Rewriting the Rules on Trade Schools to Better Safeguard Students

The U.S. Department of Education’s announcement this week that it plans to rewrite its federal student aid rules to improve the integrity of these programs is certainly welcome news. We are particularly pleased that the agency is considering strengthening a regulation that aims to prevent unscrupulous for-profit colleges and trade schools from taking advantage of financially needy students.

As we have reported previously, Congress in 1992 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” to admissions officers. 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 Education Department officials 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 agency took this action over the objections of a negotiated rulemaking panel made up of college officials, advocates for students, and consumer groups that had been assembled to consider the rule changes and of the two main national organizations representing college admissions officers.

Among other things, the revised rules allowed colleges to adjust the annual or hourly wages 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” [emphasis added]; and to provide commission-based recruiting for non-Title IV programs at institutions participating in the federal student aid programs. The net effect of adding all of these safe harbors was to make the ban much more complicated to enforce.

At the same time, the then-Deputy Education Secretary sent a memo to the head of the Federal Student Aid office announcing that the agency would treat violations of the incentive compensation ban less seriously than it had before. In the memo, the Deputy Secretary said that in most cases “the appropriate sanction” should “be the imposition of a fine,” rather than the limitation, suspension, or termination of Title IV student aid eligibility. “The direction provided by this memorandum should result in the imposition of appropriately measured sanctions for improper incentive payments by institutions [emphasis added],” he wrote.

In the years since the Education Department took these actions, some of the largest publicly-traded for-profit higher education companies have come under 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, Education Department program reviewers found that the University of Phoenix had knowingly violated the incentive compensation ban by compensating recruiters solely on their success in enrolling students. Education Department officials ultimately reached a $9.8-million settlement with the Apollo Group, the university’s parent company, to resolve issues that were raised in the review. The report’s findings are at the center of a separate False Claims Act lawsuit that has been brought against the university by two former admissions officers and is set to go to trial next spring.

In agreeing to the settlement, the Apollo Group did not admit to any wrongdoing. University officials have continued to dispute the program reviewers’ findings to this day. In fact, as we reported in February, the institution appears to have continued to defy the incentive compensation ban even after the settlement agreement was reached.

To be fair, though, the for-profit giant does seem to be trying to clean up its act. The university’s new leadership has put a high priority on increasing student retention. With that goal in mind, the company’s management has been reining in their recruiters and become more discerning in deciding who to enroll. At Higher Ed Watch, we are encouraged by these moves — though we will have to wait and see whether they are long-term changes or just temporary ones while the company is in a legal battle and coming under increased scrutiny from the federal government.

Nevertheless, concerns about recruiting abuses throughout the for-profit higher education sector continue. Last month, the trade school chain Alta Colleges agreed to pay the U.S. Department of Justice $7 million to settle allegations raised in a False Claims lawsuit that its Texas campuses had engaged in practices “designed to mislead prospective students and to misrepresent material facts to them.” Among other things, the government found that the school recruiters had lied to prospective students about their job placement rates (saying that they were more than 90 percent when they were actually just over 50 percent) and about their ability to transfer credits to other schools (even though no other accredited colleges in Texas would take them.)

At Higher Ed Watch, our primary concern is that students aren’t being misled into taking on huge amounts of debt to enroll in schools of dubious value. The incentive compensation ban was put in place to try to prevent such abuses from occurring. We’re happy to see that the new leadership at the Department of Education shares our concern and is interested in putting teeth back into its regulations.