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State & Local Policy Work

Now more than ever, as tuition costs skyrocket, student debt balloons, and the economic impact of the pandemic persists, students need better protections from fraud and abuse. Given the Department’s fickle politics, it is incumbent on States to step up. States have long played an important role as regulators and authorizers of institutions of higher education operating within their borders. As one of the key components of the "triad" of higher education, Congress has not wavered in its support of states’ unique gatekeeping role.[1] For that reason, all fifty states, the District of Columbia, and several United States territories continue to play a vital role in protecting students.

As state executives, administrative officials and legislators seek to enhance states’ gatekeeping function, Student Defense can provide detailed technical assistance on specific policy proposals. Such assistance necessarily includes careful consideration of a state’s existing legal framework. Because such detailed proposals must be tailored to each state’s legal framework, the following includes a list of generalized proposals for states to consider.

Strengthen regulation of for-profit schools by instituting a market viability test. The Higher Education Act  (HEA) requires any for-profit institution that participates in federal student aid programs to derive no more than ninety percent of its revenue from those programs, a market viability standard often referred to as “the 90/10 Rule.”[2]  An institution that does not meet the 90/10 requirement could lose its eligibility to participate in the Title IV program for at least two fiscal years. Until recently, institutions were allowed to consider education benefits for military servicemembers and veterans (such as the GI Bill) towards the ten percent of other revenue. Known as the “veterans’ loophole,” this incentivized many for-profit schools to target and aggressively recruit military students. In March 2021, Congress amended the HEA to specify that for-profit schools must take in at least 10 percent of their funding from “nonfederal” sources. This change will not take effect until 2023.[3]

States can do more to strengthen student protections by, at minimum: (i) instituting an 85/15 rule and (ii) making sure such a rule includes both federal and state tuition assistance as part of an 85 percent cap on revenue from government sources.[4] According to Department data, the slight change from 90/10 to 85/15 for federal sources alone could have a large impact in exposing schools that rely heavily on government subsidies and insulate themselves from the market. For example, according to a 2016 Department analysis, the percentage of revenues that many for-profit schools derive from Title IV funds are close to the 90% limit, and 200 for-profit schools would likely exceed the limit once the loophole was closed, a proposition that will soon be tested.[5] 

Create strong Tuition Recovery Funds that protect students from school closure and illegal conduct. Students who have been defrauded or whose schools close before they finish their program are eligible under federal law to get federal student loans discharged. This relief, however, does not help students and families who paid tuition (in whole or in part) out of pocket, with private loans, or with alternative means. According to a 2021 report by the National Consumer Law Center, roughly 20 states have “Student Protection Funds” (SPF) or “Tuition Recovery Funds” (TRF) which are collectively funded pools of money to reimburse students for tuition and other non-federal student aid costs when an event, like school closure or fraud, occurs.[6]  Although the scope may vary by state, as a general matter, TRFs reimburse students for education-related expenses, including where a student’s school has been found to have committed illegal acts.[7] State TRFs are most helpful when they cover all students and all school-related expenses. In California, which has the broadest TRF, when a school closes or loses its eligibility for state or federal aid, the state’s TRF provides reimbursement for tuition payments that students paid out-of-pocket or that were paid by state aid, federal Pell grant, or GI Bill benefits.

Of course, a key component of any TRF is adequate funding. Funding mechanisms may vary. States can require for-profit schools to contribute to the TRF as a condition of state authorization. Contributions can be set at a percentage of the school’s previous year of tuition and fees, a flat rate, or a combination of the two. Contributions can also be based on specific risk factors, such as a school’s over-reliance on federal student loans for revenue, big swings in enrollment, high loan default rates, low loan repayment rates, and other metrics. States can also require each school to fund a surety bond sufficient to reimburse the SPF for losses caused by that school.[8]

Ban all forms of incentive-based compensation in the college admissions and financial aid process. The HEA prohibits schools—and any third-party entity with which the school contracts—from compensating employees for securing student enrollments or financial aid packages.[9] The so-called incentive compensation ban is intended to ensure that the admissions process focuses on whether the school is a good fit for an individual student, rather than on how much money the student can bring to the school. However, institutions have historically exploited two loopholes in the ban.

First, rather than providing additional pay, for example, some schools have switched to disciplining or firing employees who do not meet enrollment or financial aid targets. Courts have consistently held the practice does not violate federal law.[10] States can prevent schools from engaging in this sort of gamesmanship by making clear that an employee’s pay, promotion, demotion, or firing cannot be linked in any way to that employee’s success in securing enrollments or financial aid packages.

The second loophole involves the so-called “bundled services” exception. In 2011, the Department issued guidance clarifying that there was a specific way tuition revenue could be shared with third-party companies without violating the incentive compensation ban. If the compensation was provided for a “variety of bundled services,” which could include things like marketing, student advising, technology support, and—significantly—student recruiting, then schools were in the clear.[11] Under the guidance, institutions can provide incentive compensation payments to online program managers (OPMs) that were recruiting students, so long as the OPMs provided other services. 

States should consider legislation to close the bundled services loophole by banning incentive compensation in all forms, regardless of whether a contractor provides other services to an institution of higher education.[12]  At minimum, states can increase transparency for online students by requiring colleges to disclose who is recruiting their students and running their online programs.

Ban schools from withholding students’ transcripts, diplomas, or other academic records due to disputes about unpaid debts. Often referred to as “transcript ransom,” colleges frequently refuse to release transcripts, diplomas or certificates, and other academic records until former students agree to pay in full all debts—such as tuition, private institutional loans and even library and parking fees—owed directly to the school.  Such tactics are counterproductive as they often create obstacles to students finding employment and paying off their debt. According to NPR, there are 6.6 million students nationwide who cannot obtain their transcripts from public and private colleges and universities due to unpaid bills as low as $25 or less.[13]  Students most impacted by the practice are disproportionately low income. Whether schools have much success in collecting debt by withholding transcripts is questionable at best. A study of transcript withholding in Ohio—which has aggressive collections practices—found that despite these collection efforts, less than 7 cents of every dollar owed by current and former students at public universities is recovered annually.[14] 

Unfortunately, there is no federal law or regulation prohibiting schools from engaging in this type of behavior, although the Family Educational Rights and Privacy Act of 1974 (“FERPA”) does require schools to release at least one unofficial transcript upon request.[15] Some states are starting to ban the practice. In 2019, California became the first state to legally ban public and private higher educational institutions from withholding the transcripts of students with unpaid debts.[16] In 2020, Washington State passed a similar but more permissive law.[17] In 2022, Colorado, New York, Maine, and Ohio passed laws that either limit the bases on which a school can withhold a transcript or diploma or outright ban the practice. [18]  Related measures are working their way through the legislative process in Massachusetts and Minnesota.[19]

Dialog on the federal level is also shifting. On December 1, 2021, U.S. Education Secretary Miguel Cardona stated that institutions withholding transcripts drive inequitable outcomes, reportedly “marking the first time ever the nation’s top education official has called for changing the widespread practice.”[20] In October 2021, Chairman of the House Committee on Oversight and Reform’s Subcommittee on Economic and Consumer Policy, sent letters to five states requesting documents and information concerning the practice of withholding transcripts from students who have unpaid bills.[21]

States can prevent institutions from holding these students’ futures hostage by prohibiting in-state institutions from withholding a student’s academic records due to disputes over unpaid bills.

Strengthen and Preserve State Authority to Protect Distance Education Students. To participate in Title IV programs, institutions of higher education are required to obtain state authorization both for on-ground and online distance education programs.[22]  The so-called state authorization rule requires schools operating online to satisfy all state law requirements even if they do not have a physical presence in the state.[23] Schools can satisfy this requirement by participating in a state authorization reciprocity agreement,[24] the goal of which is to reduce the amount of oversight the state in which the student resides must conduct, by requiring the state in which the institution is physically located to oversee and authorize the institution’s online out-of-state programs.[25]  

The National Council for State Authorization Reciprocity Agreements (NC-SARA) is (or at least purports to be) an agreement among 49 states (California is the only non-member) designed to serve this purpose. In exchange for membership in NC-SARA, states forgo enforcement of their higher education laws against schools that enroll their students remotely. This setup has resulted in a two-tiered system of protection, in which students attending NC-SARA-participating schools receive the benefit of fewer consumer protections than students attending non-participating NC-SARA schools. It also incentivizes NC-SARA schools to headquarter their online schools in states with weak consumer protection laws. Making matters worse, for-profit schools occupy a large portion of the online market,[26] insulating many predatory actors from meaningful oversight.

Surprisingly, NC-SARA is not controlled by the states. The majority of the board consists of school officials, accreditors, representatives of the regional compacts, and various third parties.[27]  Without a strong voice at the table, states have little say over NC-SARA’s policies and protections of students. Even though NC-SARA was designed to reduce states’ administrative burden, it has usurped states’ ability to protect hundreds of thousands of their students. 

Online education, already on the rise, grew substantially during the pandemic. Of the two million undergraduates studying exclusively online, more than 700,000 are enrolled across state lines.[28]  Now, more than ever, it is incumbent on the states to protect this vulnerable population.[29]  States can urge NC-SARA to include more state representation on its board of directors, implement minimum consumer protection standards for participating, and operate with more transparency.

States have substantial leverage with respect to NC-SARA, particularly if they act together to demand change and reform. States should consider creating an interstate task force designed to review NC-SARA from a consumer protection perspective, and make recommendations to the states on how to increase oversight of and by NC-SARA. 

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In addition to the forgoing policy proposals, States should keep in mind other accountability measures and student protections, such as strengthening standards tied to state authorization and aid, banning mandatory arbitration clauses in enrollment agreements, requiring programs lead to state licensure eligibility (when schools say they do), repealing laws that suspend professional licenses when the borrower defaults on a student loan, enhancing schools’ disclosures to students, and providing free, independent financial aid counseling.   

  • Set stronger state standards to receive state authorization and state aid. Because states authorize institutions of higher education, as well as provide a source of funding for institutions and students, states have ample authority to protect students from predatory for-profit colleges. States can, for example, set clear standards for when schools will become ineligible for state authorization and state aid based on a school’s official cohort default rate (i.e., the percentage of a school’s borrowers that enter repayment during a particular fiscal year and then default within a specific timeframe). At the federal level, schools with cohort default rates of thirty percent or greater for three consecutive fiscal years lose access to federal student loans and Pell grants.[30] Similarly, schools with cohort default rates of forty percent or greater for the most recent fiscal year also lose access to federal financial aid.[31] Using the Department of Education’s published data on cohort default rates, states can pressure institutions to improve student outcomes by setting lower cohort default rates and tying those rates to state authorization, state aid, or both.

  • Prohibiting schools from forcing students into arbitration or banning class action lawsuits. Many schools include clauses in enrollment agreements that require students to resolve disputes through mandatory arbitration and/or prohibit students from pursuing class action lawsuits. These requirements put students with legitimate grievances at an extreme disadvantage. Discovery can be limited, making it difficult to uncover evidence of misconduct. The outcome of an arbitration proceeding is usually not appealable (or, when it is, involves a standard of review that is exceedingly deferential to the arbitrator’s ruling) and often kept secret. Moreover, when a clause limits the use of class actions, students are forced to pursue claims individually, even when there is evidence of widespread misconduct, and may face the prospect of doing so without legal representation. All of these factors serve to help for-profit schools hide evidence of their fraud and abuse from other students and the public. States can play a role in ensuring that aggrieved students get their day in court. Whenever a state funds part of a student’s tuition, that state can prohibit schools receiving its funds from including mandatory arbitration clauses and class action bans in their student enrollment agreements.[32]

  • Requiring programs that provide training in fields with state licensure requirements to meet the minimum standards necessary for graduates to sit for the state licensing exam where they reside. Students who enroll at institutions of higher education in order to work in a specific profession have, too often, ended up with costly, worthless degrees. Although for-profit colleges typically have institutional accreditation to receive federal financial aid, the individual programs these schools offer are not always properly credentialed. When this happens, students graduate only to find out that they are not qualified to obtain employment in their field or that they cannot sit for or pass the required state licensing exams. Lack of programmatic accreditation affects many fields, from medicine and law enforcement to massage therapy. States can prevent students from obtaining these costly, worthless degrees by requiring, as a condition of state authorization, that any programs offered by for-profit schools for the purpose of preparing students for employment in a particular field meet the minimum accreditation standards of the field’s state licensing board and permit graduates to be eligible for state licensing or certification. Similarly, states can require these programs to meet any requirements set by the field’s trade or professional organizations.

  • Repealing laws that allow for the suspension of professional licenses whenever a borrower goes into default on his or her student loans. More than twenty-five percent of workers in the United States now require a professional license to practice their professions[33], including occupations as diverse as teachers, interior designers, nurses, lawyers, and hairstylists. In the 1990s, the Department of Education encouraged states to adopt laws that would suspend or revoke a professional license whenever a student defaulted on his or her student loans.[34] Currently, eighteen states still allow government agencies to revoke the professional licenses of student loan borrowers in default.[35] Much like transcript withholding, such a practice makes little sense: borrowers who are already struggling to repay their debts are stripped of the licenses they need in order to make money to pay back those same loans. With nearly nine million borrowers in default today,[36] the majority of whom attended for-profit and community colleges,[37] it is crucial for states to prohibit the punitive practice of government agencies denying, suspending, or revoking professional licenses as the result of defaulted student loan debt.

  • Providing enhanced disclosures to prospective students. Accurate consumer disclosures about graduate earnings, student debt levels, program length, and regulatory or law enforcement problems enable prospective students to better assess the quality and value of a degree or certificate.[38] In crafting disclosure language, the content, timing, and method of disclosures all matter. In terms of content, states can require schools to provide certain disclosures to help students make informed decisions about whether to pursue higher education. Such disclosures might include: the school’s accreditation status; the cost and length of the program; the school’s refund policy; the transferability of credits; the licensure and certification requirements of the student’s chosen profession in the state where the student resides; the cohort default rate; the job placement and earnings data of prior graduates; and any adverse actions (e.g., investigations, fines, lawsuits) taken against the school by the Department of Education, the state, the school’s accreditor, or others. In terms of timing and methodology, Student Defense believes that disclosures are most helpful when made via plain language, directly to students, and before a student makes an enrollment (or re-enrollment) decision. Such disclosures should also go through rigorous consumer testing.

  • Providing no-cost independent financial counseling for prospective and current students. The decision to take on student debt is an important one, but the federally mandated entrance and exit counseling offered by schools rarely prepares students to understand the in’s and out’s of the repayment process. For example, many students leave school confused about the difference between deferment and forbearance, the advantages and disadvantages of each loan repayment plan, and what to do if they are unemployed or cannot afford their monthly payments. States can offer free financial counseling through an entity not associated with the school at two critical decision points: before a student enrolls and shortly before graduation. This type of independent, free counseling would ensure that students understand how to manage their student loan debt. Such counseling might include: an explanation of the financial aid application process; the difference between scholarships, loans, and grants; projections of future monthly payment amounts; projections of earnings post-graduation in the student’s chosen field; repayment plans that may be most beneficial to the student; how to create and stick to a monthly budget; strategies for quickly paying off loans whenever extra funds are available; and the student’s eligibility for federal and state loan forgiveness programs, among others.

[1] See, e.g., 20 U.S.C. § 1001 (defining “institution of higher education” to include only such entities that are “legally authorized within such State to provide a program of education beyond secondary education”).

[2] 20 U.S.C. § 1094(a)(24); 34 C.F.R. §§ 668.14(b)(16), 668.28.

[3] See, e.g., Stacy Cowley, Congress Closes Loophole That Made Veterans a Target of For-Profit Schools, New York Times (Mar. 11, 2021), available at

[4] Some states have attempted to make similar changes. For example, in January 2019, Governor Cuomo proposed the NY For-Profit College Accountability Act. See FAQ Regarding New York’s Proposed For-Profit Accountability Act (last revised Jan. 22, 2019), available at: Among other things, the law would have created an 80/20 rule, whereby for-profit schools would have to demonstrate that no more than 80% of their revenue came from federal and state sources. The state legislature rejected the law. Maryland proposed an 85/15 rule, which also did not become law. See Danielle Douglas-Gabriel, Maryland bills would tighten for-profit college regulation amid Trump rollback, Washington Post (Apr. 6, 2019), available at: Multiple other states have taken action to (unsuccessfully) pass either 85/15 or 80/20 rules. See e.g., Assemb. B. 1346, 2019–2020 Reg. Sess. (Cal. 2019), available at:;  Senate B. 1544-A, 2020 Reg. Sess. (Ore. 2020), available at:

[5] Press Release, U.S. Dep’t of Educ., New Analysis Finds Many For-Profits Skirt Federal Funding Limits (Dec. 21, 2016).

[6] Robyn Smith and Joanna K. Darcus, How States Can Help Students Harmed by Higher Education Fraud, Nat’l Consumer Law Ctr. (Jan. 2021), at Appendix A, available at:

[7] See, e.g., Cal. Educ. Code § 94923(b)(2). Advocates argue that the agency overseeing California’s SPF can do better by using its discretion to apply SPF eligibility to students who attended a school sued by the agency or the California Attorney General. See Noah Zinner, Bittersweet Relief: Strengthening California’s Tuition Recovery Fund to Better Support Students, TICAS (July 2019), pp. 14-15, available at:

[8] For example, in Georgia, schools must post a bond “conditioned to provide indemnification to the Tuition Guaranty Trust Fund … .” Ga. Code Ann. § 20-3-250.10(a).

[9] 20 U.S.C. § 1094(a)(20). The Department’s regulation interpreting this provision provides that an institution will not provide any “commission, bonus, or other incentive payment” upon success in securing enrollments or award of financial aid. See, 34 C.F.R. § 668.14(b)(22)(i).

[10] See, e.g., United States v. Corinthian Colleges, 655 F.3d 984, 992–93 (9th Cir. 2011) (“[A]dverse employment actions, including termination, on the basis of recruitment numbers remain permissible under the statute’s terms.”); U.S. ex rel. Laporte v. Premier Education Group, L.P., No. 11-cv-3523, 2016 WL 2747195 (D. NJ May 10, 2016) (“Although the HEA prohibits the payment of ‘any commission, bonus, or other incentive payment,’ the Act does not concern personnel decisions, such as the hiring and the firing of employees.” (internal citations omitted)). 

[11] See U.S. Dep’t of Educ., Dear Colleague Letter: Implementation of Program Integrity Regulations (Mar. 17, 2011), available at:; see also U.S. Dep’t of Educ., Program Integrity Questions and Answers – Incentive Compensation (Mar. 2011), available at: This bundled services language was the direct result of lobbying efforts by online program mangers (OPMs) that benefited directly from it. See Kevin Carey, The Creeping Capitalist Takeover of Higher Education, Huffington Post (Apr. 2, 2019), available at:

[12] California attempted unsuccessfully to pass such a law in 2019. See, Assemb. B. 1345, 2019–2020 Reg. Sess. (Cal. 2019), available at:

[13] See Jon Marcus, States Step In To Stop Colleges Holding Transcripts Ransom For Unpaid Bills, National Public Radio (Apr. 8, 2021, 11:39 AM), available at:

[14] See Piet van Lier, Collecting against the future, Policy Matters Ohio (Feb. 20, 2020), available at: See also Megan Pauly, A Virginia law requires the Attorney’s General office to aggressively collect student debt, Virginia Public Radio (Nov. 9, 2021), available at:

[15] See 20 U.S.C. § 1232g(a)(1)(A); 34 C.F.R. § 99.10(d)(1).

[16] Assemb. B. 1313, 2019–2020 Reg. Sess. (Cal. 2019), available at:

[17] See Wash. Rev. Code § 28B.10.294 (2020), available at:

[18] See HB 22-1049, 73rd Gen. Assemb., 2022 Reg. Sess. (Colo. 2022), available at:; see also Press Release, N.Y. Bars Transcript Withholding Over Student Bills (May 6, 2022), available at:; see also S.P. 656, 130th Me. Leg., 2nd Reg. Sess. (Me. 2022), available at:; see also S.B. 135, 134th Gen. Assemb., Reg. Sess. (Ohio 2021), available at:

[19] See Bill S. 821, 192nd Gen. Ct. of the Commonwealth of Mass. (Mass. 2021), available at:; see also H.F. 1181, 92nd Leg., Reg. Sess. (Minn. 2021), available at:

[20] See Kirk Carapezza, Education secretary, college leaders want colleges to stop holding transcripts over unpaid balances, GBH (Dec. 23, 2021, 5:09 PM), available at: Secretary Cardona further explained: “To emerge from the pandemic even stronger, institutional leaders must embrace long-term change. That means evaluating long-standing institutional policies that block retention and completion for our most underserved students, such as enrollment and transcript holds for students with unpaid balances.” Id.

[21] See Press Release, H. Comm. on Oversight and Reform, Chairman Krishnamoorthi Investigates Practice of Withholding Student Transcripts Due to Unpaid Bills (Oct. 11, 2021), available at:

[22] 20 U.S.C. §§ 1001-1002, 1099c; 34 C.F.R. § 600.4.

[23] 34 C.F.R. § 600.9(c)(1).

[24] 34 C.F.R. § 600.2.

[25] What is State Authorization and What Role Does NC-SARA Play?, TICAS (Sept. 14, 2021), available at:

[26] See Undergraduate Enrollment, Nat’l Ctr. for Educ. Stats. (May 2021), available at:

[27] For information on NC-SARA’s Board of Directors, see NC-SARA’s Board of Directors, NC-SARA (last visited Feb. 16, 2022), available at:

[28] See Stephanie Hall, et al., What States Can Do to Protect Students from Predatory For-Profit Colleges, The Century Found. And Veterans Educ. Success (May 2020), available at:

[29] After meeting with NC-SARA leadership to discuss concerns about states’ ability to protect their constituents, a bipartisan group of state attorneys general urged NC-SARA to include more state representation on its board, act transparently, and implement basic consumer protection standards. See Letter from Multiple States to Dr. Lori Williams and Members of the NC-SARA Board of Directors (Aug. 2, 2021), available at:

[30] 34 C.F.R. § 668.206(a)-(b).

[31] Id.

[32] States interested in doing so should consult carefully with Student Defense or other lawyers to ensure that any policy proposals do not violate the Federal Arbitration Act.

[33] Andrew Wagner, “License Suspension for Student Loan Defaulters,” Legis Brief (Oct. 1, 2018), available at

[34] Id.

[35] Preston Cooper, “Nonsensical State Laws Yank Licenses from Student Loan Defaulters,” Forbes (June 22, 2018),

[36] Id.

[37] Preston Cooper, “Most Student Borrowers Fix Their Default – Except This Group,” Forbes (Aug. 15, 2018),

[38] For example, the Department of Education’s College Scorecard allows students to search and filter information so that they can compare costs, average loan amounts, and the average student’s ability to repay his or her loans across multiple institutions, available at: