Higher Education:

Information on Incentive Compensation Violations Substantiated by the U.S. Department of Education

GAO-10-370R: Published: Feb 23, 2010. Publicly Released: Feb 23, 2010.

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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. 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. As of January 2010, Education was reviewing these safe harbor regulations as part of a negotiated rule making process to maintain or improve federal student aid programs. The Higher Education Opportunity Act (HEOA) mandated that GAO conduct a study on Education's enforcement of the incentive compensation ban in light of the safe harbors and report on the number of violations substantiated by the Secretary of Education since 1998, the nature of these violations, and the names of the institutions involved. As agreed with Congressional offices, this report provides information on violations of the incentive compensation ban substantiated by the Secretary since 1998.

We found that between 1998 and 2009 Education substantiated incentive compensation violations at 32 schools. Of the 32 schools with substantiated violations, 17 schools were found to have violated the ban in the 5 years before final safe harbor regulations were published on November 1, 2002, and 15 schools were found to have violated the ban in the 7 years afterward. Many of the violations involved payments by schools to their staff in the form of bonuses or commissions for successfully enrolling students in the school, while a smaller number involved payments to third party contractors or noncash rewards to staff for successfully enrolling students. In addition to finding violations at 32 schools, Education entered into settlement agreements with 22 other schools. Education does not have data on the total number of school reviews and audits initiated by the Secretary and outside auditors for potential violations of the incentive compensation ban during the time period we reviewed. For this reason, it is unknown whether the total number of reviews and audits conducted each year has changed over the course of this time period and what percentage of these cases have resulted in substantiated violations.

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