The U.S. Department of Education has reversed its eight-year-old position on incentive compensation plans for student recruiters at colleges and universities receiving federal financial aid.

Federal law prohibits compensating student recruiters based on their success in securing enrollments or financial aid. The concern is that overly aggressive recruiters would encourage students to enroll in programs for which they were not qualified or to take out federal loans which they could not afford. On the other hand, colleges and universities emphasize their need to promote and reward effective recruiting practices. Attempting to balance these concerns, the Department identified 12 “safe harbors” that would not run afoul of the statutory prohibition. These safe harbors involve circumstances where, in the Department’s view, the threat of abuse is low. Included among the safe harbors are incentive compensation plans keyed to program completion, profit-sharing, limited adjustments to fixed salaries and certain employer-sponsored education programs. Many colleges and universities took advantage of one or more of these safe harbors and adopted new recruiter compensation plans in reliance on them. Those plans are now at risk.

Reacting to reports of abusive practices by student recruiters, the Department has issued new regulations abolishing all 12 safe harbors. As written, the new regulations do not recognize any de minimus or other exceptions to the statutory prohibition on incentive compensation based on success in securing student enrollment or financial aid. These new regulations take effect July 1, 2011.

Colleges and universities are well advised to review their student recruiter compensation plans and consult with legal counsel to confirm compliance with the Department’s new regulations.