UNITED STATES DEPARTMENT OF EDUCATION
             WASHINGTON, D.C. 20202


____________________________________

In the Matter of                         Docket No. 97-108-ST

ALLADDIN BEAUTY COLLEGE # 32,    

            Respondent.            
____________________________________    

Appearances:



Before:

DECISION

ISSUE

    
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.

FACTS

    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.

DISCUSSION


I.

    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.

II.

    
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.


FINDING

    
SFAP has made a final determination that Respondent's FFEL cohort default rate for fiscal year 1994 was 44.2 percent.

ORDER

    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.
                                Administrative Judge
                            

SERVICE

        A copy of the attached initial decision was sent by certified mail, return receipt requested to the following:

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 credit risks.

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.