WASHINGTON, D.C. 20202


In the Matter of                         


            Respondents.                Student Financial Assistance Proceeding




    On June 30, 1997, and October 29, 1997, the office of Student Financial Assistance Programs (SFAP) of the U.S. Department of Education (Department) initiated proceedings against Aladdin Beauty College #26 and Aladdin Beauty College #21, respectively, two institutions owned by Aladdin Beauty Colleges, Inc. (hereinafter referred to as Respondent), for the purpose of terminating the eligibility of these two institutions to participate in the student financial assistance programs authorized under Title IV of the Higher Education Act of 1965, as amended (HEA). 20 U.S.C. § 1070 et seq. and 42 U.S.C. § 2751 et seq. These proceedings are representative of a series of cases recently initiated by SFAP against institutions because of excessive cohort default rates by their student borrowers of Federal Family Education Loans (FFEL).See footnote 11 Both Aladdin institutions filed a request for hearing and, inasmuch as the issues for each were identical, at their request they were consolidated for the purposes of oral argument and initial decision.

    On January 6, 1997, Aladdin #26 was notified by SFAP that its 1994 cohort default rate was 42 percent and, on the same date Aladdin #21 was notified that its 1994 cohort default rate was 43.5 percent. Both institutions challenged these rates on two grounds: one, that SFAP used erroneous data in its calculation and, two, that the loans in question received improper loan servicing. Following a review of the erroneous data appeal submissions, SFAP affirmed the preliminary rate for Aladdin #26 and reduced the preliminary rate for Aladdin #21 from 43.5 percent to 43.3 percent; the improper loan servicing appeals were both denied.

    As was explained to the institutions in the January 6, 1997, cohort default rate notification, the Secretary of Education has the authority to terminate an institution's eligibility to participate in the student financial assistance programs authorized under Title IV of the Higher Education Act if the institution has a cohort default rate in excess of the regulatory threshold of 40 percent for any year. 34 C.F.R. § 668.90(a)(3)(iv). The Secretary implemented this unforgiving standard as a means of countering what he described as a skyrocketing of student loan default costs, as highlighted in a 1991 Senate subcommittee report entitled Abuses in Federal Student Aid Programs.See footnote 22 The Secretary has adopted the position that an institution's excessive cohort default rate serves not only as an indicator of an institution's inability to administer properly the Title IV, HEA programs,See footnote 33 but also as one which has disastrous effects on the intended beneficiaries of this student aid. The Senate Report further found that institutions with high default rates cause great injustices to their students by leaving them with huge debts and little education.

    As has been exhaustively addressed in previous decisions regarding excessive cohort default rate cases, SFAP's burden is met when it presents evidence that an institution's final cohort default rate for any year exceeds 40 percent.See footnote 44 SFAP has done that here for both institutions when it presented documentation showing that the final cohort default rates for fiscal year 1994 for Aladdin # 21 and Aladdin #26 were 43.5 percent and 43.3 percent, respectively. A respondent may raise as a defense to this proceeding only clear and convincing evidence that the default rates in question are not the final rate determined by the Department, or that the final rate determined by the Department is 40 percent or below. 34 C.F.R. § 668.90(a)(3)(iv). In the absence of such a presentation, SFAP has satisfied its burden of proving that the eligibility of both institutions to further participate in the HEA programs should be terminated.

    Respondent, the corporate owner, asks that I not stop my analysis here, but that I exercise my discretion and consider two additional factors which it believes are in its favor. First, Respondent challenges the legality of the implementing regulation which, effective July 1, 1996, eliminated an institution's opportunity to submit an Appendix D defense to this type of termination proceeding; second, it asks that I consider its implementation of certain default reduction measures which it believes mitigates a finding that its cohort default rate exceeds 40 percent.

    Up until July 1, 1996, the regulations contained a provision whereby an institution with a cohort default rate which exceeded the 40 percent threshold could successfully defend itself against efforts by SFAP to terminate its Title IV, HEA eligibility based on the excessive cohort default rate if the institution could make a showing that it had implemented the default reduction measures described in Appendix D of 34 C.F.R. Part 668 (the “Appendix D defense”). Respondent argues that the means by which the Department eliminated the Appendix D defense, set out in 34 C.F.R. § 668.90(a)(3)(iv) (1996), violates the notice and comment procedures requirement found in the Administrative Procedure Act, 5 U.S.C. § 553, because the Department did not adequately address the many comments which recommended against the elimination of this defense. Additionally, Respondent challenges the elimination of this defense as constituting arbitrary and capricious conduct pursuant to §706(2d)(A) of the same Act. Recognizing that the regulations specifically prohibit the hearing official from ruling that a regulation is invalid,See footnote 55 Respondent asks that I make a finding that the removal of the Appendix D defense violates the Administrative Procedure Act and then recommend that the Secretary adopt this finding. Clearly it is beyond my authority to rule on the legality of the changes to this regulation. Furthermore, my cursory examination of the Secretary's expressed purpose for changing this section of the regulation, as well as my review of a sampling of his remarks which address the negative comments submitted to the Department,See footnote 66 does not convince me that the changes are invalid under, or fail to comply with, the Administrative Procedure Act. Therefore, there is no need for me to submit a recommendation to the Secretary that I be permitted to inquire further into this matter.

    Respondent's next argument is that, with respect to its fiscal year 1994 cohort default rates, it should be exempted from the elimination of the Appendix D defense, and that it be grandfathered under the prior provisions of Appendix D. In support of this Respondent alleges that since 1990 it has, in good faith, spent approximately $581,002 implementing an Appendix D default reduction program for its institutions and, according to the regulations in effect prior to July 1, 1996, it had every reason to believe that its satisfactory implementation of this default reduction program exempted it from the termination of its eligibility based on excessive cohort default rates. 34 C.F.R. § 668.90(a)(3)(iv) (1995). As Respondent explains, its cohort default rate statistics for fiscal year 1994 were based on student repayments occurring during the two- year period beginning on October 1, 1993, and ending on September 30, 1995. SFAP, however, did not notify Respondent of its 1994 cohort default rates until January 1, 1997, six months after the Secretary eliminated the possibility of raising an Appendix D defense. Respondent argues that it is now unfair not to permit it to take advantage of its good faith efforts in the Appendix D arena, suggesting that if it had known then what it knows now, perhaps it would not have placed so much reliance on its default reduction measures.

    Although there is a certain appeal to this position, it overlooks the fact that Respondent's implementation of the Appendix D measures was not a discretionary act, but rather was mandatory when its cohort default rates exceeded 20 percent, and this has been the case for every fiscal year since 1989. 34 C.F.R. § 668.17(b) (1994). Therefore, to argue that it should be rewarded now for the implementation of default reduction measures during that period of time is unpersuasive.

    Respondent also contends that its default reduction measures should be viewed as a mitigating factor in the decision of whether it should be terminated. Mitigating factors have no bearing on the hearing official's decision of whether an institution's eligibility should be terminated when its cohort default rate exceeds the 40 percent threshold. As noted above, an institution in this setting has only two defenses, either that the default rate is not the final rate, or that the final rate is 40 percent or below. Neither of these are present here. Therefore, I must find that the termination of Respondent's Title IV eligibility is warranted. 34 C.F.R. § 668.90(a)(3)(iv).


    On the basis of the foregoing, it is hereby ORDERED that the eligibility of Aladdin Beauty College #26 and Aladdin Beauty College #21 to participate in the student financial assistance programs authorized under Title IV of the Higher Education Act of 1965 be terminated.

                             Judge Richard F. O'Hair

Dated: July 1, 1998


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

Glenn Bogart
Higher Education Compliance Consulting
1149 16th Avenue South
Birmingham, AL 35205

Alexandra Gil-Montero, Esq.
Office of the General Counsel
U.S. Department of Education
600 Independence Avenue, S.W.
Washington, D.C. 20202-2110

Footnote: 1    1 See Interactive Learning Systems, U.S. Dept. of Education, Dkt. No. 97-169-ST (May 21, 1998), Avanti Hair Tech, U.S. Dept. of Education, Dkt. No. 97-179-ST (May 21, 1998), Michigan Barber School, U.S. Dept. of Education, Dkt. No. 97-172-ST (May 5, 1998), Trend Beauty College, U.S. Dept. of Education, Dkt. No. 97-173-ST (Apr. 28, 1998), Delaware County Institute of Training, U.S. Dept. of Education, Dkt. No. 97-175-ST (March 13, 1998), Academy for Career Education, U.S. Dept. of Education, Dkt. No. 97-124-ST (Feb. 20, 1998); Alladdin Beauty College #32, U.S. Dept of Education, Dkt. No. 97-108-ST (Dec. 15, 1997); Palm Beach Beauty & Barber School, U.S. Dept. of Education, Dkt. No. 97-102-ST (Oct. 23, 1997).
Footnote: 2    2 Senate Report No. 58, 102d Cong., 1st Sess. (May 17, 1991).
Footnote: 3    3 34 C.F.R. § 668.16(m).
Footnote: 4    4 See supra note one.
Footnote: 5    5 34 C.F.R. § 668.117(d)
Footnote: 6    660 Fed. Reg. 183, 49179; 60 Fed. Reg.183,49184; 60 Fed. Reg. 231, 61760; 60 Fed. Reg. 231, 61769 (September 21, 1995, proposed rule), (December 1, 1995) (codified at 34 C.F.R. § 668.17).