Administrative Penalty for Violating the Incentive Compensation Ban is Repayment of All Title IV Funds

As reported in Insider Higher Education, the Department of Education released a new memorandum providing that violators of the incentive compensation ban (see (b)(22)) face repaying all Title IV funds received.  This move comes on the heels of a highly critical report from Department’s Office of the Inspector General on the Department’s handling of incentive compensation matters.  The memorandum rescinds the so-called 2002 “Hansen Memo” that set forth that violations of the incentive compensation prohibition should result in fines being assessed against violators rather than seeking repayment of Title IV funds paid to the violating institution.  The reason for this is that “a violation of the incentive compensation prohibition [does] not result[] in monetary loss to the Department.”  The 2002 memo explains this is because the students being recruited are still eligible to receive Title IV funds at the institution in question.

The new memo reverses course on this point entirely, finding that the Department, in fact, suffers damage because an institution that violates the incentive compensation ban is itself ineligible for receive funds:

[T]he Department, in fact, incurs monetary loss upon a violation of section 487(a)(20), and the appropriate response is to recover that loss, as provided for in the Department’s original policy. When acting as the Department’s fiduciary, an institution may receive funds only in accord with the representations it makes in order to become eligible for those funds. When an institution makes an incentive payment based upon the number of students enrolled, the institution breaches those representations. It thus violates a condition of its Title IV program eligibility and is not entitled to receive those Title IV funds. In this situation, an institution is liable to the Department for the cost of the funds it received.

As a result, in addition to any fines, or any actions to limit, suspend, or terminate the violating institution, the Department:

should calculate the amount of the institutional liability based on the cost to the Department of the Title IV funds improperly received by the institution. This would include the cost to the Department of all of the Title IV funds received by the institution over a particular time period if those funds were obtained through implementation of a policy or practice in which students were recruited in violation of the incentive compensation prohibition.

Its notable how this approach will that this approach differs from the approach used in U.S. ex rel. Christianson v. Everglades College, Inc., No. 12-60185-CIV (S.D. Fla.).  There, in granting a decision for relators in a false claims act case based on improper payment of incentive compensation, the court determined it “should calculate damages by first determining the amount the government paid because of a defendant’s false claims and then subtracting the value the government nonetheless received from the defendant.”  Interesting though, the court relied on the belief that the Department would not withhold payments to an institution that violates the incentive compensation ban.  Given this new memo, that view seems much more difficult to maintain.