The Standard Business Deduction

The Standard Business Deduction

Kathleen DeLaney Thomas*

In 2017, Congress passed the most sweeping tax reform bill[1]the country has seen in over 30 years.[2]The new legislation responded to many long-held concerns about the U.S. tax system, particularly that taxes were too high and that the corporate and international tax regimes were not competitive.[3]In response to those concerns, Congress lowered individual income tax rates, drastically reduced the corporate tax rate from 35% to 21%, and shifted away from a worldwide system of international taxation.[4]The bill also lowered taxes for pass-through businesses, such as partnerships, S-corporations, and sole proprietorships, by offering a new deduction for up to 20% of the business’s net earnings.[5]

In the months leading up to the tax reform bill, members of Congress also promised much needed simplification of the U.S. tax system, even going so far as to suggest that future tax returns would fit on a postcard.[6]In one respect, Congress delivered on this promise to simplify the tax system. The new legislation doubled the standard deduction, from roughly $6,000 to $12,000 for a single individual.[7]This means that individuals will now claim itemized deductions (e.g., charitable contributions or mortgage interest) only if, in the aggregate, those deductions exceed $12,000 ($24,000 for a married couple filing jointly). The higher standard deduction essentially means that fewer taxpayers will itemize their deductions, which saves time and simplifies tax return preparation.[8]

However, while the 2017 Tax Reform Bill simplifies personal deductions, the legislation does virtually nothing to simplify the tax rules for businesses. Small business owners will not see any reduction in complexity for reporting income, tracking expenses, or preparing tax returns. Instead, the new pass-through deduction only adds further complexity by inserting more steps into the process of calculating a business’s net income.

In short, Congress failed to deliver on its promise to provide simplification when it comes to small business owners. Congress could do more to reduce the complexity faced by these taxpayers, who must pay estimated taxes, track business expenses, and file complicated tax returns. To that end, this essay proposes a “standard business deduction.”[9]

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What is “Disabled?”: Ménière’s Disease and the Americans with Disabilities Act (ADA)

What is “Disabled?”: Ménière’s Disease & the Americans with Disabilities Act (ADA)

By Thomas Tobin, JD ’16, Harvard Kennedy School MPP ’16[*]

The Americans with Disabilities Act (ADA) prohibits American employers from discriminating against individuals due to disability.[1] As a threshold matter, individuals bringing suit under the ADA’s anti-discrimination provisions must demonstrate that they are “disabled.” While individuals with Ménière’s Disease often suffer impairments to their personal and professional lives, are they “disabled” for purposes of the ADA?[2] Legal precedent provides prescient lessons for individuals with Ménière’s Disease as they seek relief for alleged discrimination or unfair termination at work.

Ménière’s Disease often manifests itself in unpredictable, episodic attacks of nausea and vertigo. While Ménière’s Disease is a progressive, long-term condition, many individuals may experience remission for several months and even years between attacks.[3] Unfortunately, the episodic nature of Ménière’s Disease created a challenge for many individuals in proving their “disabled” status under the ADA.

The ADA does not provide protection for “every individual with an impairment who suffers an adverse employment action.”[4] Individuals bringing suit must prove by a preponderance of evidence that they have a disability.[5] “Disabled” status is defined by statute and occurs when an individual suffers from “a physical or mental impairment that substantively limits one or more of the major life activities.”[6] Hearing, walking, and working are among the statutorily-defined major life activities that may be potentially affected by Ménière’s Disease.[7]

In order to prove a “substantial impairment,” an individual must demonstrate that the impact of the “disability” is permanent or long-term.[8] American courts often follow a long-standing rule that intermittent manifestations of disease processes are insufficient to establish a substantial limitation on a major life activity.[9]

Simply being diagnosed with Ménière’s Disease is not sufficient to warrant “disabled” status under the ADA.[10] In Perkins v. St. Louis County Water Company,[11] a construction worker suffering from Ménière’s Disease was repeatedly absent from work and claimed that several of his absences were due to the disease. The worker’s condition caused permanent hearing loss and occasional episodes of vertigo and vomiting. Even though Ménière’s-related episodes caused the worker to miss over two-and-one-half weeks of work, the court ruled that it was insufficient to render him unable to do his job or limit his major life activities.[12] While Perkins could conceivably be read to foreclose the ability of Ménière’s Disease patients from attaining “disabled” status, one judge in the three-judge panel went so far as to specifically note that Ménière’s Disease is not “outside the bounds of disability per se.”[13]

Plaintiffs with Ménière’s Disease have, at times, struggled to marshal adequate evidence to prove their “disabled” status. In one case, a public school teacher sought accommodation for Ménière’s Disease so that she could avoid excessive walking and ascending stairs. [14] Treatment notes found that her problems with Ménière’s Disease were exacerbated by stair-climbing and rocking. Still, her supervisors “openly questioned the nature and existence of her ailments.”[15] Ultimately, her case was dismissed for insufficient evidence that the teacher suffered from a disability that substantially limited a major life activity.[16]

In McGuire v. Miami-Dade County, a computer technician with Ménière’s disease alleged that her condition caused seizures and problems with her mobility and balance.[17] She described her limitations thusly,

I lose balance. I have to lay down. I am dizzy. I vomit a lot. Those are the attacks, but in general when I handle this condition, most of the time I’m dizzy and, at some point, noises start to bother me.[18]

The federal court was unconvinced that the limitations of the employee’s Ménière’s disease were more than temporary.[19] The court called the worker’s allegations “vague” as they did not explain with adequate specificity exactly how her condition affected her or she was affected in comparison to that of the average person in the general population.[20]

Whether an individual is “disabled” is a fact-specific inquiry, often necessitating case-by-case judgment by the courts.[21] Even if a court accepts that Ménière’s Disease is a disabling condition, it must further find that the impairment substantially limits an individual’s major life activity, such as hearing or walking.[22] Ultimately, the court must be convinced that it is a disabling condition rather than an individual’s conduct that resulted in the discriminatory action.[23] The story of Patricia Brennan provides insight on what plaintiffs should guard against when approaching the courts regarding Ménière’s Disease claims.

Illinois social worker Patricia Brennan suffered from Ménière’s Disease, complaining of dizziness, decreased hearing in one ear, vertigo, and loss of balance.[24] She was subsequently terminated, and she brought suit against her former employer claiming it had failed to accommodate her disability. The Brennan court and the parties did not dispute that Ménière’s Disease was an impairment, but they contested whether Brennan was “disabled” as a result of the condition. Even as her doctor had characterized her hearing loss in her left ear as “severe,” the court claimed that she had:

offered no evidence to show how that loss affected her overall ability to hear in comparison to that of an average person in the population, whether the loss was mitigated by the use of a hearing aid and whether, when the loss occurred, it was expected to be temporary or permanent.[25]

The court went on to note that she had an operation restoring her hearing after she was dismissed from her job. Moreover, the court declared that the social worker’s ability to walk was impaired during episodes of vertigo, but the record showed that her walking was not impaired when she did not have vertigo.[26] The court dismissed her claim for insufficient evidence.

It is an unfortunate reality that individuals may suffer from employment discrimination due to their Ménière’s Disease. In order to prevail in court and prove their claim, they must demonstrate evidence of how they are affected by the condition. It is often necessary to provide sufficient evidence to (a) establish that one has Ménière’s Disease and (b) demonstrate how it is disabling in order to prove “disabled” status.

For example, a utility worker at a tire plant was found to suffer from hearing loss and tinnitus after multiple tests. [27] His employer was required to conduct annual hearing tests, the standard threshold shift test, to determine whether the plant caused its workers permanent hearing loss.[28] This worker was dismissed from his job after his employer claimed that he falsified the hearing tests. The court found there was sufficient evidence that he did not adulterate his test results. Instead, he suffered from Ménière’s Disease which would explain his abnormal test results.

In another case, a bank teller in Ohio suffering from Ménière’s Disease was subjected to teasing at work for her vertigo and hearing loss.[29] Even while her hearing loss was self-described as “profound,” the teller’s colleagues and supervisors were “snickering and laughing.” From the available evidence, the court concluded that the teller’s hearing loss was permanent, not temporary.[30] Her former employer claimed that the teller’s non-use of a hearing aid was proof that her hearing could have otherwise been controlled and was not disabling. In this case, the teller testified with specificity and had corroborating doctors’ notes that showed that her Ménière’s Disease had caused total hearing loss in her left ear, a reduction of her hearing in her right ear, and vertigo and constant tinnitus.[31] According to the teller, a hearing aid would be “of no value.”

Ultimately, whether an individual is “disabled” is a fact-intensive inquiry for the courts. To prove that one is “disabled” due to Ménière’s Disease under the ADA means to prove by a preponderance of the evidence that it affects one or more of an individual’s major life activities. Future claimants can learn from past precedent, which all too often has found insufficient evidence to prove “disabled” status. To increase the odds of prevailing, future claimants should assemble available medical evidence to substantiate and corroborate their listing of symptoms, document the extent of their limitations to fundamental life activities due to Ménière’s Disease, and communicate clearly the extent of these limitations to court officials, especially in a deposition. Further, a best practice would have an expert, such as a physician or audiologist, detail specificity exactly how Ménière’s Disease has affected the individual in comparison to that of the average person in the general population.

Obtaining “disabled” status under the ADA is a threshold issue to achieving its statutory protections. The episodic nature of Ménière’s Disease can create a significant barrier for individuals to avail themselves of the ADA’s relief. Such barriers may be especially high if defendants attempt to confine Ménière’s-related impairments to an intermittent manifestation of a disease process not worthy of “disabled” status.[32] By detailing the extent of these impairments, future plaintiffs can express their arguments in terms of major life activities and better present evidence before the court to surpass this critical threshold. In doing so, claimants can further educate courts about the disabling nature of Ménière’s Disease for many individuals and specifically how it has affected them. Documenting the disabling nature of their condition can assist individuals with Ménière’s Disease in obtaining “disabled” status.

[*] Tommy Tobin recently served as Instructor of Law at UC Berkeley’s Goldman School of Public Policy, where he taught a module on food law and policy.

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Making Cities Work

Making Cities Work

By Nino Monea JD ‘17

National elections dominate the news. But precious little policy is actually coming out of Washington these days. And officials there are often disconnected from our daily lives. At the local level, the challenges of how to run an effective city may appear more mundane on the surface, but that does not mean they are less important, or less complex.

Among the most persistently vexing questions that local leaders face is how to attract families and businesses. In January, professors from Wayne State University and Michigan State University published a working paper that found that virtually all trendy economic development strategies employed by cities over the past several years, such as building casinos, are not the driving force behind growth.[1]

Many cities attempt to spur economic growth using unproven techniques. Casinos are a perfect example of economic snake oil. In Atlantic City, lawmakers successfully pushed casinos on a skeptical population with the promise that the casinos would dedicate 2% of their annual revenue to the “health and well-being” of the city.[2] After being built, the casinos were able to subvert the “health and well-being” part of the deal through a legal loophole.[3] Much like the slot machines that they peddle, casinos usually have long odds for the city.

Rather than creating long-term growth, these sorts of projects often amount to little more than spitting matches between states. In 2013, then-Texas Governor Rick Perry made headlines for buying television ads in California encouraging businesses in the Golden State to relocate to Texas.[4] The end result is not that new jobs are created; they are simply relocated.[5]

Last year, Boston fervently attempted to win its bid to host the 2024 Olympic Games. The bid was vigorously opposed by the community group No Boston Olympics, which pointed out that the average price tag to an Olympic host city is $15 billion.[6] The group also cited research that shows Olympic Games are bad investments. In fact, there has never been a profitable one, unless accounting tricks are used to gin up the numbers, such as counting subsidies from the government as revenue.[7]

At least Boston had a relatively happy ending, as the community activists ultimately won and forced the city to drop its bid,[8] and so the city did not end up losing any money. The same cannot be said for Brazil, which hosted the 2014 World Cup. The country spent $600 million to build a massive stadium in the rainforest city of Manaus that was used for all of four games.[9] Another World Cup stadium cost Brazil $550 million and is now being used as a parking lot.[10] This is a tremendous waste, given that, in Rio de Janeiro alone, over 200,000 people lack adequate housing.[11]

Of course, not everything in life can be measured in dollars and cents. There can be perfectly legitimate reasons to invest in public projects that do not return a profit. The Hubble Space Telescope has not earned a dime, but that doesn’t make its photos any less stunning, or the knowledge about the universe that we have gained from it any less profound. But at the same time, if the goal of a project is explicitly to bolster economic growth, municipal leaders need to be upfront about what works and what does not.

In addition to being honest about which projects work, we also need to ask whom the projects are working for. In Detroit, casinos did honor their agreement to hire at least 51% Detroit residents, but several years after their development, there was no black representation in the casinos’ ownership, and the entry-level workers saw lower-than-expected wages.[12] Moreover, the promise that the casinos would deliver $73 million for minority- and women-owned businesses never came to be.[13]

In Boston, wealthy developer John Fish appeared to be the principal beneficiary from hosting the Olympics. Although he pledged to not bid on any projects, he said he would pursue contracts with transportation and college building agencies that would likely see upgrades in preparation for the games.[14] Conversely, many areas around the state would not have seen any investments from the Olympics.[15] Even worse, in Brazil, hundreds of thousands were displaced when their communities were bulldozed to make way for the gleaming new stadiums.[16]

So is there anything that cities can do? According to Professor Laura Reese, a co-author of the economic development report from January, the solution is straightforward: “[j]ust run a good basic city.”[17] To do this, city leaders should invest in things such as education, which is more strongly connected to economic growth.[18]

While investing in public schools and basic municipal services probably is not as glamorous as a shiny new development project, it is a sounder strategy. It is no secret that there are tremendous benefits of early childhood intervention programs —particularly in low-income communities. A Rand Corporation survey of well-designed early childhood intervention programs found a litany of benefits ranging from higher academic achievement to lower delinquency and crime rates, and even greater success in the labor market down the road.[19] The return on every dollar invested ranged from $1.80 to a whopping $17.07.[20] The studies tended to the largest returns when long term benefits, such as careers and reductions in crime.

The benefits of a strong education system can also have benefits for people other than the individual students. For all of the efforts municipal leaders take to woo businesses with one-time investments or tax breaks, companies often want a trained workforce – something education is crucial to accomplish. That explains why local auto dealers have donated equipment to help with vocational training programs at Arizona high schools.[21] They see it as a way to help increase the number of skilled technicians in the area that they hope to later hire.[22]

More broadly, a report from researchers at Napier University in Edinburgh examined what factors businesses consider when deciding to locate or relocate. They found that some of the most important factors were a well‑educated workforce and low crime rates.[23] On a similar note, the U.S. State Department has put together a list to help its employees decide where to live when they are deployed on tours to new locations. It urges families to consider social networks, career opportunities, and educational opportunities.[24]

This should not come as a surprise. When families and businesses have to make long-term decisions, they look at the fundamentals, not frivolities.

Rather than putting all of a city’s eggs in one basket, the better course is to focus on core issues that have widespread appeal. Nearly everyone wants good schools, safe communities, and robust municipal services. If a city gets these things right, people and businesses will come, and entertainment venues that the community wants will naturally flow from that.

All this goes to prove the wisdom of Lee Brice’s advice on the secret to success: “Don’t outsmart your common sense.”[25]

Continue reading “Making Cities Work”

A Beginner’s Guide to Legislative Drafting

A Beginner’s Guide to Legislative Drafting
By Deborah Beth Medows, Senior Attorney, Division of Legal Affairs, New York State Department of Health[*]

The ability to impact society through well-written legislation is unparalleled. As President Barack Obama stated, “A good compromise, a good piece of legislation, is like a good sentence. Or a good piece of music. Everybody can recognize it. They say, ‘Huh. It works. It makes sense.’”[1]

As a newly admitted attorney, you will need to know how to draft legislation if you choose to work as a legislative attorney. One of my earliest legal experiences occurred after I was appointed as Assistant Counsel to the New York State Legislative Bill Drafting Commission. I found myself drafting for the New York State Assembly and the New York State Senate, and advising on the constitutionality of the proposed legislation. Legislative attorneys may have different roles and state requirements can differ, so you will need to draft within the scope of your role and jurisdictional requirements. However, these are the general lessons that I gleaned from my own experiences.

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Social Insecurity: The Case for Totalization With India

Social Insecurity: The Case for Totalization With India

By Josh Craddock, JD ‘18

Death and taxes are inevitable, but at least death does not repeat itself. This maxim bites especially hard under current U.S.-India policy: expat workers pay into both countries’ Social Security systems, but are ineligible for benefits from their nation of employment. As India becomes a prominent player in the global market, international business between the United States and India has been setting new records each year. Last year, U.S.-India trade reached $107 billion, up from $60 billion in 2009.[2] Profitable business between these two countries has never been more promising. But without a change in policy, neither country can realize the full benefits of economic partnership.

In 2015, more than 275,000 Indian nationals were admitted to the United States on temporary worker visas.[3] Indians using H-1B and L-1 visas annually contribute approximately $3 billion to the American Social Security system—contributions from which they cannot receive retirement or disability benefits, and which they cannot repatriate to their home country—in addition to their payments into India’s Social Security system.[4] And this estimate does not include additional contributions made by these workers’ spouses who may be employed, such as those using L-2 visas. Over the past decade, Indian nationals working in the United States have contributed over $27.6 billion to the U.S. Social Security system.[5]

The current dual-taxation system also imposes substantial hardships on Americans working in India. Although no reliable statistics exist on how many Americans are employed in India, the Indian government estimates their contributions to India’s Employees’ Provident Fund Organization (EPFO) was $150 million in 2011.[6] These American expats are likewise unable to repatriate or benefit from their contributions to the Indian system, which amount to 12% of their total annual salary.[7] These contributions must be matched by an equal amount from the American citizen’s employer. Furthermore, when these Americans and their families return home, they may not qualify for retirement, disability, survivorship, or dependency benefits in the United States due to residence requirements for eligibility.[8]

This problem of taxation without benefit eligibility is compounded when one considers that employers are required to match their employees’ Social Security contributions in both countries—a total tax rate of 19.65% of an employee’s salary.[9] Employers that guarantee that an overseas assignment will not decrease their employee’s after-tax income are particularly affected. These employers pay both the employer and the employee Social Security contributions, but this payment is treated as “taxable compensation to the employee, thus increasing the employee’s income tax liability.”[10] The employer will often pay the additional income tax, which creates what the Social Security Administration calls a “pyramid effect” that, depending on the tax rate, can increase the employer’s foreign social security costs to as much as 65-70% of an employee’s salary.[11]

With such high tax rates, even corporations that do not pay the employee contribution may find beginning and maintaining overseas operations prohibitively expensive. Indian corporations may similarly be unable to pay American workers to work in India.

Because of these costs, the existence of a totalization agreement between the United States and another country is a significant factor American companies consider when choosing where to locate a foreign branch.[12] This sort of dual taxation hurts economic growth and may actually reduce tax revenue.[13] In the short term, both countries obtain Social Security revenue from expats who cannot collect on their contributions. But this practice usually deters investment and impedes labor mobility, leading to lower economic activity and tax revenues in the long run.[14]

Developed countries like the United States typically benefit more from totalization agreements than developing countries,[15] but Indian officials believe the agreement would help their nation, as well. They report that the lack of a totalization agreement “increases the cost of hiring Indian nationals,” discourages Indian workers from seeking employment in the United States, and “operates as a market barrier for Indian companies considering entry into the U.S. market.”[16] How many American businesses and entrepreneurs have been discouraged from investing in India, or vice-versa, because of the lack of an agreement to coordinate or “totalize” the two systems?

Currently, the United States has totalization agreements with twenty-five countries, including South Korea, Belgium, Czech Republic, and Japan.[17] India has totalization agreements with nineteen, all but one of which overlap with those with which the United States has signed agreements.[18] The Indian government is keen on signing such an agreement with the United States, yet negotiators have been stuck in a bureaucratic quagmire that has lasted for more than a decade.[19]

The current barrier to enacting such an agreement is the American objection that the two nations’ Social Security systems are incompatible because India’s EPFO does not cover 50% of the nation’s working population—most of which is employed informally.[20] But the United States’ objection is dubious, because both countries have identified practical ways to resolve the differences between their systems. In 2008, a team from the U.S. government met with officials at India’s EPFO to draw parallels between the two systems and to ensure a smooth repatriation system.[21] The joint team’s ensuing report outlined a plan to integrate the two systems if a totalization agreement were eventually passed.[22] In this sense, whether the Indian Social Security system is mandatory for Indian citizens working in India is irrelevant in practice. The pertinent fact is that EPFO contributions are mandatory for American citizens working in India.[23]

In truth, the hold-up likely stems from the United States’ unwillingness to allow repatriation of benefits before workers establish ten years of legal permanent residency.[24] Such a policy excludes the vast majority of Indian workers in the United States who are authorized on visas lasting only five to seven years. The U.S. and Indian governments are not only doubly taxing overseas workers’ social security contributions; they are also taxing workers’ patience with endless negotiations.

American reticence to reduce the residency requirement may be partly due to worries about Social Security’s towering deficit of unfunded liabilities. That deficit—conservatively estimated at $23.1 trillion[26]—would exist with or without the comparatively paltry contributions from Indian workers.[27] Deeper problems with the Social Security deficit will not be solved by taxing Indian workers without providing them benefits or permitting repatriation. The system will not be pushed over the edge into collapse because of a totalization agreement.

Professor Mukul Asher, a public policy expert from the National University of Singapore, suggests a middle ground that would serve both parties.[28] He argues that a totalization agreement created along similar lines as India’s agreement with Belgium would be an effective model for the United States.[29] This type of system would exempt workers from contributing to the Social Security system in the country where they are employed for their first five years, and allow them to repatriate any benefits that accrue after that time. India has recently signed similar totalization agreements with Canada and Australia.[30]

Overcoming American hesitation about an Indian totalization agreement is a key step to creating economic growth. Congress should authorize a congressional-executive agreement to end the negotiation and immediately conclude a totalization agreement with India. Rep. Engel’s proposal for requiring the Secretary of State to provide Congress with updates on totalization negotiations is a good first step.[31] Encouraging American businesses to expand to India could bring profits back home, while encouraging Indian businesses to open branches in the United States could create jobs in America. By increasing the profitability and competitive position of companies that adapt to the globalizing workforce, we can cultivate the full potential of the U.S.-Indian business partnership.
Continue reading “Social Insecurity: The Case for Totalization With India”

For-Profit, Anti-Student

For-Profit, Anti-Student

by Nino C. Monea, JD ’17

The legal job market is notoriously rocky. Virtually all law schools have trouble securing full-time jobs for their students. However, not all schools are equal in this regard, and many use deceptive techniques. Some of the worst cases involve private, for-profit law schools. One particularly troubling example is the Charleston School of Law (“CSOL”)—a for-profit law school in South Carolina with a poor track record of helping its graduates find gainful employment.

Annual tuition is nearly $40,000 (not counting the $12,600 for room and board)—only a little less than the median private sector salary of $47,000 for its graduates.[1] Of course, this median only includes graduates who have a job. According to Law School Transparency, 21.4% of CSOL’s graduates in 2014 are non-employed.[2] Hit by declining enrollment, the school considered not admitting any students for the new school year. It has since decided to keep its doors open, and instead laid off faculty members to stay afloat.[3]

For all the school’s woes, at least one group has done well: its owners. Over the institution’s twelve years of operation, the five original owners paid themselves more than $25 million.[4] Two of them sold their shares for an additional $6 million and retired, and a third resigned in disgust. Despite this windfall, the remaining owners announced last year that they would not pay for graduation ceremonies.[5]

Sadly, CSOL is not an aberration. These kinds of low employment statistics are par-for-the-course in the for-profit education sector. This is true not only in law schools, but for universities in general. Although not all for-profit schools use deceptive tactics, the industry overall has used numerous questionable tactics.

For-profit schools charge substantially higher tuition, on average, than nonprofit schools. An average university student will pay $13,000 to $16,000 per year for their for-profit education.[6] For comparison, the average student at a public, in-state four-year university pays $8,000 annually.[7] To make matters worse, for-profit schools target vulnerable populations, including high school dropouts, non-traditional students, the learning disabled, and even the homeless.[8] As a result, students in poverty are nearly four times as likely to be at a for-profit institution in spite of the higher tuition.[9]

Unsurprisingly, these low-income students need assistance to finance the costly education. Much of this assistance comes in the form of government grants and loans. For-profit schools have collectively taken $22 billion in Pell Grants in 2014.[10] The result is taxpayers effectively footing the tuition bill and lining the pockets of the owners of for-profit corporations.

If low-income students ultimately received remunerative employment, there would be nothing wrong with this picture. Low-income students are undoubtedly worthy recipients of public help, and the government frequently works with the private sector to achieve better outcomes.

Sadly, graduates of for-profit schools have grim job prospects, and the high tuition costs do not have a correspondingly high return on investment. There have been reports of employers saying that degrees from for-profit schools are not credible.[11] Even though students at for-profit institutions are more likely to earn certificates and associate degrees than those in community college, they reported less satisfaction with their education, were more likely to experience long-term unemployment, and have lower earnings six years after finishing.[12]

Some schools have been accused of offering misleading information about tuition and job placement. Students at one for-profit law school brought a lawsuit, claiming that their school wrongfully inflated its employment statistics.[13] A Senate investigation revealed that for-profit schools employed aggressive tactics to enroll veterans, going so far as to recruit at veteran hospitals and wounded warrior centers and misleading them about the costs of tuition.[14] Students recruited deceptively face a combination of high debt coupled with anemic job prospects.

Because of poor job prospects for graduates of for-profit schools, they commonly default on their debt. Only eleven percent of students nationwide are enrolled in a for-profit educational institution. Yet these students account for nearly half of all federal student loan defaults.[15] A quarter of all students in for-profit institutions will default within three years, nearly triple the rate of students in nonprofit schools.[16]

Legislative solutions have been proposed, but not enacted. Senators Dick Durbin, Tom Carper, and Richard Blumenthal introduced a bill that would bar for-profit colleges from getting more than ninety percent of their revenue from federal student loan funding.[17] Corinthian Colleges, Inc., a for-profit education company, alone received $180 million in GI dollars from enrolling veterans, and for-profit institutions have been accused of predatory lending and rigging job placement rates.[18] Senators Jeff Merkley and Tom Harkin also recently introduced legislation to close the loophole that allows institutions to accept federal funds even when their programs are not accredited.[19]

Efforts to enact accountability standards for these programs have met fierce opposition. Lobbying groups representing for-profit education are naturally opposed, and have deployed lobbyists to try to stymie reforms and flood regulators with form letters arguing against any new rules.[20] Members of Congress from both parties have also tried to block plans to take on for-profit educational institutions.[21]

Prospects for passage thus look dim in the current Congress. Given that we are in throes of the 2016 presidential election, it would be optimism to the point of foolishness to expect lawmakers to tackle such a contentious issue.

Fortunately, until new legislation is passed, there is an immediate solution: utilizing existing laws.

Federal agencies can utilize existing laws to crack down on deceptive industry practices. In 2014, the Consumer Financial Protection Bureau (“CFPB”) brought suit against ITT Educational Services (“ITT”), a for-profit corporation, under the Consumer Financial Protection Act of 2010 (“CFPA”). The CFPB charged ITT with employing a bait-and-switch model of education. Specifically, ITT offers students short-term loans that are zero-interest for the first nine months. If students could not pay off these loans by the end of the academic year, which exceedingly few students do, ITT coerced them into taking out high-interest, high-fee private loans to pay off the “zero-interest” loans from before.[22]

A similar suit by the CFPB against Corinthian yielded significant gains. Corinthian will forgive nearly half a billion dollars in loans, and sold half of its campuses to a company called ECMC. The new owner is working to change some of the worst practices so that future students do not face the same predatory tactics. For instance, ECMC will no longer use binding arbitration clauses, which can limit students’ ability to enforce their rights in court, in enrollment contracts.[23]

The Federal Trade Commission (“FTC”) has issued new warnings consumers about the dangers of deceptive educational institutions.[24] More recently, the FTC has demanded information on enrollment, recruitment, financial aid, and tuition from Apollo Education Group, Inc., owner of a for-profit chain.[25]

The Department of Education has promulgated rules that impose sanctions on schools where graduates’ annual loan payments exceed 20% of their discretionary income, or 8% of their total earnings.[26] Modest as these rules are, roughly 1,400 educational programs, virtually all of which are for-profit, would not make the cut.[27] The Department of Education relies upon a line in the Higher Education Act of 1965 for this rule-making authority. The law states that federal aid decisions can be given to programs that “lead to gainful employment in a recognized occupation.”[28] Over the summer, the Department of Education announced that it would fine Corinthian $30 million for misleading students about job placement opportunities and loan repayment rates.[29]

Efforts to police deceptive institutions should continue so that students are not left out to dry. There have been calls from consumer groups for the FTC to go further in policing for-profit education, as the agency has stronger enforcement powers than the Department of Education.[30] Due to industry pushback, the Department of Education had to water down sanctions on for-profit schools in its final proposed regulation.[31] The CFPB deal with ECMC was great progress, but the school is still allowed to restrict student class-action lawsuits.

All of these efforts are worth fighting for in subsequent enforcement actions. Comprehensive legislation in the mold of bills that have already been introduced would be the best long-term solution to the problem. But with Congress on cruise control, it’s up to agencies to ensure that low-income students don’t get thrown under the bus.



[1] Charleston School of Law, U.S. News & World Report, [].

[2] Charleston School of Law Profile, Law School Transparency, [].

[3] See Debra Cassens Weiss, Charleston School of Law lays off seven more faculty members, plans to enroll fall class, ABA J. (May 26, 2015, 7:00 AM), [].

[4] John M. Burbage, A legal maneuver to save the Charleston School of Law, Post & Courier (May 17, 2015 12:01 AM), [].

[5] Id.

[6] Kayla Webley, For-Profit Schools: ‘Agile Predators’ or Just Business Savvy?, Time (Jan. 9, 2012), [].

[7] Id.

[8] See Kayla Webley, Are For-Profit Colleges Targeting Low-Income Students?, Time (June 15, 2011), [].

[9] Inst. for Higher Educ. Policy, Initial College Attendance of Low-Income Young Adults 3 (June 2011), [].

[10] Allie Grasgreen, Obama retreats on college crackdown, Politico (Oct. 30, 2014 6:16 AM), [].

[11] See, e.g., Blake Ellis, My college degree is worthless, CNN Money (Dec. 2, 2015, 6:11 PM), [].

[12] See Georgia West Stacey, For-Profit College Students Less Likely to Be Employed After Graduation and Have Lower Earnings, New Study Finds, Center for Analysis of Postsecondary Education and Employment, [].

[13] See William Browning, Florida Coastal School of Law grads file suit against school, allege deceptive practices, (Mar. 7, 2012 12:06 AM), [].

[14] See Danielle Douglas-Gabriel, For-profit colleges aggressively target veterans for enrollment. These Democrats want it to stop., Wash. Post: Wonkblog (June 25, 2015), [].

[15] Emily Fox, White House crackdown on for-profit colleges begins today, CNN Money (July 1, 2015, 2:34 PM), [].

[16] Webley, supra note 6.

[17] See id.

[18] See Julia Glum, For-Profit Colleges’ 90/10 Loophole Latest Target For Democrats With Military And Veterans Education Protection Act, Int’l Bus. Times (June 24, 2015, 3:07 PM), [].

[19] See Ellis, supra note 11.

[20] See Grasgreen, supra note 10.

[21] See id.

[22] See CFPB Sues For-Profit College Chain ITT for Predatory Lending, Consumer Fin. Protection Bureau (Feb. 26, 2014), [].

[23] See Alan Pyke, $480 Million in For-Profit College Debts Are Actually Worth Less Than $8 Million, ThinkProgress (Feb. 4, 2015, 11:10 AM), [].

[24] See Paul Fain, FTC Joins For-Profit Fight, Inside Higher Ed (Nov. 14, 2013), [].

[25] See John Lauerman, Regulators Investigate For-Profit College Chain Apollo for ‘Deceptive’ Marketing, Bloomberg Bus. (July 29, 2015, 10:07 AM), [].

[26] Fox, supra note 15.

[27] Id.

[28] Grasgreen, supra note 10.

[29] See Alec Covington & Jodie Herrmann Lawson, CFPB Pursues Recovery Against For-Profit College Corinthian and Relief for Its Students, Subject to Inquiry (June 5, 2015), [].

[30] See Fain, supra note 24.

[31] See Grasgreen, supra note 10.