Cosmetology Schools Sue Betsy DeVos Over Obama-Era Rules

(Bloomberg) -- The American Association of Cosmetology Schools sued Education Secretary Betsy DeVos claiming that a gainful-employment rule implemented by the Obama administration shouldn’t be applied to beauty schools.

The lawsuit, filed Friday in federal court in Washington, seeks an order barring the rule that threatens career schools’ access to federal student aid if they saddle their graduates with too much debt relative to their earnings. The trade group said the rule is harmful when applied to beauty schools, whose graduates typically underreport income from cash tips.

The U.S. Department of Education has tightened standards on for-profit education institutions, forcing the schools to demonstrate that graduates have found gainful employment that will allow them to pay off their student debt. If they don’t meet certain requirements, the schools risk not being eligible to participate in the government-student-loan program.

“A provision that is supposed to protect our students in fact hurts them badly,” Adam Nelson, executive director of the association, said in a statement. “We trust that the Department of Education did not mean to create this crisis and we hope that under new leadership, they will remedy this flaw, or that the court will address our grievance.”

Tips Income

The trade group claims in its lawsuit that the income data, which comes from the Social Security Administration, undercount the gratuities paid in cash to cosmetology graduates, who tend to be self employed. While the government relies on individuals receiving such income to self-report it, they have an incentive to underreport “in order to reduce their federal and state payroll tax liabilities,” according to the complaint. Some graduates also underreport simply because of poor record keeping, the association claims in the suit.

That reported “income gap phenomenon” puts cosmetology schools at a disadvantage in any assessment of adherence to the rule and threatens access to federal funding. The rules, which the association called an “abuse of discretion,” may improperly force cosmetology programs to close even though they’re doing an excellent job of preparing students for gainful employment, the association said.

Jim Bradshaw, a spokesman for the Education Department, had no immediate comment on the filing. The trade group claims the department has failed to consider alternatives for cosmetology programs.

‘Crisis Point’

“We would have preferred to work this out in a fair and equitable manner in any other forum,” said Edward Cramp, a partner with the law firm Duane Morris LLP who serves as outside general counsel for the AACS. “Unfortunately, our schools are nearing a crisis point, and we were forced to sue, to protect these schools from this untenable federal regulation as it applies to this sector of higher education.”

For-profit schools are struggling to regain the trust of students and regulators after the industry was rocked by federal and state investigations into aggressive marketing, high tuition and recruitment practices and concerns about student debt. 

About a third of recent for-profit college graduates attending career-training programs from 2008 to 2012 earned less than $14,500, what a full-time worker making the federal minimum wage would earn in 2014, even as they incurred student debt, according to data released by the Department of Education in November. In contrast, 14 percent of those from public schools’ vocational programs, graduated from programs whose typical graduates made so little.

DeVos was confirmed as education secretary earlier this week. A longtime Republican Party donor and activist, she’s an advocate of free market in education, including for-profit charter schools.

The case is American Association of Cosmetology Schools v. DeVos, 17-cv-00263, U.S. District Court, District of Columbia (Washington).

--With assistance from Janet Lorin and Shahien Nasiripour To contact the reporter on this story: Sophia Pearson in Wilmington, Delaware at spearson3@bloomberg.net. To contact the editors responsible for this story: David Glovin at dglovin@bloomberg.net, Joe Schneider