Department of Education Letter Gives Some Clarity on New Rules: Analyst

on March 21 2011 8:35 AM

Robert W. Baird said there is no change in its education services thesis after viewing the Department of Education's clarification letter for new rules that go into effect July 1, 2011.

The Department of Education released a Dear Colleague letter March 17 that gives clarification on three program integrity rules published in October: state authorization, incentive compensation, and misrepresentation, said Robert W. Baird.

While any regulatory clarity is a positive and certain points may ease some industry concerns, we remain generally cautious on the post-secondary group as other regulatory issues (gainful employment, 90/10) remain significant overhangs. More importantly, it is unclear when deteriorating fundamentals will recover, said Amy Junker, an analyst at Robert W. Baird.

Junker said while nothing regarding the rules is fundamentally changed and areas of ambiguity remain, the letter confirms that extreme interpretations of the rules are not the Department of Education's intent to enforce.

Junker said some companies have cited uncertainty with the rules as potential risks, particularly fears of back-ups at the state level in approving their online operations and if the incentive compensation ban would apply to senior management.

The Department of Education says it will not punish online schools for the purposes of the fiscal 2011-12 school year (begins July 1) who are making a “good faith effort” to comply with the regulation, i.e., schools have applied for necessary approvals, even if such applications have not been acted upon by a particular state.

Also, approval in states that currently lack rules for out-of-state online operators will not be necessary and states will not be forced to create such rules, the Department of Education said in the letter.

While schools will likely continue to disagree with the incentive compensation rule overall, the Department of Education did clarify which jobs fall under the ban. Importantly, it does not apply to executive management (e,g., when making strategic enrollment decisions) or to college presidents (e.g., when giving talks to prospective students about a school).

While the Department of Education maintains that tuition-sharing arrangements are a form of indirect incentive compensation, it does allow for tuition to be a source of compensation to unrelated third parties for a variety of bundled services (including marketing, application assistance, recruitment services, and career counseling) so long as the third party does not make prohibited compensation payments to its employees.

Junker said the responsibility lies on the school to ensure its partner is in compliance.