Department of Education issues third-party servicer guidance changes

The U.S. Department of Education (ED) issued a new Dear Colleague Letter (DCL) (GEN-23-03) regarding requirements and responsibilities for third-party servicers (TPS) and institutions on Feb. 15, 2023. On Feb. 28, 2023, the future effective date for the guidance was established and the reporting deadline was extended to Sept. 1, 2023. Subsequently, ED delayed the effective date yet again through an update that was published on April 11, 2023, noting that the effective date of the revised final guidance letter will be at least six months after its publication allowing institutions to meet the reporting requirements.

The DCL notes that ED is revising its guidance in response to the growing number of entities that may be contracted by an institution to provide services as a means to increase enrollment and transition academic programs into a distance education format. ED has existing regulations that are imposed on an institution but has issued further guidance. The guidance clarifies that entities performing the functions of student recruiting and retention, the provision of software products and services involving Title IV administration activities and the provision of educational content and instruction are defined as TPS. The TPS are subject to such additional regulations.

While much of the DCL is consistent with previous guidance on TPS, the new DCL aims to expand the definition of who qualifies as a TPS based on the services performed to ensure entities are subject to important statutory and regulatory limitations. The expansion focuses mainly on entities that may perform services aligned with student recruiting, retention, development of instructional course content and dissemination of marketing materials. It is yet to be determined what additional requirements will be included in the Office of Management and Budget (OMB) Compliance Supplement regarding these new requirements that external auditors may be required to test.

The DCL includes a set of tables listing various functions and services that, if outsourced, would deem the entity performing such services subject to the TPS requirements, as well as a listing of exceptions that would not qualify as a TPS relationship. There is also a section of questions and answers.

The DCL also reminds institutions of the following key items related to TPS:

• An institution and TPS are jointly and severally liable to ED for any violation by a TPS, and the institution will be held responsible for any liability incurred as a result of software deficiencies, data breaches, incorrect consulting advice, lost or damaged records and/or violations of TPS requirements. 
• Institutions that contract with TPS entities covered under the guidance are subject to reporting requirements with respect to the entities. The reporting requirements include reporting TPS on the E-App within 10 calendar days of entering into a contract with the TPS or a substantial modification to an existing contract.
• The TPS entities themselves are subject to annual non-federal audits of the Title IV-relevant functions they perform, if such functions are covered by the audit guide, and submitting the TPS data form by the effective date. The TPS annual compliance audit, if applicable, will follow in the fiscal years that begin after the effective date of the reporting requirements.

ED received more than 1,000 comments on the revisions. Feedback from National Association of College and University Business Officers (NACUBO), the American Council on Education (ACE) and 84 other higher education stakeholders includes that TPS expansion is so broad that it would significantly increase the number of businesses subject to TPS regulations and would cover almost any contract between an institution and a TPS. Other concerns include that the expanded TPS definition to now disallow arrangements with non-U.S.-based TPS could impact study abroad programs and other partnerships. There is also a lawsuit pending against ED by 2U related to the new DCL. 2U is an educational technology company that contracts with colleges and universities to build and support online programs.

As a result of the feedback received, ED requires additional time for institutions and companies to come into compliance with the new guidance. The update published on April 11, 2023, included a list of TPS that ED does not consider to constitute TPS subject to the requirements.

Act now!

Institutions should reevaluate their existing arrangements to assess whether any services provided are now subject to the expanded TPS guidance and monitoring. ED also announced on Feb. 15, 2023 that they are reviewing incentive compensation for college recruiters. We recommend that when reviewing arrangements for the new TPS guidance, institutions should also review existing compensation policies to determine if the payment structure or arrangements need modification. Institutions should also stay alert for any further updates on the guidance or timelines given the significant comments and feedback that ED has received.

For more information, or to learn how Baker Tilly specialists can help, contact our team.