Higher Education Institutions Cautioned Against Misleading Statements About External Service Providers

January 29, 2025

On Jan. 14, 2025, the U.S. Department of Education issued guidance through a Dear Colleague Letter that, if left in place by the new administration, could significantly expand Federal Student Aid program reviews, attorney general investigations, and potential qui tam actions against institutions of higher education and “external service providers” such as online program managers that engage in business with these institutions. According to the Department, these external service providers and “their respective employees, contractors, or representatives” are subject to federal requirements pertaining to misrepresentation, and eligible institutions can be held liable for any misstatements by those providers.

The Jan. 14, 2025, Dear Colleague Letter

The Department’s Dear Colleague Letter “remind[s]” institutions that receive federal financial student aid under Title IV of the Higher Education Act of 1965, as amended, (HEA) of their obligations pertaining to misrepresentations under § 487(c)(3) of the HEA and the Department’s regulations, including subpart F of part 668. These requirements prohibit institutions “from providing false, misleading, or inaccurate information about the nature of its educational program(s), its financial charges, or the employability of its graduates.” According to the Department, third-party entities also are subject to the same requirements as eligible institutions, and failure to follow those requirements can be attributable to the eligible institution. As such, violation could result in limitation, suspension or termination of the eligible institution’s funds.

The Department realized that it could not classify third-party entities such as online program managers as third-party servicers through guidance after unsuccessfully attempting to do so. The Department is now attempting to regulate third-party entities engaged by institutions as “external service providers.”

The Department specifies three types of statements related to external service providers that “are likely to qualify as a misrepresentation.” First, it focuses on statements that inaccurately identify an external service provider’s employee as an employee of the eligible institution, such as when communicating with prospective and enrolled students including by e-mail. The Department clarifies that its primary concern is “the use of contracted staff for recruitment purposes” rather than temporary contractors used to assist financial aid offices during busy seasons. According to the Department, its view that this type of conduct is deceptive is consistent with other federal and state consumer protection laws. The Department noted that “[t]he touchstone” of deciding whether a disclosure is deceptive is “the overall net impression of the representation” rather than “its literal truth or falsity.”

Second, the Department states thatdeceptive or misleading statements about a person’s role in recruitment could be deceptive. For example, presenting a person who is a sales representative or recruiter as an academic advisor or a counselor, regardless of whether that person is employed by the eligible institution or external service provider, may qualify as a misrepresentation. The Department’s main concern appears to be that some eligible institutions allegedly rewarded salespersons with the title of “counselor” based on their level of sales in violation of the incentive compensation ban.

Third, the final category is representing a program or component or resource that is provided in “substantial part” by an external service provider as “ ‘the same as’ a corollary residential or campus-based version of the program provided by the eligible institution.” The Department says that it is misleading and deceptive to describe a program offered by an external service provider as the same as a campus-based program when there may be differences in rates of completion, job placements, earnings or licensures.

The Department is clear that these three scenarios “do not constitute an exhaustive list,” meaning the Department could say that analogous scenarios also count as misrepresentations.

Misrepresentations related to the nature of educational programs, financial charges or the employability of graduates may violate the Federal Trade Commission (FTC) Act in addition to the HEA and its implementing regulations. The FTC has brought recent cases against higher education institutions and companies involved in student lending that the FTC has alleged have made false or misleading claims to students.

Possible Implications for Qui Tam Litigation Actions

The Dear Colleague Letter could significantly increase the possibility for Federal Student Aid Program Reviews to include an inquiry into statements and representations by an institution’s external service providers. Additionally, state attorneys general may determine that there are parallels between this guidance and the state consumer protection laws referenced in this guidance such that they have grounds to open investigations. The FTC also may use this guidance document to take adverse actions against higher education institutions.

Finally, this guidance invites qui tam litigation actions against such institutions and potentially against external service providers. When an institution of higher education receives federal financial student aid under Title IV, it certifies that it complies with all conditions for such funds.  Possible litigants could use this Dear Colleague Letter to bring actions against institutions and their external service providers. Institutions that receive Title IV federal financial student aid should evaluate their operations with external service providers and consider the best way to structure their business to ensure that they are well prepared against any possible enforcement actions, investigations, or lawsuits under the Dear Colleague Letter.

Unlike with some prior Dear Colleague Letters, the Department has not set any virtual listening sessions or opportunity to comment. But the Department encouraged schools to contact it through the Contact Customer Support form link in Federal Student Aid’s help center regarding any comments or questions.

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

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