Summary of ED's Guidance on State Authorization, Misrepresentation, and Incentive Compensation

The Department of Education (ED) issued an extensive set of new and revised regulations related to program integrity on October 29, 2010. ED has released Dear Colleague Letter (DCL) GEN-11-05 with additional guidance on three of the topics addressed by the regulations, which become effective on July 1, 2011:

  • State authorization
  • Misrepresentation
  • Incentive compensation

ED encourages institutions to review the preambles to both the final rules and the proposed rules upon which they were based for basic guidance. Highlights of the supplemental guidance provided in the DCL are given below, but institutions should carefully review the DCL in its entirety.

State Authorization -- General

An institution must be legally authorized by a state in order to establish eligibility to participate in the Title IV student aid programs. Revised regulations provide more detail about the requirements of state authorization. The DCL states that these regulations "are premised on the notion that an institution must obtain some type of authorization as a postsecondary institution to be considered legally authorized by the State."

The DCL clarifies that "The legal basis for the institution's existence as an eligible institution under the HEA is its authorization, by name, to offer postsecondary education." Authorization may be accomplished by a State agency that charters an institution, a statute that establishes a postsecondary institution, or a provision of a State's constitution that establishes a postsecondary institution. Whichever method is used, "established by name" literally means that the statute, constitution, or other state action must specifically establish and name the institution. The regulation does not preclude a state from having a further approval or licensure process with which the institution must comply even if authorization is accomplished by these means.

[However, the DCL points out that the preamble to the final rules states that "to the extent a public community college is a State institution, it is an instrumentality of a State government and is by definition compliant" with the new regulation.]

In the absence of a state law or charter, articles of incorporation filed with the state’s Secretary of State may serve as authorization if the institution is incorporated by name as a postsecondary institution. If the articles of incorporation are the same as articles of incorporation for a business or nonprofit entity, they will not serve as state authorization for Title IV purposes. If the institution is not incorporated by the state as a postsecondary institution, a further state approval or licensure by name is required.

The DCL discusses exemptions from certain aspects of the state authorization rules and limitations on those exemptions. ED also reinforces the required state processes for resolving complaints about institutions, exempted or not.

State Authorization -- Distance Education

The new rules explicitly address the federal expectation that a school offering distance education to out-of-state students will comply with any authorization requirements of that state relative to distance education. The federal regulations do not specify any authorization process for distance education, but rather defer to the state to determine whether authorization is required and what it entails. ED will not be publishing a list of state authorizing methods or agencies for distance education but will encourage voluntary development of such information by other entities.

There is no Federal minimum number of enrollments that triggers compliance, according to the DCL: "It is up to a State to establish the conditions for when State approval is required. States may decide to adopt their own de minimus tests."

The DCL states that an institution must identify where a student is located and seek approval from the State before enrolling the student in an online program, if such approval is required by that State: "If a State requires such approval for the provision of distance or online education to students located in the State, a student is eligible for title IV, HEA funds only if the required State approval has been obtained." In answer to "What happens if the student moves to another State?" the DCL states: "While the location of the student is initially determined at the time of enrollment in a program, consistent with other determinations of student eligibility, it must also be reevaluated each time an institution makes a new award to a student."

ED emphasizes that schools have always been expected to comply with out-of-state requirements for distance education offerings.  However, the DCL offers the following consideration:

"For purposes of the 2011-2012 award year alone, the Department will consider an institution to be making a good-faith effort to prospectively comply with the distance education regulations for State authorization, if --

  • The institution has applied for approval of its offerings in such a State, either in response to the publication of the regulations, or earlier if the State notified the institution that such approval was required;
  • The institution is able to document its application for approval and the application's receipt by the State; and
  • The institution notifies the Department when the State issues its decision on the pending applications for approval."

Nevertheless, the DCL confirms that students from a state in which a school did not have required distance education authorization are ineligible for TIV funds from that school:  "Institutions have always been responsible for knowing when such approvals are needed, and are expected to have obtained them when required to do so as an integral aspect of obtaining State authorization. As a result, as it has done in the past, the Department expects to continue to hold institutions responsible for the return of title IV funds that were obtained without the requisite State authorization to receive them, and it likewise retains the ability to take other actions against noncompliant institutions."

Schools must provide contact info for complaint resolution for students taking distance education out of state, as mandated under student consumer information regulations, whether or not a state has distance education authorization rules.


The DCL assures institutions that the revised regulations concerning misrepresentation do not reduce "the procedural protection given by the HEA and applicable regulations to an institution to contest the specific action the Department may take to address substantial misrepresentation by the institution."

Further, "nothing in the regulations alters a student's ability to pursue claims of substantial misrepresentation pursuant to State law, and nothing in the regulations creates a new Federal private right of action."

Incentive Compensation

The DCL confirms that "only two types of activities are subject to the incentive compensation ban: securing enrollment (recruitment) and securing financial aid. No other activities are subject to the ban. When other activities are coupled with recruitment or securing financial aid, institutions must consider how they compensate persons or entities to avoid payments that are prohibited." The DCL provides a table and examples to illustrate how these principles would be applied to activities that institutions carry out in support of recruitment and financial aid.

Payments to persons or entities that undertake or have responsibility for recruitment and decisions related to securing financial aid are subject to the incentive compensation ban (regardless of title or position) even if their work also includes other activities.

The DCL also provides a table and examples of different types of payments relative to their characterization as incentive compensation.

In the DCL, ED also discusses "standard evaluative factors" other than seniority that an institution may take into account in determining compensation of employees.

ED also states in the DCL that institutions cannot make payments to individuals covered by the incentive compensation ban based upon students' academic performance while enrolled.


Publication Date: 3/21/2011

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