Partial 'Program Integrity'

WASHINGTON – The U.S. Department of Education today released a set of proposed rules intended to prevent abuses of federal financial aid programs by establishing new consumer protections, ensuring that only eligible students receive federal aid, and clarifying the courses and programs for which students can use federal aid dollars.

Though the notice of proposed rule making (NPRM) to be published in Friday’s Federal Register includes more than 500 pages of rationale and regulatory language on 15 issues related to the integrity of the federal financial aid programs, what’s most likely to get attention is what’s missing: a full set of regulations defining “gainful employment,” the mechanism through which most programs at for-profit institutions and non-degree programs at nonprofit institutions qualify for federal aid.

In earlier iterations, debated through months of negotiations involving federal officials and a variety of higher education stakeholders, the department had proposed establishing a maximum permissible ratio of the loan debt-to-income ratio for graduates of most programs offered by for-profit colleges. But in the wake of significant pushback from some members of Congress and various voices within higher education, and a demand from the White House Office of Management and Budget for more evidence to support the proposal, the department has chosen to hold off on proposing a specific "metric" to measure whether programs are preparing their students for gainful employment because “we want to get it right,” as Education Secretary Arne Duncan said in a statement.

Department officials say they expect to release the rest of the gainful employment proposal later this summer, with plenty of time to meet a Nov. 1 deadline for publishing a final version of the rules that would take effect on July 1, 2011.

Though the department’s current release does not include a full set of regulations on gainful employment, it does call on institutions to provide data on students’ debt levels and job placement and graduation rates, both to the department and for public disclosure on their own websites.

On other issues, the regulations call for the removal of 12 “safe harbors” meant to clarify how recruiters could be paid without violating federal law banning “incentive compensation.” The regulations also provide a definition of credit hours that would give nontraditional programs greater flexibility.

After the proposed rules' official release on Friday, stakeholders and members of the public will have 45 days to submit comments to the department. Agency officials will take the comments into consideration as the department makes revisions ahead of a release of final regulations. The final regulations are due out by Nov. 1 and will go into effect on July 1, 2011.

Terry W. Hartle, senior vice president of government and public affairs at the American Council on Education, said the “encyclopedic” document indicated to him that “the department has gone to a great deal of effort to document its thinking and the evolution of its proposals, and to explain how it got to where it is.”

The NPRM comes more than four months after the end of negotiated rule making, a series of three one-week sessions that brought together stakeholders from public, private and for-profit institutions -- as well as specific interest groups like students, consumer advocates and financial aid administrators – to try to reach consensus with the department on revisions to all the regulations under consideration. Because the panel failed to reach agreement on all the issues, the department was at liberty to revise them all before publishing the NPRM.

With hundreds of pages of regulatory language to digest, most observers contacted Tuesday night as the department circulated the materials among stakeholders homed in on gainful employment and incentive compensation, two issues likely to drastically change the landscape of for-profit higher education.

Gainful Employment

On gainful employment, a senior department official said, “we still intend to hold programs accountable with some metrics.” Whether that’s the 8 percent debt-to-income ratio proposed in January ahead of the third round of negotiated rule making, or some other measure, was not something that the official would discuss.

The official said that the Office of Management and Budget’s analysis of the gainful employment rule as potentially having a major economic impact was just one factor in the delay. “Given the controversy we want to make sure we do it right,” the official said. The department hopes to issue the full gainful employment proposal later this summer so that it can go through the public comment process, and any further revisions, by Nov. 1, for implementation in mid-2011.

Under the initial gainful employment proposal released today, for all programs that qualify for Title IV aid because they prepare students for “gainful employment in a recognized occupation,” institutions would be required to submit to the department on an annual basis the Classification of Instructional Program code for the program, identifying information about each student who completes the program, the date the student completed the program, and the amount of money each student received in private student loans and institutional financing.

The department would presumably use that data to populate the metrics it establishes to define gainful employment. To Barmak Nassirian, associate executive director for external relations at the American Association of Collegiate Registrars and Admissions Officers, that’s evidence enough that the department will go ahead with the creation of some sort of metric. “They’re asking for input data to be disclosed,” he said. “The way I read that is if they were going to backtrack, divide the difference, sort of adulterate the original robust proposal, then why in the world would they seek out all those data and not give themselves the regulations to act?”

Some officials at for-profit colleges and investment analysts who watch the industry had, ahead of the rules’ release, read the delay on gainful employment as a signal that the department was softening its metric, if not eliminating it entirely. For-profit institutions and their key lobbying group, the Association of Private Sector Colleges and Universities (until last week known as the Career College Association), have spent millions of dollars trying to persuade the department, Congress and the general public that the debt-to-income ratio would be detrimental to students and to the country.

Harris Miller, APSCU’s president, said the delay indicates that Duncan “has done what he’s said and is making sure the proposals help protect students and don’t harm them or harm the country, as the original proposal clearly would have.”

Miller’s claims about the gainful employment rule’s potential to do damage have been disputed by groups that advocate for students including the United States Public Interest Research Group and the Institute for College Access and Success, which were among the signatories of a letter to Duncan that urged the department to go ahead with a debt-to-income ratio rule.

The NPRM also includes regulations requiring institutions to publish on their websites detailed disclosures related to programs that prepare students for gainful employment. At minimum, institutions would have to post the following for each program:

1. The occupations that it prepares students to enter, with links to the Department of Labor’s O*NET.
2. The on-time graduation rate of students in the program.
3. The cost of the program, including tuition, fees, room, board and other institutional costs.
4. The placement rate for students completing the program (by June 30, 2013).
5. The median debt load incurred by students who completed the program in the previous three years, broken down into debt from federal student loans, from private educational loans, and from institutional financing.

Christine Lindstrom, U.S. PIRG’s higher education program director, said her group is “hopeful that the disclosure requirements put forth in the gainful employment section set the stage for a strong definition of gainful employment” in the second NPRM.

Incentive Compensation

Issues related to the aggressive recruiting of students -- at both nonprofit and for-profit colleges -- have kept compensation rules for admissions and financial aid officers under close scrutiny for two decades.

After a series of lawsuits in the late 1980s and early 1990s suggested that the practice of paying recruiters based on how many students they convinced to enroll was a problem, Congress voted in 1992 to amend the Higher Education Act of 1965 to bar Title IV-eligible institutions 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. Chief among the concerns being put forth by Congress and consumer groups was that unqualified students were being recruited and falling into debt as the result of aggressive recruiting practices, not their own desires or academic abilities.

Critics (many from for-profit institutions) argued that there was no way to change an employee’s compensation if it was not at least in part based on doing his or her job well -- which for a recruiter would mean recruiting students -- and the Education Department under President George W. Bush agreed.

In 2002, 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.

The Obama administration’s proposal eliminates the safe harbors entirely. In its preamble to the regulations, the department said it “believes that the removal of these regulatory safe harbors is necessary to ensure that” the ban on incentive compensation is not easily violated. “The department has determined that these safe harbors do substantially more harm than good, and believes that institutions should not look to safe harbors to determine whether a payment complies.”

Instead, the department suggests that any compensation plan be put to what it is calling a “two-part test”: first, whether it is a payment given to a person or entity for services rendered, and second, whether it is provided “directly or indirectly upon success in securing enrollments or the award of financial aid, which are defined as activities engaged in for the purpose of the admission or matriculation of students for any period of time or the award of financial aid.” If the answer to both questions is “yes,” then the payment would violate the incentive compensation ban.

Going forward, the department is open to issuing “Dear Colleague” letters and responding to other questions from institutions seeking clarification about the ban, department officials said.

Miller, of APSCU, criticized the decision to eliminate the safe harbors. “Rather than fixing it, they’re proposing blowing it up, throwing out basically 18 years of work and trying to reinvent the wheel,” he said. Though the department’s description of its decision-making process in drafting the regulation points to the reluctance of Elaine Neely, a Kaplan Higher Education executive who represented for-profit institutions on the negotiated rule making panel, Miller insisted that she was not the only panelist who objected to eliminating all the safe harbors.

One of the panelists who had worked with Neely on a compromise proposal presented to the department during rule making was Hartle of ACE, who said Tuesday that the elimination of safe harbors “will remove ambiguity that makes it possible to provide some incentive compensation,” as is still the case, he said. “This pretty well closes the door.”

Definition of a Credit Hour

While the gainful employment and incentive compensation issues have dominated the public discussions about the rule making, some of the other lower-profile topics could have as much if not more potential impact, and on a broader array of institutions.

Foremost among them is the department's proposal to define (for the first time in federal policy) what a "credit hour" is, and to clarify the obligations of accreditors and state agencies in ensuring that colleges are requiring sufficient academic work from students in exchange for course credit. The department argued that such a definition was necessary because the absence of one "may be the basis for abuse by institutions in determining sufficient course content for a credit hour," raising questions about the quality of credits (and ultimately degrees) awarded by some institutions.

Throughout most of the rule making negotiations, the Education Department had taken a relatively hard, traditional line, leaning toward defining a credit hour (see Page 68) in a precise, mechanistic way, based largely on the longstanding bedrock of the Carnegie unit.

That approach drew strong criticism from those who argued that at a time when policy makers are increasingly embracing alternative types of teaching and learning, including online education, mandating a single, seat-time-based measure of when a student has accumulated enough knowledge to justify the awarding of federal aid in return was wrongheaded.

The proposed rules released by the department today seem designed to strike a balance between those two perspectives. Perhaps influenced by the aggressive stance taken by the department's inspector general against the credit-hour policies used by several accrediting agencies -- which will be the subject of a Congressional hearing tomorrow -- the rules would define a credit hour as "one hour of classroom or direct faculty instruction and a minimum of two hours of out of class student work each week for approximately fifteen weeks for one semester or trimester hour of credit," or equivalent amounts of actual instruction for quarters or other time periods.

"This standard measure will provide increased assurance that a credit hour has the necessary educational content to support the amounts of federal funds that are awarded to participants in federal funding programs and that students at different institutions are treated equitably in the awarding of those funds," the department said in a preamble explaining the rules.

The definition also includes an exception, though, that accepts as a credit hour "[i]nstitutionally established reasonable equivalencies for the amount of work required in [the previous definition] for the credit hours awarded, including as represented in intended learning outcomes and verified by evidence of student achievement."

That exception is necessary, the department's preamble says, because "other measures of educational content are being developed by institutions," and federal officials "do not intend to limit the methods by which an institution may measure a student's work in his or her educational activities."

It is unclear whether the department's compromise will succeed in satisfying both those who worry that some colleges are giving academic credit (and consuming federal student aid) in exchange for insufficient academic work, and those who argue that now is the wrong time to rigidly define and limit the types of acceptable college learning.

Other Issues

The NPRM also includes regulations on the following issues:

• Misrepresentation. Regulations include a set of consumer protections that give the department greater authority to take action against institutions that appear to be employing deceptive advertising and sales practices.
• Definition of high school diploma. Requires institutions to develop a means for determining whether a student's high school diploma was valid if either the institution or the Secretary of Education had reason to think it was invalid or awarded by a "diploma mill."
• Ability to benefit. An investigation by the Government Accountability Office pointed to misconduct in the approval and administration of ability to benefit tests, which are used by some institutions as a way to determine whether a student who does not have a high school diploma or equivalent is eligible for Title IV aid. Regulations create stricter rules about who can administer the tests and those testers' connections to institutions that could enroll the students.
• Satisfactory academic progress. Investigations at various institutions have shown that under current regulations, students can continue to take classes and receive federal aid for as many as two years, even if they are not meeting their institutions' academic standards. The regulations would require institutions to develop processes for monitoring academic progress more closely and warning students who are in danger of losing their Title IV eligibility.
• Verification. Creates regulations that make much of the process of verifying the information on a student's Free Application for Federal Student Aid simpler, because it will in many instances be dependent upon data that comes directly from the Internal Revenue Service.
• Timeliness and method of disbursement. Regulations would make it possible for some students to get aid disbursements to spend on books and supplies by the seventh day of a payment period, even as documents are still being processed and verified.