On June 18, 2010, the U.S. Department of Education published a Notice of Proposed Rulemaking ("NPRM") covering fourteen higher education topics. While current regulations set forth 12 incentive compensation "safe harbors" -- explicitly permitted activities deemed not in violation of the ban on providing incentive compensation to school agents based on increases in student enrollment and financial aid awards -- the proposed rules eliminate the safe harbors in total. In its place, the Department has provided that any eligible institution:
will not provide any commission, bonus or other incentive payment based directly or indirectly upon success in securing enrollments or the award of financial aid, to any person or entity who is engaged in any student recruitment or admissions activity, or in making decisions regarding the awarding of title IV, HEA program funds. (NPRM, at 34874)
An Issue for All Institutions of Higher Education
Contrary to the belief that incentive compensation is an issue for proprietary schools alone, the elimination of the safe harbors will have a serious impact on many non-profit schools and is likely to necessitate, at a minimum, a review of current agreements with executives at non-profit schools. For example, it is common practice for coaches and athletic directors to receive incentive compensation for attaining high graduation rates among student athletes or a high Academic Progress Rate ("APR").1 Similarly, university presidents and other executives may receive bonuses for increased enrollment in featured programs. In light of the Department's commentary on the proposed rule -- and its broad reading of the term "indirectly" -- such practices are questionable at best:
The Department believes that [the safe harbor exempting incentives for program completion] permits compensation that is "indirectly" based on securing enrollments -- that is, unless the student enrolls, the student cannot successfully complete an educational program. . . . This safe harbor may lead to lowered or misrepresented admissions standards and program offerings, lowered academic progress standards altered attendance records, and a lack of meaningful emphasis on retention. The Department has seen schools that have devised and operated grading policies that all but ensure that students who enroll will graduate, regardless of academic performance. (NPRM, at 34817-18)
[S]ome negotiators advocated for an institution's ability to pay a bonus on the basis of students who complete their programs of instruction, as currently provided for in the fifth safe harbor. . . . The Department does not agree. (NPRM, at 34819)
Officials are not shielded from this ban despite admissions not being their primary function:
Securing enrollments or the award of financial aid means activities that a person or entity engages in for the purpose of the admission or matriculation of students for any period of time or the award of financial aid to students.
These activities include recruitment contact in any form with a prospective student . . . . (NPRM, at 34874)
The Department also made clear that supervisors and upper level administrators are not exempted from this rule:
The Department believes that [the safe harbor for managerial and supervisory employees] is no longer appropriate because senor management may drive the organizational and operational culture at an institution, certain pressures for top, and even middle, management to secure increasing numbers of enrollments from their recruiters. (NPRM, at 34818)
The Department's position is that section 487(a)(20) of the HEA is clear that the incentive compensation prohibition applies all the way to the top of an institution or organization. Therefore, individuals who are engaged in any student recruitment or admissions activity or in making decisions about the award of student financial aid are covered by the prohibition. (NPRM, at 34819)
What Next?
The NPRM is not, however, a final rule. The Department established a 45-day period to receive comments from all interested persons that ends on August 2, 2010. If, as announced, the Department is able to publish a final rule by November 1, 2010, schools will have to come into compliance with the new rule on or before July 1, 2011.
If you would like to discuss this or any of the other proposed rules in the NPRM (e.g., providing definitions of a credit hour, rules related to return of title IV funds, new rules governing misrepresentations), please contact Dennis Cariello via email at dcariello@sonnenschein.com.
Footnote
1. APR scores are a metric devised by the NCAA to measure continued enrollment and eligibility of student athletes.
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