This provision forbids institutions that receive federal student financial aid funds from paying incentive compensation for student recruitment services. The FCA has been an effective enforcement tool in this arena because institutions must certify that they are complying with the incentive payment ban when they participate in the federal student financial aid programs. If an institution is later found to have been making prohibited incentive payments to persons or entities for student recruitment, then the government – or a relator suing on its behalf – may claim the funds were obtained by falsely certifying compliance.
As we discuss further below, the regulatory landscape concerning the incentive payment ban has changed over the years, as various “safe harbors” have come and gone. One such safe harbor, the so-called “bundled services” exception, still exists in the form of sub-regulatory guidance, and has contributed to the growth of online program management companies (OPMs). When higher education institutions decide to establish online programs, they often engage OPMs to handle technology development and support, marketing, and recruitment and enrollment services, among other things.1 Relying on the “bundled services” exception, institutions often pay OPMs a share of tuition derived from the online programs.
Recently, some members of Congress have raised questions regarding the legal defensibility of the “bundled services” exception, and a recent FCA case suggests DOJ might not consider it a valid defense in an FCA suit.
Title IV of the Higher Education Act of 1965 (HEA) authorizes the student financial aid programs (Title IV Programs) to provide financial assistance to students in higher education.2 In the late 1980s and early 1990s, there were reports of abuse by for-profit colleges that participated in the Title IV Programs, “ranging from the enrollment of prisoners to the falsification of records and signing up of nonexistent students to pad enrollments.”3 In 1991, a Senate investigation found that the federal student loan program, “particularly as it relates to proprietary schools, is riddled with fraud, waste, and abuse.”4 In response, Congress adopted a number of reforms, including the incentive payment ban.
To be eligible to participate in the Title IV Programs, a higher education institution must enter into a “program participation agreement” with the U.S. Department of Education (the Department) in which it certifies its compliance with a long list of rules. One of those rules5 is the incentive payment ban, which forbids institutions that receive Title IV funds from paying an employee or third party “any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid” if the employee or third party performs any student recruitment or admissions activities or makes decisions about the award of financial aid.6
In the late 1990s and early 2000s, “improper recruiter compensation among for-profit schools was a hot topic.”7 In 2002, after some backlash over its recent enforcement activity, the Department took a new approach to the incentive payment ban.8 Specifically, the Department adopted new safe harbors, including the first iteration of the “bundled services” exception, which allowed “[p]ayments to third parties, including tuition sharing arrangements, that deliver various services to the institution, even if one of the services involves recruiting or admission activities or the awarding of Title IV, HEA program funds.”9
In 2010, the Department rescinded the safe harbors regulation, including the section about bundled services.10 However, on March 17, 2011, the Department published guidance that left open the door for certain third party entities, such as OPMs, to earn a share of tuition in exchange for providing institutions with a bundle of services, including student recruitment services.11 The sub-regulatory guidance stated, “[T]he Department does not consider payment based on the amount of tuition generated by an institution to violate the incentive payment ban if that payment compensates an unaffiliated third party that provides a set of services that may include recruitment services.”12 The Department explained that the independence of the third party entity would provide a safeguard against previously-seen abuses: “When the institution determines the number of enrollments and hires an unaffiliated third party to provide bundled services that include recruitment, payment based on the amount of tuition generated does not incentivize the recruiting as it does when the recruiter is determining the enrollment numbers and there is essentially no limitation on enrollment.”13
Recent FCA settlements involve the bundled services exception
On October 19, 2020, San Diego Christian College (SDCC) reached a settlement with DOJ over allegations in an FCA qui tam complaint that it unlawfully compensated a now-defunct OPM, Joined, Inc. (Joined), based on its success in recruiting students for enrollment.14 According to the complaint, SDCC and two other schools that have also entered into settlements, North Greenville University (NGU) and Oral Roberts University (ORU), certified their compliance with the incentive payment ban through execution of a program participation agreement in order to receive Title IV funds.15 They then allegedly violated the ban by entering into tuition-sharing agreements with Joined, which was affiliated with NGU and “engage[d] primarily in recruiting and enrolling college students” for the defendants. The complaint alleged defendants’16 claims for federal student financial aid funds violated the FCA because they arose from false certifications of compliance with the ban.17
The relator argued the bundled services exception was not available to the defendants. He would not “concede that such an exception, mentioned in neither statute nor regulation, exists or is consistent with congressional intent.”18 Additionally, the relator argued, even if the exception does exist, the defendants would not qualify for the exception for two reasons. First, NGU allegedly held a 33% ownership interest in Joined, which meant that Joined was not an “unaffiliated third party.” Second, “the majority of the services Joined provided to Defendants involved recruitment, enrollment, and re-enrollment.”19 Notably, however, the bundled services exception, as conveyed in the Department’s 2011 guidance, requires that the third party entity in this context provide “a set of services that may include recruitment services.”20 Nothing in the guidance indicates that a bundle of services would not qualify for the exception if recruiting constitutes a “majority” of the total services provided.
Members of Congress question the legality of the bundled services exception
Consumer advocates have been questioning the legality of the bundled services exception for several years, and recently lawmakers started asking questions as well. On January 23, 2020, Senators Elizabeth Warren and Sherrod Brown sent letters to five of the largest OPMs “to express concern about reports of [their] business practices” and to inquire about their “use of federal student aid funds in the administration of OPM services to institutions of higher education that participate in federal student aid programs.”21 The Senators went on to say: “Today, OPM contracts often stipulate that the college or university must share 50% or more of any resulting tuition revenue from students with the OPM. Because these agreements often delegate recruitment responsibilities to the OPM, this tuition-sharing arrangement may violate federal law, which prohibits paying commissions for recruiting and enrolling new students.” Finally, they questioned whether the Department’s 2011 guidance “is consistent with the text of the Higher Education Act.” To consider fully the legality of “bundled services” agreements, the Senators requested that the OPMs provide information and documents, including copies of contracts with Title IV higher education institutions and evidence of compliance “with the incentive compensation provision of the HEA and/or the ED guidance on incentive compensation issued on March 17, 2011.”22
The recent settlements and congressional attention demonstrate that the incentive payment ban continues to be an area of enforcement risk, with possible increased scrutiny and regulatory developments under the Biden Administration. Activity in this area warrants ongoing monitoring.
1. See Margaret Mattes, The Private Side of Public Higher Education, The Century Foundation (Aug. 7, 2017), available at https://tcf.org/content/report/private-side-public-higher-education/?session=1.
2. 20 U.S.C. §§ 1070 et seq.
3. David Whitman, When President George H. S. Bush ‘Cracked Down’ on Abuses at For-Profit Colleges, The Century Foundation (Mar. 9, 2017), available at https://tcf.org/content/report/president-george-h-w-bushcracked- abuses-profit-colleges/?session=1 (quoting Bruce N. Chaloux, “State Oversight of the Proprietary Sector,” in Community Colleges and Proprietary Schools: Conflict or Convergence? New Directions for Community Colleges 91 (Fall 1995): 89) (internal quotation marks omitted).
4. Abuses in Federal Student Aid Programs: Report Made by the Permanent Subcommittee on Investigations of the Committee on Governmental Affairs United States Senate, S. Rep. No. Senate-R-102-58, at 6 (May 17, 1991), available at https://files.eric.ed.gov/fulltext/ED332631.pdf.
5. See 20 U.S.C. § 1094(a).
6. Id. § 1094(a)(20).
7. See Gretchen Morgenson, A Whistle Was Blown on ITT; 17 Years Later, It Collapsed, N.Y. Times (Oct. 21, 2016), available at https://www.nytimes.com/2016/10/23/business/a-whistle-was-blown-on-itt-17-years-later-it-collapsed. html?_r=0
8. See id.
9. 34 C.F.R. 668.14(b)(22)(ii)(L).
10. 75 FR 66832.
11. Letter from Edward Ochoa, U.S. Dep’t of Educ., Assistant Sec’y of Educ. For Postsecondary Educ., to Colleague, Implementation of Program Integrity Regulations, at p. 11 (Mar. 17, 2011) available at http://ifap.ed.gov/sites/ default/files/attachments/dpcletters/GEN1105.pdf.
14. Press Release, U.S. Dep’t of Justice, California University To Pay $225,000 For Allegedly Violating Ban On Incentive Compensation (Oct. 19, 2020), available at https://www.justice.gov/opa/pr/california-university- pay-225000-allegedly-violating-ban-incentive-compensation
15. See Complaint, ¶¶ 25-32, United States ex rel. Shoe v. San Diego Christian Coll., No. 6:16-cv-01570 (D.S.C.), Docket No. 1.
16. Id. ¶ 1.
17. Id. ¶ 23.
18. Id. ¶ 38 n.1.
19. Id. ¶ 21.
20. Letter from Edward Ochoa, U.S. Dep’t of Educ., Assistant Sec’y of Educ. for Postsecondary Educ., to Colleague, Implementation of Program Integrity Regulations, at p. 11 (Mar. 17, 2011) available at http://ifap.ed.gov/sites/ default/files/attachments/dpcletters/GEN1105.pdf.
21. Letters from Elizabeth Warren and Sherrod Brown, U.S. Sens. to OPMs, at p. 1 (Jan. 23, 2020) available at https://www.warren.senate.gov/imo/media/doc/Letters%20to%20multiple%20orgs.%20re%20OPM%20Business% 20practices.pdf.
22. Id. at. p. 4.