On June 2, 2015, the U.S. Department of Education issued new guidance announcing its intent to aggressively enforce a provision of Title IV of the Higher Education Act (the “HEA”) that prohibits the payment of incentive compensation to certain college and university employees. The provision bars institutions that receive Title IV federal financial aid (such as grants, loans, and work study) from providing bonuses or other monetary awards for success in securing enrollments or financial aid to any person engaged in student recruiting or the awarding of student financial aid.

The Department has always maintained it has the power to punish colleges and universities that violate the incentive compensation ban by recovering the Department’s financial losses, imposing fines, and taking action to limit or exclude an institution from participating in the Title IV program. However, in a memo released in 2002, the Department took the position that it did not suffer monetary loss on account of an institution’s violation of the incentive compensation ban because an institution’s violation did not affect a student’s eligibility to receive Title IV funds. Thus, the Department did not seek to recoup Title IV funds paid out on account of improperly recruited students when an institution violated the incentive compensation ban.

In the new 2015 guidance, however, the Department reversed the 2002 guidance, stating now that it does suffer financial loss on account of an incentive compensation violation. The new guidance reasons that Congress intended colleges and universities to receive Title IV funds only when they abide by all of the Department’s Title IV regulations, including the incentive compensation ban. Therefore, notes the guidance, an institution that violates the incentive compensation ban has received Title IV funds it shouldn’t have, resulting in a financial loss to the Department.

The effect of the Department’s change in position is that the Department will now (in addition to imposing fines and limitations on Title IV participation) seek to recover all Title IV funds related to a violation of the incentive compensation ban. In the Department’s words, it will seek to recover all “Title IV funds received by the institution over a particular time period if those funds were obtained through implementation of a policy or practice in which students were recruited in violation of the incentive compensation prohibition.”

What this means to you

Under the 2015 guidance, the Department intends to impose harsh penalties for violations of the incentive compensation ban. If a college or university pays improper incentive compensation to admissions or financial aid employees, the Department will force the institution to pay back all Title IV funds associated with each improperly recruited student. This could result in colleges and universities having to pay back substantial funds to the Department. To minimize the risk of such an outcome, colleges and universities should audit their compensation practices to identify any potential violations of the incentive compensation ban, ensure that relevant employees are properly trained on the contours of the ban, and consult with legal counsel to design compensation practices that are fully compliant going forward.