UPDATE: For-Profit College Group Sues To Block New Regulations

A trade group representing a number of for-profit colleges has filed suit in federal court seeking to block the U.S. Department of Education from implementing new rules governing state-level program authorization, incentive compensation for employees and misrepresentation of promotional materials.

The rules were part of a package of 13 regulations issued by the federal government in late October. The 14th rule, generally considered the most controversial as it could punish programs for graduating students with high debt loads, is expected to be issued in the next few months and isn't included in this suit.

The Association of Private Sector Colleges and Universities, known as APSCU, on Friday asked the U.S. District Court for the District of Columbia to block the rules from going into effect as planned on July 1. APSCU alleged in the suit that its members are "grievously and irreparably injured" by the three rules and asked the court to find the regulations unlawful. It said the Education Department didn't follow correct procedure in creating the rules and violated its scope of power and the Constitution.

APSCU boasts more than 1,500 member schools, including campuses owned by Career Education Corp. (CECO), DeVry Inc. (DV), Education Management Corp. (EDMC), ITT Educational Services Inc. (ESI), Washington Post Co.'s (WPO) Kaplan Higher Education and others.

The group said it simultaneously sent a letter to U.S. Secretary of Education Arne Duncan, asking him to voluntarily withdraw the regulations. Duncan is also named as a defendant in the suit.

The Education Department said it hasn't yet received the letter.

If not withdrawn within a given time frame, APSCU will ask the court for an injunction "until the substance of our challenges are resolved," Miller said.

Justin Hamilton, a spokesman for the Education Department, said the agency is "confident that the published regulations will do the best job of protecting students and taxpayers."

Miller warned the issue of state authorization may be difficult to compromise on. The rule issued in October will require schools to receive approval from every state in which it has students, using metrics approved by the federal government. That's a daunting task for some schools with nationwide online operations.

Miller said it's unlikely all states will be able to update their procedures to meet the federal government's requirements by the July 1 deadline, leaving students in those states potentially ineligible for access to federal student aid.

The incentive compensation regulation has been a lightning rod for criticism, as many industry insiders say it's unclear who is restricted from receiving bonuses based on student performance. Intended to ensure that recruiters don't enroll underqualified students to meet bonus targets, many say they don't know whether the rule would also apply to football coaches who bring in top athletes or even chief executives who improve student retention and graduation rates.

Meanwhile, Miller said the two sides could likely come to an easy agreement on the rule governing how schools can be punished for providing misrepresentative material to the public, and what constitutes a "substantial misrepresentation." According to the lawsuit, the current rule violates the Constitution's due process clause in the way it handles penalties for misstatements.

-By Melissa Korn, Dow Jones Newswires; 212-416-2271; melissa.korn@dowjones.com

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