Comments to the Department of Education on Proposed Institutional Eligibility
Regulations
(Submitted October 7, 2002)
Introduction
On behalf of our low-income clients, the National Consumer Law Center (NCLC)1
is responding to the Department of Education’s proposed rules to amend
institutional eligibility provisions under the Higher Education Act (HEA). These
comments are also submitted on behalf of Community Legal Services of Philadelphia
and The Legal Aid Foundation of Los Angeles.
1. Program Participation Agreement/”Incentive Compensation”
(§668.14)
The Existing Incentive Compensation Provisions Help Prevent Fraud
NCLC objects to the proposed changes to the “incentive compensation”
regulations. We are very concerned that the proposed regulations will gut existing
bans on the payment of commissions to vocational school recruiters. These rules
were passed in 1992 as part of a package of legislation aimed at stopping the
abusive practices of scam vocational school operators.
We object to the proposed rules on both procedural and substantive grounds.
Procedurally, we are concerned that the Department chose to make this change
despite a failure to achieve consensus at negotiated rulemaking sessions. Further,
the Department has not provided a satisfactory rationale for the change. Negotiators
including the Department failed to provide concrete examples explaining how
the current regulation poses problems for legitimate schools. In contrast, there
is ample evidence, including numerous recent Inspector General investigations,
indicating that violations of the “incentive compensation” rules
still occur and that the regulations are necessary to help prevent abusive and
deceptive recruiting activity.
Congress passed the ban on commissions, bonuses and other incentive payments,
20 U.S.C. §1094(a)(20), in response to serious abuses, mainly by many for-profit
vocational schools during the 1980’s and early 1990’s. These abuses
are well documented, particularly in the report of the U.S. Senate Permanent
Subcommittee on Investigations of the Committee on Governmental Affairs, “Abuses
in Federal Student Aid Programs”, Report #102-58, May 17, 1991 (The “Nunn
Report.”).
The Senate investigators and others uncovered the rampant abuses that naturally
followed from tying an employee’s compensation to numbers of students
enrolled. Many recruiters’ compensation was based not just on the numbers
of students enrolled, but also on the numbers of students eligible for maximum
federal aid. Compensation, in many cases, was also connected to the length of
time the student stayed in school. Enrollment contracts at these schools charged
a disproportionate amount for the early parts of the program with the expectation
that many students would fail to complete the program. Recruiters therefore
had strong incentives to lure low-income students in, regardless of the student’s
ability to complete the program or even benefit at all from the program.
This competitive “drag anyone in the door” admissions system was
a disgrace. Federal financial assistance should go only to those students who
can benefit from higher education and only then to attend institutions that
meet their needs.
The incentive compensation regulations passed in 1992 helped curb these abuses.
The ban has benefited borrowers as well as legitimate schools working to prove
accurate and helpful information to prospective students. There is simply no
need to amend the current regulations.
The Proposed Regulations Improperly Rewrite the HEA Statute
The proposed regulations should not be finalized because they conflict with
the statutory directive at 20 U.S.C. §1094(a)(20). This provision states
clearly that institutions will not be eligible to participate in the financial
aid programs if they provide any commission, bonus, or other incentive payment
based directly or indirectly on success in securing enrollments or financial
aid to any persons or entities engaged in any student recruiting or admission
activities or in making decisions regarding the award of student financial assistance.
The proposed rules discussed below are of particular concern:
a) §668.14(b)(22)(ii)(A) would exempt from the “incentive
compensation” prohibition payment of fixed compensation (such as a fixed
salary) as long as that compensation is not adjusted up or down more than twice
during any twelve month period.
This provision would for the first time exempt “salary” compensation
from the commission ban if adjusted no more frequently than every six months.
This provision would invite schools and recruiters to game the system. For example,
they could hire recruiters, pay them salaries, and then adjust salaries (upward
or downward) depending on the numbers of students enrolled in the last six months.
This merely delays the payment of commissions and also encourages last-minute
recruiting as employees approach the six month salary adjustment period.
(b) §668.14(b)(22)(ii)(B) would exempt from the “incentive
compensation” prohibition compensation to recruiters based upon their
recruitment of students who enroll only in non-Title IV programs.
This provision threatens to open the door to abuses by schools luring students
in to private loan products that they cannot afford. Serious problems might
also arise if students, once enrolled, are then encouraged to sign up for title-IV
programs.
(c) §668.14(b)(22)(E) would exempt from the “incentive compensation”
prohibition compensation based upon students successfully completing the educational
program.
This provision does not eliminate the types of problems that have occurred in
the past. Tying commission to completion rather than enrollment will just as
easily lead to abuses, particularly by schools with inferior educational services.
In these cases, a student’s completion of the program is not a measure
of success and should not be considered as such for incentive compensation purposes.
In contrast with the 1980’s and early 1990’s, vocational schools
are increasingly recruiting high school graduates who are more likely to complete
the programs even if they are dissatisfied. In many cases, they are told they
will still owe the full amount on their loans even if they withdraw. Unscrupulous
vocational school operators often defraud these students even though many complete
the programs. They are left in most cases without job prospects and with unmanageable
student loan debt burdens.
This provision would encourage recruiters and other school personnel to make
misrepresentations to enrolled students so that they will complete the programs.
The school will then collect the tuition and the recruiter will collect his
commission. Under these circumstances, the recruiters and other employees have
a monetary incentive to make misrepresentations in order to keep dissatisfied
students in school. As with the other provisions discussed in these comments,
this situation would undermine the power of the incentive compensation ban and
encourage fraud.
(d) §668.14(b)(22)(F) would exempt from the “incentive
compensation” prohibition compensation for “pre-enrollment”
activities.
Allowing commissions to be paid for these activities is a bad idea. It merely
encourages the same types of aggressive and deceptive advertising practices
that have caused problems n the past.
(e) §668.14(b)(22)(G) would exempt compensation to managerial
or supervisory employees who do not directly mange or supervise employees who
are directly involved in recruiting.
This provision would provide an end-run around paying commissions to those directly
involved in recruitment. It would also be very difficult for the Department
to enforce. In most cases, determining whether commissions were paid to a school’s
managers or supervisors as opposed to employees will require detailed investigations
of the school’s internal personnel structures.
The Proposed Regulations Will Be Difficult To Enforce
The proposed regulations not only open the door to future abuse, but also
pose serious compliance problems. The current statute and regulation is straightforward.
The proposed rules muddy the waters considerably, adding a list of exceptions
that gut the rule. In many instances, they would also require the Department
to engage in intensive fact finding to police these regulations.
There is no valid policy reason to open this floodgate again. Even if there
was a problem, the proper and most equitable way to address it is through the
legislative process. The Department, in fact, previously acknowledged that changes
to incentive compensation could only be made through new legislation.2
They should be held to their word.
NCLC objects to the Department’s proposal to eliminate the “12
hour rule.” The rule is one of the few quantitative standards designed
to assess the quality of a school’s educational programs. It is not perfect,
but it has been effective in curbing abuses.
NCLC believes in innovative programs that will help low-income borrowers gain
access to higher education. If in fact the 12 hour rule is an impediment to
greater education access, we are interested in working with others to figure
out useful alternatives. However, instead of working collaboratively to develop
alternatives, the Department has simply replaced the 12 hour rule with the “one
day rule” for all institutions.
The “one day” standard is not appropriate for all schools and
particularly not for those for-profit vocational schools that try to limit the
amount of coursework as much as possible in order to make the highest profits.
The elimination of the 12 hour rule will allow unscrupulous for-profit school
operators to shorten their courses significantly, yet still charge the same
tuition to financial-aid eligible students. This sends the wrong signal to these
schools—that they can make the most money by offering the least amount
of classroom time.
In its rationale for the elimination of the 12 hour rule, the Department states
that the clock hour/credit hour conversion regulations, 34 C.F.R. §668.8(k)
and (l), provide adequate safeguards. It is questionable whether this is the
case since schools develop ways to get around the conversion standard. Further,
this admittedly minimum amount of protection does not even apply to programs
that are at least two academic years and where a degree is provided. 34 C.F.R.
§668.8(k)(1),(2). Chain schools are increasingly offering these “degree”
courses where quality of instruction is often inferior.
We understand that there may be some need to allow certain institutions greater
flexibility in providing distance education courses or other types of “flexible”
courses particularly for working students. This need to innovate, however, should
be discussed in Congress with full participation of representatives from the
higher education and student community.
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1 The National Consumer Law Center, Inc. is a nonprofit
Massachusetts corporation, founded in 1969, specializing in consumer issues,
with an emphasis on consumer credit. On a daily basis, NCLC provides legal and
technical consulting and assistance on consumer law issues to legal services,
government, and private attorneys representing low-income consumers across the
country. NCLC publishes a series of practice treatises and annual supplements
on consumer credit laws, including Student Loan Law (2001), Unfair and Deceptive
Acts and Practices (5th ed. 2001 and Supp.), as well as bimonthly newsletters
on a range of topics related to consumer credit issues and low-income consumers.
2 “The Power of the Internet for Learning: Final
Report of the Web-Based Education Commission”, December 2000.
