U.S. Department of Education Issues New Guidance on Third-Party Servicers

The U.S. Department of Education (Department) published its newest "Dear Colleague Letter" (DCL ID: GEN-23-03) on Feb. 15, 2023, making sweeping changes to the regulation of agreements between institutions of higher education and third-party servicers (TPS) that administer any aspect of their participation in federal financial aid programs. The guidance materially expands the kinds of third-party arrangements subject to the Department's regulation, including most online program managers (OPMs). Covered TPS arrangements must comply with specific contracting, auditing, liability and reporting requirements. Institutions and TPS with covered agreements have until May 1, 2023, to report their arrangement to the Department.

The Department invites comments on the DCL by March 17, 2023.

What Is a Third-Party Servicer?

By statute, a TPS is defined as "any individual, any State, or any private, for-profit or nonprofit organization, which enters into a contract with (1) any eligible institution of higher education to administer … any aspect of such institution's student assistance programs under this subchapter; or (2) any guaranty agency, or any eligible lender, to administer … any aspect of such guaranty agency's or lender's student loan programs …, including originating, guaranteeing, monitoring, processing, servicing, or collecting loans." 20 U.S.C. § 1088(c) (emphasis added).

The Department interprets the "any aspect" part of this definition to expand the persons and entities that qualify as TPS on the presumption that "most activities and functions performed by outside entities on behalf of an institution are intrinsically intertwined with the institution's administration of [federal financial aid] programs…." The DCL targets OPMs and other companies involved in market research, marketing, student recruitment, enrollment management, student retention services, technology-related support (e.g., software products and services for administering federal financial aid) and the provision of curriculum content.

The DCL provides illustrations of functions that fall within the Department's TSP definition. Examples include:

• processing admissions applications, including the collection of documents, screening and/or determining initial or final qualification of applicants
• administering/proctoring ability-to-benefit tests or establishing or administering any aspect of an eligible career pathway program
• preparing or obtaining data for and submitting campus safety and security data reports
• preparing and/or disseminating promotional materials to market educational programs if the entity or individual provides any technology, curriculum or faculty, or is otherwise involved in the design or delivery of educational programs
• performing default management, prevention and aversion activities
• providing computer services or software in which the provider has access to, or maintains control over, the systems needed to administer any aspect of the Title IV programs
• conducting activities designed to keep a student enrolled at an institution
• audit activities, if the individual or entity also performs any other activities related to the institution's administration of the Title IV programs
• developing curricula or course materials unless the institution maintains full control over them and delivers the instruction itself
• establishing an account at a third-party entity, or transferring funds to it or an affiliated entity for purposes of writing, printing and mailing Title IV credit balance checks

This sub-regulatory guidance, which was not enacted pursuant to the Administrative Procedure Act (APA), is in tension with the current TPS rule that the Department enacted pursuant to the APA and has not withdrawn. That rule expressly excludes from the TPS definition "financial and compliance auditing," "providing computer services or software," "publishing ability-to-benefit tests," and "mailing of documents prepared by the institution." See 34 C.F.R. § 668.2. These inconsistences and the scope of the guidance may lead to legal challenges.

What Is Not Considered a Third-Party Servicer?

Illustrations of functions that fall outside the TPS definition in the DCL are few and heavily qualified. They include publishing ability-to-benefit tests, conducting voluntary workshops and training programs, warehousing records, providing information technology (IT) support without access to or control over Title IV programs, providing optional academic support, and ordinary financial and compliance auditing.

What Does the DCL Require?

Vendors newly characterized as TPS must be eligible to participate in federal aid programs under Title IV of the Higher Education Act Amendments. According the DCL, TPS must not be 1) located outside of the U.S., 2) owned or operated by persons who are not U.S. citizens, nationals or lawful U.S. permanent residents; 3) limited, suspended or terminated by the Secretary of Education within the last five year; 4) have been required to repay more than 5 percent of administered Title IV funds in the past two audit years, and 5) not have been cited during the preceding five years for failing to submit timely Title IV audit reports.

Institutions must report TPS agreements, modifications and terminations to the Department within 10 days through the Department's E-App process. Institutions must also obtain from TPS and their subcontractors signed Certification By Lower Tier Contractor forms. TPS must submit to the Department its Third-Party Servicer Data Form and update the form as necessary. TPS must also engage an independent auditor to conduct annual compliance audits of the TPS' Title IV functions for eligible institutions.

TPS agreements must be in writing and contain terms specified by the Department, including but not limited to 1) joint and several liability for Title IV violations; 2) compliance with all applicable Title IV requirements; 3) reporting suspicion of fraudulent or criminal conduct in administering Title IV programs; 4) confirming student eligibility and return of Title IV funds when students withdraw; 5) returning to the institution all records related to the TPS' administration of Title IV programs, including the return of all unexpended Title IV funds, and 6) compliance with the Family Educational Rights and Privacy Act (FERPA) for the protection of student records. In addition, the DCL states that institutions and the Department must have ready access to the TPS' records concerning its Title IV functions.

These additional reporting, contracting and auditing obligations should reinforce Title IV compliance among participating institutions and TPS. More attention will be focused on the terms of TPS agreements, including incentive compensation arrangements. However, administrative burdens, costs and compliance risks for institutions and TPS may also increase.

Limits on Academic Program Participation

Last year, the Department in DCL GEN-22-07 expressed special concern about arrangements that institutions make for the provision of academic programs by TPS ineligible to participate in Title IV programs. The Department found that some institutions incorrectly characterized or accounted for the percentage that the program provided by the TPS. In its new guidance, the Department reiterates that a TPS owned or controlled by the same persons as an institution are limited to providing 25 percent or less of an institution's academic program. Other TPS may provide more than 25 percent but less than 50 percent of the program when approved by the institution's accreditor.

Contact Us

Given these sweeping changes to TPS relationships, institutions and TPS are well advised to consult with legal counsel regarding compliance and risk management efforts. For assistance, please contact the authors, your Holland & Knight professional or another member of our Education Team.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.