Yesterday, the DC District Court issued an opinion in the continuing saga of the U.S. Department of Education’s 2010 Program Integrity regulations.   The case rejected the Department’s rationale (we discussed this preamble previously) for banning graduation/retention rate bonuses and its explanation on the effect the ban on incentive compensation would have on diversity enrollment.   This Court remanded the issue back to the Department to better justify the reasons for the incentive compensation ban prohibiting these bonuses and to better explore the effect of the ban on minority enrollment.

Interestingly, the Court appeared to reject the Department’s view that everything is a proxy for enrollment when it relates to incentive compensation:

The “proxy” argument is advanced by the Department’s lawyers on summary judgment (in response to an invitation from the Circuit, but is not reflected in the Amended Preamble. Moreover, if graduation rates could be used as a proxy for recruitment numbers, graduation rates would need to serve as a nearly identical substitute for enrollment figures.  Nothing in the administrative record suggests the Department performed such an analysis, even after remand. What the Department stated in the Amended Preamble is the common-sense and irrefutable proposition that “compensation for securing program completion requires the student’s enrollment as a necessary preliminary step.” It cannot be gainsaid that enrolling in a postsecondary program—of any kind—precedes completion; in other words, one cannot end what one has not begun.

If accepted, this rationale would allow the Department to ban all incentive-based compensation in higher education, as enrollment is always a necessary predicate to any assessment of program success or student achievement. Congress specified that postsecondary institutions are prohibited from providing commissions, bonuses, or other incentive payments based “directly or indirectly on success in securing enrollments . . . .” 20 U.S.C. § 1094(a)(20) (emphasis added). Had Congress intended to proscribe all incentive-based compensation, it would have expressly done so by enacting a general ban on incentive payments, not limited to enrollments.  The fact that Congress chose to ban only enrollment-based incentives indicates that any regulatory prohibitions must be reasonably tied to enrollment, without permeating the entire postsecondary education process. (Citations omitted).

Also, it seems the Department will have a tough road in convincing that a graduation-based incentive is inconsistent with the Higher Education Act:

The Department’s reference to short-term programs only highlights the analytical deficiencies in its Amended Preamble. The Department does not point to evidence substantiating the prevalence of short-term programs as replacements for full-length education. It does state that “[c]oncern over recruiters guiding students to short-term programs was not as prominent when the safe harbor was adopted in 2002 because the number of such programs was not as widespread then, having grown dramatically in more recent years.” Assuming this statement is based on the Department’s expertise and entitled to deference, it fails to explain why the growth of short-term programs justifies a complete ban on graduation-based compensation for programs of all lengths. If the Department has evidence of particular abuses with short-term programs, it could readily address those concerns by linking graduation-based compensation to program length. But it cannot offer those concerns as a basis for eliminating all graduation-based compensation.  As the D.C. Circuit pointed out, the goal of the HEA is successful graduation.  (Citations omitted).

As for the issue of the effect on minority enrollment, the Court noted that “the Amended Preamble continues to avoid that question.”

As a result, the Court remanded the regulations back to the Department to address the infirmities with its analysis.  In the meantime, given the failure to provide a basis for eliminating the graduation rate safe harbor, that that safe harbor should still be operable.  Moreover, given the lack of a proper record for how the entire rule will impact minority enrollment, it would seem that the 2010 version of the incentive compensation rule is not enforceable.  Obviously, there are risks with maintaining this position – not the least of which would lead to being targeted for program reviews by the Department of Education.  But, this does seem to be the natural implication of the Court’s decision.