Law of Unintended Consequences Meets Law of Supply and Demand: New USDE Rules for Online Programs

Judith McDanielBy Judith McDaniel
Editor, Web-based Course Design

[Note: Judith is both a college professor (PhD) and a lawyer (JD). -Editor]

Under federal USDE rules that took effect on July 1, 2011, every online program, school, university is now required to apply for approval in every state in which it has (or recruits) students. Schools have three years to come into compliance with the new regulations, but as of July 1, they must show a “good faith effort” to meet this requirement. A number of educational journals have been following this implementation (“As Costs of New Rule Are Felt, Colleges Rethink Online Course Offerings in Other States“), but I’d like to look at the consequences down the road a bit further.

According to U.S. law, each state regulates its own education. In the past, this has meant that it could set the standards for the brick and mortar institutions that did business there — that have an actual physical presence in the state. Today’s new rules do not require that the institution have a brick and mortar presence in the state, but if a student is physically present in that state, the school in which the student is studying must meet state standards.

Disclosure:  I teach in a fully online M.A. program. My students come from all over the United States. I have had students studying while they lived in Europe or South America. Today, one is attending a seminar in Dublin (physically present in Ireland) and receiving credit. Recently, a student living in Ohio lost her job and moved back to live with her parents in Texas. Another moved with her husband from Vermont to a new job in South Dakota. Life goes on, and adult students frequently choose online education because it allows them the flexibility they need as adults with professional and family lives.

As this snowball of regulation rolls down hill, the intended consequences are both predictable and manageable. Educational institutions with online programs are preparing applications to seek approval to operate in every state in which they have students or hope to recruit students. States are responding to those applications — some with ease when the application is short, others with difficulty when each application is hundreds of pages long. The expectation behind the new regulations, of course, is that students will benefit because there will now be oversight of what these programs promise, what they deliver, and the quality of the education.

There are reasons that USDE implemented these regulations. A few for-profit institutions of higher education have promised much and produced little — except receiving a high percentage of federal financial aid and allowing a high student default rate on those loans. Students who received degrees or certificates from those programs were unable to get the promised jobs — jobs that had been used to market the online programs. The intention of allowing states to regulate online education is to mitigate some of those questionable practices.

Are there consequences that are not intended or expected?  Let me count the ways.

Costs to educational institutions that have to meet this regulation will increase. The expense of employee time to prepare the applications is one cost. Then there are the fees charged by states. Right now some states don’t charge much at all (Texas), and others have large fees — up to and exceeding $10,000. It won’t be long before the states, following the competitive model, will have equalized their fees to a great degree — and we can be sure that those states with high fees will not be lowering them in this time of budget crunches.

But that is a one time cost, right?  Most institutions can absorb it. But the regulations require renewal every year, and most renewal fees are at least one-half the original application fee. This becomes an ongoing cost of doing business, and we can be sure that it will be passed on to the consumer, our students.

Tuition increases mean two things — fewer students or increased borrowing for tuition. Fewer students translate (according to many studies) to less well trained workers, fewer companies able to fill positions locally. More student loan debt — well, we all know what that means. More defaults. More doubling up of households. Less ability for debt-laden students to take public service jobs that pay less.

But wait. Maybe the educational institutions just need to get a little more focused. If most of your students are from the Midwest, the East Coast or California, why not just take students from the area that offers the greatest revenue? And my student who moved from Ohio to Texas? Does she lose her ability to complete her degree? How complicated do we want to make getting an education? Another unintended consequence is online education will lose that which makes it most attractive to adult students — anytime, anywhere learning.

What about the premise that state regulation will rein in the violators? Are marketing misrepresentations going to be all that states want to regulate? I seriously doubt that. Will the academic requirements for Maine and Arizona be the same for a master’s degree in literature? For a master’s degree in education?

As the unintended consequences of these new regulations, look for law suits and — possibly — congressional action down the road. For years tort law has required a “presence” by a company in a state in order for an injured consumer to be able to sue in state court. That lack of presence, when the company has no physical office or headquarters in the state, is defined as having no employees in the state, having no products actually made in the state, not directing advertisement to the state or shipping their products to the state (“U.S. Supreme Court: International Shoe v. State of Washington, 326 U.S. 310 (1945“). In other words, a company must not “enter the stream of commerce” in a given state if it wants to retain its immunity from liability.

But in the case of tort law, that standard has been slipping. Recent Supreme Court decisions have “found that foreign manufacturers and subsidiaries are protected from liability suits in state courts because they had insufficient connections to justify jurisdiction” (“Is International Shoe Getting the Boot?“). It is not too far a stretch to imagine Congress or the courts finding little reason to burden educational institutions with a connection that is far more tenuous than that between a manufacturer and its products.

Online education is fairly new, as one measures these things. We need standards and we need to meet reasonable criteria. But we don’t need 50 different states setting these standards and criteria with no common ground.

Next week: US News & World Report’s claim that its “ranking” of online education will help set those standards.

2 Responses

  1. If I understood correctly your post and Frank B. Withrow’s The Need for High DL Standards Will Raise Standards Across America, education being of state competence, there are not and cannot be federal government standards for higher education courses in the US?

    Yet even so, isn’t there a movement among US universities that offer Distance Learning, towards creating some kind of standard-based quality certifying entity for these DL courses, in collaboration with and recognized by the education departments of all states? I mean something on the line of the EduQua label we have in Switzerland, whose partners are official bodies regrouping cantonal education authorities.

    Or maybe there already is such a states-recognized US certification? If so, why can’t it be used to simplify the registration procedure you describe, and lower costs, both for higher-ed institutions and authorities? e.g. certified institutions could have an accelerated registration procedure, or the procedure could even be done via the the certifying entity.

  2. Claude, yes there is such a movement among US universities, still very much in the discussion phase. I will write about it in next week’s article. First we have to remove the barrier of state regulation of online courses at all.

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