Can Colleges Compensate Recruiters Based On Graduation Rates?

As we've noted before, our higher education practice regularly receives inquiries related to incentive compensation plans for recruiters. Late last year, following a series of rulemakings, lawsuits, and court decisions, the Department finally revised its position regarding whether institutions of higher education may pay recruiters completion-based or graduation-based compensation.* We've received enough inquiries on this topic that we thought we would address it here in REGucation. As is always the case with incentive compensation matters, the guidance is murky, and institutions should proceed with caution.

Rulemakings and remands

The Department's regulations addressing incentive compensation, located at 34 C.F.R. 668.14(22)(i), require that as a condition of participation in the federal financial aid programs, an institution must agree:

It will not provide any commission, bonus, or other incentive payment based directly or indirectly upon success in securing enrollments or financial aid to any person or entity engaged in any student recruiting or admission activities or in making decisions regarding the awarding of title IV, HEA program funds....

Effective July 1, 2011, the incentive compensation regulations were revised significantly as part of a "Program Integrity" rulemaking. Among other things, the Department eliminated a safe-harbor in the law that had permitted institutions to compensate admissions personnel based upon "a student's successfully completing his or her educational program or one academic year of his or her educational program, whichever is shorter." 34 C.F.R. 668.14(22)(ii)(E)(2009). In the preamble to the final regulations (the "2010 Preamble"), the Department offered the following comments, in relevant part, concerning the decision to remove this safe harbor provision:

"The Department believes that an institution's resolute and ongoing goal should be for its students to complete their educational programs. Employees should not be rewarded beyond their standard salary or wages for their contributions to this fundamental duty.

...

"In addition, there is nothing about the making of incentivized payments to recruiters based upon student retention that enhances the quality of a student's educational experience. If the program of instruction has value and is appropriate for a student's needs, a student will likely enjoy a positive educational experience regardless of the manner in which the student's recruiter is compensated.

"Finally, the Department's experience has shown that some institutions pay incentive compensation to recruiters based upon claims that the students who the recruiter enrolled graduated and received jobs in their fields of study. Yet, included among the abuses the Department has seen, for example, is a circumstance where a student's field of study was culinary arts, and the so called employed student was working an entry-level position in the fast food industry. Such a position did not require the student to purchase a higher education ''credential.'' As a result, we believe that paying bonuses to recruiters based upon retention, completion...