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N.Y. ASS'N OF CAREER SCH. v. SED.

October 25, 1990

NEW YORK STATE ASSOCIATION OF CAREER SCHOOLS, ET AL., PLAINTIFFS,
v.
STATE EDUCATION DEPARTMENT OF THE STATE OF NEW YORK, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Sweet, District Judge.

    OPINION

Plaintiff New York State Association of Career Schools ("NYSACS") and certain schools which are members of the NYSACS have moved for a preliminary injunction pursuant to Rule 65, Federal Rules of Civil Procedure against the defendants State Education Department of the State of New York ("SED"), its Commissioner and certain of its officers and employees (collectively "SED"). Based upon the findings and conclusions set forth below, the motion is denied.

PRIOR PROCEEDINGS

NYSACS filed the complaint in this action on September 24, 1990 alleging that the recently enacted amendments to Section 5001, et seq. of the New York State Education Law contained in Senate Bill 5817-E and Assembly Bill 7517-D (the "Amendments") violated certain of the amendments of the United States Constitution. By order to show cause, NYSACS sought a temporary restraining order on that date to bar the enforcement of the Amendments which by the terms of the legislation were to become effective on October 1, 1990. The restraint was denied and a schedule was set for the hearing of the application for preliminary injunction.

Argument and evidence was received on September 10, 11 and 17, 1990 and final argument was heard on September 24 at which time the matter was considered submitted.

THE FACTS

NYSACS and its members are non-degree granting proprietary schools offering to teach "any subject by any plan or method including written, visual, or audio-visual methods", § 5001, Education Law (the "Schools"). The Schools are today approximately 350 in number, having ranged in number from 250 in 1979 to 400 in 1989. The average school receives gross tuition revenues of $700,000 per year but 30% of the Schools are larger than the average and those schools, a number of which are part of national chains, account for 70%, of the total revenues received by the Schools. Certain of the larger schools have tuition receipts in the millions, the largest chain having total tuition receipts of $50 million. The rate of closing among the Schools was seven times greater in 1989 than it was in 1985.

The students in the Schools under certain circumstances are eligible for federal aid by way of student loans in an average amount of $3000 and so-called Pell grants in an average of $3000 plus some certain expenses. The average tuition for the Schools throughout the state is $6000. The federal loans are guaranteed by the State through the Higher Education Services Corporation ("HESC"). The majority of the students at the Schools are minorities, between the ages of 18-27, unemployed and without high school diplomas.

A number of the Schools adopted a practice of hiring recruiters to locate students to participate in the courses offered in the Schools with remuneration based upon the per person enrollment without regard to the qualifications of the student or the completion of the course of study. Such practices coupled with the aid programs led to abuses and in certain instances criminal prosecutions. See e.g., United States v. Grundhoefer, 916 F.2d 788 (2d Cir. 1990) (defendants convicted of defrauding the government and students out of guaranteed student loan checks). Default on the federal loans results in barring the defaulting student from any further financial aid, and the State is called upon to perform on its guarantee.

The default rates for the Schools was approximately 70%, of the total amount of defaulted loans for 1988, some $75,184,225 out of $122,947,459. Students attending the Schools take out 22% of the federally guaranteed student loans but amount to 44% of the defaults. The default rate for the Schools in New York City is 25.6% and that of the two year Community Colleges of the City University of the City of New York ("CUNY") is 20.9%. Nonetheless, out of 43,884 defaulted guaranteed student loans in 1988, 31,254 of them were taken out by students attending non-degree granting proprietary schools. Students of the Schools taking courses less than 600 hours are required to pay 100% of the tuition costs.

There is competition between the Schools for students and between the Schools and degree-granting institutions which offer continuing education courses and publicly financed Boards of Cooperative Education Services ("BOCES") which offer vocational and training courses and schools offering courses where the tuition is less than $300. No evidence was presented as to the extent of this competition though examples of roughly comparable course offerings were presented. Many of the vocational courses offered by the degree-granting institutions are in the nature of continuing education in a particular field. Prior experience or training and a high school diploma are on occasion an entry requirement. In general the students enrolling for courses offered by the degree granting institutions are better educated, more affluent and older. The Schools' primary objective is to provide education to permit entry level employment.

Degree granting institutions are subject to regulation under Parts 52, 53, 54, and 145 of the Regulations of the Commissioner of SED. These institutions are mainly non-profit (some small number of degree-granting proprietary colleges do exist, approximately 29) and are subject to the peculiarities of academic discipline with respect to course approval, tenure and the requirements for credits. Their governance is customarily responsible to and selected by a constituency other than the management of the institution. Changes in operation are more deliberate and slower than those of the Schools which are subject only to the restraints imposed by customary commercial practice. Degree-granting institutions are reviewed before the authority to issue credits is granted, in the course of which finances, teacher qualifications, faculty, courses, resources, administration and plant are considered by the state authorities. These institutions are subject to periodic review and must submit audited financials to SED.

BOCES courses offered in the daytime must be approved by SED as other public school courses are approved. Certain of the BOCES evening or vocational courses are regulated by legislation outside the Education Law but others are not. The BOCES governance is that of the school districts making up the BOCES which are thereby publicly financed.

Since 1949 New York State (the "State") has regulated private schools. Since 1979 there has been a regulatory scheme in place affecting the Schools. Sections 5001 and 5002 and the regulations of SED prior to the amendments at issue here provided that all advertising by the Schools required pre-approval, a licensing process for sales agents which required submission to the SED and consequent delays, performance bonds for the Schools before approval of their licensing, bonding for each of the sales agents, as well as course approvals and the licensing requirements.

The Amendments were the product of the usual legislative process as indicated by the bill jacket which was introduced into evidence. Certain of the Schools and presumably NYSACS made presentations in the course of this process. Certain new provisions were added to the Education Law:

1.  Requirement of audited financial statements;
  2.  Requirement of refund provisions in
      enrollment agreements similar to those in
      effect for degree granting installations;
  3.  Criminalization of every intentional
      violation of the statute, as amended;
  4.  9/10ths of 1% assessment on the Schools'
      gross tuition revenues (before refunds) to
      pay the expenses of the Bureau of Proprietary
      Schools Supervision ("BOPS") 7/10ths of 1%
      and to finance the tuition Reimbursement Fund
      (2/10ths of 1%) and the expenses of
      regulation;
  5.  Surprise visits at Schools during which the
      Schools' operation is observed unless
      visitation is refused, an action which might,
      or might not, result in a disciplinary
      hearing with attendant due process rights. No
      warnings are given in the course of these
      visits.
  6.  Restrictions on sales compensation by
      limiting per head commissions for recruiters
      to 1% of the recruiters base salary and
      making the commission contingent on the
      students retention, and the licensing of
      sales agents.

In addition NYSACS has cited the following provisions which relate only to the Schools and not to degree-granting institutions or BOCES.

  1.  All provisions authorizing fines, penalties,
      refunds, other sanctions, hearings or other
      civil proceedings against proprietary schools
      or any of their officers, directors,
      shareholders or owners;
2.  Requirement of certified statistical reports;
3.  Required disclosures for licensure;
  4.  Restrictions on transfer or sale of license,
      business or assets;
  5.  Restrictions on discontinuance of School's
   ...

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