Department of Education Guidance Expands Possible Liability for Private Companies That Contract With Higher Education Institutions

February 21, 2023


  • Education Department Delays Sept. 1 Effective Date of Dear Colleague Letter on Third-Party Servicers (April 12, 2023)
  • U.S. Department of Education Launches Secret Shoppers Program to Investigate Colleges and Universities (March 16, 2023)
  • On February 28, 2023, the Department updated the Dear Colleague Letter regarding third-party servicers to expressly state: “the guidance in this Dear Colleague Letter will not become effective until September 1, 2023.” The Department also extended the public comment period on this Dear Colleague Letter to Thursday, March 29, 2023. Finally, the Department extended the reporting deadline for institutions and third-party servicers to September 1, 2023. (March 1, 2023)

On Feb. 15, 2023, the U.S. Department of Education issued guidance that significantly expands the definition of “third-party servicer” to include services completed by many online program managers (OPMs) and entities providing other services that historically have not been considered third-party servicers. Institutions and entities considered third-party servicers under the new guidance are subject to mandatory reporting requirements by May 1, 2023.

New Guidance – Who Is a Third-Party Servicer?

On Feb. 15, 2023, the Department released a Dear Colleague Letter, GEN-23-03, that significantly alters the definition of a third-party servicer in Title IV of the Higher Education Act of 1965, as amended, and its implementing regulation, 34 C.F.R. § 668.2. Historically, third-party servicers were limited to entities that helped with financial aid, such as by making sure funds are administered appropriately. The Department’s new third-party servicer definition will include many OPMs and other entities not previously considered a third-party servicer.

Under the new guidance, an entity is a third-party servicer if it assists an institution in:

(1) recruiting or retaining students;

(2) providing software products and services involving Title IV administration activities; or

(3) providing educational content and instruction.

The Department acknowledged OPMs often provided these services, especially educational content and instruction, and stated that an entity that provided these services is a third-party servicer even if it is not compensated for its services and even if it is a state agency.

The Department further stated that institutions cannot contract with any third-party servicer (or subcontractor) located outside the United States or owned or operated by an individual “who is not a U.S. citizen or a national or lawful U.S. permanent resident.”

The Department strongly encouraged institutions to include provisions in any third-party servicer contract to terminate the contract immediately, without penalty, if the institution is notified that the Department has imposed an emergency, limitation, suspension or termination action with regard to a servicer’s ability to contract with the institution to administer any aspect of its participation in the Title IV programs.

New Reporting Requirements

Under the new third-party servicer guidance, institutions have until May 1, 2023, to report arrangements with third-party servicers, including OPMs, that previously have not been reported to the Department, ensure that contracts include specified terms for third-party servicers, obtain a signed certification form from each third-party servicer, and ensure their e-App is updated to identify each servicer. The Department may require a copy of a contract with a third-party servicer, potentially exposing the contract to disclosure under the federal Freedom of Information Act. Entities, including OPMs, that meet the definition of a third-party servicer as a result of the guidance must submit a Third-Party Servicer Form or update their existing form by May 1, 2023, and meet annual audit requirements.

A Rule and Not Guidance?

The Department was forthright that it had “not previously notified the community that the performance of these functions subject[ed] an entity” to third-party servicer requirements. But it justified the sudden switch because of (1) the growth of online education services (especially during the COVID-19 pandemic); (2) the increase in associated federal student loan debt for online education services; and (3) the Department’s reviews of contractual arrangements between institutions and outside entities that showed the activities and functions performed by outside entities were “intrinsically intertwined” with the administration of Title IV programs.

The Department, however, has not gone through negotiated rulemaking or notice-and-comment rulemaking to expand the definition of a third-party servicer, and the definition in its guidance document arguably is more expansive than the statutory definition of a third-party servicer in 20 U.S.C. § 1088(c):

The term “third party servicer” means 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, through either manual or automated processing, any aspect of such institution’s student assistance programs under this subchapter and part C of subchapter I of chapter 34 of Title 42;  or

(2) any guaranty agency, or any eligible lender, to administer, through either manual or automated processing, any aspect of such guaranty agency’s or lender’s student loan programs under part B of this subchapter, including originating, guaranteeing, monitoring, processing, servicing, or collecting loans.

The Department did not include its typical disclaimer in this new Dear Colleague Letter that guidance documents do not have the force and effect of law and are not meant to bind the public or regulated entities. The Department also did not address the retroactive application of its guidance and appears poised to apply its guidance to any entity that could be considered a third-party entity on Feb. 15, 2023, because the guidance is “[e]ffective as of the date of publication.” Accordingly, the Department appears to treat its Dear Colleague Letter as a rule and invites comment on it until March 17, 2023, even though the Dear Colleague Letter is effective immediately.

Impact on Institutions, OPMs and Other Entities

Institutions should identify agreements with any entity that provides services related to recruitment or retention, software products and services involving Title IV administration activities, and the provision of educational content or instruction. Institutions should determine whether such entities are  third-party servicers under this guidance and whether these “new” third-party servicers comply with the requirements in the guidance. If these “new” third-party servicers do not comply with the guidance, providing a copy of the  guidance to such entities will prove helpful in discussing how to move forward in ensuring compliance.

Newly identified third-party servicers, including OPMs, will likely face greater scrutiny and may face more liability because they must contract to be jointly and severally liable to the Department for any Title IV violations, must file annual audits with the Department, and must comply with Title IV and its implementing regulations, among other requirements. Institutions could also face greater liability because they must agree to be jointly and severally liable with the third-party servicers, including OPMs, for any Title IV violation committed by that entity.

Changes to the Bundled Services Exception to the Incentive Compensation Ban

Title IV prohibits institutions of higher education from providing commissions, bonuses or other incentive compensation based on an individual’s or company’s performance through securing enrollment or financial aid. This prohibition is commonly known as the “incentive compensation ban” or the “incentive compensation rule.” In 2011, the Department issued guidance, GEN-11-05, allowing an exception to this ban called the “bundled services exception” when an outside company provided other services, such as course design and counseling.

The Department indicated an intent to propose changes to the bundled services exception, which exists only in its guidance documents and not in a regulation. The Department arguably will take the position that it may rescind or change its guidance concerning the bundled services exception at any time and without going through negotiated rulemaking or notice-and-comment rulemaking.

The Department invited comment from institutions, faculty, OPMs and other third-party contractors, scholars, advocates and students on nine 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? This will help the Department understand the proportion of the spending in the bundle that goes to recruitment versus a range of services.

(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 also is supported by an OPM?

(5) How would changing third-party servicer 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 third-party services 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?

Given the likely changes to the bundled services exception, institutions, OPMs and other entities should consider commenting and assess how the new guidance may affect their outsourcing assistance recruitment, curriculum and other services.

The virtual listening sessions will be held March 8-9 from 1 p.m. to 4 p.m. (EST). Individuals who would like to present comments of up to three minutes must register by sending an email to [email protected] no later than 12 p.m. (EST) on the business day prior to the listening session at which they want to speak. The message should include the name of the speaker, the email address of the speaker, and one or more dates and times during which the individual would be available to speak. Individuals who want to observe the listening sessions also are required to register for each day in which they wish to observe.

Institutions and entities, which now are considered third-party servicers under the Dear Colleague Letter, should consider commenting on the guidance and participating in the department’s upcoming listening sessions on the bundled services exception to the incentive compensation ban.

Please contact the authors if you have questions regarding the guidance and other education enforcement or compliance concerns.