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The New York Institute of Technology, which a decade ago entered into an ill-fated partnership with a for-profit higher education company, has been ordered to pay $2.5 million in a $4 million settlement because the college's partner paid recruiters based on how many students later enrolled.

The settlement is the latest fallout from NYIT’s joint venture with Cardean Learning Group, a marriage of nonprofit and for-profit higher education interests made with the intention of spawning a hybrid online institution, Ellis University. Cardean, since bought out by Capital Education, was ordered to pay $1.5 million.

Under the original agreement for the venture, undertaken in 2003, Cardean provided course content and financial backing for Ellis College, a then-new online arm of NYIT. The intention was for Ellis, operated by the for-profit company, to piggyback on NYIT’s accreditation so that students could receive federal financial aid until it could break away to become a fully accredited institution in its own right -- Ellis University. Students at Ellis College would then transfer to the newly formed and independent university.

At first, things went according to plan. The college spun off from NYIT and was duly accredited. But then the relationship quickly deteriorated. Each party filed a lawsuit, both settled in August 2008; NYIT claimed that Cardean had breached its contract and owed the nonprofit college more than $2 million, and Cardean claimed that NYIT had tried to undermine Ellis University’s search for independent accreditation. Ellis eventually lost its regional accreditation from the Higher Learning Commission. (The university retains national accreditation.)

The settlement, in a lawsuit from the Education Department’s inspector general and the U.S. attorney for the Southern District of New York, dates from a happier time in the NYIT-Cardean partnership, before Ellis University gained independence. Students enrolled in Ellis College when it was an online branch of NYIT received degrees from the institution even though they could take only Ellis College classes. When NYIT first contracted with Cardean, Cardean recruited students to Ellis College and paid the recruiters based on how many students enrolled, the Education Department said.

Federal financial aid regulations prohibit basing recruiters’ pay on how many students they enroll. The Education Department noted that enrollment at Ellis College boomed during the partnership -- by 2007, the online college enrolled 3,700 students who received $17 million in federal financial aid.

Much of the Cardean-NYIT relationship could serve as a cautionary tale about institutional partnerships. But the settlement is likely an isolated case, and one that illustrates the difficulty of navigating complicated incentive compensation rules, said Michael B. Goldstein, who leads the higher education practice at Dow Lohnes, a Washington law firm, and who has represented Ellis University in the past.

“I think there are just totally unique characteristics that caused it to happen,” Goldstein said.

Incentive compensation (or paying recruiters for students) is prohibited at all institutions. The college acknowledged in the settlement that it did not pay adequate attention to Cardean’s practices, but said it was not aware that the private company was paying recruiters based on student enrollment.

“NYIT had no knowledge of any improper recruiter compensation practices conducted by Cardean,” Elizabeth Sullivan, a NYIT spokeswoman, said in a statement. The college is proud to have been “on the forefront of quality online education” when Ellis launched, Sullivan said. The branch was phased out in 2008, when Ellis University earned its (now withdrawn) accreditation.

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