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Aggressive Tack on Incentive Comp

December 1, 2009

WASHINGTON -- In its first pass at proposed regulatory language aimed at reining in abuses in federal financial aid programs, the U.S. Education Department on Monday recommended eliminating 12 exceptions to a 1992 law that barred colleges from paying admissions officers based on their success in enrolling students.

The proposal on incentive compensation is one of 14 that department officials sent Monday to members of a team of college officials, advocates for students, and others charged with negotiating possible changes in federal regulations governing the integrity of the aid programs. (The proposals were posted Tuesday on the department's Web site.) The negotiated rule making panel discussed the various issues on its agenda at a four-day meeting last month; its second meeting, to discuss the proposals circulated by the department Monday, is set for next week.

Incentive compensation is among the most contentious topics on the panel's plate. Congress acted in 1992 to bar financial aid-eligible colleges and universities from paying commissions, bonuses or any other incentives to recruiters based on their success in getting students to enroll and apply for financial aid, out of concern (stoked by a wave of scandals involving for-profit colleges in the late 1980s) that recruiters would bring in unqualified students to boost their own compensation and their institutions' bottom lines.

A decade later, though, the Education Department added a series of 12 "safe harbors" to the regulations, specifying kinds of compensation that were permitted under the law. Among the safe harbors are a provision for up to two salary or hourly wage adjustments in any 12-month period, profit-sharing bonus plans that apply to all of an institution’s full-time employees, and token recruiting gifts to students and alumni with a fair market value of no more than $100. (Note: This paragraph has been updated to correct a factual error.)

In formulating an agenda for the current round of rule making, the Obama administration -- influenced by concerns expressed by consumer rights advocates and groups like the National Association for College Admission Counseling -- focused on incentive compensation and signaled its intent to eliminate the safe harbors.

And that's precisely what it proposed doing in the incentive compensation proposal it shared Monday. "Consistent with the majority of the comments made by the participants [at November's meeting], the Department believes that the specific language of the [1992] statute is clear, and that the elimination of all of the regulatory 'safe harbors' would best serve to effectuate congressional intent" the draft proposal states.

Under the proposal, the department suggests draft regulatory language that says of a college in compliance with federal law: "It will not provide any commission, bonus, or other incentive payment based directly or indirectly upon success in securing enrollments or financial aid to any person or entity engaged in any student recruiting or admission activities or in making decisions regarding the awarding of student financial assistance, title IV, HEA program funds, except that this regulation shall not apply to the recruitment of foreign students residing in foreign countries who are not eligible to receive Federal student assistance."

The way federal negotiated rule making works, draft regulatory proposals like the ones the Education Department distributed Monday are the starting point for negotiations, and federal agencies often stake out aggressive positions that sometimes get watered down or negotiated to a compromise. That will certainly be what officials of for-profit institutions will be seeking, as they favor the 2002 exceptions to the 1992 law.

Among the other proposals released Monday:

  • The department opted not to put forward "at this time" regulatory language that would define the term "gainful employment" in the requirement that vocationally oriented colleges show that they "prepare students for gainful employment in a recognized occupation" to qualify for federal financial aid. But department officials say they are considering two options for determining whether institutions are ensuring gainful employment for their students. One would require a college to show a "reasonable relationship" between the price a student is charged for the program and the "value added," which the department suggests could be defined as the difference between the salary earned by the average graduate of the program and the average high school graduate. "Another approach," the department's document states, "would be to look at whether a student’s starting annual income is adequate to repay the average debt service obligation for someone completing a specific program, while still having an adequate amount available to meet living expenses."
  • The department suggests significantly increasing the number and types of "misrepresentations" to students that can get a college in hot water, to include more aspects of the institution's academic requirements, state approval of specific academic programs, and information about the availability of financial aid.

 

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