On 29 October 2010, the U.S. Department of Education (ED) published two sets of final regulations that address a number of important matters for institutions that participate in student financial aid programs under Title IV of the Higher Education Act, as amended (HEA). 75 Fed. Reg. 66832 (2010); 75 Fed. Reg. 66665 (2010). The new rules address program integrity in five areas: institutional eligibility, recruiting and admissions, program eligibility, student eligibility and aid determinations, and aid disbursements and refunds. One set of final rules was first announced in a Notice of Proposed Rulemaking (18 June NPRM) issued on 18 June, and will become effective on 1 July 2011.1 The other set of final rules -- which addresses only new approval requirements for programs that lead to gainful employment in a recognized occupation -- was first announced in an NPRM issued on 26 July 2010 (26 July NPRM) and will also become effective on 1 July 2011. ED expects to issue a second round of gainful employment regulations in early 2011, to become effective 1 July 2012. This Education Investors Alert highlights selected aspects of the final regulations of interest to for-profit postsecondary education institutions and investors in that sector.

  1.  Institutional eligibility

State authorization. Currently, in order to be eligible to participate in Title IV programs, an institution must be "legally authorized" to provide an educational program beyond secondary education in the state in which the institution is physically located. Some states allow postsecondary educational institutions to offer educational programs under authorization to operate a business or charitable organization, without requiring separate approval by a state education licensure agency.

Under the final rule, in order to meet the "legally authorized" requirement, state authorization must satisfy new criteria:

  • States must have a process to review and take appropriate action on complaints concerning postsecondary educational institutions, including enforcing applicable state laws (but need not, as under the 18 June NPRM, have a process to take adverse action against institutions).
  • An institution in such a state meets the "legally authorized" requirement if the institution is established as an educational institution by charter, statute, constitutional provision, or other action issued by an appropriate state agency or state entity that identifies the institution by name and affirms or conveys to the institution the authority to operate educational programs beyond secondary education, including programs leading to a degree or certificate.
  • Such institutions may be exempted from state regulations based on accreditation by an accrediting agency recognized by ED or operation for at least 20 years.
  • An institution in such a state meets the "legally authorized" requirement if it is authorized to conduct business or operate as a nonprofit charitable organization and is authorized, by name, to offer postsecondary education.
  • Such institutions may not be exempted from state regulations.
  • If an institution offers postsecondary distance or correspondence education to students in a state in which the institution is not physically located or otherwise subject to state jurisdiction, the institution must meet any state requirements for the institution to be legally offering postsecondary or distance education in that state. Institutions must be able to document state approval for distance education if requested by ED.

The new regulations will require some states to enact or amend state laws in order to conform to federal requirements and enable institutions in the state to continue to participate in Title IV programs. The preamble indicates that institutions unable to obtain the necessary state authorization by 1 July 2011, may request a one-year extension from ED (and if necessary, a second one-year extension), but must submit an explanation from the state as to how the extension will permit the state to comply with the state authorization requirements of the final rule.

The new regulations do not apply to institutions that are authorized to offer postsecondary education by the federal government, are authorized to offer postsecondary education by certain Indian tribes, or are exempt from state authorization as a religious institution (as defined in the final rule) under the relevant state constitution or state law.

  1. Recruiting and admissions

Incentive compensation. The HEA generally prohibits institutions from providing any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any person or entity engaged in student recruiting or admissions activities or in making decisions regarding the award of student financial assistance. The HEA exempts recruitment of foreign students residing in foreign countries who are not eligible for Title IV assistance.

The final rule adopts the strict reading of the incentive payment provision proposed in the 18 June NPRM and abolishes the 12 safe harbors that ED established in 2002 to define circumstances under which an institution would not run afoul of the incentive payment prohibition. The repeal of the safe harbors does not affect the statutory exemption for recruitment of foreign students.

In the preamble, ED advised that "going forward, actions that were permitted . . . will neither be automatically prohibited, nor automatically permitted. Instead, institutions will need to re-examine their practices to ensure that they comply with" the incentive payment provision. The preamble suggests (but does not require) that institutions consider two questions concerning any payment or compensation: "(1) Whether it is a commission, bonus, or other incentive payment, defined as an award of a sum of money or something of value paid to or given to a person or entity for services rendered; and (2) Whether the commission, bonus, or other incentive payment is provided to any person based directly or indirectly upon success in securing enrollments or the award of financial aid, which are defined as activities engaged in for the purpose of the admission or matriculation of students for any period of time or the award of financial aid." According to ED, a "Yes" answer to both questions would result in a violation of the incentive payment prohibition. The HEA and the final rule also contain a third element – whether the person or entity to whom an incentive payment is made is "engaged in any student recruitment or admission activity, or in making decisions regarding the award of title IV, HEA program funds."

Important differences between the proposed rules and the final rules include the following:

  • The final regulations prohibit payments based "in any part, directly or indirectly, upon success in securing enrollments or the award of financial aid." (Emphasis added). The modification is intended to clarify that no part of a covered employee's salary may be based on success in securing enrollments or financial aid.
  • According to ED, the final regulations apply to "all employees at an institution who are engaged in any student recruitment or admission activity or in making decisions regarding the award of title IV, HEA program funds." The preamble clarifies that the final regulations may apply to, among others, college presidents. The preamble also suggests, however, that a president's "mere attendance at an open house or speaking with prospective students about the value of a college education or the virtues of attending a particular institution" would not rise to the level of "student recruitment or admission activity."

The new rules permit eligible institutions, contractors to eligible institutions, and other entities to make –

  • "merit-based adjustments to employee compensation provided that such adjustments are not based in any part, directly or indirectly, upon success in securing enrollments or the award of financial aid" and
  • "profit-sharing payments" as long as the payments "are not provided to any person engaged in student recruitment or admission activities or in making decisions regarding the award of title IV, HEA program funds."  

The preamble to the final rule gives limited guidance concerning the legality of specific arrangements. For example:

  • "[I]n some instances compensation to recruiters who arrange contracts between an institution and an employer, where the employer pays the tuition and fees for its employees, would be permissible under the ban on incentive compensation."
  • "[P]aying bonuses to recruiters based upon retention, completion, graduation, or placement remain in violation of the HEA's prohibition on incentive compensation."
  • "The HEA does not prohibit advertising and marketing activities by a third party, as long as payment to the third party is based on those who 'click' and is not based in any part, directly or indirectly, on the number of individuals who enroll or are awarded financial aid."
  • "[A]rrangements under which an institution is billed based on the number of student files that are processed (e.g., a volume-driven arrangement) are not automatically precluded, provided that payment is not based in any part, directly or indirectly, on success in securing student enrollments or the award of financial aid."
  • "As long as an institution complies with [the incentive payment rule], it may be appropriate for an institution to have salary scales that reflect an added amount of responsibility."

In addition, ED stated that it "does not intend to provide private guidance regarding particular compensation structures," but may provide clarifications in an ED publication such as the Federal Student Aid Handbook or a Dear Colleague Letter.

Misrepresentation. The HEA and ED regulations currently empower ED to take adverse action against an institution that participates in the Title IV programs for "any substantial misrepresentation made by that institution regarding the nature of its educational program, its financial charges or the employability of its graduates." The new regulations strengthen ED's regulatory enforcement authority against institutions that engage in substantial misrepresentation and expand the definition of "misrepresentation."

Whereas current law focuses on misrepresentations by institutions themselves, the final rules provide that an institution that participates in the Title IV programs ("Title IV institution")2 is deemed to have engaged in substantial misrepresentation when the Title IV institution itself, one of its representatives, or any non-Title IV institution, organization, or person with which the Title IV institution has an agreement, makes a substantial misrepresentation about the Title IV institution's educational programs, financial charges, or the employability of its graduates. Unlike the proposed rules, however, the final rules specify that non-Title IV institutions, organizations, or persons are within the scope of the definition only when the Title IV institution's agreement with them is an agreement "to provide educational programs, marketing, advertising, recruiting, or admissions services." The final rules do not cover statements made by students through social media outlets or statements made by entities that have agreements with the Title IV institution to provide other kinds of services.

The final rules also clarify the definition of "misrepresentation" and expand the parties to whom a substantial misrepresentation cannot be made. Current law focuses on misrepresentations to students, prospective students, enrolled and prospective students' families, and the U.S. Secretary of Education (Secretary). Under the final rule misrepresentations include "[a]ny false, erroneous or misleading statement an eligible institution or any [non-Title IV] institution, organization, or person with whom the eligible institution has an agreement to provide educational programs, or to provide marketing, advertising, recruiting or admissions services makes directly or indirectly to a student, prospective student or any member of the public, or to an accrediting agency, to a State agency, or to the Secretary." (Emphasis added.) A "misleading statement" is "any statement that has the likelihood or tendency to deceive or confuse." The definition of "substantial misrepresentation" is generally consistent with current regulations.

The new regulations also expand the prohibition on substantial misrepresentation to include additional substantive areas, which differ only slightly from the proposed rules. Examples of these new substantive areas include:

  • statements about programmatic and specialized accreditation;
  • statements about conditions under which the Title IV institution will accept transfer credits earned at another institution;
  • statements about whether successful completion of a course of instruction qualifies a student to receive a local, state, or federal license or non-governmental certification required as a precondition for employment, or to perform certain functions in the states in which the educational program is offered; and
  • statements regarding the cost of the program and the Title IV institution's refund policy if the student does not complete the program.

The final regulations augment the actions that ED may take if it determines that a Title IV institution has engaged in substantial misrepresentation. Specifically, under the final regulations, ED may revoke a Title IV institution's program participation agreement, impose limitations on a Title IV institution's participation in the Title IV programs, deny participation applications made on behalf of the Title IV institution, or initiate a proceeding against the Title IV institution to fine the Title IV institution or to limit, suspend or terminate the Title IV institution's participation in the Title IV programs.  

High School Diploma. Students must have a high school diploma or its recognized equivalent in order to be eligible for Title IV aid. The proposed regulations required institutions to develop and follow procedures for evaluating the validity of a student's high school completion "if the institution or the Secretary has reason to believe that the diploma is not valid or was not obtained from an entity that provides secondary school education." ED adopted the proposed regulations without change. The 2011-12 Free Application for Student Financial Aid will instruct students who indicate that they will have a high school diploma when they begin college in 2011-12 to provide the name, city, and state of the high school from which they received or will receive the diploma. Responding to public comments, ED declined to create a list of "fraudulent or 'bad' high schools" or to provide for a process by which a student may appeal an institution's determination that his or her diploma was invalid. ED promised to provide additional guidance on the implementation of this rule as necessary in Dear Colleague Letters, electronic announcements, and the Federal Student Aid Handbook.

  1. Program eligibility

Gainful employment. In order to be eligible for Title IV funds, a program at a proprietary institution must provide training that prepares students for gainful employment in a recognized occupation.3 Neither the HEA nor current ED regulations define the term "gainful employment."

In the 18 June NPRM, ED proposed reporting and disclosure requirements related to gainful employment. In the 26 July NPRM, ED proposed rules that would define gainful employment in accordance with certain debt-to-income ratios and a repayment rate as well as rules that would require institutions to obtain prior approval from ED for new programs that lead to gainful employment in a recognized occupation. ED plans to finalize the rules regarding gainful employment metrics in early 2011, with an effective date of 1 July 2012. The 29 October final regulations address disclosure and reporting requirements and prior notice and approval requirements related to new programs that lead to gainful employment.

Reporting Requirements. Each year (as described below), an institution must submit to ED certain information relating to gainful employment. Whereas the proposed regulation required reporting of certain information related only to each program completer, the final regulations require reporting of certain information related to each enrolled student, augment the list of student-specific information that must be reported and require reporting of certain program information. The information that must be reported is:

  • For each student enrolled in a program that leads to gainful employment:
  • identifying information about each student enrolled in the program;
  • if the student began the program during the award year, the ED Classification of Instructional Program (CIP) code of that program;
  • if the student completed the program during the award year, the name and CIP code of that program; the date the student completed the program; the amount the student received from private educational loans and institutional financing plans; and, unlike the proposed rule, information on whether the student matriculated to a higher credentialed program at the institution or transferred to a higher credentialed program at another institution.
  • For each applicable program, by name and CIP code, the total number of students enrolled in the program at the end of each award year and identifying information about each student.

Unlike the proposed rule, the final rule requires institutions to report to ED no later than 1 October 2011, the information described above for the 2006-07 through 2009-10 award years. In addition, if an institution is unable to supply all or some required information, it must provide an explanation to ED.

Disclosure Requirements. An institution must provide prominently on certain pages of its website and in its promotional materials the following information for each program that leads to gainful employment:

  • the occupations that the program prepares students to enter;
  • the on-time graduation rate for students completing the program (calculated using a new formula introduced in the final rule that compares the number of students who completed the program within "normal time" to the total number of students who completed the program during the most recently completed award year);
  • the cost of the program, including tuition and fees, books and supplies, and room and board;
  • the median loan debt incurred by students who completed the program as provided by the Secretary (disaggregating (1) median loan debt from federal loans and (2) median loan debt from private education loans and institutional financing plans); and
  • the placement rate for students completing the program. Unlike the proposed rules, the final rules provide that this rate will be determined under a methodology to be developed by the National Center for Education Statistics (NCES). Until that method is developed, an institution must report its placement rate only if its accreditor or state authorizing agency requires it to calculate such a rate.

ED plans to develop a disclosure form that institutions will be required to use when the form becomes available. ED will seek public comment on the form. The public will also have an opportunity to comment on NCES's proposals regarding placement rates.

New Programs. The final rules establish a process for new program approval for Title IV purposes that differs substantially from the proposed rules. However, the new process is intended to serve as a placeholder until ED promulgates gainful employment measures and develops a process that tailors approval requirements to a program's performance with respect to such measures.

Under the final rules, an institution must notify ED at least 90 days before the first day of classes when it intends to add a new educational program that prepares students for gainful employment in a recognized occupation. The notice must, at a minimum, include the following information:

  • how the institution determined the need for the program and how the program is designed to meet market needs;
  • how the program was reviewed or approved by a business advisory committee, program integrity board, and/or businesses likely to employ graduates;
  • documentation that the program has been approved by the institution's accreditor; and
  • the date of the first day of class of the new program.

Unlike the proposed rule, the final rule does not require institutions to provide ED with employer affirmations or enrollment projections. However, the preamble suggests that such requirements may be part of the final regulations regarding gainful employment measures.

After notification, the institution may proceed to offer the new program unless ED identifies a concern or need for additional information and alerts the institution, at least 30 days before the start of classes, that approval is required. In deciding whether to seek additional information, ED will consider the following aspects of the institution's submission. When deciding whether to deny a new program for Title IV purposes, ED will consider the last three bullets.

  • the institution's demonstrated financial responsibility and financial capability;
  • whether the new program is one of several new programs that will replace similar programs currently provided by the institution;
  • whether the number of new programs is inconsistent with the institution's historic program offerings, growth, and operations; and
  • whether the institution's process and decision to add the new program were sufficient.

Definition of credit hour. HEA implementing regulations require that, to be recognized by ED, an accreditor must have standards to evaluate an institution's or program's "measures of program length and the objectives of the degrees or credentials offered." ED currently relies on accrediting agencies to make judgments about program length and the amount of credit granted for course work. The credit hour is used for Title IV purposes to define an eligible program and an academic year as well as to determine enrollment status and the amount of Title IV aid that an institution may disburse per payment period. Current regulations do not define "credit hour."

In response to perceived deficiencies in some accreditors' policies and procedures, ED's final regulations define "credit hour" as an "institutionally established equivalency that reasonably approximates not less than" either:

  • "[o]ne hour of classroom or direct faculty instruction and a minimum of two hours of out of class student work each week for approximately fifteen weeks for one semester or trimester hour of credit, or ten to twelve weeks for one quarter hour of credit, or the equivalent amount of work over a different amount of time"; or
  • an equivalent amount of work, established by the institution, for other academic activities, including "laboratory work, internships, practica, studio work, and other academic work leading to the award of credit hours."

The preamble to the final regulations emphasizes that new credit-hour requirements are intended to give institutions "responsibility to determine the appropriate credit hours or equivalencies" within the parameters set forth above. In addition, the preamble clarifies that the definition of "credit hour" is used only "in determining eligibility for, and the amount of, federal program funds that a student or institution may receive." In awarding academic credit, "[a]n institution will be able to continue using the long-standing credit-assignment practices that it has found to be most effective for determining credit hours or equivalent measures . . . so long as it either ensures conformity, or uses a different measure, for determining credit hours for Federal purposes."

The final regulations also require institutional accreditors to review the reliability and accuracy of an institution's credit-hour assignment, including through review of an institution's policies and procedures for credit-hour assignment and application of those policies and procedures. An accreditor must take appropriate actions to address an institution's credit hour deficiencies, and it must notify the Secretary if it finds systemic noncompliance or significant noncompliance in one or more programs.

Written arrangements between institutions. The final rules make no changes to ED's proposed rules on written arrangements that involve a Title IV or non-Title IV institution providing a portion of a Title IV institution's educational program. The final rules amend existing regulations on written arrangements to provide that the Title IV institution that grants the degree or certificate must provide more than 50 percent of the educational program where the arrangement is between two or more Title IV institutions that are owned or controlled by the same individual, partnership, or corporation.

The final rules also expand the circumstances under which a Title IV institution may not enter into an arrangement with a non-Title IV institution under which the non-Title IV institution provides part of the educational program to students enrolled at the Title IV institution. Those circumstances generally relate to the non-Title IV institution's compliance record with ED, if any. Under the final rules, ED also requires a Title IV institution that enters into a written agreement with another Title IV or non-Title IV institution to provide to current and prospective students the following information about the agreement:

  • the portion of the educational program the institution granting the degree or certificate is not providing;
  • the name and location of the other institutions or organizations providing the portion of the program not offered by the institution granting the degree or certificate;
  • the method of delivery of the portion not offered by the institution granting the degree or certificate; and
  • the estimated additional cost to the student of enrolling in a program provided under the arrangement.
  1.  Student eligibility and aid determinations

Ability to Benefit. The final rules make no changes to ED's proposed rules concerning a student's eligibility for Title IV aid based on the student's ability to benefit from the education or training offered. The regulations expand student eligibility for Title IV funds to include students who "ha[ve] been determined by the institution to have the ability to benefit from the education or training offered by the institution based on the satisfactory completion of 6 semester hours, 6 trimester hours, 6 quarter hours, or 225 clock hours that are applicable toward a degree or certificate offered by the institution."

Retaking coursework. The new rules adjust the definition of a "full-time student" to allow repeated coursework to count toward a student's full-time enrollment status in term-based programs in certain circumstances. The final rules added several caveats that were not in the proposed rules. Under the final rules, a student is eligible to receive Title IV aid for only one repetition of a previously passed course, and a student may not receive Title IV aid for retaking previously passed courses if the student is required to retake those courses because the student failed a different course in a prior term.

Satisfactory Academic Progress. The final rules make a number of changes in the requirement that students make "satisfactory academic progress" (SAP) in order to maintain Title IV eligibility. Among other changes, the final rules provide that an institution must evaluate SAP (1) at the end of each payment period if the length of the educational program is one academic year or less or (2) for all other educational programs, at the end of each payment period or at least annually to correspond to the end of a payment period. This change responded to comments indicating that the proposed regulations "[would] not work well for nonterm and nonstandard term programs" whose students complete payment periods at various points during the year.

Verification. ED also made several revisions to the process for verifying student aid application information.

  1.  Aid disbursement and refunds

Timeliness and method of disbursement. As provided in the 18 June NPRM, the final regulations require institutions to provide means for Pell Grant-eligible students to acquire necessary books and supplies by the seventh day of the payment period if, ten days before the beginning of the payment period, the student meets all disbursement requirements and the student would have a Title IV credit balance had the funds been disbursed. Unlike the proposed regulations, the final regulations (1) require that institutions have a policy under which a Pell-eligible student may opt out of the way the institution provides for the student to acquire books and supplies and (2) permit institutions to credit funds for books and supplies to a student's account without receiving written authorization from the student.

Return of Title IV funds – term-based module program. Institutions must return Title IV funds in certain circumstances when a student withdraws. In a change from prior ED guidance, the final regulations generally treat as withdrawn a student in a module program (with "module" defined as a course or courses that do not span the entire length of the payment period or period of enrollment) if the student does not complete all days or clock hours and weeks of instructional time in the enrollment or payment period that the student was scheduled to complete prior to withdrawing. For nonstandard-term and nonterm programs, the final rule generally treats a student as withdrawn if the student is not scheduled to begin another course within the payment period or period of enrollment for more than 45 calendar days after the end of the module that the student ceased attending. The preamble to the final regulations addresses certain scenarios and contains questions and answers intended to guide institutions in determining whether a student has withdrawn from a module program.

Return of Title IV funds institutions taking attendance. Currently, if a student ceases attendance without providing official notification of withdrawal, institutions that are not required by a third party to take attendance may use the midpoint of the payment period or period of enrollment as the student's withdrawal date for purposes of returning unearned Title IV funds to ED or the lender. Under the final regulations, if an institution requires faculty to take attendance, the institution must use attendance records to determine the student's withdrawal date for purposes of returning unearned Title IV funds. The preamble to the final regulations clarifies that an institution need not use the student's actual withdrawal date simply because a faculty member chooses to take attendance in a particular course; the institution or a third party must require it.

The final regulations also provide examples of the types of activities that constitute academic attendance for Title IV purposes, including:

  • Physically attending class where there is opportunity for direct interaction between the instructor and students
  • Submitting an academic assignment
  • Taking an exam, interactive tutorial, or computer-assisted instruction
  • Attending a study group assigned by the institution
  • Participating in an online discussion about academic matters
  • Initiating contact with a faculty member to ask a question about an academic subject studied in the course

The final regulations remove academic counseling or advising from the definition of academic attendance. Other activities that do not qualify as academic attendance include:

  • Living in institutional housing
  • Participating in the institution's meal plan
  • Logging into an online class without active participation