 3 Prior to the 1995 regulatory changes, which created the present form of the 40 percent
rule and eliminated any discretion on the part of the hearing official, a school could avoid
termination by demonstrating that it was implementing default reduction measures described in
Appendix D of the regulation. As part of the 1995 regulatory changes, the so-called Appendix D
defense was eliminated. Respondent alleges that the elimination of the Appendix D defense was
arbitrary and violated the rulemaking requirements of the Administrative Procedure Act. Such an
argument is clearly beyond the scope of my authority and should be reserved for presentation as
part of any judicial challenge which Respondent may seek for its termination.