Memo to Education Department: Rewrite the Rules on Trade Schools

The U.S. Department of Education is about to begin a major rewrite of its federal student aid regulations to put into effect changes Congress made to the programs when it renewed the Higher Education Act this summer. While working on these regulations, we believe that agency officials should also reconsider rule changes made in 2002 — changes that have made it easier for unscrupulous trade schools to take advantage of financially needy students.

In 1992, Congress added a provision to the Higher Education Act prohibiting colleges from giving “any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments.” The ban on incentive compensation for college recruiters was included as part of a broader effort by lawmakers to crack down on fly-by-night trade schools that had been set up to reap profits from the Title IV federal student aid programs. With reports rampant that trade schools were enrolling unqualified low-income individuals simply to get access to Title IV funds, policymakers believed it was important to bar postsecondary-education institutions from paying recruiters on the basis of how many students they enrolled.

A decade later, top officials at the Department of Education with ties to the for-profit sector decided to weaken this prohibition. In November 2002, the Department issued new regulations that created 12 “safe harbors” for colleges that wished to provide incentive payments to their admissions employees. The Department took this action over the objections of the negotiated rulemaking panel that had been assembled to consider the rule changes and of the two main national organizations representing admissions officers.

Among other things, the revised rules allowed colleges to:

• Adjust the annual or hourly wage of recruiters up to twice a year, as long as the adjustment “is not based solely on the number of students recruited, admitted, enrolled, or awarded financial aid.”
• Provide commission-based recruiting for non-Title IV programs at institutions participating in the federal student aid programs.
• Include the prohibited payments as part of “profit sharing” as long as the payments are made to all or “substantially all” employees of the school.
• Compensate recruiters with a bonus based on student retention, if a student completes either an entire program or one year of a program, whichever is shorter.
• Provide commission-based compensation to employees who performed “pre-enrollment” activities, such as answering telephone calls, referring inquiries, or distributing institutional materials.
• Provide commission-based payments to managerial or supervisory employees who are not directly involved or do not supervise those involved in recruiting, admissions, or awarding of financial aid.
• Enter into revenue sharing or commission-based contracts “with outside entities for recruiting or admissions activities or the awarding of Title IV aid”, as long as the individuals performing these functions “are not compensated in a manner that would be impermissible” to school employees.

Many of these exemptions violate both the spirit and letter of the law barring commission-based compensation. And most could be easily gamed by unscrupulous schools to engage in the types of predatory recruiting practices that the law expressly prohibits.

Overall, the changes appear to have been designed to make the ban much more difficult to enforce. “The new exemptions are so numerous that they expand the regulatory language by more than six-fold,” the American Association of Collegiate Registrars and Admissions Officers wrote in an October 2002 letter opposing the changes. “What is and what is not allowable will be more difficult for institutions, for the Department, and for the courts to understand and correctly interpret.”

In the years since the rule changes were made, some of the largest publicly-traded for-profit higher education companies have come under intense scrutiny from federal and state regulators and have faced numerous lawsuits by former employees, shareholders, and students over allegations that they have engaged in misleading recruiting and admissions tactics to inflate their enrollment numbers. In 2004, for example, the Department reached a $9.8 million settlement agreement with the University of Phoenix after the agency concluded that the school had knowingly violated the incentive compensation ban. Last year, the U.S. Supreme Court allowed a False Claims lawsuit to proceed against the University of Phoenix over allegations by former recruiters who say they were compensated solely on their success in enrolling students.

In light of these controversies, the Department of Education should use the upcoming negotiated rulemaking sessions to reconsider the rule changes it made in 2002 to weaken the compensation ban. At Higher Ed Watch, we firmly believe that the Department should eliminate loopholes that have made it harder for the agency to ensure the integrity of the federal student aid programs and safeguard students.

Editor’s Note: The New America Foundation has submitted recommendations to the Department of Education for negotiated rulemaking. You can read our comments here.