April 8, 2003

DOE Creates 12 Safe Harbors for Compensating Student Recruiters

Holland & Knight Newsletter
Paul G. Lannon

Colleges and universities have waited 10 years for the Department of Education (DOE) to issue regulations that define permissible compensation programs for student recruiters.  Since 1992, when Congress enacted Title IV of the Higher Education Act of 1965, 20 U.S.C. § 1094(a)(20), colleges and universities have known only that, with the exception of recruiting foreign students residing in foreign countries, it was generally illegal to compensate recruiters based on their success in securing enrollments or financial aid.  Without further guidance from the DOE, institutions risked enormous financial penalties when they provided any form of incentive compensation to student recruiters.  For example, in 2001, the Office of Inspector General, charged with enforcement of the section, recommended Indiana Wesleyan University return $30 million in Family Federal Education Loan funds for illegal recruiting activities.1

The wait is over.  On November 1, 2002, the DOE finally issued its regulations on compensating student recruiters.  The final regulations will be codified at 34 C.F.R. § 668.14(b)(22)(ii)(A) through (L).  They apply to the 2003-2004 award year, beginning July 1, 2003. 

 The new regulations carve out 12 safe harbors which set forth “specific payment arrangements that an institution may carry out that have been determined not to violate the incentive compensation prohibition ...”.  In general, the new regulations permit merit-based compensation when it is not based solely on the number of students recruited, admitted, enrolled or funded with federal aid.

Acceptable Non-incentive Compensation Adjustments

The first of the 12 safe harbors, “Adjustments to Employee Compensation,” applies to adjustments in fixed salaries or hourly wages.  The DOE will now permit two adjustments, up or down, every 12 months, as long as no adjustment is based solely on success in securing admissions, enrollments or financial aid.  This policy reflects the common practice of setting probationary periods for recruiters.  Adjustments may include raises and bonuses, but an adjustment for cost of living given to all or substantially all of an institution’s full-time employees will not be counted.

Acceptable Incentive Compensation

The remaining 11 safe harbors describe permissible, incentive-based compensation.  In the DOE’s view, these safe harbors are acceptable because they reflect situations that do not pose a significant risk of fraudulent or unscrupulous procurement of federal funding.  The additional safe harbors are as follows:

  • Incentive payments are permissible when the recruited students enroll only in programs that are not eligible for Title IV funds.

  • Compensation for contracts with employers: discussed below.

  • Profit-sharing or bonus plans are permissible as long as the payments are made to all or substantially all of the institution’s full-time professional and administrative staff and the payments are substantially the same in amount or in percentage of compensation.

  • Compensation based upon completion of an educational program or academic year.  Avoids recruitment of students not qualified for an institution’s program.  Requires completion of 24 semester or trimester credit hours, 36 quarter-credit hours or 900 clock hours of instruction.

  • Compensation for pre-enrollment clerical activities, such as answering telephone calls, referring inquiries, or distributing institutional materials.

  • Managerial and supervisory employees may receive incentive-based compensation if they do not directly manage student recruiters or award Title IV funds.

  • Non-monetary, token gifts of not more than $100 in value per year are permitted to an institution’s students or alumni for recruiting purposes.

  • Profit distributions based on proportional ownership of an institution.

  • Internet-based activities that provide information about the institution, refer prospective students to the institution or facilitate online applications.

  • Payments to third-party businesses that deliver services to the institution, but are not involved recruiting, admissions or the awarding of Title IV funds.

  • Payments to third parties for recruitment activities: discussed below.

The sections on compensation for contracts with employers and payments to third parties for recruitment activities generated substantial commentary from reviewers and therefore warrant further analysis.

Contracts with Employers

This safe harbor for employer-sponsored programs exempts incentive payments when the recruiter is paid for successfully securing a contract to provide education and training to a business’ employees.  There are, however, some limitations.  The safe harbor applies only when the employer pays for more than 50% of an employee’s tuition and fee charges, the recruiter’s incentive compensation is not based on the number of enrolled employees or the amount of revenue thereby generated, and there is no contact between the recruiter and the enrolled employee.

Payments to Third Parties for Recruitment Activities

This last safe harbor is a catch-all category permitting incentive payments to third-party recruiters if the compensation program otherwise falls within one or more of the other 11 safe harbors.  Many commentators were concerned that this safe harbor violated the spirit of the incentive compensation prohibition as well as the express language of the statute.  However, the DOE has determined that, as long as the outside recruiter adheres to the same limitations that apply to the institution, then incentive payments to third parties would not violate the statutory prohibition.

Final Notes

The new safe harbors strike an important balance:  they maintain a barrier to fraud and opportunistic behavior in the federal funding of student admissions while still permitting colleges and universities enough flexibility to improve the performance of their recruiters.

While the new safe harbors provide much-needed predictability for colleges and universities, they are narrowly defined, and the penalties for noncompliance are not specified.  Accordingly, institutions are well-advised to consult with legal counsel in developing incentive compensation programs for their recruiters. n

[1] See “Illegal Recruitment of Students: The DOE Cracks Down.”

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