For-Profit-Education: Sector Under Siege – Regulations Recap

Under Siege

For those interested and/or operating in education lead generation, you should definitely make sure you subscribe to Inside Higher Education’s daily newsletter. It’s all things education, and many days might go by without news or analysis regarding the for-profit sector, but when news does happen, they cover it perhaps the best. As a reader, what you realize, especially a reader with an internet marketing background, is something we have said before – the world of education is a complex one. And, like any major industry, only a fraction of the education world intersects with the lead generation world. That intersection involves by and large, for-profit-education institutions working with external marketing services firms to assist them in generating leads. The relationship between the two has grown significantly since its infancy a decade ago to a billion dollar per year relationship.

The billions spent over the past decade have created countless internet advertising companies and a great deal of shareholder value for the for-profits. The relationship between the two – lead generators and the schools – has had its ups and downs, but any issues were their issues – price, transparency, quality, etc. The two sides have not had to worry about many external issues, and this is incredibly true of those in lead generation. I’m embarrassed to say that when I started generating leads for schools in 2002 (creating ads, landing pages, and hosting forms), I couldn’t explain how the schools got paid. I was more familiar with Title IX than Title IV let alone any legislation around the Higher Education Act. Today, I know a lot more than I did but not nearly enough.

Included here is some of what has transpired in the world of online education over the past year. There will be some incomplete information and hopefully not too many mistakes. It is not meant to be the authoritative guide to all things edu lean gen. It is created mainly for those in the space who are as I was years ago – just thinking about their side of the business. Such a one-sided view of the world is the quickest way to see that world end. (If you haven’t already, you can view an earlier piece “Pondering the Future of the For-Profits” inspired by a fair but not flattering piece done by Frontline, which helps explain why those outside the sector can have a less than positive view of the space.)

First, some must-know definitions:

Higher Education Act – enacted into law in 1965. This complicated piece of legislation covers much more than student aid; but, it is the language around the dispersion of federal funds that impacts all of education and any school wishing to be eligible for funds. That language is covered in Title IV and why you will hear student financial aid referred to as Title IV funds.  The bill is reauthorized every four to six years. It was last reauthorized in 2008 by President Bush.

Negotiated Rule Making – Negotiated rulemaking began in the 1980s, but wasn’t used extensively until the Negotiated Rulemaking Act of 1990 encouraged all federal agencies to use it to enhance the rulemaking process. On December 31, 2008, the Department of Education announced it would establish five negotiated rulemaking (negreg) committees to prepare proposed regulations under Title IV of the Higher Education Opportunity Act (HEOA). Source NASFAA

Notice of Proposed Rule Making – More from NASFAA: Under negotiated rulemaking, the Department works to develop a Notice of Proposed Rulemaking (NPRM) in collaboration with representatives of the parties who will be affected significantly by the regulations. This is done through a series of meetings during which these representatives, referred to as negotiators, work with the Department to come to consensus on the Department’s proposed regulations.

What you need to know from a procedural level:

While the Department of Education is required by law to use negotiated rulemaking to develop NPRMs for programs authorized under Title IV of the Higher Education Act, and while the process of negotiated rulemaking is designed to bring together of the potentially affected parties to try and find agreement on new rules, there is no requirement that all parties come to agreement. Reaching consensus is how the reaching of agreement is referred in the negreg process.

Key to understanding where we are today is the following from the NASFAA site:

When negotiators fail to reach consensus, the federal agency is permitted to continue its rulemaking process without considering any of the input from negotiators. When negotiators failed to reach consensus last year, the Department drafted its own rules. In such cases, the Department says it tries to draft rules in accordance with agreements reached during the rulemaking sessions. But in some instances, the Department drafts regulations that some or all negotiators disagree with.

The drama enveloping the current online education lead generation space has everything to do with the negotiated rule making process that is almost complete. All public meetings have been held, and the time for any further commenting has closed.

Broad Issues & Key Concepts:

Incentive Compensation – In 1992, Congress banned schools participating in federal student aid programs from paying commissions, bonuses, or other incentive payments to individuals based on their success in enrolling students or securing financial aid for them. Congress instituted this incentive compensation ban to eliminate abusive recruiting practices in which schools enrolled unqualified students who then received federal student aid funds. (Source Government Accountability Office)

Safe Harbors – In 2002, the U.S. Department of Education (Education) issued regulations–commonly referred to as “safe harbors”–that allowed for 12 activities or payment arrangements that schools could use without violating the ban against incentive compensation. (Source Government Accountability Office). Number 10 deals with the internet. recognizes that the Internet is simply a communications medium, much like the U.S. mail, and is outside the scope of the incentive compensation prohibition. It permits a school to award incentive compensation for Internet-based recruitment and admission activities that –

  • provide information about the school to prospective students,
  • refer prospective students to the school, or
  • permit prospective students to apply for admission online. (Knutte & Associates)


1992 – Department of Education bans any form on incentive compensation with respect to enrollments. Strict definitions in place.

2002 – Pendulum swings the opposite way. Safe harbors outline 12 specific rules where schools would not violate the ban against incentive compensation.

2010 – ???

Expected Decisions:

Judging by the negotiators selected by the Department of Education during the recently concluded negotiated rulemaking process, it can be concluded that the negotiations had a definite bent towards a more traditional view of education, one that does not view favorably education as a business.  In other words, the deck was stacked against the current business operations of the for-profit schools. There were 14 issues being tackled as part of this neg reg process. Consensus was reached on nine. That left the Department of Education to specify the rules. The Department has published several Notice of Proposed Rule Making, giving a view into what the final rules will state. Those where consensus was not reached included two issues most important to the for-profits:

Elimination of Safe Harbors – The Department of Education will in all likelihood remove the 12 safe harbors which helped specify actions that would not violate the ban on incentive compensation. Gone is the carve-out for internet based activities.

Gainful Employment – For schools to be eligible for Title IV funds, they must (among other things), train students for “gainful employment in a recognized occupation.” Congress nor the Department of Education has prior to this attempted to define gainful employment. Until now. Students at for-profits are taking out tens billions per year in student financial aid. You want them to pay it back. Makes sense. This definition, more than anything, has had investors nervous. What happens if the proposed rule makes it almost impossible for for-profits (who serve a traditionally different socioeconomic group than traditional not-for-profits) to meet the definition’s guidelines?

On July 23rd, 2010, the Department of Education released its proposed regulations to define gainful employment. It looked to be less onerous than initially feared. “Under these proposed regulations, the Department would assess whether a program provides training that leads to gainful employment by applying two tests: One test based upon debt-to-income ratios and the other test based upon repayment rates.”  Stocks rallied. On August 16, 2010, the data the Department planned on using for the second test, repayment rates, came out. Using those numbers, many of the large for-profits would not meet the criteria to be eligible for Title IV funds. Stocks tanked.

Per the NPRM:

Based on the program’s performance under these tests, the program may be eligible, have restricted eligibility, or be ineligible. A program that meets both of these tests, or whose debt-to-income ratio is very low, would continue to be eligible for title IV, HEA program funds without restrictions, while a program that does not meet any of the tests would become ineligible. A program that meets only one of the tests would be placed in a restricted eligibility status, unless it has a high repayment rate.

Under certain circumstances, the proposed regulations would also require an institution to disclose the test results and alert current and prospective students that they may difficulty repaying their loans.

Let’s say that last part again, with emphasis added, “Under certain circumstances, the proposed regulations would also require an institution to disclose the test results and alert current and prospective students that they may difficulty repaying their loans.

Where we’re headed:

Greater Transparency – We’re entering a world where students must be told much more in advance. Whether on the landing pages or on the phones, big warning signs may be present. Regardless, students will be made aware of vital data that they must request today, e.g., total cost, placement rates, and median loan debt.

Fewer Leads? – This is the multi-hundred million dollar question. If a school’s program doesn’t fulfill the eligibility requirements for financial aid, they won’t be accepting new students. No new students, equals no leads. Corinthian’s Everest College Phoenix Online will no longer purchase leads beginning September 1st, 2010.

Legislation vs. Regulation – Everest College Phoenix’s decision had less to do with the proposed / expected rules and everything to do with an issue not discussed – accreditation. Schools must also be accredited as part of their eligibility. The specific for accreditation are not governed or determined by the Higher Education Act.  The standards used by accrediting bodies has been the subject of not infrequent scrutiny. We are entering another period of such scrutiny, lead not by the Department of Education but by Congress, namely Senator Harkin, the ranking member of the Senate Committee on Health, Education, Labor, and Pensions. Senator Harkin has had to hearings looking into the business and practices of for-profit-education. His goal is to create reform that would outlast an administration change. Regulations, such as those being proposed and enacted by the Department of Education could be changed if a new administration comes into power. Not so with legislation.

Where does that leave us?

By November 1, 2011, the final rulings will be released which will go into effect July 2011. The next milestone could take place any day, or we might have to wait until November. As marketers, we can’t control whether students will repay their loans, but we can influence it. We must be vigilant in stopping any who continue to allow misrepresentations to occur. Not only are they potentially illegal, but they will flood the system with garbage and have already put in jeopardy the future of online education lead generation. It’s a question of potentially earning less money versus earning no more money. Which will it be?

ranking member of the Senate Committee on Health, Education, Labor, and Pensions
  • Ken

    Fascinating overview, Jay. I think it'll be unworkable for schools to track and report on how their former students have fared in the job market which will affect how future students can finance their education. How soon, for how long and for what salary should a former student be employed in order to qualify as a success? Here's my guess: schools (and marketers) will use all manner of asterisks and fine print to make long legalistic disclaimers, which consumers will ignore, and the marketing will otherwise go on as before.

  • FJM09

    Thank you for a very insightful description of the current state of the Market Funded Sector or the Private Sector of Education, depending on one's view. I agree with some of the approaches being considered to improve the quality output of students in this sector. It is my hope that law makers and regulators use a scalpel to design final regulations and not a machete. The impact to the under-represented population is immeasurable if the adequate controls are not considered. I know this is not the current focus of the senate. However, law makers need to evaluate the impact and value of some of our local community colleges and state colleges, some of which have, in my opinion, have unacceptable graduation rates. It would be ideal if at the end of this process, our post-secondary schools, regardless of market funded or not, yield quality graduates that will help us meet the shortage of talent.

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