Did the Department Drop the Ball?

WASHINGTON -- The Government Accountability Office’s “secret shopper” investigation of recruiting practices at for-profit colleges was a mixed blessing for the U.S. Department of Education.

At one level, the findings presented at last week’s Senate Health, Education, Labor and Pensions Committee hearing were a vindication. Videotaped evidence pointed to fraud at four colleges, and questionable or deceptive practices at all 15 campuses investigated.

But, at the same time, GAO’s discoveries have put the Education Department on the defensive, trying to explain why it hasn’t done more to prevent recruiters from making deceptive statements to potential students. There are already rules on misrepresentation and incentive compensation of college employees for securing enrollments -- which the department is expected to tighten in its final regulations, to be published by Nov. 1 -- and while weak rules may be part of the problem, they’re not the whole story.

Could the department have conducted its own secret shopper investigations and cracked down on aggressive recruiting practices before Congress and GAO got involved? Has the department failed to use all the tools in its existing enforcement toolbox as frequently and as well as it could have?

To most observers, the answer to both questions is yes. While the department has not publicly acknowledged that it didn't do enough before now, the steps it is taking to ramp up enforcement of the current rules suggest that it does feel pressure to do more. On Friday, responding to the questions raised at last week's hearing, Education Secretary Arne Duncan wrote to Sen. Tom Harkin, the panel's chairman, defending its record and laying out its plans for more vigorous enforcement.

At last week's hearing, Sen. Carte Goodwin (D-W.Va.), the interim replacement for the late Sen. Robert Byrd, asked Gregory D. Kutz, GAO’s managing director of forensic audits and special investigations, whether the problems found on campuses indicated a lack of sufficient regulations, or of enforcement of existing regulations by the department.

“Probably both,” Kutz said. “Given what we saw, it certainly appeared a little bit like the wild, wild west out there, if you will. So that would indicate that there is not a lot of regulatory infrastructure in place overseeing or enforcing.”

The problems, several observers say, are a mix of policing, enforcement and the rules themselves. The department has been introspective and active in revising its rules on misrepresentation and incentive compensation, but has yet to say or do much to acknowledge publicly its shortfalls in the other two areas.

Terry W. Hartle, senior vice president of government and public affairs at the American Council on Education, says that while “good enforcement is the best regulation, and the Department of Education does have wide authority, including emergency power to shut down a school very quickly,” it hasn’t used that power effectively for at least the last decade.

“Unfortunately, the department’s track record in terms of enforcing its regulations can only be described as abysmal,” says Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers. “They get a failing grade -- quite frankly, it’s the same as the SEC’s grade on protecting investors from [Bernard] Madoff.” An admitted foe of for-profit higher education, Nassirian encourages more investigation and enforcement, as well as tighter regulations.

A Republican aide on the Senate education committee says that “the department’s enforcement role has historically been very light.” The growth of the for-profit sector and the Title IV program hasn’t led the department to ramp up its efforts, and as a result, the staffer says, “it really hasn’t been doing a good job looking at anyone -- for-profits, nonprofits -- and trying to find the kinds of things GAO found.”

“It’s their job to do it," he adds. "It’s not the accreditors’ job, it’s not really the state agencies’ job to enforce federal laws, it’s really the Department of Education’s job to figure it out.”

But not everyone agrees. Michael B. Goldstein, co-leader of the higher education practice at the Washington law firm Dow Lohnes, whose clients include for-profit colleges, says the department is already doing enough to enforce its regulations. “The idea is not that you catch everyone, it’s that you’ve got a sufficiently robust enforcement effort that they understand they have to follow rules,” he says, “and I think they do.”

The Career College Association and some of the for-profit colleges visited by GAO investigators have announced their own secret shopper programs, but it’s unclear how transparent or public the findings of those programs will be. An Education Department-run secret shopper program could prove to be a useful deterrent for individual “rogue” recruiters and whole companies.

“It’s not just the individual enforcement actions that prevent fraud and abuse but rather the knowledge that any given student you’re talking to might be a secret shopper,” says Mark Kantrowitz, publisher of Finaid.org. “Knowing that the student you’re with could be an undercover investigator from the Department of Education would likely clean up behavior.”

The Office of Federal Student Aid is in the process of developing its own secret shopper program to investigate admissions and financial aid practices. But to get the program up and running, the department says, it needs additional funding and staff. The office is also in the midst of hiring 64 new oversight employees to help ratchet up the number of on-site program reviews it performs each year.

While not quite acknowledging that its monitoring of for-profit institutions has failed to keep pace with the explosive enrollment and financial growth in the sector, FSA confirmed that it is considering creating a financial oversight team that would focus only on for-profit institutions.

The department has been “very anemically funded” when it comes to operating expenses, Nassirian says. “They haven’t been dealt a very good hand and whatever hand they’ve been dealt they haven’t played very well.”

Harris N. Miller, president of the Career College Association, says he sees “a need for increased enforcement by all three arms of the triad” -- the federal government, state governments and accreditors -- “as we have no problem with the department being more proactive in enforcement.”

Though CCA supports some of the department’s proposed regulations, “a myriad of laws and regulations are on the books already that deal with the issues that the GAO highlighted in its investigation,” Miller says. “We’re a little frustrated, frankly, in all the new regulations, and the department framing these issues like there’s nothing they can do short of regulating more. We believe the department has the authority to do more than just listen to complaints. They have a policing role here.”

One reason policing hasn’t been aggressive, says Nassirian, is because of the melding of democracy and bureaucracy at the Education Department, with political appointees, including the secretary, leading an agency of career civil servants.

“We’ve had cycles of some of the very people that the department should have been investigating invited in to run the place,” he says, referring to several former for-profit executives who joined the department during the George W. Bush administration. “Civil servants understand that showing excessive zeal on behalf of the taxpayers and the students will not be a smart long-term career move. Being aggressive under one administration might work, but under the next it will get you pushed out.”

The department’s Office of Inspector General examines passively, performing audits and investigations only after it receives a complaint or other indication of wrongdoing at an institution. Since 2005, OIG has issued 37 reports on postsecondary institutions and accreditors, 21 of which involved for-profit colleges.

But the Obama administration has in recent months begun introducing new consumer protection functions. Among them:

• An internal complaint database to track institutions that are under scrutiny and a partnership with the Federal Trade Commission to share complaints across agencies.
• A partnership with the Securities and Exchange Commission to share compliance problems found at publicly traded for-profit higher ed companies.
• Working with the inspector general, FSA in July began reviewing institutions to target consumer issues involving distance learning and misrepresentation.
• A consumer protection position that will report to FSA's new chief customer experience officer.

“Public policy in areas like this isn’t fixed and permanent, you can’t build it and leave it standing like some Greek temple,” says Hartle. “Over time, you need to do renovations.” Some of those renovations, he adds, need to be to the regulations, but others need to be to the department's enforcement mechanisms.

The department’s Office of Federal Student Aid has the emergency authority to end an institution’s Title IV program participation when it identifies statutory or significant regulatory noncompliance. FSA can deny recertification to participate in Title IV during the review the office performs on each Title IV-eligible institution every six years.

In less extreme instances, FSA has the power to place growth restrictions on the number of campuses or amount of Title IV aid a program can receive. FSA also has the power to fine institutions up to $27,500 for each instance of regulatory noncompliance. Institutions can also be put under close monitoring by the department.

During the 2009 fiscal year, 75 of the 116 institutions that lost Title IV eligibility were for-profit colleges, generally because they lost accreditation, merged with another institution, voluntarily withdrew from the Title IV program, or closed.

Kantrowitz says the department needs to be more visible and more severe in enforcing noncompliance issues that aren’t severe enough to require an institution to shut down. “There’s a need for intermediate sanctions that are severe enough to make colleges reconsider their behavior,” he says. “Fines need to be more than just the cost of doing business.”

When the department’s means for punishing institutions is just closer monitoring in the future or a small fine, the cost-benefit analysis may keep some colleges in active noncompliance, Kantrowitz says. “Give them a profit motive to do stricter enforcement, stricter training of their staff.” He suggested that larger fines or strict limits on the amount of Title IV funds an institution could get -- as well as publicized closures, when necessary -- could do a lot to change behavior. “Having high-profile consequences for this kind of behavior will encourage some colleges to toe the line.”

The Republican staffer agrees, to a point. “For legitimate, clear-cut cases of bad acts, there’s a real question to be asked whether the penalties are tough enough based on the damage this can cause to a student over the totality of the student’s life,” he says. “At the same time, you can’t take out the machine gun to catch a bug.”

Goldstein says the penalties for institutions found to be violating Title IV regulations are sufficient. “Certainly with regard to the publicly traded companies, the penalties of getting tagged are severe -- there’s no penalty worse than what the market place could assess,” he says. “A fine of $8 million is not so draconian to the University of Phoenix, but a 2 percent drop in their stock is a whole lot of money.”