The Politics and Law of Online Education
We here at RNL try to be informative and on the cutting edge of trends and insights regarding what is happening in and around the higher education market. We often talk about marketing, recruitment, and fundraising, but the subject of our recent webinar is a little different. Many clients and prospective clients have been asking about the changing regulatory landscape in and around the business of higher education—with a focus on online education—and we are responding.
So what does the changing regulatory landscape mean for you, for your school, and for how folks like us work with you? Instead of just sharing views on these subjects, we asked a seasoned expert in higher education law to join us on a recent webinar, to shed light on these issues, and to answer your questions.
Paul Lannon is not only an old friend and advisor, but also one of the foremost experts on higher education policy and law. Paul co-chairs the national education law team at Holland and Knight, and has been an education-industry lawyer for 30 years. He has represented colleges and universities, as well as companies that work with or provide services to the sector. Holland and Knight not only provides regulatory advice, but also has transactional lawyers and lobbyists performing public policy and regulatory work. Among the questions we addressed in our discussion were:
- What is going on in DC? How are politics influencing higher education regulations?
- How is the 90-10 rule evolving?
- Will the “Dear Colleague” letter, which for more than 10 years has permitted online program management (OPM) providers to sign revenue-share contracts, survive?
- How can institutions plan for regulatory change that may impact the viability of traditional OPM?
- How can institutions ensure maximum transparency from traditional OPM firms?
- Who is liable—traditional OPMs or their university clients—if a breach of title IV regulations is identified?
- What is Senator Elizabeth Warren’s latest letter to traditional OPM firms all about?
- How should universities think about all of the “mergers and acquisitions between for-profits and nonprofits?
On-Demand Webinar: The Politics of and Law of Online Education
Here’s an edited transcript of the webinar’s questions and answers
Greg: Let’s set the stage. How are DC politics influencing higher education regulations? What sorts of attention are being placed on higher education, and how are you seeing that play out from a regulatory perspective?
Paul Lannon: Consumer protection is at the forefront of President Biden’s domestic agenda. The Department of Education is focused on addressing student borrowed debt relief. During the campaign, Biden talked about particular amount of student debt cancellation—somewhere around $10,000. To date there hasn’t been a consensus among legislators on any specific amount of loan cancellation. The administration continues to investigate whether the executive office has unilateral authority to cancel debts on its own. They’re expecting a legal opinion from the Department of justice later this spring.
GAO Study: Later this spring we’re also expecting word from the General Accounting Office regarding higher education use of OPMs and how that’s been working out from an economic standpoint. That study should be enlightening. We’re all looking forward to seeing what it says. That study was prompted by Congressman Bobby Scott, Senator Patty Murray, and others who are pushing for more information on OPMs.
Rule Making Agreement: In December, the administration wrapped up its first round of negotiated rule making with respect to higher education, reaching agreement on four general areas:
- Discharging student debt for those that have total and permanent disabilities;
- Discharging debt for “false certifications” (credentials that turns out to be worthless);
- Pell Grant eligibility for prison education programs, which should be a positive step for everybody; and
- Eliminating interest capitalization for “non-statutory capitalization events,” which I must admit I don’t know really what that means, but it was on the list of agreed items.
Proprietary Institutions: The Education Department is also looking at policy changes that are likely to affect proprietary institutions. They’re revisiting the 90-10 rule, which means that institutions can’t derive more than 90 percent of their tuition revenue coming from Federal Student Aid. The “gainful employment” requirements for those proprietary institutions is also being reviewed. Changes in control and ownership of institutions is also a hot topic, particularly if institutions are looking to change from for-profit to nonprofit. There are lots of questions and a lot of confusion at the department about how to handle these issues.
At-Risk Institutions: And then there are issues regarding institutions at high financial risk, those on the bubble, so to speak and what kind of reporting requirements, sort of monitoring requirements, and things like that should be required. So all of those issues are on the table for the spring and summer barring other issues taking priority.
Title IX: In April we’re also expecting the department to issue a notice of proposed rulemaking regarding Title IX and campus sexual assault and harassment procedures. You may remember the Trump Administration changed Obama-era rules. We expect it to be a multiyear situation with some contentious back and forth. A lot of different interest groups are involved there and we expect some headlines and news making along the way.
Greg O’Brien: You mentioned the 90-10 Rule. Where do we sit today in terms of having that rule being reinvented? Will that only apply to for-profit schools or do you think there’s momentum in having that apply to all universities?
Paul Lannon: I don’t see the momentum to apply it all universities. The focus tends to be on the proprietary institutions because of the underlying concern that the profit motive is somehow counterproductive because it tends to maximize profits over other values that in the nonprofit world are typically higher: the integrity of the academic process, the integrity of the admissions process, making sure that students are qualified, etc.
Greg O’Brien: Years ago there was a “Dear Colleague” letter, in which the Department clarified the rule banning performance-based compensation. The letter indicated that as long as institutions were buying “bundled services” they were exempt from the ban. This was the “hat” on which the OPMs built their sales for many years. I understand that such “clarification” can be revoked at any point, without a negotiated rule making session or an act of Congress. Given things that we hear from Senator Warren and some others, how should we think about that Dear Colleague letter through today’s OPM lens and what caution or not might you share with universities who are thinking about working with a partner on our revenue share type structure?
Paul Lannon: Tomorrow is actually the 11th anniversary of that Dear Colleague letter, which came out March 17th, 2011. It is important to understand that the legal permission for institutions to share revenue with OPMs is highly precarious. There are three levels of authority that govern what institutions can and cannot do:
- Statutory authority: federal statute approved by Congress and the president;
- Regulatory authority: Department of Education implementation of the statute; and
- Sub-regulatory authority providing guidance on regulations. This last one is guidance, not law. That’s what the Dear Colleague letter is.
The statute says, “We cannot provide incentive-based compensation to student recruiters because we’re afraid that doing so will encourage them to enroll students who aren’t qualified or aren’t ready to take on student debts and things like that.” The department’s regulation enforces that ban on incentive-based compensation for student recruiters and applies to tuition sharing because it is incentive compensation. And as long as the OPM is providing student recruitment services the ban applies.
The rule—which the courts tend to defer to—says that there is enough evidence of good faith that we’re not concerned about predatory practices in certain circumstances. This is the “bundled services exception” which is the subject of the Dear Colleague letter. It says that in circumstance where colleges are hiring an OPM to provide a bundle of services—recruiting, marketing, administrative support, online support, and other things—it is acceptable to pay them a share of the revenue produced. The Department will accept such arrangements as long as the institution is unaffiliated with the OPM and is not itself providing incentive-based compensation to recruiters.
So in essence, the department is using the letter to say, “We’re not going to enforce the ban.” But this all rests on sub-regulatory guidance, not law or even regulation. It is literally just guidance, meaning it can be revoked at any time, without congressional or presidential authority. The Department has revoked 12 other exceptions “safe harbors” that had been in place for incentive-based compensation in recent years, and replaced with the “bundled services” exemption. They can easily do this again.
Greg O’Brien: I want to dig into that one click further. It’s been 11 years since the Dear Colleague letter, and from the time I first read about “bundled services” I had some concern that industry could pretty easily figure out how to get around it. Is this notion of a bundle as vague as it sounds?
Paul Lannon: I don’t think it should be alarming right now. The higher education market is more mature that it was in 2011 and there has been scrutiny for the past decade of the relationship between OPMs and higher ed. Both the institutions and the OPMs understand that it can’t be a sham. In other words, it can’t be 90 percent recruiting services and 10 percent marketing, or administrative, or stapling. It really has to be true bundled services where the OPM is doing substantially more than just recruiting students – helping with the platform, the educated model, the marketing and other what they call non-covered activities on statute. Is it possible that some are skating on thinner ice than others? That is probably true. I don’t think there is an industry standard yet about how much it has to be non-recruiting activities and a bundled services package, but (to date) there is no guideline from the department.
Greg O’Brien: Many institutions are wanting to take on many of the responsibilities that used to comprise pieces of the “bundle.” Recent research from Bob Shireman and others has made it pretty well known that often in these OPM deals three quarters of the investment is coming from the marketing piece. The question is “What is the risk in those types of relationships and how should we think about the bundle?” When does it get too narrow, and at what point do you think about the associated risk?
Paul Lannon: I think you always need to think about the risk. There are two big institutional questions at the beginning when you’re deciding on entering into an OPM agreement or renewing one. First, is it worth the investment? Can we do it better in-house or is this going to restrict our ability to develop the in-house capabilities? And so you want to look for examples for terms that would promise exclusivity or that prevent competition or solicitation of experts in the area so that you retain the flexibility and the option to develop the capabilities in-house. Secondly, some of these contracts are huge and the numbers are huge. You need to decide about the risk because if the department determines that the relationship violates the ban on incentive-based compensation, the liabilities can be very large, multimillion dollar liabilities.
The institution is the fiduciary here for Federal Student Aid. So they’re on the hook first line. They’re the first line liability here and are liable to repay to the department all financial aid that was in improperly awarded and dispersed. So that’s a big financial risk. And as I mentioned before, it is important to recognize that the legal permissibility of that is precarious. It’s been around for a decade, so that’s a good sign. And that breathes a lot of content and comfort, but it is technically not a law and can be revoked.
Greg O’Brien: That’s a great point. I spent a lot of time on the investment side of education service providers. I’ve sat in investor presentations by OPM firms where they call out the fact that, “No, we’re not liable. The university is the one that’s regulated.” So I think it’s important for universities to realize it’s the actions of your OPM are something that you bear liability for in regards to Title IV violations.
Paul Lannon: And that liability will not be contracted away. I just want to clarify. Institutions can’t shift that risk elsewhere. As a fiduciary, you’re on the hook.
Greg O’Brien: So even from an indemnification standpoint, you can’t indemnify yourself in the clear.
Paul Lannon: You can certainly try to get the OPM to agree to indemnification. But you’ll still be liable. That’s right.
Greg O’Brien: A question just came in about how to get out of an OPM contract. These are often well written, and tight, and long-term, and binding. Have you seen any examples of schools that have found a way to exit an OPM contract early?
Paul Lannon: I wish I had a magic bullet for you. It really depends on the contract language. Most of them are very well and carefully drafted usually by the OPM and their attorneys to be protective of their interests. So the opportunities for terminating early usually aren’t there unless there is economic reasons for both sides to part ways. Maybe the relationship isn’t working out, enrollment is decreasing, or the profit margin for the OPM isn’t particularly robust. That is usually the best time to try to negotiate an exit or much more limited relationship. That’s the reality.
Greg O’Brien: I know of at least one school where they held a “vote of no confidence” in their OPM. While that might mean nothing from a contractual standpoint, it could depending on the university bylaws, as I understand it. For many schools that would become a matter of public record. Even if you’re stuck working with the OPM for many more years, if the market becomes aware of your school voting that you have no confidence in them, that could be the kiss of death for a firm.
With the growth of hybrid programs or even just straight campus recruitment, does the bundled services provision apply to that as well?
Paul Lannon: Yes. It’s the student that determines whether the ban really applies. If the student is participating or eligible to participate in Federal Student Aid, subject to Title IV monies, then the ban applies. But that is ALSO why it does NOT apply to international students. They’re not eligible for student financial aid, but it would apply to online students to the extent they’re eligible in degree granting programs.
Greg O’Brien: Does the regulation apply to non-credit bearing programs or courses?
Paul Lannon: For the same reasons as stated above, the rule does NOT apply to non-credit because such students are not eligible for financial aid funds under Title IV.
Greg O’Brien: However, there’s been some testing with applying Title IV to coding academies and things like that, right?
Paul Lannon: The general rule is that it doesn’t apply to non-degree granting programs because the students in those other programs are not eligible for Federal Student Aid. But there’s a relationship to a degree-granting program. Credits can be transferred or the non-credit bearing courses part of a practicum that’s required for the degree or other connection into the degree granting program. And by that logic, the students become eligible for student financial aid, then the ban would apply. So it’s worth taking a closer look at some of those programs to see whether it’s subject to the ban or not.
Greg O’Brien: People are aware of a letter that Senator Warren wrote to some OPM executives. What’s happened there and where are we at today?
Paul Lannon: That letter was signed by several other senators. I think it signals an increased interest in that issue you mentioned earlier, transparency. There’s not a lot transparency among OPMs, there are no reporting requirements, and no monitoring by the federal government. So there’s a gap in the knowledge both at the Department and in Congress as to exactly how these OPMs work with college and universities. What the terms of contracts are? What kind of profit margins are they getting? This is part of a fact gathering effort by federal legislators to advance the consumer protection agenda and justify policy changes, regulatory changes.
These letters sent to the OPMs were focused on only on the tuition-sharing model. They weren’t interested in other models, fee-for-services, flat rates, etc. That is because the primary concern is consumer protection. OPMs can be really helpful to institutions that need more revenue or that don’t have the administrative capabilities to do the online programs in-house. BUT, it is important to remember that the federal ban on incentive compensation with student recruiters is there because there’s a real issue. There were predatory practices, and when you have a profit motive linked to enrollment, it tends to encourage those kinds of predatory practices.
Greg O’Brien: How should higher ed administrators be thinking about the notion of legislative reform, which takes a long time, versus more urgent threats to their relationships with their OPMs?
Paul Lannon: I think institutions and OPMs collectively need to take the risk of regulatory reform seriously. The risk that the tuition-share model either will disappear or become very limited based on new data and policy reform at the federal level. It is a real risk. The current administration is definitely taking a hard look at it and is considering reform. If Republicans take over the House or the Senate, this may be put in the back burner again.
There are two different ways of addressing that risk. The first is through lobbying. It’s a legislative fix. As we’ve seen from Senator Warren’s letter, the federal government is asking for insights in this area. It’s an opportunity to educate them about what OPMs and institutions are doing and how that’s affecting students. If you’re a fan of the tuition sharing model the goal is to show that tuition sharing does more good than harm. More good to the students, more good to the institutions.
The second is through the contract. Contracts vary, but it’s important to make sure that institutions have lawyers carefully look review with a risk management in mind. Obviously the OPM have this in place. From the institutional side, we’re looking at provisions that make sure everybody understands that their compliance is required with Title IV, and that within the bundled services exception, there is intent to comply with the bundled services exception. Its also importantly to include a provision that says that if the law changes (if the Dear Colleague letter is revoked or there’s a modification to it in some important way) either the contract terminates (because tuition sharing becomes illegal) or the parties have to meet and confer and consider alternatives. Finally, we need more attention to indemnification provisions or other provisions that talk about non-exclusiveness or competitiveness that allow the schools to develop an in-house capabilities should they choose to do so.
Greg O’Brien: In recent years we’ve seen schools buying one another or proprietary schools being acquired by nonprofits. How do you think about that from a consumer awareness perspective? How should institutions think about that?
Paul Lannon: Taking a perspective of federal regulation, we all should know that there has been stricter scrutiny of proprietary institutions in higher education. So if you want to reduce that kind of federal regulation and related concern for your investors or for your students, it is advantageous to move to non-profit status. I think the federal regulators and state regulators tend to favor the traditional nonprofit model and higher education.
Now, when you’re actually planning a merger or sale, it’s important to understand that at the federal level, they’re not as sophisticated with the technicalities of transactional practice, mergers and acquisitions and asset acquisitions. So they tend to try to create large categories. This is an asset situation, this is a merger situation, and they don’t have a lot of other categories. So they try to put the round pegs in the square holes and the square holes around pegs, etc. So we often have some difficulty translating what we’re trying to do in a way that the regulators appreciate and understand within the limited structure of their regulations.
The federal concerns focus on ensuring that the transaction is not a way to provide golden parachutes or other unfair incentives for individuals involved. Is some group benefiting disproportionately by this transaction to the detriment of students or faculty or others? They’re going to scrutinize the transaction to see if it’s fair to the nonprofit entity that’s resulting and their resources or is it going to be too limiting, too restrictive, too burdensome?
About the author
Greg O’Brien is passionate about expanding access to and reducing the cost of quality higher education for all. As Chief Growth Officer, Greg and his team collaborate with RNL’s clients and partners to help drive successful outcomes. He also teaches Marketing at Harvard University and Southern Methodist University. Previously, Greg was CEO of Noodle, an innovative online program manager and college search site.
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