Taking on Incentive Compensation

November 5, 2009

WASHINGTON -- Just as new scrutiny surfaces on the University of Phoenix’s alleged use of illegal recruiting practices, a Department of Education-appointed panel debated possible changes in federal rules governing recruiter compensation for bringing students to their institutions.

In discussions Tuesday afternoon and Wednesday morning, the team of negotiators charged with considering the revision of regulations meant to protect federal financial aid programs from potential abuses by colleges, universities and others turned to the rules guiding incentive compensation for recruiters, financial aid officers and others who may get paid based on how many students apply to or enroll at their institution.

A 1992 amendment to the Higher Education Act of 1965 barred financial aid-eligible colleges and universities from paying commissions, bonuses or any other incentives to recruiters based in any way on success in getting a student to enroll and apply for financial aid. The concern was that recruiters would bring in unqualified students who are unable to get through their coursework -- let alone complete a degree -- and fall deep into debt taking out federal and private loans to pay their tuition.

But it couldn’t be expected that admission or financial aid officers would never merit a raise or bonus, some critics argued, and in 2002 a series of 12 "safe harbors" were added 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.

In the seven years since the safe harbors were drafted, said Carney McCullough, a senior policy analyst for the Education Department, complaints about aggressive recruiting practices have continued to pour in from students and enrollment advisers, suggesting “a lack of clear guidance still” on permissible compensation structures for recruiters at for-profit and non-profit institutions alike.

The department chose to reopen the issue in this current round of "negotiated rule making," she said, in an attempt to see whether some or all of the safe harbors needed to be revised or eliminated, or if others ought to be added.

The negotiator representing admission officers, David Hawkins, director of public policy at the National Association for College Admission Counseling, said he wanted to see more thorough enforcement of incentive compensation rules. “This is where the department can rightly exercise their authority to really take the steam out of this engine.”

Though complaints about aggressive recruiting tactics have come from all kinds of institutions, there was an inferred emphasis on for-profits like Phoenix (which, for its part, refutes the allegations made by ProPublica and NPR's "Marketplace" in the news story mentioned above). Hawkins said NACAC has catalogued violations “taking place primarily in the for-profit sector but also in nonprofits.” His group’s policies regard admission officers “as professionals, rather than salespersons” and support a full ban on incentive compensation.

“There may be a safe harbor or two that we can reasonably see hanging around,” he added, but “safe harbors have unnecessarily complicated enforcement and led to what I see as fairly widespread noncompliance in this area.”

The for-profit colleges’ representative, Elaine Neely, senior vice president of regulatory affairs for Kaplan Higher Education, voiced support for the safe harbors and said her sector “would like to see more clarity, not less” on what compensation structures are allowed or disallowed under the law. “Whatever the rules are, we just want to know what they are … and follow them.”

The alternate representative for two-year public institutions, Joan Zanders, of Northern Virginia Community College, said she didn’t think further clarification would do much to deter recruiters from finding ways to get around the rules and to be compensated for the students they bring in. “You simply cannot legislate [or regulate] ethics,” she said.

Another supporter of paring down or eliminating safe harbors was Terry W. Hartle, senior vice president for government and public affairs at the American Council on Education, who represents college presidents on the panel. The department, he said, would never be able to “find enough safe harbors that can be defined specifically and narrowly enough” to define all permissible pay structures while preventing all possible loopholes in the law.

Margaret Reiter, a former California deputy attorney general on the panel representing consumer advocacy organizations, voiced specific concerns about the language in almost all of the safe harbors.

After taking the pulse of the other negotiators, who had a clear inclination against for-profits and their sometimes aggressive recruiting tactics, Kaplan’s Neely said her fellow panelists were “looking at this as a one-sector issue” and taking aim at for-profits. She cautioned that the current rules – and any revisions – apply not just to recruiters and financial aid officers at for-profits, but also to NCAA coaches, presidents and others at non-profits whose pay might be tied to how many students apply to or enroll at a college or university.

Joan Zanders was mistakenly identified as Joan Berkes of the National Association of Financial Aid Administrators in an earlier version of this story. Both women are on the panel.

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