Federal Judge Rejects Career Colleges’ Challenge to New “Incentive Compensation” Rule

What just may have been the for-profit colleges’ last chance to save the 12 "safe harbors" that the Bush administration created in 2002 that have helped schools skirt a federal law banning schools from providing incentive payments to their admissions employees was dealt a fatal blow on Tuesday. The U.S. District Court for the District of Columbia upheld the Department of Education’s new regulation that puts an end to these loopholes.

The ruling by Judge Rosemary Collyer came in a lawsuit that the Association of Private Sector Colleges and Universities (APSCU)  filed in January seeking to block the Education Department from putting into effect several regulations it finalized in November that aim to prevent unscrupulous schools from taking advantage of financially needy students. In addition to the rule enforcing the federal incentive compensation ban, APSCU (which was formerly and more appropriately known as the Career College Association) also challenged rules that were designed to strengthen the role that states play in preventing fraud, waste, and abuse in the federal student aid programs and to prohibit colleges from providing misleading information to prospective students and others about their programs.

Judge Collyer awarded the career college group a partial victory. While the judge upheld the regulations dealing with incentive compensation and misrepresentation, she stuck down a key part of the new state authorization rules on technical grounds (which you can read more about here and here).

At Higher Ed Watch, we have always been most interested in the regulation enforcing the statutory ban against paying recruiters based on their success in enrolling students because there has been so much abuse in this area. And we believe that most of this abuse is a direct result of the Bush administration’s decision to introduce the safe harbors, which have allowed some of the largest for-profit higher education companies in the country to circumvent the law.

As we have previously reported, the association’s lawsuit is rife with misleading statements and disingenuous arguments about both the Education Department’s conduct of the rulemaking process and the incentive compensation regulation. In January, we ran a post responding to some of the group’s claims. In March, we published some of the Obama administration’s responses.

Today, we are running excerpts from judge’s decision that will hopefully be the final word on the association’s faulty arguments. [Editor’s Note: many of the citations to other legal cases have been removed to make more readable.] Here are the group’s claims and Judge Collyer’s assessment of them:

Lawsuit: In developing the rules, the Education Department “employed unlawful proceedings to adopt regulations that are both contrary to law and arbitrary and capricious.”

Ruling: “The plaintiff complains about the haste with which the [Education] Secretary announced his intention to engage in rulemaking, issued a proposed rule, collected comments, and announced a final rule. None of these complaints shows more than that Plaintiff disagrees with the Secretary’s policy choices, and wishes the Secretary had listened harder to APSCU’s points of view. There is no suggestion of substantive wrongdoing.”

Lawsuit: In eliminating the 12 ‘safe harbors’ that the Bush administration created in 2002 to the incentive compensation ban, the Education Department acted improperly by “purport[ing] to make illegal what it had previously determined eight years earlier to be legal and fully compliant with the HEA, even though there has been no intervening statutory change, no directive from Congress to do so, and no other identifiable basis for the change.”

Ruling:  “Although, as noted, the Department changed course by eliminating the twelve safe harbors, the Department supplied a “reasoned analysis” and its justification for the change… See Williams Gas Processing-Gulf Coast Co, L.P v Ferc (noting agency is free to change course provided a reasoned basis for its departure, and not simply through casually ignoring prior policies); Rust, 500 U.S at 187 (affirming as a reasoned analysis for a change in policy the agency’s explanation that ‘prior policy failed to implement properly the statute and…that the new regulations are more in keeping with the original intent of the statute, [and], are justified by client experience under the prior policy’)."

“Based on its experience, the Department has explained its conclusion that the safe harbors did “substantially more harm than good” because they allowed schools to evade the objectives of the HEA and the omission of the safe harbors would bring the regulations and conduct into conformity with the statute…The Secretary has articulated a rational connection between the facts before him and the choices he made. That is all that is required.”

Lawsuit: The Department acted illegally by extending the incentive compensation ban to salaries and merit-based salary adjustments, which are not specifically mentioned in the law. “The HEA only prohibits ‘bonus[es]’ and ‘commissions’ – neither of which are salaries – and the related category of ‘other incentive payments.’”

Ruling:  “To be precise, the new compensation regulations define a commission, bonus or other incentive payment as ‘a sum of money or something of value, other than a fixed salary or wages.’" In other words, “the Department does not assert authority to oversee or regulate the setting of a fixed annual wage, which is the common mean of ‘salary’ or other wage." In regards to merit-based salary adjustments, "Congress did not directly address the precise question before the Court as it neither defined the term ‘bonus’ or ‘other incentive payment,’ nor speak to whether certain kinds of salary increases could be considered incentive payments. Rather than provide tight definitions, Congress prohibited ‘any commission, bonus, or other incentive payment that was based directly or indirectly’ on success in enrollments or financial aid.  The statutory provision “speaks in broad terms that do not foreclose oversight of bonus or other incentive payments when they are based upon success at recruitment or provision of financial aid, although dressed in the guise of salary increases.” [Italics in original]

“A court will invalidate agency action if it is arbitrary, capricious, or manifestly contrary to the statute. No doubt it would be easier to comply with, and enforce, the HEA if the simple distinctions between salaries and incentive payments, as provided by the [2002] Clarifying Regulations, were maintained, but a new Secretary is not limited by the regulatory choices of his predecessor if he adequately states the reason for any changes. Given the record before the Court, APSCU presses too narrow a reading of the statute, arguing that a ‘bonus’ is typically awarded in addition to an employee’s annual ‘salary,’ and that ‘other incentive payments’ must be read in a limited fashion to only incorporate schemes like ‘bonuses’ or ‘commissions,’ and not any type of adjustment to a ‘salary.’”

Lawsuit: The Department’s regulation essentially prohibits colleges from offering recruiters merit-based salary adjustments. “To be merit-based, salaries must be based on employees’ on-the-job performance. Thus, for a recruiter, merit-based salaries must reward recruiting performance.”

Ruling: “The new regulations expressly permit merit-based adjustments to employee compensation ‘provided that such adjustments are not based in any part, directly or indirectly, upon success in securing enrollments or the award of financial aid.’” The Department “is concerned with raw numbers: recruiters who sweet talk unqualified students into applications for courses and federal loans when there is no realistic chance that the student will gain from the coursework or be able to repay the loan. Such a concern does not bar APSCU’s members, for instance, from rewarding recruiters’ success through other indicia, such as seniority, job knowledge and professionalism, dependability, or student evaluations.”

“While APSCU is understandably frustrated at its inability to provide merit-based pay increases to recruiters based on the easiest to measure and, arguably, most logical merit metric – numbers recruited – that does not mean the regulations are themselves impermissible interpretations of the HEA or otherwise unreasonable, especially in light of congressional concerns with recruitment practices and the administrative record.”

The career college group says that it is considering appealing the ruling on the regulations that the judge let stand. Here is another case where we think that the industry would be smart to quit while it’s ahead. The association achieved a significant victory by derailing a good part of the state authorization rule. But APSCU’s arguments on the Department’s handling of the rule-making process and the incentive compensation regulation have been incredibly weak from the start, as we have repeatedly pointed out. Judge Collyer wasn’t fooled, and we don’t see why an appellate court would see things any differently.


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