Incentive compensation rule and bundled services exception

The incentive compensation rule forbids institutions that participate in Title IV programs to provide “any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities or in making decisions regarding the award of student financial assistance.” 20 U.S.C. § 1094(a)(20); see also 34 C.F.R. § 668.14(b)(22). The rule does not apply to recruitment of foreign students residing in foreign countries who are not eligible to receive federal financial aid.

In 2011 guidance, ED took the position that revenue or tuition sharing with a service provider constituted a payment based on success in securing enrollments. However, it also announced what it referred to as the “bundled services exception” to allow tuition sharing in certain limited circumstances. ED described the exception as follows:

A third party that is not affiliated with the institution it serves and is not affiliated with any other institution that provides educational services, provides bundled services to the institution including marketing, enrollment application assistance, recruitment services, course support for online delivery of courses, the provision of technology, placement services for internships, and student career counseling.  The institution may pay the entity an amount based on tuition generated for the institution by the entity’s activities for all bundled services that are offered and provided collectively, as long as the entity does not make prohibited compensation payments to its employees, and the institution does not pay the entity separately for student recruitment services provided by the entity.

The Federal Register announcement explains that ED “is seeking to better understand the impact of the bundled services exception in the context of growing online enrollment and associated Federal student loan debt.” According to ED, OPMs and other third-party entities have increasingly recruited students to institutions and received payments for such enrollments because of the bundled services exception. ED therefore is reviewing the 2011 guidance to determine whether changes are appropriate.

ED’s decision to revisit the incentive compensation rule comes on the heels of a April 2022 U.S. Government Accountability Office (GAO) report prepared at the request of Congress. The report analyzed both the incentive compensation rule and OPMs and included a recommendation that ED clarify institutional reporting obligations to enable ED to find incentive compensation rule violations.

Public comment period

ED will host virtual listening sessions on March 8 and 9, 1:00–4:00 pm ET. Commenters must email ED (margo.schroeder@ed.gov) no later than noon ET the day before the session at which they would like to present.  Observers must register to attend. ED also will accept written comments through the Federal eRulemaking Portal until March 16 (Document ID: ED-2023-OPE-0030-0001).

ED invites feedback on nine questions:

1. What are the benefits and disadvantages of the current incentive compensation exception for bundled services for institutions and students?
2. How can the Department better identify, define, and address the activities that may raise concerns under the current incentive compensation guidance?
3. How much of an institution’s spending on a bundle of services provided by a third-party entity is typically allocated to recruitment and related expenses? This will help the Department understand the proportion of the spending in the bundle that goes to recruitment versus a range of services.
4. How has contracting with a third-party providing services under the bundled services exception impacted enrollment, tuition and fees, the types of programs offered, the modality through which programs are provided, student outcomes, revenues, and expenditures at institutions? How do these results compare to programs not supported by an OPM or students attending in-person at a program that is also supported by an OPM?
5. How would changing third-party servicer contracts from a revenue-sharing model to a fee-for-service model impact the services, such as recruitment, currently provided to an institution under the bundled services exception?
6. How do tuition and fees of programs supported by third-party services differ when provided under a revenue-sharing model as compared to a fee-for-service model?
7. To what extent does the bundled services exception impact institutions’ ability to create or expand online education offerings? To what extent would fee-for-service models impact institutions’ ability to create or expand online education offerings?
8. How might the Department more clearly define what it means to be an unaffiliated third-party for purposes of the incentive compensation guidance to ensure there is no affiliation between the institution and the entity providing services?
9. What steps can the Department take to better ensure compliance with the prohibition on incentive compensation?

Next steps

ED’s request for public comment signals its intention to issue updated guidance on the incentive compensation rule. Such updates likely will affect institutions and companies that rely on the bundled services exception. We encourage you to consider:

• Your institution’s or company’s compliance with the existing incentive compensation rule guidance, particularly as it relates to the bundled services exception.
• How the topics raised in ED’s questions may affect operations, revenue, or other institutional or company priorities.
• Whether to submit oral or written comments during the public comment period.

We are available to assist you in these efforts.

Authored by Stephanie Gold, Joel Buckman, and Megan Wilson.