REGULATORY ISSUES IN ONLINE EDUCATIONA Brief Overview

Orange Passion, a Division of Lifebushido

TABLE OF CONTENTS

Introduction and Overview 3 Some definitions and industry buzz words4 Federal laws and regulations 5 Accreditation issues 12 Cohort Default rate issues 13 Online schools with highest default rates 15 Conclusion 17

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INTRODUCTION AND OVERVIEW

This document presents a brief overview of regulatory issues in online education.

We discuss the main federal laws and regulations that affect distance learning institutions and provide a list of Online schools with the highest “cohort default” rates.

It is important to note that distance learning institutions are affected by state laws in addition to federal laws. State laws are not discussed in this document and can be researched and presented in a subsequent document, if desired by Campus Direct.

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SOME DEFINITIONS AND INDUSTRY BUZZ WORDS Title IV - Title IV of the Higher Education Act of

1965 (the Act, the HSA) covers the administration of the United States federal student financial aid programs. “Title IV- eligible” institutions are able to provide federally-funded financial aid to their students.

Cohort Default Rate - A cohort default rate is the percentage of a school's borrowers, who enter repayment on certain loans during a federal fiscal year (October 1 to September 30) and default prior to the end of the next one to two fiscal years.

Accreditation - Accreditation is the process of reviewing a school’s programs and policies to see if it meets criteria set by an outside agency. When a school is found to meet the minimum criteria, it is granted accreditation.

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FEDERAL LAWS AND REGULATIONS THAT AFFECT DISTANCE LEARNING INSTITUTIONS

The 90-10 RuleThe 90-10 rule states that a for-profit institution of higher education may not receive more than 90% of its revenue from federal Title IV grants and loans. This rule was established as a way of measuring the "quality" of an institution. The theory behind it is that if a college is deriving no more than 90% of its revenue from Title IV, it is a quality institution that is able to attract students, willing to invest some portion of their own funds in the institution and the education it provides. The single largest barrier to compliance is the Department's nearly unrebuttable presumption in the current regulation that Title IV funds are used toward institutional charges.

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FEDERAL LAWS AND REGULATIONS THAT AFFECT DISTANCE LEARNING INSTITUTIONS Family Educational Rights and Privacy Act

(FERPA)The Family Educational Rights and Privacy Act of 1974, also known as the Buckley Amendment, are federal guidelines that deal with the privacy of student records. In particular, FERPA addresses the confidentiality of student education records, as well as the release and review of those records. Students have the right to: review their educational records; request amendments to those records to ensure that they are not inaccurate, misleading, or otherwise in violation of their privacy or other rights; have consent to disclosures of personally identifiable information contained within their records; and file a complaint with the U.S. Department of Education concerning alleged failures to comply with the requirements of FERPA.

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FEDERAL LAWS AND REGULATIONS THAT AFFECT DISTANCE LEARNING INSTITUTIONS Technology, Education, and Copyright

Harmonization Act (TEACH Act)Copyright law gives educators a separate set of rights, in addition to fair use, to display and perform the works of others in the classroom. However, before the TEACH Act was signed into law in October 2002, virtual classrooms were held to much different standards. The TEACH Act revises the U.S. Copyright Act and expands the scope of educators' rights to perform and display works and to make the copies integral to such performances and displays for distance learning courses and programs. While the rights are closer to those of a traditional, physical classroom, there exists a considerable gap between what the statute authorizes for face-to-face teaching vs. distance education. 7

FEDERAL LAWS AND REGULATIONS THAT AFFECT DISTANCE LEARNING INSTITUTIONS The Incentive Compensation Rule

A 1992 amendment to the Higher Education Act of 1965 that bars financial aid-eligible colleges and universities from paying commissions, bonuses, or any other incentives to recruiters, based in any way on success in getting a student to enroll and apply for financial aid. The concern that led to the creation of this rule was that recruiters would bring in unqualified students who were unable to get through their coursework and degree -- and fall deep into debt, taking out federal and private loans to pay their tuition.

In 2002 a series of 12 "safe harbors" were added to the regulations, specifying kinds of compensation that were permitted under the law. Among the safe harbors are a provision for up to two salary or hourly wage adjustments in any 12-month period, profit-sharing bonus plans that apply to all of an institution’s full-time employees, and token recruiting gifts to students and alumni with a fair market value of no more than $100.

Reducing or eliminating “safe harbors” is currently being discussed by a Department of Education-appointed panel, as many critics argue against them.

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FEDERAL LAWS AND REGULATIONS THAT AFFECT DISTANCE LEARNING INSTITUTIONS

Distance Education Demonstration Program (DEDP)In 1998, the Distance Education Demonstration Program (DEDP) was created as a test to see if the rules regarding financial aid for distance education needed to be changed. Congress granted a number of distance learning colleges, universities, systems and consortia of institutions waivers from the 50-percent rule and/or 12-hour rule (see next 2 slides) in order to give students greater access to Title IV funding. This program was scheduled to continue through the 2004-2005 academic year when Congress was expected to consider comprehensive changes to the Higher Education Act. The program was renewed and continues to be in effect.

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FEDERAL LAWS AND REGULATIONS THAT AFFECT DISTANCE LEARNING INSTITUTIONS

The 50-Percent Rule – repealed in 2006 The 50-percent rule was created in 1992 and

excluded Title-IV eligible institutions from offering federal financial aid if: the institution offered more than half its classes

through distance education had half or more of its students enrolled in

distance learning courses, or offered correspondence and telecommunications

courses that amounted to half or more of all courses. The 50% rule was eliminated by Congress on February 8, 2006.

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FEDERAL LAWS AND REGULATIONS THAT AFFECT DISTANCE LEARNING INSTITUTIONS

12-Hour Rule – repealed in 2002Like the 50-percent rule, the 12-hour rule's original intent was to ward off fraud by diploma mills and correspondence programs. It mandated non-traditional, higher education programs that did not operate on a traditional academic calendar to provide at least 12 hours of "regularly scheduled instruction, examinations, or preparation for examination" per week of instructional time in order for students to be eligible for federal financial aid. Unlike the 50-percent rule, which is written into law, the 12-hour rule was an Education Department regulation. It was repealed in November 2002 under the Internet Equity and Education Act of 2001.

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ACCREDITATION ISSUES FOR DISTANCE LEARNING INSTITUTIONS Accreditation is a key issue for Distance Learning

institutions, as consumers are becoming more savvy about seeking accredited institutions for their online education.

The highest accreditation non-trade schools can receive is Regional Accreditation.

Non-Trade School Accreditation is granted by 6 regional agencies, recognized by the United States Department of Education (USDE) and the Council for Higher Education Accreditation (CHEA). These are the same agencies that accredit reputable brick-and-mortar schools.

The highest accreditation for Trade Schools is National Accreditation.

Many online schools are accredited by the Distance Education Training Council (DETC); however DETC Accreditation is not as widely accepted as Regional Accreditation and students often have trouble transferring their credits to other institutions.

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COHORT DEFAULT RATE ISSUES The cohort default rate, which was instituted with

the establishment of The Higher Education Act of 1965 was a way of keeping schools in check with regards to loan issuance.

There were concerns that low-income students were becoming prey to the many institutions that were springing up, at the time, in the inner-cities and were offering substandard education and thus, making it difficult for students to get employment to repay loans after their graduation.

This was especially a concern of trade schools and this system was devised to hold schools accountable by denying them access to federal grants and loans if their cohort default rate exceeded 25% for 3 years or 40% in one year.

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COHORT DEFAULT RATE ISSUES CONTINUED… Compared to brick-and-mortar schools, online

schools have a greater percentage of institutions with a 10% or greater default rate. Approximately 15% of the online schools run into this category as opposed to the approximately 5% of traditional schools.

Currently default rates are tracked over a 2 year period and in 2010 this will change to a 3 –year period. With a longer time to follow up on loan repayment, default rates are expected to increase to well over 25% for many online schools. Proprietary schools and schools, offering an education of 2 years or less, have a higher likelihood to experience this increase.

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TOP ONLINE SCHOOLS WITH THE HIGHEST COHORT DEFAULT RATES

Online School Cohort Default Rate

Charter College 21.7%Western International

University 18.5

Lincoln College Online 18.1

Westwood College 17.7

Wyo-Tech 17.1

Antonelli College 15.4

LA College Online 15.1

Florida National College 14.9

Ultimate medical Academy 14.4

Potomac College 14.2

Kaplan University 13.3

Ashford University 13.3 15

TOP ONLINE SCHOOLS WITH THE HIGHEST COHORT DEFAULT RATES

Online School Cohort Default Rate

Stratford University 13

Everest College Phoenix 13

San Joaquin Valley College 12.9

Rasmussen College 12.8

Norwich University 12.5

Herzing University 12.4

Keiser University 12Colorado Technical University

Online 10.9American InterContinental

University Online 10.5

Sterling College 10.3

Post University Online 9.916

CONCLUSION

Some of the main regulatory issues in online education revolve around Title IV funding and cohort default rates.

Accreditation is becoming a key issues and non-trade schools seek to be accredited by Regional Agencies, whereas trade schools seek National Accreditation.

15% of online schools have cohort default rates of 10% or higher, whereas only 5% of traditional schools face the same challenges.

Cohort default rates for online schools are expected to increase, due to a law change that stipulates rate tracking over a 3-year versus the original 2-year period.

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