On February 15, 2023 (updated February 16, 2023), the United States Department of Education (“ED,” or the “Department”) released a Dear Colleague Letter[1] (the “DCL”) regarding the “Requirements and Responsibilities for Third-Party Servicers and Institutions.” This DCL announces additional regulatory oversight for higher education service providers by expanding the definition of a third-party servicer (“TPS”). The DCL rescinds and updates previous guidance related to the definition of a TPS, and expands the guidance to include all service providers that administer any aspect of an institution’s Title IV student assistance program. The DCL confirms that its guidance is particularly focused on, but not limited to, “online program managers”, or OPMs, who assist (perhaps eyeing distance education and expanded enrollment) with student recruiting and retention, the provision of software regarding Title IV activities, and the provision of educational content and instruction.
What You Need to Know:
- The DCL has announced an expansion of/confirmation of ED oversight to OPMs, including TPS software companies and content creators.
- This guidance triggers additional risks and compliance obligations for colleges and universities.
- Even as the DCL reasserts existing incentive compensation standards, ED indicates that changes, including to the “bundled services exception,” may be on the horizon.
- Institutions should promptly review relevant contractual relationships with each TPS for newly-triggered or anticipated reporting obligations, and take advantage of opportunities to participate in the public comment process.
The DCL constitutes a major expansion in the types of services that are subject to TPS regulatory requirements, specifically addressing “entities performing the functions of student recruiting and retention, the provision of software products and services involving Title IV administration activities, and the provision of educational content and instruction.” These requirements previously attached primarily to functions or services more traditionally aligned with Title IV. For example, compare a vendor retained to determine a student’s eligibility for Title IV funds (surely subject to these requirements) to a vendor hired to drive up dwindling student enrollment (not as clear). Many service providers in the latter category will now be considered by ED and the colleges and universities they serve as part of the Title IV ecosystem.
As noted, the DCL explicitly acknowledges that the Department is responding to the “large and growing industry” of OPMs that offer services like “market research, marketing and student recruiting, enrollment management, student retention services, and technology-related support.” The demand for these services has exploded over the past few years as colleges and universities seek assistance in combating enrollment declines and transitioning academic programs into a distance learning format.
Who counts?
The DCL provides a set of examples to assist providers and institutions in determining whether a provider is subject to the TPS requirements. These examples demonstrate when an activity, service, or role is considered an aspect of an institution’s Title IV program participation, and when it is not. For example, with respect to “Recruitment- and Application-Related Activities,” an entity is subject to TPS requirements if “[p]erforming individualized and interactive financial aid counseling,” but not if merely “[p]ublishing and/or mailing general student financial aid information” without “individualized and interactive financial aid counseling.” The DCL provides similar illustrations for other aspects of the Title IV program:
- With respect to “Student and Institutional Eligibility,” the Department categorizes a provider as a TPS when it is “[d]etermining student Title IV eligibility and related activities,” “[p]rocessing, awarding, certifying, originating, and/or approving Title IV awards or award packages and/or disbursements,” and “[a]dministering/proctoring ability-to-benefit tests or establishing or administering any aspect of an eligible career pathway program,” but not when it is “[p]ublishing ability-to-benefit tests.”
- With respect to “Consumer Information,” the Department considers a provider to be a TPS when it is “[p]reparing and/or obtaining data for required consumer information disclosures,” such as crime statistics, emergency notifications, crime logs, and emergency responses and evacuation plans, but not when it is “[c]onducting campus crime awareness and/or drug and alcohol prevention informational meetings, instructional programming, and/or public awareness campaigns/events” that are open to the public and not limited to students from a specific institution.
- With respect to “Default Prevention,” the Department categorizes a provider as a TPS when it is “[p]erforming default management/prevention/aversion activities,” but not when it is “[p]reparing or presenting financial literacy curricula or programming, workshops, and/or public awareness campaigns/events,” as long as they are open to participants regardless of Title IV status and not used to satisfy the institution’s exit loan counseling requirement.
Additional examples are provided for the function areas of Delivery of Title IV Funds, Computer Services/Software and Record Maintenance, Retention of Students, Instructional Content, Consulting and Auditing, and the Federal Perkins Loan Program.
The expansion to new service providers increases the risk of violating compliance obligations by the third party and the institution alike. A provider with existing institutional contracts may no longer be an acceptable business partner; providers not previously compliant will have to become so—and quickly. Violating these obligations may lead to an investigation by the Department, which could result in sanctions in the form of fines, emergency action, limitation, suspension, or termination from the Title IV program.
Potential Changes to the Bundled Services Exception
The DCL confirms that a TPS is subject to the same incentive compensation prohibitions as colleges and universities, namely the bar on direct or indirect incentive compensation for recruiting new students or securing financial aid for students. One exception to this rule is the “bundled services exception,” which allows institutions and third parties to share tuition revenue for recruitment and other services provided by the third party. But, this exception may be ripe for change. The Department recently announced that it will hold “virtual listening sessions to receive public comments, recommendations, and suggestions to improve guidance on the incentive compensation prohibition…, particularly with respect to bundled services,” along with the solicitation of written comments.
Additional Obligations Under the DCL
The heightened compliance obligations are far from trivial. Institutions must now report to the Department[2] contracts with new entities, or modifications and terminations with existing ones, that meet the TPS criteria within ten calendar days of entering into a contract. The DCL also mandates specific contractual provisions that institutions must enter into with servicers. Some are common sense provisions likely already in place, such as requiring the TPS to comply with the Family Educational Rights and Privacy Act (“FERPA”) when handling an institution’s education records. Other provisions may be jarring to providers not previously considered to be TPS, such as agreeing to “comply with all applicable statutory, regulatory, and other Title IV requirements, including submission of TPS compliance audits” and to “be jointly and severally liable with the institution for any violation of Title IV requirements resulting from the functions performed by the servicer,” permitting the Department to seek repayment for Title IV violations from the institution, the TPS, or both.
Action Steps
Colleges and universities should carefully analyze the new guidance to determine if any existing third-party services they are utilizing fall under the scope of the new TPS guidance. If so, institutions have until May 1, 2023, to report any TPS arrangements; for the entities meeting the definition of a TPS for the first time as a result of the DCL, a corresponding obligation exists to submit a Third-Party Servicer Data Form to the Department, or update its existing form, by the same date. Particular attention should be paid to ensuring no such services are being provided by a third party located outside of the United States or owned or operated by a non-U.S. citizen or national, or a lawful permanent resident, and all contracts should be reviewed to identify potential conflicts. Colleges and universities should review contracts they have in place with providers now brought in under the TPS umbrella to ensure that those contracts are compliant with regulatory requirements. Institutions can also take advantage of opportunities to participate in public comment provided by the Department, with the open public comment period on this guidance open through March 17, 2023.
The Higher Education Industry Group at Saul Ewing will continue to monitor this complex and evolving area of the law. Please do not hesitate to contact any of the authors or your regular Saul Ewing contact with any questions about the substance of this alert.
[1] Dear Colleague Letters are one of the primary ways the Department conveys legal guidance regarding the Title IV federal student aid programs. Though this guidance is not law per se, institutions should expect the Department to treat it as such.
[2] This can be done using the Department’s E-App process. If the institution is unsure of whether a provider is subject to the TPS requirements, the institution should contact its School Participation Division at CaseTeams@ed.gov.
