ED Provides Guidance on Title IV Third-Party Servicers
May 16, 2012
A Dear Colleague letter published by the Department of Education (ED) provides general guidance to institutions that contract with third-party servicers to administer any aspect of their participation in Title IV programs.
As defined in 34 CFR 668.2, a third-party servicer is "an individual [not including an employee of the institution] or a State, or a private, profit, or non-profit organization that enters into a contract with an eligible institution to administer, through either manual or automated processing, any aspect of the institution's participation in any title IV, HEA program."
The letter lists some Title IV functions that, if performed by a third-party, would trigger ED's requirements on those entities. The non-exhaustive list includes:
- Processing student financial aid applications
- Performing need analysis
- Determining student eligibility and related activities
- Certifying loan applications (this would also include originating Direct Loans)
- Processing output documents for payments to students
- Receiving, disbursing, or delivering Title IV, HEA program funds, excluding lock-box processing of loan payments and normal bank electronic fund transfers
- Conducting activities required by Title IV, HEA consumer information service regulations
- Preparing and certifying requests for advance or reimbursement funding
- Loan servicing and collection
- Preparing and submitting institutional eligibility and participation notices and applications
- Preparing a Fiscal Operations Report and Application for Participation (FISAP)
Third-party servicers in contract with an institution must comply with all statutory and regulatory provisions applicable to Title IV. Third-party servicers are also required to report to the ED Inspector General any instances of suspected fraud at the contracted institution and are jointly and severally liable with the institution to ED for any violation by the servicer of any statutory or regulatory provision. Institutions are required to notify ED within 10 days if they enter into, significantly modify, or terminate a contract with a third-party servicer.
Title IV Disbursements and Credit Balances
ED reminds institutions that an entity contracted to deliver Title IV credit balances is considered a third-party servicer and is subject to the third-party servicer rules.
Under certain circumstances, a third-party servicer may be considered a school official for the purposes of FERPA. The institutions would then be able to provide the servicer with personally identifiable information (PII) without an eligible student's consent, as long as the servicer is not using the PII to set up a bank account or to maintain a credit balance for the student. Those two instances would require written consent from the student.
FERPA regulations set the conditions that must be met for a contractor to be considered a school official. The contractor--or, in this case, the third-party servicer--must:
- Perform an institutional service or function for which the school would otherwise use employees.
- Be under the control of the school with respect to the use and maintenance of education records.
- Comply with the FERPA requirements governing the use and redisclosure of PII from education records.
Note: On May 18, ED issued a correction to this Dear Colleague letter. The letter had stated that institutions needed to provide copies of all contracts with third-party servicers to ED. This was incorrect. Institutions need only provide copies of contracts if they are asked to do so by the Secretary.
Institutions are strongly encouraged to review the full text of the letter.
Vice President, Regulatory Affairs
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