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Faulty Oversight on Incentive Pay

Faulty Oversight on Incentive Pay
October 8, 2010

As the U.S. Education Department prepares to revise its rules restricting incentive compensation for college officials who recruit students, a report by Congress's investigative arm Thursday reveals that both the regulations and the department's internal policies during the 2000s hampered the government's ability to find and punish violations of the incentive compensation law.

The law forbids institutions that are eligible for federal financial aid from offering commissions, bonuses or other payments to people who succeed in getting students to enroll or receive federal aid. Proposed rules issued by the Obama administration in June -- due to be released in final form in the coming weeks -- would remove 12 “safe harbors” added in 2002 that clarify how recruiters could be paid without violating federal law banning “incentive compensation.”

The report by the Government Accountability Office is the second part of an incentive compensation study that was mandated by the 2008 legislation that renewed the Higher Education Act; the first report, which was released in February, examined the extent and nature of violations of the incentive compensation rules from 1998 through 2009.

The second report, "Stronger Federal Oversight Needed to Enforce Ban on Incentive Payments to School Recruiters," adds little to the earlier study's accounting of the sorts of incentive compensation violations that unfolded during that 11-year period, though it provides some new details about a $2 million fine that the department proposed (and then withdrew) against the parent company of what is now Anthem College, which was found to have "provided bonuses totaling $359,405 to recruiters for enrolling 4,750 students," according to GAO.

Instead, the new report focuses on the ways in which the Education Department -- through a combination of policy and practice -- was both less aggressive in ferreting out potential misbehavior by colleges and less inclined to impose tough penalties than it might have been.

Specifically, the GAO found that the department did not make particularly good use of its main mechanisms for identifying potential violations of the incentive compensation regulations: compliance audits and program reviews. The compliance audits failed to uncover problems with incentive compensation at 32 of the 53 institutions that were found to have such problems in the GAO's review of other department records, because the auditors either did not choose to look at incentive compensation issues or did not follow up on previously identified violations at those colleges.

And the department's system of program reviews -- which "supplement the annual audits and focus on high-risk schools" -- "does not identify all program reviews that examine incentive compensation," so the agency "cannot identify the extent of incentive compensation problems, track monitoring actions over time, or assess and improve the effectiveness of its program reviews," GAO said.

The inadequacies in the department's system of identifying potential violations have been compounded by its shortcomings in enforcement, the accountability office concluded. The GAO ties much of the failure to 2002 policy changes in which department officials both instituted the 12 safe harbors and altered the department's punitive approach from "identifying [financial] liabilities to assessing fines."

The safe harbor regulations, the GAO writes, "made it more difficult to prove a school paid incentive compensation," especially the provision that allows institutions to adjust a recruiter's compensation twice in a year if the changes are not "solely" based on enrollments. "[O]fficials reported challenges in proving that changes to employee pay were solely based on enrollments, as required to substantiate a violation," the GAO report says.

And the shift from liabilities to fines was problematic, the agency said, because "[f]ines are often significantly smaller dollar amounts than liabilities, which require a school to pay back federal student aid funds related to a violation," and while a college found liable for misspending federal money must prove its compliance, "when assessing a fine, the burden of proving a violation is on Education."

The GAO report urges the Education Department to strengthen its auditing and program review procedures and to revise its penalty structure and apply it more evenly.

Those now running the Education Department -- who have promulgated the new rules that would strip the safe harbors and therefore toughen enforcement of the incentive compensation ban -- not surprisingly told the GAO they endorsed the agency's findings.

So, too, did Senator Tom Harkin, the Iowa Democrat whose critical series of hearings on for-profit higher education has largely supported the Obama administration's tougher regulation of the industry.

“The GAO report makes clear that the Bush Administration failed to protect students from aggressive marketing by weakening regulation and oversight of for-profit college recruitment efforts," Harkin said in a prepared statement. "This report, combined with GAO’s recent undercover work that found abusive and deceptive practices at all 15 colleges visited, underscores the need for the Department of Education to close the loopholes that have allowed for-profit college recruiters to take advantage of far too many American students.”

 

 

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