The Department indicated that it reviewed numerous contractual arrangements between institutions and outside entities and determined that there was a need for an updated list of functions and activities that fall within the scope of the TPS requirements.
Important Update: On February 28, 2023, the Department published an update to Dear Colleague Letter 23-03 that makes clear the guidance does not become effective until September 1, 2023. The reporting deadline for institutions and third-party servicers to report to the Department is also extended until September 1, 2023. Further, the Department extended the comment period through March 30, 2023.
Institutions of higher education (IHEs) and companies providing services to IHEs (including so-called online program managers or OPMs) should take careful note of two announcements by the U.S. Department of Education that could significantly impact the institution/service provider relationship and the Department’s oversight of that relationship.
First, and most immediately effective, the Department has revised its subregulatory guidance regarding the activities that make an entity providing services to an IHE a “Third Party Servicer” (TPS) for Title IV purposes. In a significant expansion over prior guidance, an OPM providing services to an IHE related to student recruiting and retention, providing software products and services involving Title IV administration activities, or providing educational content and instruction are now defined as a TPS. Being defined as a TPS comes with significant increased risk and compliance obligations by the third party and the institution. There is an open public comment period on this change through March 17, 2023.
Given the breadth of the changes, IHEs and their OPM partners need to fully understand their reporting requirements to the Department, whether changes to their contracts are required and the legal and liability impacts the changes will have on both the IHE and the OPM.
Second, the Department announced that it is holding listening sessions and taking public comment on potential revisions to the so-called “bundled services” exception to the Title IV incentive compensation ban, which currently allows IHEs and third parties to share tuition revenue for recruitment and other services provided to an IHE by the third party.
Both of these changes will require reassessment of the relative contracting risks and revision of such contracts to reflect new guidance. The guidance largely focuses on the practices of OPMs, but could have expanded implications for all public, nonprofit and for-profit institutions in the area of outsourcing assistance with recruitment, curriculum and other services, as it applies to any entity providing the listed services.
Third-Party Servicer Guidance
On February 15, 2023, the Department released updated TPS guidance in Dear Colleague Letter GEN-22-03 that clarifies when entities that contract with institutions are considered TPSs and thus, regulated entities. This guidance revokes all prior TPS guidance that most institutions and their contracting partners (including OPMs) have historically relied upon in establishing and documenting their relationships. If a third party is deemed to be a TPS, the impact could be significant. The entity must agree by contract to be jointly and severally liable to the Department with the institution for any Title IV violations, include specific contract terms in its agreements with institutions, and file annual audits with the Department, among other requirements. This also means that institutions agree to be jointly and severally liable with the TPS for any Title IV violation committed by the TPS.
The Department indicated that it reviewed numerous contractual arrangements between institutions and outside entities and determined that there was a need for an updated list of functions and activities that fall within the scope of the TPS requirements. Under the new guidance, for example, the Department considers 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 all as the activities of a TPS. This goes far beyond prior guidance regarding of the scope of the TPS definition.
Both institutions and servicers should carefully analyze the new guidance to determine if any services fall under the scope of the new TPS guidance. If they do, institutions will have until May 1, 2023, to report any TPS arrangements that have not been previously reported to the Department. OPMs may want to proactively work with institutions to ensure that their relationships are being properly and consistently communicated to the Department.
Finally, the new guidance provides that “[t]o protect the interests of institutions, taxpayers and students”— and with no further explanation—an institution may not contract with a TPS to perform any aspect of the institution’s participation in a Title IV program if the servicer (or its subcontractors) is located outside of 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. This prohibition applies to both foreign and domestic institutions. This requirement may impact a significant number of current OPM relationships.
The Department is taking public comments through March 17, 2023, and may revise the guidance based on public input.
Incentive Compensation Ban
The Department also announced that it will hold virtual listening sessions on the impact of its guidance on how IHEs may compensate their recruiters. The Higher Education Act (HEA) prohibits IHEs from providing a commission or bonus to individuals or entities based on securing enrollment or awarding financial aid. Current guidance is derived from a 2011 Dear Colleague Letter GEN-11-05, which created an exception for third parties if they provide a set of “bundled services.” Since issuing the 2011 guidance, the Department has observed a significant growth in the number of students recruited by entities operating under the bundled services exception. Through the listening sessions, the Department seeks to learn more about how this exception has affected the growth of online enrollment and associated federal student loan debt.
Specifically, the Department invites comment on the following specific questions:
- What are the benefits and disadvantages of the current incentive compensation exception for bundled services for institutions and students?
- How can the Department better identify, define and address the activities that may raise concerns under the current incentive compensation guidance?
- 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.
- 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?
- 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?
- 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?
- 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?
- 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?
- What steps can the Department take to better ensure compliance with the prohibition on incentive compensation?
These questions are directed at the bundled services exception and will likely lead to significant revisions to the 2011 guidance, but the timing of any changes at this point is uncertain.
The virtual listening sessions will be held from 1:00 p.m. to 4:00 p.m. Eastern on March 8 and 9. Individuals who would like to present comments of up to three minutes must register by sending an email to email@example.com no later than 12:00 p.m. Eastern on the business day prior to the listening session at which they want to speak. Individuals who want to observe the listening sessions, but who do not want to present comments, also are required to register. The Department will post registration links for attendees who wish to observe.
In addition to the listening session, the Department is accepting written public comments at regulations.gov through March 16, 2023 (Docket ID ED-2023-OPE-0030).
What This Means for Institutions and Service Providers
We recommend that all institutions, OPMs and TPSs (or entities providing services that may make them TPSs), evaluate their current contractual arrangements to ensure compliance and participate in the options provided by the Department for public comment.
For More Information
If you have any questions about this Alert, please contact Katherine D. Brodie, Kristina Gill, Anthony J. Guida Jr., any of the attorneys in our Higher Education Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.