It's Up to the Department Now

February 1, 2010

WASHINGTON — Months of negotiations on the U.S. Department of Education’s proposed revisions to regulations intended to guard against abuses of the federal financial aid program ended Friday with no agreement on the most controversial issues under consideration.

Under federal regulatory procedures, the panel of negotiators -- representing two- and four-year nonprofit institutions, for-profit colleges, students, consumer advocates and campus administrators -- needed to reach consensus on the full package of 14 issues for the revisions to be adopted unchanged by the Education Department unchanged. But the group could not strike compromises on five proposals during the third and final week of negotiated rule making.

Negotiations were most hopelessly stuck on the two issues to which the panel had devoted the most time over their months of work, and that department officials most dramatically revised: the definition of “gainful employment” and how to maintain Congress’s ban on incentive compensation for recruiters. Negotiators also could not reach agreement on issues related to institutions’ return of Title IV funds to departments and on state authorization of an institution as a requirement for Title IV eligibility.

Without overall consensus, the department is free to revise all 14 rules as it sees fit before releasing them for a final round of public comment. The department is likely to adopt the revisions to the nine rules on which the panel reached “tentative agreement” unchanged or with only minor changes.

But on the five issues left unresolved, the department will have to balance its policy goals with the realities of politics. Depending on how the department chooses to revise it, the proposed 8 percent debt-to-income ratio as the primary definition of whether a vocational program or institution prepares its graduates for gainful employment could garner opposition from multiple constituencies within higher education and from Congress.

On incentive compensation, the department risks being seen as attacking only the for-profits, a charge that emerged as the Obama administration took control, and that further intensified with the realization that just four of the 28 primary and alternate negotiators on the panel to discuss all the issues at play in this rule making session represented for-profit institutions.

On the first day of rule making, Elaine Neely, senior vice president of regulatory affairs for Kaplan Higher Education, tried to add two more primary negotiators to the panel, both of whom represented for-profit institutions different in size and management from Kaplan, which is owned by the Washington Post Co. Margaret Reiter, a former California deputy attorney general who prosecuted cases against for-profit institutions, opposed the additions.

Throughout the rule making process, debates on issues large and small often pitted Reiter against Neely. Though some panelists’ hearts may have been with Reiter’s position seeking to leave for-profit colleges little room to potentially skirt the regulations, their minds were swayed by Neely’s arguments.

On several issues, including gainful employment and incentive compensation, Neely was able to effectively corral the support of panelists from nonprofit colleges by questioning the department’s statutory authority, asking for specific examples of the kind of abuses the department was trying to prevent, and warning of a “slippery slope” of regulations that might begin by targeting for-profits but expand to affect nonprofit colleges and universities, too.

If the department opts to take on regulatory positions that would do particular damage to for-profit institutions, it risks facing not just the wrath of the proprietary sector, but also of nonprofit institutions and associations that have come to see the rules’ weaknesses, in large part because of Neely’s persuasiveness.

The panel was also unable to reach agreement on the return of Title IV issues because of concerns about how to calculate repayment of aid for module-based courses and issues of taking attendance. State authorization ended up being a sticking point for Reiter, who worried about the role of accreditors.

Gainful Employment

Going into the rule making process, it was unclear what the department might do to address consumer advocates' concerns that some programs that promised to prepare students for employment in specific fields were actually leading graduates toward debt and jobs they could have gotten without the credentials that saddled them with that debt.

Non-degree vocational programs at nonprofit institutions and most offerings at for-profit colleges and universities qualify for participation in the federal financial aid program because, as the Higher Education Act puts it, they “prepare students for gainful employment in a recognized occupation.”

The regulations already in place did not define “gainful employment,” and the department included no proposed changes to those regulations, instead questioning whether the term needed to be defined. If so, the department's initial issue paper on incentive compensation said, “what should be the relationship between tuition and fee charges (and/or loan debt) and expected earnings?

"For programs where this relationship is not reasonable, when and how should the department no longer consider the program to be an eligible program for title IV purposes?”

Neely, of Kaplan, saw the potential for any proposal from the department to blow up into “price controls” that might start out targeting programs at for-profits but could start down a “slippery slope” toward price controls for all institutions of higher education. “This is the first step, folks, into an even bigger issue about cost and debt load,” she said, prefacing a mantra she’d use many more times in the weeks to come. “This is an issue for Congress.”

There was, during the first round, some debate over what gainful employment might look like and whether tuition or debt load ought to be linked to graduates’ salaries. Rule making is intended to be a series of negotiations on the principles and specific details of regulations, but without any regulations to negotiate, it was difficult for the panel to see the true issues at play during the first round.

By the second round, in December, the department still had not come forward with any proposed regulatory language, but did bring up two potential means for defining gainful employment: a tuition-to-salary ratio and a debt-to-salary ratio. Most of the discussion focused on the first approach and came with criticisms leveled not just by Neely but by the alternate representing college presidents, Bob Moran, director of federal relations and policy analysis at the American Association of State Colleges and Universities; the alternate representing financial aid officers, Val Meyers, associate director of financial aid at Michigan State University; and the alternate representative for business officers, Anne Gross, vice president of regulatory affairs at the National Association of College and University Business Officers.

Panelists questioned the specific details of the proposals and whether any definition of gainful employment was even needed. “You can Google ‘gainful employment,' ” Gross said. “It’s something that’s been used for years and has a fairly well-understood definition. It’s been used in the Higher Education Act for 40 years without difficulty.” Neely again said she didn’t think Congress had given the department the authority to regulate on the issue and other negotiators voiced their agreement.

It seemed possible that, in the interest of consensus, the department might drop the issue of gainful employment altogether going into the third week of negotiations, but when draft regulations were released in mid-January ahead of the final round, they included the surprise of a new proposal capping annual debt repayments at no more than 8 percent of a program graduate’s salary. Though less controversial during the December round of negotiations than the tuition proposal, this plan, spelled out in the clear black and white of regulatory language, garnered substantial opposition during last week’s discussions.

Again, it was not just Neely who spoke in opposition. On Monday, the primary representative for college presidents, Terry W. Hartle, senior vice president for government and public affairs at the American Council on Education, leveled a laundry list of concerns about the proposal, including about cost and privacy and the potential for “unintended consequences.” Todd Jones, of the Association of Independent Colleges and Universities of Ohio, who worked in the Education Department during the second Bush administration, worried about the potential for lawsuits.

Throughout, non-federal negotiators seemed hell-bent on getting the department to drop its proposal entirely. Rather than suggesting workable emendations, they focused on trying to persuade department officials to wholly eviscerate the proposal, an idea that Fred Sellers, a senior policy analyst in the Office of Postsecondary Education, and others from the department seemed unwilling to consider.

At the same time, Reiter and the primary representative for students, Rich Williams, the U.S. Public Interest Research Group’s higher education associate, continued to push for the debt-to-income ratio to be adopted with only minor edits. But they were unable to persuade the rest of the panel, even while sharing stories of students whose lives had been ruined by debt accrued while working toward meaningless vocational credentials.

After mulling panelists’ views for the better part of Monday and Tuesday, department officials came back to the negotiations Wednesday morning to say they remained unwilling to drop the proposal. For two hours, panelists voiced more concerns about the regulation and seemed far away from agreement. By the end of the day Wednesday, it was clear the sides would not be able to find compromise on whether and how the department ought to regulate on gainful employment.

One department official said late Wednesday that the department would never propose regulations "we don’t think we have the legal authority to do,” which suggests final regulations will still include the debt-to-income ratio. The department agreed in negotiations to take on more of the work in determining graduates’ incomes and in calculating ratios, but it’s unclear how that will translate into final regulatory language.

As onerous as the proposal seems and as much as Neely was able to garner support from panelists with little direct interest in its outcome, it may not actually get all that much opposition from higher education as a whole or from the general public. Within the nonprofit higher education world, most of the programs that would be regulated by the rule are at community colleges, which are generally far less expensive than for-profits’ offerings and are often so affordable that they don’t even require students to take out loans.

Incentive Compensation

During the first two rounds of negotiations, incentive compensation was the issue that got the greatest attention from panelists and observers (many representing financial firms that invest in for-profit colleges) alike. After a string of scandals involving for-profit colleges that were alleged to have aggressively recruited unqualified students, a 1992 amendment to the Higher Education Act banned financial aid-eligible colleges and universities from paying commissions, bonuses or any other incentives to admissions and aid officers that were based in any way on success in getting a student to enroll.

But the ban’s lack of clarity on how recruiters could be compensated led to more confusion and lawsuits, according to some critics, and resulted in the adoption of a series of 12 “safe harbors” generated in 2002 by a negotiated rule making panel. Seeking to define the forms of compensation that were permissible, the key safe harbor specified that employees could receive no more than two annual pay adjustments and that those adjustments could not be “solely” based on recruiting or enrolling students.

Even with the safe harbors in place for the better part of a decade, the department was still receiving a steady stream of complaints about aggressive recruiting practices, Carney McCullough, a senior policy analyst in the Office of Postsecondary Education, said during the first round of negotiations in November. The fact that students still seemed to be aggressively pursued without regard for their interests and abilities, at for-profit and nonprofit institutions, seemed to suggest “a lack of clear guidance still” on how recruiters could and couldn’t be paid.

Heading into the negotiations and through the first round, the lines seemed to be drawn between Neely and the for-profits, and everyone else.

When discussions began, one of the most vocal opponents of aggressive recruiting tactics was David Hawkins, director of public policy at the National Association for College Admission Counseling, who argued that the methods used by some for-profit colleges and universities reached far outside the professional code of conduct that guided his organization. He wanted to see most, if not all, of the safe harbors eliminated, with Congress’s ban speaking largely for itself. This sentiment was echoed by Hartle, of ACE, and several other panelists.

In its first set of revisions, the department proposed eliminating all 12 safe harbors and replacing them with nothing other than “Dear Colleague” letters, as needed, to address problems as they arose. But the department’s all-or-nothing approach seemed to be a bit too much for most negotiators during December's round of discussions.

Hartle said he thought Congress had not intended “to ban any form of merit-based compensation for people in admissions and financial aid” and that without any regulatory guidance, “the language of the statute … is ambiguous enough that it is very hard for institutions to know what is legitimate to do and what is not legitimate.” Other panelists, too, worried about lack of guidance, and it was out of that concern that Hartle formed a subgroup that tried to draft new regulatory language between the second and third weeks of negotiations.

The proposal, released on Tuesday morning of the final week, permitted institutions and contractors to make no more than two merit-based pay adjustments annually so long as they were “not based on success in securing student enrollments on a per student basis.” But adjustments could consider “performance against institutional goals, such as total enrollment, completion or graduation, but shall be primarily based on qualitative factors as determined by the institution.”

The problem, though, was that while Hartle and his four coauthors -- Hawkins; Neely; Michale McComis, of the Accrediting Commission of Career Schools and Colleges; and Susan Lehr, of Florida State College at Jacksonville -- were able to draft language to which they all agreed, neither department officials nor the students and consumer advocates had been included in the negotiations.

McCullough, of the department, said she and her colleagues “think institutions know what merit-based adjustments are” and don’t need further regulatory guidance. “We don’t need to get so prescriptive, because that’s where we get into trouble,” with institutions using that language to find loopholes that essentially permit incentive compensation.

On Tuesday afternoon, when the department produced its own draft based on the proposal that came from Hartle’s group, the substantive difference was the deletion of the draft’s definition of merit-based adjustments to include institutional goals including total enrollment. That deletion seems to have prevented the negotiators from reaching any kind of agreement on the issue.

McCullough said Friday morning that she thought “we the department have come a very long way” in agreeing to merit-based adjustments of any kind. “We were happy eliminating safe harbors and repeating statutory language” and adding no new language to the regulation.

As discussion continued Friday, it was clear that any movement toward agreement on the issue wouldn’t be unanimous. Hartle, Hawkins, Reiter and other panelists expressed concerns with the department’s language and with proposed revisions that came from Neely.

Hartle, who had been so instrumental in getting Hawkins and Neely to agree on their sub-group’s proposal, said that, “speaking on behalf of college and university presidents, we can live with the department’s language.” Other panelists, too, expressed reluctant acceptance of the plan.

But Neely came back to the table just 10 minutes before negotiations were set to end at 2 p.m. Friday with a draft that retained all the small tweaks and loopholes that would still make it possible for for-profit institutions to substantially compensate their recruiters based on their ability to get large numbers of students to enroll.

The department’s final regulations could end up looking like the proposal that Hartle said he supported, which at once struck the safe harbors but still permitted annual adjustments to pay.

To everyone but Neely, it began to seem acceptable.

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