oversight

OIG review of H.R. 2637, the "Supporting Academic Freedom through Regulatory Relief Act" – Date Issued: September 09, 2013. PDF (1.51M)

Published by the Department of Education, Office of Inspector General on 2013-09-09.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                        UNITED STATES DEPARTMENT OF EDUCATION
                                          OFFICE OF INSPECTOR GENERAL

                                                                                              THE INSPECTOR GENERAL




September 9, 2013


The Honorable George Miller
Ranking Member
Committee on Education and the Workforce
U.S . House of Representatives
2181 Rayburn House Office Building
Washington, D.C. 20515

Dear Representative Miller:

Thank you for your letter of August 13,2013, requesting that the U.S. Department of Education
(Department) Office of Inspector General (OIG) review H.R. 2637, the "Supporting Academic
Freedom through Regulatory Relief Act." Your letter requested that OIG review the legislation
and, based on our work and ow- review of the Department's justification for the program rules
affected by the legislation, determine whether the legislation would weaken the Department's
ability to effectively: (1) reduce student loan defaults, (2) create controls to root out wasteful
spending or other abuses, (3) protect the consumer interests of student borrowers and grant
recipients, and (4) strengthen the overall accountability of the nation's higher education
programs. Attached you will find the results of our review.

If you have any questions or need additional information, please do not hesitate to contact me
directly at (202) 245-6900, or have a member of your staff contact our Congressional Liaison,
Catherine Grant at (202) 245-7023.

Si11cerely,


(   ,.<1-f-L.        f I y-­
Kathleen S. Tighe
Inspector General


Attachment

cc: The Honorable Jolm Kline, Chairman, Committee on Education and the Workforce,
    U.S. House of Representatives

    The Honorable Gabriella Gomez, Assistant Secretary, Office of Legislation and 

    Congressional Affairs, U.S. Department of Education 




                               400 MARYLAND AVE., S.W.      WASHINGTON, D.C. 20202- 1510

       Our mtssion is to ensure equal access to education and to promote educational excellence throughout the Nation.
           U.S. Department of Education Office of Inspector General 

         Review of H.R. 2637, "Supporting Academic Freedom through 

                            Regulatory Relief Act" 

On August 13, 2013, Representative George Miller, Ranking Member of the Committee on
Education and the Workforce, U.S. House of Representatives, requested that the
U.S. Department of Education (Department) 011ice of Inspector Genera] (OIG) review
H.R. 2637, the "Supporting Academic Freedom through Regulatory Relief Act." Representative
Miller asked OIG to review the legislation and, based on our work and our review of the
Department' s justification for the program rules affected by the legislation, determine whether
the legislation would weaken the Department' s ability to effectively: (1) reduce student loan
defaults, (2) create controls to root out wasteful spending or other abuses, (3) protect the
consumer interests of student borrowers and grant recipients, and (4) strengthen the overall
accountability of the nation's higher education programs. In responding to this request, we relied
on our audit and inspections reports and investigations, our Congressional testimony, and our
review of and comments on the proposed and final program integrity regulations in accordance
with our responsibilities under the Inspector General Act of 1978.

Published in 2010 and 2011, the Department's program integrity regulations went into effect in
July 2011 , and the gainful employment regulations in July 2012. The regulations included
changes that OIG had previously recommended to the Department through our audit, inspection,
and investigative work. As I testified before the U.S. Senate Committee on Health, Education,
Labor, and Pensions in March 2010, we believe the changes embodied in the new regulations­
including changes in the areas of a credit hour definition, gainful employment, State
authorization, and incentive compensation-will improve protections for students and taxpayers.

       Definition of a Credit Hour

       A credit hour is a unit of measure that gives value to the level of instruction, academic
       rigor, and time requirements for a course taken at an educational institution. Although a
       credit hour is a concept widely recognized in academic environments, prior to the 2010
       program integrity regulations, a credit hour had never been defined in either statute or
       regulation. In the program integrity regulations, the Department for the first time
       established such a definition. Section 2(a) ofH.R. 2637 repeals this definition and
       Section 2(c) of the bill prohibits the Secretary of Education from promulgating or
       enforcing any regulation or rule with respect to the definition of the term 'credit hour' for
       any purpose under the Higher Education Act of 1965, as amended (HEA).

       Prior to the changes contained in the program integrity regulations, the general
       assumption had always been that accrediting agencies defined what constituted a credit
       hour and evaluated the assignment of credit hours to particular courses and programs.
       Our work has shown that this general assumption was not valid. Our work in 2002 and
       2003 identified that the two regional accrediting agencies we reviewed did not have
       minimum requirements for the assignment of credit hours. Although the two national
       accrediting agencies we reviewed defined a credit hour, it was a somewhat limited
       definition. As a result of this work, in 2004, we recommended that Congress establish a
         statutory definition of a credit hour in the HEA stating: "For programs that are not
         offered in clock~hours, credit hours are the basis for detennining the amount of aid
         students are eligible for. Absent a definition of a credit hour there are no measures in the
         [HEA] or regulations to ensure comparable funding across different types of educational
         programs." Our recommendation was not included in the HEA reauthorization. Our
         most recent work on credit hours at the three largest regional accrediting agencies from
         2009 and 2010 showed that none of the accrediting agencies defined a credit hour and
         none provided guidance on the minimum requirements for the assignment of credit hours.
         Because the accrediting agencies did not develop their own minimum standards in this
         area, we supported the Department's efforts to develop a definition of a credit hour in the
         program integrity regulations.

         With the explosion of on~ line postsecondary education, increase in accelerated programs,
         and the beginning of direct assessment programs, the value of a credit hour as the basis
         for the amount of Federal student aid (Title IV) a student can receive becomes
         increasingly important. Defining a credit hour protects students and taxpayers from
         inflated credit hours, improper designation of full~time student status, the over-awarding
         of Title IV funds and excessive borrowing by students. Having a definition of a credit
         hour as is contained in the program integrity regulations provides increased assurance
         that a credit hour has the necessary educational content to support the amounts of Federal
         funds that are awarded to participants in the Title IV programs and that students at
         different institutions are treated equitably in the awarding of those funds.

         The definition of a credit hour contained in the regulations does not limit an institution's
         ability to innovate on the delivery of postsecondary education; rather, its emphasis is that
         a full-time student should be academically engaged on a full-time basis as determined by
         the institution. To protect students and ensure that the taxpayers ' investment in education
         provides value, we believe that a definition of a credit hour is needed to provide meaning
         to the law and the regulations.

         Gainful Employment

         The HEA has long required eligible proprietary institutions and postsecondary vocational
         institutions to prepare students for gainful employment. 1 Prior to the final regulations
         published by the Department in June 2011 , there was no statutory or regulatory definition
         of what constituted gainful employment. During the 1998 HEA reauthorization, we
         recommended that Congress amend the statute to require institutions preparing students
         for gainful employment have a 70 percent graduation rate and a 70 percent placement
         rate. This recommendation was not included in the final bill. As such, we supported the
         Department's efforts to define this concept in the program integrity regulations. In those
         regulations, the Department developed a test that focuses on the debt~to-income ratio for
         students in specific programs.



1
 The statute does provide an exception for proprietary schools providing a baccalaureate degree in liberal arts prior
to January l, 2009.

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Section 2(a) ofH.R. 2637 repeals the gainful employment regulation and Section 2(b) of
the bill prohibits the Secretary of Education from promulgating or enforcing any rule or
regulation related to gainful employment until the date of enactment of a law that extends
one or more programs authorized under the HEA.

Although proprietary schools are not the only sector subject to the gainful employment
regulation, they are the largest. That sector has seen rapid growth, increases in loan debt,
and escalating default problems. In 2009, proprietary schools made up about 13 percent
ofthe student population receiving Title IV funding, but represented 47 percent of the
defaulted loans. Students who are not gainfully employed and cannot afford to repay
their loans face very serious challenges. Discharging Federal student loans in bankruptcy
is very rare. The common consequences of default include large fees--collection costs
that can add 25 percent to the outstanding loan balance-and interest charges; struggles
to rent or buy a home, buy a car, or get a job; collection agency actions, including
lawsuits and garnishment of wages; and the loss of tax refunds and even Social Security
benefits. Moreover, borrowers in default are no longer entitled to any deferments or
forbearances and may be ineligible for any additional student aid until they have
reestablished a good payment history. The Department's goal in promulgating these
regulations was to identify the poorest performing programs to ensure that (1) students
who enroll in these programs do not have to face these difficult challenges, because they
are not prepared to secure gainful employment rather than being left with unaffordable
debts and poor employment prospects, and (2) the Federal investment in Title IV is well
spent.

If a program is required to prepare a student for gainful employment in a recognized
occupation, the expectation that the student should have the ability to repay any loans
after completing the program does not seem unreasonable. In the OIG's view, while
there are many ways that the statutory requirement for gainful employment could be
given meaning, without some criteria for what gainful employment is, schools cannot be
held accountable, students can be harmed by not being able to pay loan debt which results
in default, and taxpayers will bear the burden of increasing default rates.

State Authorizations

The HEA requires institutions of higher education to have approval from the States where
they operate to provide postsecondary educational programs. Prior to the 2010 program
integrity rule change to the State authorization requirement, the regulations did not define
the existing statutory requirement that an institution of higher education had to be legally
authorized in a State. As such, an institution of higher education could be considered
authorized by the State simply by obtaining a business license. The State did not need to
recognize that the institution was providing educational services. State oversight through
an institution of higher education having to obtain approval to offer postsecondary
education and by State regulatory agency ongoing activities plays an important role in
protecting students, although there may be a lot of variation in how those responsibilities
are exercised. As the Department has noted, one indicator of the importance of State
oversight has been seen in the movement of substandard institutions and diploma mills


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         from State to State in response to changing State requirements. Providing a definition to
         the State authorization requirement is also critical considering the explosion of on-line
         education to assure legal authorization is obtained by an institution from each State where
         its education services are provided to students.

         Although OIG has not issued an audit specifically on State authorization of educational
         institutions, we did issue a report in September 2000 on management controls for on-line
         education at State agencies and accrediting agencies. The report discussed several
         accountability recommendations that State agencies themselves had made for Federal
         action that would enhance licensing/approval and accreditation procedures in order to
         better protect students and ensure the quality of programs and courses that arc offered
         primarily through on-line education. State agencies' recommendations included a call for
         States to strengthen on-line education Jaws, and asked the Federal Government to issue
         regulations for institutions offering programs using on-line education methods when the
         institution operates in a State that does not provide sufficient regulation of educational
         programs. 2

         The Department's coverage of State authorization in the program integrity regulations did
         not go as far as a number of recommendations made by States and discussed in our 2000
         report. The 2010 program integrity regulations require that the State authorization
         specifically recognize institutions as providing education beyond the secondary level
         rather than just requiring a business license. They also require that States identify where
         students may go with complaints about an institution, although it did not require the
         creation of any new complaint mechanism. The final requirement is that an institution
         needs to be in compliance with the State laws where it is providing postsecondary
         education to be eligible to participate in the Title IV programs.3 This is not a new
         requirement, but one with which some institutions were not complying.

         Section 2(a) ofii.R. 2637 repeals the State authorization regulation and Section 2(b) of
         the bill prohibits the Secretary ofEdueation from promulgating or enforcing any rule or
         regulation related to State authorization until the date of enactment of a law that extends
         one or more programs authorized under the HEA.

        In the OIG 's view, the States' oversight role over institutions of higher education, as
        exercised through the State authorization process, is as important as the role of the other
        two members of the program integrity triad-the Department and the accrediting
        agencies. Requiring the States to recognize that an institution is providing postsecondary
        education rather than only requiring a business license, providing a mechanism for
        students to report fraud and abuse, and expecting postsecondary institutions to comply
        with the laws ofthe States in which they operate serve only to strengthen this important
        State role.

2
 Audit Report ED-OIG/A0990030, page 20
3
 0n July 12, 2011 , the U.S. District Court for the District of Columbia struck down this provision on the grounds
that the Department did not provide adequate opportunity in the Negotiated Rulemaking Process for institutions to
comment on this provision. Institutions, however, still have the obligation to comply with State laws as it is a
condition for Title IV eligibility.

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         Incentive Compensation

         Prior to 1992, the HEA contained a prohibition on the use of incentive compensation
         based on success in securing enrollments or financial aid in the program eligibility
         section for the Federal Family Education Loan program. In the 1992 amendments to the
         HEA, Congress expanded the prohibition to all Title IV programs and placed it under the
         Program Participation Agreement section of the 1-IEA. The prohibition was designed to
         protect students from the high pressure tactics used by recruiters to enroll students in
         programs for which they may not have been prepared or did not want. The students were
         saddled with unwanted debt, at increased cost to the taxpayers. In 2002, the Department
         modified the regulations prohibiting incentive compensation to add 12 safe harbors for
         institutions. By 201 0, when the Department proposed the removal of the 12 safe harbors
         through the program integrity regulations, the Department had recognized that the same
         bad behaviors that the ban on incentive compensation was meant to prevent were
         occurring and protected under the safe harbors.

         In March 201 1, the Department issued guidance that permitted Title IV revenue sharing
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         with entities providing student recruiting along with other services, although this
         practice had been one of the safe harbors eliminated by the program integrity regulations
         scheduled to take effect on July 1, 2011. Section 3 ofH.R. 2637 would codify such
         revenue sharing; it would also permit additional payments to recruiters as long as such
         payments were not "solely" for student recruitment services.

         The OIG objected to the Depmtment's March 2011 guidance as contrary to the HEA's
         ban on incen6ve compensation5 and objected to the revenue sharing safe harbor when the
         Department first proposed it in 2002 as contrary to the IIEA. 6 H.R. 2637 would for the
         first time create Congressional exceptions to the ban on incentive compensation.

         In proposing the elimination of the safe harbors in the program integrity regulations, the
         Department stated that "safe harbors do substantially more harm than good."7 It also
         noted that in its experience "unscrupulous actors routinely rely upon [the] safe harbors to
         circumvent the intent of [Congress's ban on incentive compensation]." In connection
         with the former safe harbor that permitted compensation schemes that were not "solely"
         based on the number enrolled, the Department noted that the need to "look behind"
         documents that ostensibly indicated compliance required "enormous amounts of
         resources, and has resulted in an inability to adequately determine whether institutions
         are in compliance with the incentive compensation ban in many cases."8 We similarly
         have observed this problem in conducting our oversight work. For exan1ple, our audit of
         Ashford University issued in January 20 ll , we found that the University had designed a
         compensation plan for enrollment advisors that provided incentive payments based on

4
  Dear Colleague Letter GEN- I 1-05, March 17, 20 II
5
  Semiannual Report to Congress, No. 45, page 9
6
  Semiannual Report to Congress. No. 62, page II
7
  75 Fed. Reg. 34818 (June 18, 20 I0)
8
  75 Fed . Reg. 66872-3 (Oct. 29, 200 I0)

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success in securing enrollment. Although changes to salaries were made only every 6
months, the University provided managers with discretion to adjust salaries within each
of the salary ranges and did not document on what basis it adjusted salaries. The
University could not demonstrate that its enrollment advisors' salary adjustments were
not based solely on success in securing enrollment. Therefore, we could not determine
whether the University's compensation plan and practices qualified for the safe harbor for
salary adjustments.

The statutory ban on all commission, bonus, or other incentive payments to employees of
the institution or outside entities that recruit or provide admissions activities still serves
an important purpose in protecting students and taxpayers from improper and misleading
recruiting and admissions efforts. We continue to investigate allegations of
misrepresentation and improper incentive payments. In August 2011, the U.S.
Department of .Justice intervened in a Qui Tam whistlcblower law suit against Education
Management Corporation (EDMC) concerning alleged violations of the incentive
compensation ban. In announcing the suit, the Justice Department stated that "[w]orking
with the Department of Education, we will protect both students and taxpayers from
arrangements that emphasize profits over education." In its press release, the Justice
Department explained that the "action against EDMC seeks to recover a portion of the
$11 billion in Federal student aid which EDMC allegedly obtained through false
statements and which enriched the company, its shareholders and executives at the
expense of innocent individuals seeking a quality education."

We are concerned that the change in the statute (as well as the Department's March 2011
guidance) may encourage institutions of higher education to simply outsource recruiting
and admissions activities and pay incentives based solely on success in securing
enrollments. It is unrealistic to expect that, if an entity is paid a commission, bonus, or
other incentive for recruiting or admissions activities based on its success in securing
enrollment, its recruiters or admissions personnel will not also be subject to pressures or
incentives to improperly recruit and admit students, thereby placing students at risk of the
same recruiting practices that Congress sought to prevent in 1992. Under the previous
safe harbor allowing institutions to make additional payments to recruiters and
admissions personnel that were not based solely on success in securing enrollments, we
identified convoluted compensation schemes that appeared on the surface to comply with
the safe harbor when they did not. The aggressive sales tactics that result from incentive
compensation have a history of harm to students through defaulting on their loans and
taxpayers through absorbing the cost of default. In the OIG's view, the ban on incentive
compensation should not be weakened.




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