California Cosmetology Coalition American Association of Cosmetology Schools v. Richard W. Riley, Secretary of Education
Docket: 96-55314
Court: Court of Appeals for the Ninth Circuit; April 11, 1997; Federal Appellate Court
The case involves the Ninth Circuit Court of Appeals reviewing regulations issued by the Secretary of Education concerning refund policies for postsecondary schools related to students who withdraw before completing their term, as governed by 34 C.F.R. 668.22. The district court ruled that these regulations conflicted with the Higher Education Act (HEA), specifically 20 U.S.C. 1091b, which outlines required refund policies for Title IV federal aid recipients. The court affirmed the district court's injunction against enforcing the regulations.
Title IV of the HEA establishes federally funded student aid programs, including grants and loans. To address rising educational costs and inequitable administration of aid, Congress enacted the Higher Education Amendments of 1992, mandating that participating schools create a "fair and equitable" refund policy for students who withdraw early. The criteria for fairness and equity require that the refund amount meets at least one of three minimum standards: compliance with applicable state law, adherence to refund requirements set by an accrediting agency approved by the Secretary, or a pro rata refund for first-time students who withdraw before completing 60% of their program.
Currently, only the first and third calculations outlined in the refund policy need to be made, as the Secretary has yet to approve any accrediting agency's refund policy, rendering 20 U.S.C. 1091b(b)(2) inoperative. The 1992 Amendments stipulate that refunds must first reimburse Title IV loan programs, followed by Title IV grant programs, other aid sources, and finally the student (20 U.S.C. 1092(a)(1)(F)).
On December 23, 1991, prior to the 1992 Amendments' enactment, the Secretary proposed amendments to 34 C.F.R. 668.22 regarding institutional refunds for students who withdraw before completing their programs. Final Regulations were published on November 29, 1994, which adopted the earlier proposal and introduced a new calculation method for determining refunds. Institutions must calculate the refund based on the 1992 Amendments and subtract any unpaid scheduled cash payments owed by students or the government.
"Scheduled cash payment" refers to unpaid institutional charges not covered by financial aid for the enrollment period, excluding amounts scheduled to be paid by Title IV assistance that the student was awarded but not entitled to upon withdrawal (34 C.F.R. 668.22(g)(2)(ii)). This requirement shifts costs from the government to institutions and students, obligating schools to reimburse the government for amounts still owed by students. Consequently, students receiving full grants may find themselves in debt due to this regulation.
For example, if two students have a $3,000 program cost, with $500 out-of-pocket expected from each and the remainder covered by Title IV assistance, and both withdraw, the school retains $1,500 per student for attendance. If one student paid their out-of-pocket amount and the other did not, the school must consider the unpaid amount when calculating the refund, impacting how much can be retained and potentially converting grant funds into debt for the student who did not pay.
Refund calculations for student withdrawals previously relied on the payments received by the school. For Student A, who received $2500 entirely from Title IV assistance, the school refunded $1000 to Title IV. Student B, who had contributed $500 and received $2500 from Title IV, had a $1500 refund to Title IV. Under the Final Regulations, the school may retain different amounts, allowing it to keep $1000 for Student A and $1500 for Student B, while refunding $1500 to Title IV for both and billing Student A for the remaining $500.
The Final Regulations mandate that institutions must: (1) compute all applicable refunds as specified in 34 C.F.R. 668.22(b)(3); (2) select the calculation yielding the largest refund or use their own policy if it exceeds the calculated refunds; (3) deduct any unpaid scheduled payments from the retention amount; and (4) refund the difference between total payments received and the calculated retention amount, as per 34 C.F.R. 668.22(h).
In contrast, the 1992 Amendments indicate that a school’s refund policy is deemed fair if it refunds the larger amount required by state law or a pro rata refund for first-time students who withdraw before completing 60% of their program.
The California Cosmetology Coalition and the American Association of Cosmetology Schools filed a lawsuit against the Secretary to challenge the Final Regulations, arguing they contradict the 1992 Amendments by requiring refunds that exceed state and accrediting standards. The district court agreed, issuing a preliminary injunction, stating that the regulations improperly interpret what constitutes a "fair and equitable" refund by including unpaid charges, which is not mandated by the statutory language in 20 U.S.C. 1091b.
The district court determined that excluding unpaid charges from the amount schools can retain, while requiring these charges to be added to the refund amount, alters the explicit language of the 1992 Amendments and exceeds the Secretary's authority. Consequently, the court granted the Coalition's motion for summary judgment, permanently enjoining the enforcement of regulations that mandated this exclusion and addition. The Secretary appealed this decision.
In reviewing the summary judgment, the standard applied is de novo. If Congressional intent is clear from the statutory language, it must be honored. The language of the 1992 Amendments indicates that institutions are required to create "fair and equitable" refund policies, which must be deemed fair if they meet certain statutory criteria.
The Coalition argues that compliance with these criteria inherently makes a refund policy fair and equitable. Conversely, the Secretary contends that the statute is ambiguous, allowing him to interpret it. He focuses on the term "unearned" in 20 U.S.C. 1091b(a), asserting that the lack of a definition for "unearned" in the Higher Education Act (HEA) gives him the authority to define it in line with the regulations.
The Secretary's interpretation is that "unearned" funds include total charges assessed to a student, not just the payments received at the time of withdrawal. He posits that federal aid funds are considered "unearned" until the institution has earned payments from all other sources, prioritizing student obligations. Thus, the Final Regulations mandate that refunds equal the unearned portion of total charges, calculated by including unpaid charges, which ensures that student funds are treated as earned first. The Secretary argues that his definition of "unearned" deserves Chevron deference.
The Secretary contends that there is a conflict between sections 1091b(b) and 1092(a)(1)(F) regarding the treatment of unpaid charges in refund calculations. Without including these unpaid charges in the institutional refund, students who did not pay their out-of-pocket share before withdrawal will effectively avoid their financial responsibility, as Title IV funds would cover their obligations. This situation, according to the Secretary, leads to a "constructive refund" that contravenes the directives of 1092(a)(1)(F). The D.C. Circuit supported this view in Career College Ass'n v. Riley, acknowledging a tension between the two statutes but concluding that both fail to address the issue of unpaid charges explicitly. The court believed Congress did not consider unpaid charges in the refund calculation, assuming students would meet their financial obligations. Consequently, the court deferred to the Secretary's interpretation of "unearned" tuition and charges. The regulation was deemed as not adding to the refund but ensuring equitable treatment among all students regarding unpaid charges. The court disagreed with earlier district court rulings that invalidated these regulations, asserting they mischaracterized the regulation's purpose.
In contrast, the district court in this case deemed section 1091b clear in defining a fair and equitable refund minimum, while asserting section 1092(a)(1)(F) only outlines the order of repayment without defining "unearned" to include unpaid charges. The reviewing court concurred with the district court's interpretation, emphasizing that Congress's language in section 1091(b) is explicit and does not require the Secretary to define "unearned" tuition. The Secretary's argument implies that section 1092(a)(1)(F) alters the calculations set forth in 1091b(b), which was addressed in Mead Corp. v. Tilley.
Upon termination of an employee benefit plan, all accrued benefits automatically vest and must be disbursed from the plan's available funds. Under Section 4044(a) of the Employee Retirement Income Security Act of 1974 (ERISA), the priority of benefit payments is established: first to nonforfeitable benefits guaranteed by the Pension Benefit Guaranty Corporation, followed by all other nonforfeitable benefits under the plan, and lastly to all other benefits. Any remaining funds can be recouped by the employer. The plaintiffs contended that their benefits, although not accrued, should be classified as "benefits under the plan" and paid prior to employer recoupment. The Court rejected this view, asserting that 4044(a)(6) serves as a distribution mechanism for existing benefits rather than a source for new entitlements. Similarly, Section 1092(a)(1)(F) functions as a distribution mechanism for refunds calculated under Section 1091b(b), located in a subsection regarding "Information dissemination activities," which does not modify refund amounts. This section mandates that institutions provide students with a statement of their refund policy based on Section 1091b, indicating that it merely facilitates the distribution of calculated amounts. The absence of statutory ambiguity means the agency is not entitled to Chevron deference, and the clear statutory language must prevail. The argument that Congress may have overlooked the issue of unpaid charges is dismissed, as it is presumed Congress acts deliberately. The Secretary recognized Congress was aware of the unpaid charges problem but chose not to require adjustments in the refund calculations. The Secretary's additional arguments rely on a presumed statutory ambiguity that does not exist, highlighting a significant divergence between the 1992 regulations and the criteria explicitly outlined by Congress for determining a "fair and equitable refund."
A regulation cannot amend a statute or add provisions not present in the statute, as established in Koshland v. Helvering and United States v. Calamaro. The 1992 regulations violate this principle by exceeding the Secretary’s authority, which is limited to adopting regulations that implement Congressional intent. Regulations that conflict with statutory provisions are void. The district court's judgment was affirmed, indicating the Secretary’s actions in promulgating the 1992 amendments were unauthorized. In cases where state law or accrediting agency policies do not dictate refund procedures, the Secretary mandates that schools refund the larger amount between their own refund policy and the Federal refund outlined in 34 C.F.R. 668.22(d). However, 20 U.S.C. 1091b(c)(1) specifies that "pro rata refunds" exclude unpaid charges, leading the Secretary to state that regulations requiring the inclusion of unpaid charges in refunds were superseded. While the D.C. Circuit and the Secretary suggest the 1992 Amendments necessitate fair refunds to the government, this is inaccurate; the Secretary acknowledged that 20 U.S.C. 1091b(a) only mandates refunds to students be "fair and equitable."
