Can colleges reward students and alumni for referring new students?

by Thompson Coburn LLP

One of the more common questions we receive in our higher education practice concerns whether an institution may offer a student or alumni referral program without running afoul of federal law. Or, more specifically, whether such a program violates the incentive compensation regulations enforced by the U.S. Department of Education. Invariably, our response is that an institution considering such a program should proceed with caution.

The regulations addressing incentive compensation, located at 34 CFR 668.14(22)(i), require that as a condition of participation in the federal financial aid programs, an institution must agree:

  • “It will not provide any commission, bonus, or other incentive payment based directly or indirectly upon success in securing enrollments or financial aid to any person or entity engaged in any student recruiting or admission activities or in making decisions regarding the awarding of title IV, HEA program funds, except that this limitation does not apply to the recruitment of foreign students residing in foreign countries who are not eligible to receive title IV, HEA program funds.”

Prior to July 1, 2011, the regulations provided no definition of the phrase “person or entity engaged in any student recruiting or admission activities or in making decisions regarding the awarding of title IV, HEA program funds.” In the absence of any specific definition, the Department always took the position that the broad language of the incentive compensation law extended to any person engaged in recruiting prospective students, including currently enrolled students and alumni of the institution. And in fact, the law included a “safe harbor” provision that spoke specifically to the limitations on gifts to students or alumni. Under this former safe harbor, the awarding of token gifts to an institution’s students or alumni was permitted, “provided that the gifts are not in the form of money, no more than one gift is provided annually to an individual, and the cost of the gift is not more than $100.”
Effective July 1, 2011, the incentive compensation regulations were revised, and the safe harbor referenced above was eliminated. In the preamble to the proposed regulations, the Department offered the following comment concerning the removal of this particular safe harbor, evidencing the agency’s continuing view that referral programs involving gifts to students and alumni can be problematic:

  • “…students oft-times do things with little reflection if it brings an immediate reward, and such things as a $100 gift card constitute a substantial incentive for many students. Further, the fair market value of an item might be considerably greater than its cost. A high value item for which the institution paid a minimal cost could not be considered a token gift. As a result, even the provision of token gifts to students and alumni is fraught with the potential for abuse, creating the need to remove this safe harbor.”

This commentary, and the removal of the related safe harbor, suggest strongly the Department’s belief that all gifts to students or alumni should be prohibited, even where such gifts are “tokens.”

And yet, at the same time the Department removed the noted safe harbor and made the associated comments, it also opened the door for such programs. For the first time, the Department added to the regulations a definition of the term “entity or person engaged in any student recruitment or admission activity or in making decisions about the award of financial aid.” Specifically, the Department added 34 CFR 668.14(b)(22)(iii)(C), which provides:

  • “Entity or person engaged in any student recruitment or admission activity or in making decisions about the award of financial aid means—
    (1) With respect to an entity engaged in any student recruitment or admission activity or in making decisions about the award of financial aid, any institution or organization that undertakes the recruiting or the admitting of students or that makes decisions about and awards title IV, HEA program funds; and
    (2) With respect to a person engaged in any student recruitment or admission activity or in making decisions about the award of financial aid, any employee who undertakes recruiting or admitting of students or who makes decisions about and awards title IV, HEA program funds, and any higher level employee with responsibility for recruitment or admission of students, or making decisions about awarding title IV, HEA program funds.” (Emphasis added) 

Of considerable significance, the new definition limited the definition of “person” to employees only. Thus, when the new regulations became effective, the law seemed specifically to exclude students, alumni, and for that matter, any non-employee, from coverage. And as previously noted, the safe harbor discussing the limitation on gifts or payments to students and alumni was eliminated, as well. Also of note, the guidance in the Federal Register and elsewhere that accompanied the final regulations did not touch on this specific point.
Thus, the current regulations, at least as a technical matter, seem to exclude from the incentive compensation prohibition payments to students and alumni for referrals. And indeed, many institutions now are offering referral programs for students and alumni, which include small gifts to individuals who make the referrals. Certain accreditors have even offered best practices for administering such referral programs, clearly implying their conclusion that offering such programs is permissible. 
Nonetheless, it seemed incongruous in the extreme that the Department would act to eliminate the restrictions on gifts to students and alumni in 2011, when the general purpose of the rulemaking was to tighten and strengthen program integrity, and in particular, the incentive compensation laws. Moreover, as noted above, the Department explicitly stated in the preamble to the proposed regulations its view that referral gifts to students and alumni potentially create unwanted incentives. Also of note, the Department and the DOJ both have been actively enforcing the incentive compensation prohibition in recent years, and there is little about the current political or regulatory climate that suggests that this trend is likely to change anytime soon.
For all these reasons, we suggest that any institution considering a referral program for students or alumni move forward deliberately and with caution, and only if the institution is comfortable tolerating the associated risk. The letter of law appears to permit such programs, but it is hard to shake the feeling that the Department might take a different view.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Thompson Coburn LLP | Attorney Advertising

Written by:

Thompson Coburn LLP

Thompson Coburn LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.