Investment analysts have been on edge since President Obama took office, worried that the new administration would ramp up government oversight of the for-profit higher-education sector. Their fears deepened this spring, when the Education Department announced that it would take a “fresh look” at several rules affecting proprietary colleges.
While the rule-making process is still in the early stages, with formal negotiations set to begin in September, analysts expect the department to tighten the rules that govern how colleges compensate recruiters for enrolling students. They worry that publicly traded companies won’t be able to sustain their current growth rates if they can’t reward their recruiters for bringing in business.
Lobbyists for for-profit colleges say analysts are overreacting. They accuse short sellers, who profit when a company’s stock falls, of spreading hysteria to deflate the value of their companies’ stock.
“I think the for-profit community is more worried about how the investment community is worried than they are about the process itself,” said Nancy B. Broff, a lobbyist representing ITT Educational Services Inc. “Nobody I’m talking to is running around saying the sky is falling.”
Providing ‘Safe Harbor’
Congress barred colleges from basing compensation on student enrollment in 1992 amid reports that some trade institutions were enrolling unqualified students in order to receive their federal student-aid dollars. By prohibiting commissions, lawmakers hoped to discourage recruiters from signing up students for classes they couldn’t handle. Under the law, colleges may not provide “any commission, bonus, or other incentive payment” to recruiters or admissions officers based on their success in securing enrollments or financial aid.
A decade later, the Education Department convened a committee to clarify the rules, which for-profit colleges had long complained were unclear and ambiguous. When the panel disbanded without reaching consensus, the department took action on its own, issuing regulations that outlined 12 “safe harbors” from the law.
The new rules allowed proprietary institutions to adjust recruiters’ salaries twice a year, so long as the increase was not based “solely” on success in enrolling students. The rules also exempted most Web-based recruiting and admissions activities from the ban and allowed for bonuses based on the number of students completing an academic year and bonuses based on clerical “pre-enrollment” activities, such as answering phone calls and referring student inquiries.
But the most controversial of the safe harbors may have been the last, which permitted payments to third-party recruiters, so long as they were not compensated “in a manner that would be impermissible” for employees of the institution.
To critics, the exemption seemed an obvious response to a series of audits by the Education Department’s Inspector General that found that several nonprofit colleges had violated the incentive-compensation ban when they entered into recruiting deals with a division of Apollo Group, a for-profit company. Under the arrangements, the colleges paid Apollo’s Institute for Professional Development a portion of the tuition for students it recruited. The audits, which were conducted in 2001 and 2002, recommended that the Education Department require the colleges to return millions of dollars in student aid received by students recruited under the deal.
The colleges, however, were never required to return the money. Two days before the department published its final “safe harbor” rules, William D. Hansen, then the deputy secretary, issued a memorandum saying that most violations of incentive-compensation rules would be punishable with a fine. In the memo he argued that such violations do not cost the government money “because improper recruiting does not make students ineligible to receive aid.” Ultimately, the audited colleges paid fines ranging from $0 to $70,000, while Apollo paid the department $490,000 to settle claims involving 14 other colleges.
Critics accused the Bush administration of bending the rules to benefit its friends in the for-profit-college sector. At the time, the department’s assistant secretary for postsecondary education was Sally L. Stroup, the former chief Washington lobbyist for the Apollo Group, and its deputy assistant secretary for postsecondary education was Jeffrey R. Andrade, a former consultant to the Career College Association, a lobbying group for for-profit institutions.
“The Bush administration basically stopped paying attention,” said Stephen Burd, editor of the Higher Ed Watch blog at New America Foundation, a public-policy institute. “They gave them the green light to do whatever they wanted.”
False-Claims Lawsuits
In the years since the safe harbors were created, some of the largest for-profit institutions have come under scrutiny by state and federal regulators, and a number of former recruiters have filed lawsuits under the False Claims Act that accuse colleges of improperly compensating recruiters. Major cases are pending against Kaplan University and the University of Phoenix.
False-claims lawsuits allow whistle-blowers to sue on behalf of the government. If the whistle-blowers prevail, they win a share of the money that is returned to the federal government. Lawsuits involving incentive compensation typically seek the return of federal student-aid funds that a college’s students received while it was violating the ban.
So far at least one such suit has been successful. In 2007, Oakland City University, a nonprofit Baptist College in Indiana, agreed to pay $5.3-million to settle a whistle-blower’s complaint that it paid him and other employees commissions and bonuses based on their ability to enroll students. The whistle-blower got $1.4-million of the money; the remainder went to the federal government.
The Phoenix case, which is scheduled to go to trial next March, hinges on the word “solely.” The university argues that it did not base pay raises exclusively on enrollments, and that other, nonenrollment factors were considered. The plaintiffs, two former recruiters for the company, counter that the nonenrollment factors were window dressing designed to mask an illegal-compensation scheme.
The Apollo Group, the University of Phoenix’s parent company, has already paid billions of dollars to settle allegations related to its recruiting operations. In 2004 it agreed to pay the Education Department $9.8-million after a departmental review found that Phoenix rewarded recruiters who put the most “asses in classes” and set up a system “to evade detection of its improper recruiting system.”
The report also described “intimidation techniques” used by recruiting managers on subordinates who were “not meeting the enrollment numbers.” In some cases, poorly performing managers were ordered to work in a glass-enclosed area known as the “red room,” where senior recruiters and managers would hover over them and monitor their calls.
Reviewing the Rules
Education Department officials announced the new rule making in May, saying the agency wanted to take a “fresh look” at several rules because there was a “new sheriff in town.” The news sent stocks of publicly traded, for-profit colleges tumbling, as analysts warned of increased federal oversight. In late May, close to 700 analysts flooded a conference call with department officials, seeking clues into the agency’s agenda.
Since then, the department has taken pains to reassure for-profit colleges and analysts that it is not singling them out for scrutiny, but focusing on “integrity” across all sectors. Still, any changes in the incentive-compensation rules would have the biggest impact on proprietary institutions.
For-profit lobbyists and analysts believe the department will be taking a close look at the “solely” standard —potentially replacing “solely” with a more-restrictive standard, such as “predominantly” —as well as the safe harbor for online recruiting. Online recruiting has become much more sophisticated and much more widespread since 2002, with recruiters now interacting directly with students through social-networking sites like Facebook and Twitter.
Critics of the safe harbors hope the department will eliminate the 12 exemptions altogether, or at least tighten them significantly. They say the Education Department subverted the law and Congressional intent back in 2002, and want the Obama administration to put the teeth back in the rules.
“The statute is almost irrelevant,” said David A. Hawkins, director of public policy and research for the National Association for College Admission Counseling. “We want to make it relevant again.”
But Trace A. Urdan, an education-industry analyst with Signal Hill, an investment firm, says he expects the changes to be “marginal” given the limitations on rule making. As the administrative agency, the department must work within the confines of existing law; only Congress has the authority to change the statute.
“This summer will be very scary for investors, but in the fall, it will end up looking pretty mundane,” he predicted.
Harris N. Miller, president of the Career College Association, says his members are hoping simply for “clarity as to what’s right and wrong.”
“What we don’t want is to be left with ambiguity,” he said.
