ED Issues Updated Third-Party Servicer Guidelines
February 28 Update: The Department of Education updated its letter on February 28 to indicate that the effective date and reporting deadline for this third-party servicer guidance is September 1, 2023, as NACUBO and others had requested. ED has also extended the window for comments on the changes to March 30. In its update, ED indicated that it is “especially interested in comments on the impact of continuing the existing limitation on institutions contracting with third-party servicers operating outside the United States or owned or operated by individuals who are not U.S. citizens…” including how to address concerns about how to hold those servicers liable, if necessary.
On February 15, the Department of Education published a Dear Colleague Letter broadening the requirements for what constitutes a third-party servicer (TPS). The guidance is effective immediately, updating and replacing several previous postings from ED.
In general, a TPS performs functions or services necessary—
- For the institution to remain eligible to participate in Title IV programs
- To determine a student's eligibility for Title IV funds
- To provide Title IV-eligible educational programs
- To account for Title IV funds
- To perform any other aspect of the administration of the Title IV programs or to comply with the statutory and regulatory requirements associated with those programs
ED said it reviewed many contractual arrangements between institutions and outside entities and determined that “most activities and functions performed by outside entities on behalf of an institution are intrinsically intertwined with the institution’s administration of the Title IV programs and thus the entities performing such activities are appropriately subject to TPS requirements.”
Because of this, ED states that it is “revising its guidance concerning the functions of student recruiting and retention, the provision of software products and services involving Title administration activities, and the provision of educational content and instruction.” Companies providing such services are often called online program mangers (OPMs).
If an entity meets the definition of a third-party servicer, several regulatory requirements kick in. The school must notify ED within 10 days of signing, or modifying, a contract with the servicers, and contracts must include certain provisions. The third-party servicer also must provide certain information to ED and undergo an annual compliance audit. Both parties, the institution and the third-party servicer, are jointly and severally liable for any violations of Title IV requirements.
ED’s guidance also contains a “non-exhaustive list of functions and services that, if outsourced by an institution to a third party, would render that third party a TPS subject to TPS requirements.” Business officers should pay particular attention to this section of the guidance.
Schools cannot contract with a TPS if the servicer (or its subcontractors) is located outside the United States or is owned or operated by an individual who is not a U.S. citizen or national or a lawful U.S. permanent resident. Additionally, a TPS may not have—
- Been limited, suspended, or terminated by ED within the preceding five years;
- Had, during the servicer’s two most recent audits, an audit finding that resulted in the servicer being required to repay an amount greater than five percent of the funds that the servicer administered under the Title IV programs for any award year; or
- Been cited during the preceding five years for failure to submit audit reports required under Title IV of the Higher Education Act in a timely fashion.
Third-party servicers were originally included in ED’s Fall 2022 regulatory agenda, with the regulations slated for revision in 2023. It is unclear if ED will revisit the underlying regulations in light of this guidance.
Institutions have until May 1, 2023, to report any arrangements with a TPS that have not previously been filed with ED. Entities or individuals that meet the definition of a TPS in ED’s guidance are required to submit the TPS Data Form to ED or update their existing form by May 1.
Additionally, ED is seeking comments on the guidance. Comments are due via Regulations.gov by March 17 and can be filed within Docket ID “ED-2022-OPE-0103.”
ED also announced that it will be holding virtual listening sessions on March 8 and 9 to allow for feedback on a 2011 carveout to its ban on incentive compensation for recruiters. The exemption exists for third parties if they provide a bundled set of services, which can include recruitment.
A community letter sent to ED from higher education associations including NACUBO asks for a postponement of at least 30 days for both the reporting date and comment period to allow for a careful review and comment on the changes and to acknowledge the “significant institutional compliance efforts that it will entail.”
NACUBO plans to continue examining ED’s guidance and submit comments on the changes.