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After two lawsuits by for-profit colleges, the Obama administration is backing down from its ban on colleges paying recruiters bonuses based on graduation rates.

The Education Department formally announced Friday that it had reconsidered its position and will no longer prohibit colleges from paying commissions to recruiters that are tied to students’ graduation or completion rates.

The reversal comes after federal courts have twice sided with for-profit colleges in ruling that the administration did not provide a sufficient justification for the rule.

The announcement does not change the federal law that prohibits colleges from paying recruiters bonuses based on the number of students they enroll. But it does roll back part of the Obama administration’s efforts to tighten the incentive compensation rules, which were aimed at cracking down on abuses in the for-profit college industry.

A federal appeals court in 2012 largely upheld the administration’s package of stricter incentive compensation rules. But the court singled out the ban on bonuses tied to students’ graduation as not properly justified. A federal judge in 2014 again ruled that the department didn’t provide a sufficient rationale for the ban.

The administration argued in court that colleges were making an end run around the ban on bonuses tied to enrollment numbers by instead doling out bonuses based on graduation rates.

But on Friday, the department said it had changed its position because it "lacks sufficient evidence to demonstrate that schools are using graduation-based or completion-based compensation as a proxy for enrollment-based compensation.”

The Association of Private Sector Colleges and Universities, the for-profit college association that had sued to block the rules, applauded the department's decision. In a statement, Steve Gunderson, the group's president and chief executive officer, said it was "a victory in APSCU's larger mission to achieve good outcomes for the students served by our members."

"This aspect of the compensation regulation was improperly adopted five years ago," Gunderson said. "And only our pursuit of a legal remedy in federal court led to the department’s belated corrective action."

Meanwhile, some advocates for tough incentive compensation rules said they were disappointed in the administration’s reversal. 

David Hawkins, director of public policy and research at the National Association for College Admission Counseling, called the change “a significant setback” for the integrity of federal student aid programs.

“I am perplexed and disappointed that the department has made this decision,” Hawkins said in an email. “Abuses related to incentive compensation have persisted throughout the history of the federal student aid programs, a lesson that the department has unfortunately already forgotten.”

Effect on Minority Student Recruitment

Some for-profit colleges have argued that tighter limitations on how they can pay recruiters would harm their efforts to recruit minority students.

Last year, a federal court said that the administration had not properly considered how the incentive compensation rules would affect minority recruitment efforts or minority student enrollments.

The department’s announcement on Friday addressed that concern. The administration conceded that its restrictions on bonus pay may reduce minority student enrollment at some institutions, though it said it was difficult to quantify that reduction.

“Although the ban on incentive compensation may cause minority student enrollment numbers to decline, we expect that the minority students who do ultimately enroll will have a better chance at success, because they will have enrolled based on a decision made free of pressured sales tactics, and they presumably would be a good fit for the school they select,” the department wrote.

The administration said that it would not provide any special dispensation to colleges that want to pay bonuses to recruiters engaged in minority student outreach.

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