An Obscure Federal Publication Should Have Predatory Student Finance Companies Shaking in their Boots

By Ben Kaufman | June 7, 2023

Last month, the White House’s Office of Federal Financial Management (OFFM) released its annual Compliance Supplement. OFFM is the part of the White House that aims to make sure federal dollars are being spent in compliance with the law, and its yearly Compliance Supplement summarizes the things that auditors should be looking out for when examining government outlays.

Unsurprisingly, few outside of Washington have likely ever heard of OFFM, and its doorstopper of a Compliance Supplement—this year’s clocked in at 2,061 pages—generally doesn’t top anyone’s year-end list of Best Reads. But buried more than 1,800 pages into the 2023 edition of this document, nestled under the unassuming header “PART 5 – CLUSTERS OF PROGRAMS,” the Biden Administration may have just sent one of the strongest signals to date that it intends to hold predatory companies accountable when they take advantage of students and student loan borrowers.

The Biden Administration may have just sent one of the strongest signals to date that it intends to hold predatory companies accountable when they take advantage of students and student loan borrowers.

In particular, the 2023 Compliance Supplement makes the following key changes to audits of federal student aid programs, including the loan and grant programs authorized under the Higher Education Act: [1]

• The Compliance Supplement sends a shot across the bow of the risk-riddled campus card market. Students who take on federal aid can have any money left over after tuition and fees be sent onto a pre-paid card or into a bank account with an associated debit card. Consumer advocates including SBPC have warned for years that this “campus card” market is rife with abuse, bad incentives, and endemic non-compliance with basic consumer protections that are already on the books—all in part because of how half-heartedly the Department of Education (ED) has historically supervised this space. In October 2022, for example, the Consumer Financial Protection Bureau (CFPB) found that one company that controls 70 percent of the campus card market had deceptively ushered students into more expensive accounts when cheaper options were available, loaded its contracts with sneaky junk fees, and lied to students about their rights, all under ED’s nose.

  To combat this status quo, the new Compliance Supplement adds an entirely new section outlining what the campus card market is, the full set of compliance requirements that firms within it face, and how auditors should approach inquiries into campus card companies. This guidance is extremely detailed; when noting that auditors should ask for the full set of contracts that might underlie a college’s relationship with a campus card company, for example, the Compliance Supplement takes the time to parenthetically reiterate the specific kinds of contractual activities that might make such relationships fall under one set of rules instead of another. Companies that may currently be used to skirting regulations without consequences should be on notice—the White House appears to expect its auditors to pay far more detailed attention to campus card providers’ behavior in the future.

• The Compliance Supplement shows the Biden Administration will not tolerate violations of the federal prohibition on incentive-based compensation. Since 1992, colleges that participate in federal student aid programs have generally been banned from paying recruiters or their own employees “any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid.” This so-called “incentive compensation ban” came in response to scandals where schools and their agents had used aggressive, badly-incentivized sales tactics to drive students into low-quality courses.

  Unfortunately, compliance with the incentive compensation ban has proven elusive. A recent Government Accountability Office (GAO) report, for example, found that certain for-profit education companies called Online Program Managers (OPMs) have been skirting this ban by improperly offering commission-type bonuses to individual employees, even while the companies’ agreements with schools as a whole complied with the restriction. The GAO noted that this behavior is already prohibited, and that these types of violations festered in part because ED’s audits of OPMs pertaining to incentive compensation have historically been fatally weak. For example, the GAO indicated that ED could not even identify through its audits how many agreements between schools and OPMs exist, and that basic aspects of these deals go wholly unexplored in instances where auditors do manage to find them.

  (Of course, this is all to say nothing of the so-called “bundled services” loophole that ED installed in the incentive compensation ban in 2011 that allows OPMs to exist in the first place, despite these companies’ business model producing a steady stream of student harm.)

  In response, the new Compliance Supplement includes a vastly expanded standalone section dedicated solely to incentive compensation, its definition under the law, and the full set of individuals and organizations that are prohibited from receiving or awarding it. The Compliance Supplement points specifically to the GAO’s recent findings on OPMs, reiterating that the conduct they have been engaging in is already banned under existing regulations, and even reminds auditors that the incentive compensation ban applies to “any educational offerings” that a school’s contractors provide. This statement implies that programs such as the predatory coding bootcamps that OPMs offer under schools’ brands are still subject to the incentive compensation ban despite not being eligible for federal student aid. Finally, the Compliance Supplement offers detailed recommendations for how auditors should approach a thorough investigation of a school’s adherence to the incentive compensation ban, touching on the context of OPMs and also reaching beyond it. These additions amount to a clear sign that the Biden Administration is well aware of and will no longer tolerate improper incentive-based payments or lax audits thereof.

• The Compliance Supplement underscores the Biden Administration’s commitment to accountability for low-quality courses. Since the inception of federal student aid programs, scammers have attempted to enrich themselves by driving students toward low-quality courses that load them with unaffordable debts while failing to prepare them for gainful employment. Short-term programs such as certificate and vocational training courses have long made up an outsized share of these fraudulent or otherwise failed areas of study. Currently, courses that last for 300 to 600 “clock hours” are eligible only for federal student loans but not Pell grants, and their ability to access federal student aid is contingent on them meeting certain standards for student completion and job placement. Still, many short-term programs that are part of the federal student aid system continue to show “a limited return of investment” for enrollees.

  
  Noting the risks present among short-term programs, the 2023 Compliance Supplement offers far more detail than prior editions on the “Minimum Program Completion and Placement Rates” that these courses must meet to maintain eligibility for federal student aid. The Compliance Supplement walks through the full range of regulations that these standards touch, how the relevant rates are meant to be calculated, and how auditors can go about examining them. With a growing set of for-profit colleges, lobbyists, and massive corporations pushing for short-term programs to gain access to federal Pell grants, the Compliance Supplement’s reiteration of the standards that these programs must meet is welcome.

Taken as a whole, the changes contained in OFFM’s 2023 Compliance Supplement are among the clearest articulation to date of how seriously the Biden Administration takes compliance with students’ financial protections. This attitude marks a welcome break from prior administrations’ apparent ambivalence about both these rules and auditors’ historically poor monitoring of their implementation. 

However, the Biden Administration should not mistake putting predatory companies on notice with actually holding them accountable. It is now up to the White House to make sure that it follows through on the threat of stringent oversight by ensuring that agencies such as ED and the CFPB meaningfully scrutinize these firms—no shortage of which are already repeat offenders—and that federal agencies use every tool at their disposal to bring badly behaved companies to justice. 

The Biden Administration should not mistake putting predatory companies on notice with actually holding them accountable.

The Biden Administration should also not forget that finally enforcing existing laws and regulations does not change the fact that many of these protections remain far too weak. Even if the Compliance Supplement improves audits of the campus card market, for example, there are still several important changes the Biden Administration will need to make in its upcoming Negotiated Rulemaking to the cash management regulations that govern the space. Even if the Compliance Supplement improves audits related to incentive compensation, the Biden Administration will still need to rescind the bundled services loophole and stop walking back proposed and badly needed changes to its guidance for third-party servicers. And even if the Compliance Supplement improves audits related to outcomes at short-term programs, the Biden Administration will still need to ensure that predatory programs do not gain access to Pell grants, among other changes. The list goes on.

Overall, the Biden Administration took one important step by publishing its vastly improved Compliance Supplement. Now it just has to take the rest of them.

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Ben Kaufman is the Director of Research & Investigations at the Student Borrower Protection Center. He joined SBPC from the Consumer Financial Protection Bureau where he worked on issues related to student lending.

[1] A copy of the relevant section of the 2023 Compliance Supplement is available here, a copy of the same section from the 2022 edition is available here, and a document comparing the 2022 and 2023 editions is available here.