There is absolutely no truth to the rumor that the U.S. Education Department's Hal Plotkin will appear at a protest on textbook prices today dressed in a 10-foot-tall mascot costume as "Textbook Rebel."
WASHINGTON -- Higher education hates the U.S. Education Department's recently enacted regulation requiring institutions to seek and gain approval from any state in which they operate, and has fought it on multiple fronts. Late Tuesday colleges and universities got at least a temporary reprieve from the part of the rule to which they most object -- its application to online programs in which even one student from a state enrolls.
WASHINGTON -- Weeks after the U.S. Education Department issued softened regulations designed to ensure that vocational programs prepare graduates for "gainful employment," House Republicans made abundantly clear Friday that, in their view, the rules had not been eased nearly enough, and that they would continue to oppose them.
The irresistible force of the Cheneyist federal government has met the immovable object of colleges entrenched in their Eisenhower-era way of doing things, or so some commentators on the Department of Education’s recent attempt at negotiated rule making would have it. If that were true, it would be a fairly traditional conflict that could be resolved through standard political channels.
Under those conditions, the service of a critic such as Anne Neal on the National Advisory Committee on Institutional Quality and Integrity (NACIQI), the department panel that reviews accreditors, would excite little attention. Government and politics are joined at the hip, and Neal has been a visible and effective commentator on important policy issues, from a position roughly congruent with that of Republicans. Fair enough.
But that isn’t the situation. What is really happening is that accrediting bodies, which are not part of any government, are being jammed in between the principals like trapped sheep and beaten from both sides. The feds beat them for not thinking or acting like enforcers. Their collegiate membership beats them for listening to The Idiots In Washington. The Department of Education is using accreditors as a human shield to absorb incoming fire from schools, while simultaneously insisting that the accreditors, not the feds, fight back, with ammunition supplied by the feds themselves.
Sorry, that’s a foul. Can’t do it that way. It’s even inconsistent with the usual habits of the force-based Cheneyist government, which is usually quite willing to simply declare any opposition -- indeed, any discussion -- to be enemy action and begin stomping. Of course, arranging for a third party to be blamed for one’s actions is as old as politics.
Neal has argued that the formal linkage between the feds and accreditors needs to come to an end. She is right. This civil union of the 1950s, so convenient in another era under other conditions, no longer works. Eligibility for federal financial aid should be decoupled from accreditation as soon as possible and determination of eligibility brought inside the Department of Education. The department does it already for foreign schools, albeit badly. The establishment of an eligibility unit inside the department would simplify the situation immensely. If ever a Republican president were to support additional staff for the department, this is where they should go. Democrats could hardly object: adding this function where it belongs would allow government to work more efficiently and colleges to have a much clearer idea of what standards they must meet. A fine bipartisan plan.
The feds are trying in a very crude, clumsy way to transform accreditors into things that they were never intended to be and cannot be effectively: enforcement arms of the federal government. If the federal government wants to impose standards on schools that want federal aid, fine. Standards must be met for most federal aid, and that is as it should be. But the feds should not hide behind a third party in a shotgun wedding, when the bride would rather be anywhere else and the children think their new daddy is made by Frankenstein.
The standards for eligibility for financial aid should be set through a rational, governmental rule-making process that establishes the standards -- just like every other agency does it. Well, I make no claims of rationality for all governmental decisions, but neither can I do so for all policies established by accreditors -- assuming that anyone can figure out what they are.
Various critics of accreditation argue that the process is intrusive, ineffectual, does not help maintain quality and is not worth keeping. That’s a discussion that needs to happen between the colleges and their accreditors, separately from what standards the federal government expects colleges to meet for aid eligibility. I have seen good, bad and useless things emerge from accreditors during my years working in higher education, and the discussion needs to happen. Separately. It is not appropriate to try to answer those questions, which are not federal in nature, in the middle of a tug-of-war between colleges and the feds, by wrapping the rope around the necks of the accreditors in the middle.
There is no reason for accreditors to be attached to the federal government. Allowing this interspecific coitus to continue is simply a recipe for mutant policy offspring that can’t be effective. End it now. It’s time for a shotgun divorce.
Alan L. Contreras has been administrator of the Oregon Office of Degree Authorization, a unit of the Oregon Student Assistance Commission, since 1999. His views do not necessarily represent those of the commission.
After a year in which it dominated the headlines, the student loan “scandal” has lost its head of steam. New York Attorney General Andrew Cuomo has largely moved on to other areas of interest. And the U.S. Senate and House of Representatives, which have each passed different Sarbanes-Oxley-like versions of legislation to address the issue, have also taken up other matters for now.
But that doesn’t mean that colleges and lenders are out of the woods, as the U.S. Department of Education is just getting started with administrative investigations and enforcement actions that will make the department ground zero on this issue in 2008.
In response to criticism from Cuomo, the Congress, and the General Accountability Office, the department increased its oversight of colleges and lenders during the latter half of 2007. In July, the Federal Student Aid office (FSA) sent letters to 921 colleges whose student-loan volume was almost entirely, if not entirely, with one lender. The letters were intended to remind the colleges of the requirement to provide borrowers a choice of lender. Then, on October 24, FSA sent letters to 55 of those colleges, as well as 23 lenders that held loans with one or more of the originally identified 921 colleges, requesting information and documents that could indicate the existence of improper inducements, in violation of the Higher Education Act of 1965, as amended (HEA), and its regulations.
Those 78 colleges and lenders (and perhaps many others) should be prepared for the possibility of an administrative investigation and enforcement action by the department in 2008. Here are four things they can expect:
1. More Adversarial Program Reviews
Based on my personal knowledge of the department’s prior practice, and its current organizational structure, two different divisions that report to the Federal Student Aid Program Compliance office are currently reviewing the responses of the colleges and lenders: (1) the School Eligibility Channel is examining college compliance, and (2) Financial Partners Eligibility & Oversight is examining lender compliance. Although FSA, and not the department’s Office of the Inspector General (OIG), is conducting the oversight, I expect OIG to be working behind the scenes with FSA to ensure that colleges and lenders are held accountable for regulatory violations.
An examination of colleges by FSA’s School Eligibility Channel typically takes the form of a program review, which is FSA-speak for “investigation.” A program review entails an on-site visit by FSA that generally involves the collection of financial-aid documents and interviews with financial-aid administrators. Colleges receive notice that a program review will be initiated and are provided the opportunity to respond to a preliminary program review report before FSA issues a “final program review determination” letter. Colleges can expect the School Eligibility Channel to be reluctant to accept their explanations for business arrangements with lenders. There will be findings of regulatory non-compliance in the program review letters.
Lenders have historically had a much more cooperative relationship with Financial Partners Eligibility & Oversight than colleges have had with the School Eligibility Channel. Financial Partners once boasted that, as its name suggests, it works in partnership with lenders to promote best practices and to provide technical assistance. However, that collaborative approach was criticized in September 2006 by the OIG as one that “emphasized partnership over compliance.” As a result, lenders should expect a more adversarial relationship with Financial Partners, which, like the School Eligibility Channel, will conduct program reviews and make findings of regulatory non-compliance.
2. Application of an Uncertain Legal Standard
What types of agreements between colleges and lenders transgress the current prohibition against inducements? Only FSA knows. It is very difficult to discern the legal standard that FSA will apply.
The department’s longstanding interpretation of the anti-inducement provisions is that a violation requires there to have been a quid pro quo, i.e., something given for something taken. In other words, there must be a payment or other inducement provided in exchange for FFEL loan applications. That interpretation finds support within the department as far back as 18 years ago and remained the department’s position through this past summer.
In a February 1989 Dear Colleague Letter, the department described several types of business-development activities between colleges and lenders that would be deemed permissible so long as they were intended as a form of advertising or as a creation of good will, “rather than as a quid pro quo for loan referrals.” Secretary Margaret Spellings actually attached that guidance to her August 9, 2007 letter to the higher-education community urging colleges and lenders to act in the best interests of students and parents. Indeed, three months earlier, in May, the Secretary testified to a congressional committee that a payment can only constitute an improper inducement where there is a quid pro quo.
The department, however, published new regulations on November 1, 2007 that changed its interpretation of the HEA’s anti-inducement provisions. The regulations, which become effective on July 1, 2008, eliminate the requirement of a quid pro quo and replace it with a standard that will prohibit virtually all business-development activities between colleges and lenders, including efforts to create good will. The department made this change of interpretation by giving itself the authority to limit, suspend or terminate a lender from the FFEL Program if the lender is unable to present sufficient evidence that payments or services provided to a college were provided “for a reason unrelated to securing applications for FFEL loans or securing FFEL loan volume.”
In the preamble to the regulations, the department signaled that the new regulatory language is intended to prohibit virtually any payment that is provided merely for the purpose of securing FFEL loans. This would prohibit virtually all payments because FFEL lenders are, after all, in the business of securing FFEL loans. With the quid pro quo requirement eliminated, nearly all business-development and good-will activities will now be prohibited.
FSA should, of course, wait until the effective date of the new regulations before it applies this new interpretation of the anti-inducement provisions. And, even then, FSA should apply the new interpretation only to payments offered on or after that date or else risk holding colleges and lenders liable for activities that were not illegal at the time they were conducted. But FSA’s intentions are unclear, considering that it seems to already be looking to the new regulations to support its probe of agreements between lenders and affiliates of colleges.
3. Probes Into Lender Agreements With College Affiliates
Based on FSA’s letters, lenders can expect FSA to examine not only agreements between lenders and colleges, but also those between lenders and affiliates of colleges. By "affiliates of colleges," FSA undoubtedly means entities such as alumni organizations. In July 2007, as part of a highly-publicized settlement agreement with Cuomo, Nelnet agreed to stop paying alumni associations for exclusive referrals of their consolidated loans. However, agreements with alumni organizations and other college affiliates are not yet covered by the federal anti-inducement statutes and regulations.
The HEA’s anti-inducement provisions prohibit lenders from making payments “to institutions of higher education or individuals.” Although the current regulations use the slightly different phrase “to any school or other party” to describe the scope of covered recipients, once that phrase is read in the context of the HEA language (as it must be so read), the term “other party” in the regulations can only mean “individuals.” It cannot be construed to mean or to include college affiliates because such entities are neither “institutions of higher education” nor “individuals.” So FSA seems to be probing lender agreements with some entities that are not currently covered by the regulations.
The new regulations will, however, add “school-affiliated organizations” as an additional class of covered recipients and, therefore, in a matter of six months, give FSA authority in this area. The term “school-affiliated organization,” which was defined broadly by the Department, covers any organization that is directly or indirectly related to a college, regardless of whether it is within the college’s structure and control. It includes alumni organizations, foundations, athletic organizations, and social, academic, and professional organizations. But because the HEA’s anti-inducement provisions for lenders only cover payments to “institutions of higher education or individuals,” the new regulatory prohibition against payments to “school-affiliated organizations” appears to go beyond the HEA.
4. More Limitation, Suspension and Termination Proceedings
Colleges that are found in regulatory non-compliance generally receive an FPRD letter that assesses a liability against the college, or they receive a notice imposing an administrative fine. In the past, FSA initiated limitation, suspension, or termination proceedings against colleges only in the most egregious cases. FSA has never terminated a large, well-respected college from the Federal Family Education Loan (FFEL) Program, and no one thinks they will do so over this. But FSA might place limitations upon them. Smaller colleges -- particularly for-profit, career colleges -- may not be so lucky.
And while limitation, suspension and termination proceedings for lenders were extremely rare in the past, FSA will now choose to initiate them. This is so because FSA can require “corrective action,” which includes a monetary payment, only as part of a limitation or termination proceeding. As a result, lenders can expect such proceedings.
That is what colleges and lenders can expect from the department in 2008 in terms of administrative enforcement. Here is what they (indeed, every American) should demand of the department: Responsible and principled leadership.
The Department Should Enforce the Law Responsibly and in a Principled Manner
Increased accountability in the FFEL Program should be greatly welcomed by all. Every taxpayer should demand that colleges and lenders, like any other recipient of our hard-earned tax dollars, play by the rules. And colleges and lenders, themselves, should insist on accountability in the FFEL Program. Where true violations of the statutory and regulatory anti-inducement provisions are discovered, FSA should put an immediate stop to it. And where those violations are flagrant or committed with a fraudulent intent, FSA should impose the most serious administrative sanctions.
But internal pressure from the OIG and external pressure from Cuomo, the Congress or the news media to severely punish violators should not be perceived by senior department officials as “cover” for FSA to impose unnecessarily harsh penalties. Getting a “pound of flesh” by reflexively imposing large administrative fines against our nation’s colleges or by unreasonably limiting, suspending or terminating the very lenders that help put our college students through school would be counterproductive.
Instead, FSA should carefully exercise its inherent administrative enforcement discretion by thoroughly reviewing each violation on a case-by-case basis to determine whether a sanction is even needed. For example, regulations allow for informal compliance procedures to permit a lender to show that the violation has been corrected or to at least present a plan for correcting the violation and preventing its recurrence. However, if a sanction is needed, then FSA should fashion a penalty that is sufficient, but not greater than necessary, to achieve the purposes of the FFEL Program and to ensure its continued viability and integrity. Among the factors FSA should consider are the nature and circumstances of the violation and the violator’s history of regulatory non-compliance.
The coming year of administrative enforcement will make some people within the FFEL Program very anxious, but it will serve an important purpose. Colleges and lenders must be held to account for conduct that denied borrowers a true choice of lender as a result of improper payoffs. And the department, acting in the best interests of those same borrowers, should strictly enforce the laws on the books and exercise sound discretion in doing so. Administrative enforcement is not a one-size-fits-all process.
Jonathan Vogel is a former Deputy General Counsel of higher education at the U.S. Department of Education and a former federal prosecutor with the U.S. Department of Justice. He is now a partner with the law firm of Sonnenschein Nath & Rosenthal.