UNITED STATES DEPARTMENT OF EDUCATION
WASHINGTON, D.C. 20202
______________________________________
In the Matter of
ALADDIN BEAUTY COLLEGE #26
Appearances:
Before:
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).
_________________________________
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