U.S. Department of Education Substantially Expands Regulatory Oversight of Service Providers and Academic Partners to Higher Education Institutions

NOTE: In a blog post dated April 11, 2023, the Department (ED) indefinitely delayed the effective date of the Dear Colleague Letter guidance discussed in our March 2, 2023 alert below. For more information, please see our summary of ED’s subsequent announcement.

On February 15, 2023, the U.S. Department of Education (ED) announced a substantially expanded interpretation of the activities which render an entity providing services to a higher education institution a Third-Party Servicer (TPS) for regulatory purposes under Title IV of the Higher Education Act (Title IV).  Although Dear Colleague Letter GEN-23-03 (DCL) describes the expansion as primarily focused on companies that assist institutions in launching and managing their distance education offerings — namely “online program managers” (OPMs) — the scope of ED’s revised interpretation is significantly broader than just OPMs and entities that provide services specifically associated with an institution’s administration of Title IV requirements and compliance obligations associated therewith. Rather, the DCL repeals ED’s prior guidance concerning TPS designations and newly imposes TPS status on a range of entities that provide marketing and recruiting services, retention services, instructional delivery or content (including, potentially, clinical and externship experiences), various software and technology services, and consulting services.

As initially released, the DCL was immediately effective, with compliance by both institutions and TPS entities required by May 1, 2023, although ED also provided thirty (30) days for public comment. On February 28, 2023, however, ED delayed the effective date of the DCL to September 1, 2023. The public comment period was also extended through March 29, 2023.

ED also announced on February 16, 2023, that it will hold virtual listening sessions on the impact of its previous guidance on how institutions compensate persons and entities that engage in student recruiting activities. These listening sessions will include feedback on ED’s March 2011 guidance which permitted otherwise-prohibited incentive compensation, in the form of revenue sharing with certain third parties, if that third party provides a bundled set of services that includes recruitment. The sessions will take place on March 8 and 9, 2023, and require registration by both commenters and attendees.

Expanded Third-Party Servicer Rules

Being considered a TPS for regulatory purposes by ED carries many compliance obligations, including being jointly and severally liable with institutions for any Title IV liabilities arising from the activities of the TPS. Institutional contracts with any TPS must explicitly include that joint and several liability and must contain certain cybersecurity requirements and other mandatory provisions under ED regulations. Institutions must identify any TPS within the institution’s standing Title IV program participation records with ED. The TPS also must undergo and submit an annual compliance audit to ED, plus submit an annual data form to ED which describes the institutions with which it works, the services it provides, and its ownership.

Under longstanding ED regulations, an entity constituting a TPS is one that “administer[s], through either manual or automated processing, any aspect of the institution's participation” in any Title IV program. Those formal regulations also enumerate various matters within the scope of TPS activities, each of which is associated with processing Title IV funds, assisting institutions in their activities related to awarding and disbursing Title IV funds, loan servicing and collection, required consumer information disclosures to borrowers, and certain reporting to ED. Notwithstanding that focus on direct involvement with an institution’s Title IV processing and related activities, in recent years ED has gradually expanded its view of what constitutes a TPS through prior sub-regulatory guidance.

This DCL is the most far-reaching interpretation by ED of what constitutes a TPS, and thus what types of entities are subject to the requirements described above. In addition to entities previously considered by ED to be TPS, because of their involvement with processing of Title IV funds and related financial aid activities, the DCL illustrates that ED now considers activities in the following areas to be covered:

Marketing and Recruitment Activities:

• Interacting with prospective students for the purposes of recruiting or securing enrollment (including but not limited to providing prospective students with information on educational programs, application and document requirements, deadlines, and the enrollment process).
• Assisting students with the completion of application and enrollment processes (including admissions and enrollment counseling).
• Processing admissions applications.
• Establishing or modifying admissions standards for acceptance into the institution or any educational programs offered by the institution.
• Preparing or disseminating promotional materials to market educational programs, if the provider is also involved in the design or delivery of the program or provides the program with technology, curriculum, or faculty.

Retention Activities:

• Monitoring academic engagement and/or daily attendance.
• Conducting outreach to students regarding attendance or academic engagement.
• Responding to inquiries from students and/or their families regarding assistance or resources designed to help students maintain enrollment in the institution/program or to maintain eligibility for Title IV aid.
• Any other activity designed to keep an individual enrolled at an institution eligible for Title IV federal student aid.

Instructional Content:

• Providing any percentage of a Title IV-eligible program at an institution.
• Establishing requirements for the completion of a course and/or evaluating whether a student has met those requirements.
• Delivering instruction or mandatory tutoring.
• Assessing student learning, including through electronic means.
• Developing curricula or course materials, unless the institution maintains full control of the curriculum/materials and delivers the instruction itself.

Computer/Software Services and Record Maintenance:

• Collecting, reviewing, and/or maintaining the information and/or documentation necessary to make or support student eligibility determinations and/or to disburse Title IV funds to a student or borrower.
• 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, whether through manual or automated processing. This includes, but is not limited to, systems related to financial aid management, recruitment and enrollment, admissions, registration, billing, and learning management.

Consistent with past requirements, the DCL provides that entities considered to be a TPS, and their subcontractors, cannot be (1) located outside of the United States or (2) owned or operated by an individual who is not a U.S. citizen or national or a lawful U.S. permanent resident. While this restriction has been based on government-wide limitations on the processing of federal funds and related information by non-U.S. entities, the vastly expanded scope of what constitutes a TPS now causes this limitation to apply to a range of entities whose services to postsecondary institutions do not involve the processing of any funds. In its February 28, 2023, announcement updating the DCL and delaying the effective date, ED specifically requested comments on the impact of continuing the existing limitation on institutions contracting with TPS operating outside the U.S. or owned or operated by individuals who are not U.S. citizens, nationals, or permanent residents, including how to address ED’s concerns about the ability to hold such servicers liable if necessary.

All postsecondary institutions and service providers should carefully review the DCL to determine whether any services fall under the expanded scope of TPS activities, and to assess what actions may be required to comply by the stated deadline of September 1, 2023. Several other activities identified by the DCL were generally designated as TPS functions by earlier ED guidance, but institutions and providers would be prudent to revisit earlier assessments of their TPS status and compliance obligations in those areas as well.

Incentive Compensation Listening Sessions

Under the Higher Education Act and longstanding ED regulations, institutions are generally prohibited from providing any commission, bonus, or other incentive payment based, directly or indirectly, on success in securing enrollments or financial aid to any persons engaged in student recruiting, admissions activities, or making decisions about the award of student financial aid. Among the limited exceptions to the incentive compensation prohibition is the so-called “bundled services exception” established by a 2011 Dear Colleague Letter, which permits institutions to pay certain third parties involved in student recruitment on a revenue-share basis, but only if such payments are for a variety of services that are offered and provided collectively, and further provided that the entity does not itself make prohibited compensation payments to its employees.

The February 16, 2023, announcement states that ED has observed a significant increase in the number of students recruited to institutions by entities operating under the bundled services exception, particularly through institutional arrangements with OPMs, and that it is considering changes to its guidance in this area. It therefore will conduct virtual listening sessions on March 8 and 9, for which it seeks comment on the following specific questions:

1. What are the benefits and disadvantages of the current incentive compensation exception for bundled services for institutions and students?
2. How can the Department better identify, define and address the activities that may raise concerns under the current incentive compensation guidance?
3. How much of an institution’s spending on a bundle of services provided by a third-party entity is typically allocated to recruitment and related expenses?
4. How has contracting with a third party providing services under the bundled services exception impacted enrollment, tuition and fees, the types of programs offered, the modality through which programs are provided, student outcomes, revenues and expenditures at institutions? How do these results compare to programs not supported by an OPM or students attending in-person at a program that is also supported by an OPM?
5. How would changing TPS contracts from a revenue-sharing model to a fee-for-service model impact the services, such as recruitment, currently provided to an institution under the bundled services exception?
6. How do tuition and fees of programs supported by TPSs differ when provided under a revenue sharing model as compared to a fee-for-service model?
7. To what extent does the bundled services exception impact institutions’ ability to create or expand online education offerings? To what extent would fee-for-service models impact institutions’ ability to create or expand online education offerings?
8. How might the Department more clearly define what it means to be an unaffiliated third party for purposes of the incentive compensation guidance to ensure there is no affiliation between the institution and the entity providing services?
9. What steps can the Department take to better ensure compliance with the prohibition on incentive compensation?

Individuals who would like to comment during the listening sessions must register with ED no later than Noon (EST) on the business day prior to the listening session at which they want to speak. Individuals who wish to observe the listening sessions, but who do not want to present comments, also are required to register. In addition to the listening session, ED is accepting written public comments through March 16, 2023.

Please do not hesitate to contact John Przypyszny, Jonathan Tarnow, Cindy Irani or Sarah Pheasant if you have any questions regarding either of the matters discussed above, or other education regulatory matters.