Higher Education:

Stronger Federal Oversight Needed to Enforce Ban on Incentive Payments to School Recruiters

GAO-11-10: Published: Oct 7, 2010. Publicly Released: Oct 7, 2010.

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In 1992, Congress banned schools participating in federal student aid programs from paying commissions, bonuses, or other financial incentives to individuals based on their success in enrolling students or securing their financial aid. The ban applies to all postsecondary schools, including private for-profit, public, and private nonprofit schools. Congress instituted this incentive compensation ban to eliminate deceptive recruiting practices and to protect federal student aid funds from fraud and abuse. However, we recently found evidence of deceptive or fraudulent recruitment practices at certain postsecondary schools in which school officials misrepresented programs or encouraged students to falsify their financial aid applications to obtain federal student aid. Questions have been raised about whether schools are consistently acting in the best interest of students during the recruitment process, and whether the federal investment in student aid is adequately protected. The U.S. Department of Education (Education) is responsible for monitoring schools participating in federal student aid programs and enforcing compliance with the incentive compensation ban. Education has the authority to assess fines or take other actions against schools found violating the ban. In the Higher Education Opportunity Act, Congress mandated that GAO conduct a study on Education's oversight of the incentive compensation ban. In February 2010, we issued a report which provided information on incentive compensation violations substantiated by Education from January 1998 through December 2009, the nature of these violations, and the names of the institutions involved. This report provides additional information on Education's oversight of the ban during this time period. Specifically, we examined (1) how Education monitors schools for potential violations of the incentive compensation ban, and (2) the extent to which Education has used its authority to enforce the incentive compensation ban.

We found: Education has processes to monitor schools for potential violations, but its methods to detect violations and track monitoring activities are limited. 1) Education uses annual independent audits, program reviews, and other processes to monitor schools for potential violations, but primarily relies on the audits. Annual audits are conducted by independent auditors who evaluate school compliance with all federal student aid rules, including the ban on incentive compensation for recruiters. 2) Weaknesses in the audit process may limit detection of potential incentive compensation violations. For example, we found that independent auditors did not always document testing of school compliance with the ban or follow up on prior year audit findings to determine if past problems had been corrected or were still occurring. 3) Program reviews conducted by Education staff supplement the annual audits and focus on high-risk schools; however, Education's current tracking system does not identify all program reviews that examine incentive compensation. As a result, Education cannot identify the extent of incentive compensation problems, track monitoring actions over time, or assess and improve the effectiveness of its program reviews. In addition, Education cannot determine if it has appropriately targeted resources to review high-risk schools and dedicated sufficient resources to monitor schools for violations. Education has used some of its authority to enforce the incentive compensation ban, but its efforts may be hindered by its own penalty policies and practices. 1) Between 1998 and 2009, Education resolved most incentive compensation cases by requiring corrective actions or reaching settlement agreements, and did not limit, suspend, or terminate any school's access to federal student aid. 2) Education changed its enforcement policy in 2002, which resulted in an increased burden on Education to prove a violation and lessened associated financial penalties (fines and settlement payments). As a result, it became more difficult for Education to prove a school violated the incentive compensation ban and schools ultimately paid smaller penalties. 3) Education officials shared with us internal guidance that is used to determine fines and settlement payments for incentive compensation cases. Internal guidance for imposing fines and settlement payments establishes caps on total penalty amounts, although related regulations do not have such caps. Education officials have stated that the agency has not always used the guidance to determine fines and settlement payments. 4) Education's varying approaches for determining fines and settlement payments could lead to inconsistent treatment of schools without adequate justification for the differential treatment. For example, some schools were fined for incentive compensation violations, while others were not. In one case, Education withdrew an initiated school fine of over $2 million dollars, and case documentation did not reveal the reason for the fine withdrawal. In order to strengthen Education's monitoring and enforcement of the incentive compensation ban and to help protect students and the federal investment in their education, we are recommending that the Secretary of Education: 1) Coordinate with Education's Office of Inspector General to strengthen suggested procedures provided to auditors for auditing and reviewing school compliance with the ban. 2) Track the total number of program reviews it conducts, specifically looking at incentive compensation issues in order to improve Education's ability to target its resources to high-risk schools and monitor schools for violations. 3) Update the guidance used to set fines and settlement payments to establish appropriate financial penalties, and apply the guidance when determining fines and settlement payments for incentive compensation cases.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In 2014, the Department of Education reported that the Federal Student Aid (FSA) office provided the Department's Office of the Inspector General (OIG) with comments on its draft guidance to auditors for auditing and reviewing school compliance with the incentive compensation ban. Specifically, FSA recommended the OIG add guidance instructing the auditor to review two additional types of compensation schemes. The OIG guidance provides a list of red flags for auditors to consider and requirements to compare recruitment staff records with various compensation schemes to determine a school's compliance with the incentive compensation ban.

    Recommendation: In order to strengthen Education's monitoring and enforcement of the incentive compensation ban and to help protect students and the federal investment in their education, the Secretary of Education should coordinate with Education's Office of Inspector General to strengthen suggested procedures provided to auditors for auditing and reviewing school compliance with the ban.

    Agency Affected: Department of Education

  2. Status: Closed - Implemented

    Comments: Program Compliance of Federal Student Aid has added a code corresponding to incentive compensation in its data system to track the type and scope of program review conducted. This will enable the Department to more effectively track program reviews that are initiated as a result of incentive compensation concerns.

    Recommendation: In order to strengthen Education's monitoring and enforcement of the incentive compensation ban and to help protect students and the federal investment in their education, the Secretary of Education should track the total number of program reviews it conducts, specifically looking at incentive compensation issues in order to improve Education's ability to target its resources to high-risk schools and monitor schools for violations.

    Agency Affected: Department of Education

  3. Status: Open

    Comments: The Department of Education reported in 2014 that the Federal Student Aid (FSA) office revised its guidance to note that the fine amount would account for the particular facts and circumstances of a case and be commensurate with the harm caused by the violations. However, as of August 2014, FSA has not established a process to weigh factors in an incentive compensation case, such as how an incident of incentive compensation should be defined, that affect final fines and settlement payments in these cases.

    Recommendation: In order to strengthen Education's monitoring and enforcement of the incentive compensation ban and to help protect students and the federal investment in their education, the Secretary of Education should update the guidance used to set fines and settlement payments to establish appropriate financial penalties, and apply the guidance when determining fines and settlement payments for incentive compensation cases.

    Agency Affected: Department of Education

 

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