On July 17, 2024, United States Under Secretary of Education James Kvaal announced that the U.S. Department of Education intends to engage in negotiated rulemaking to draft regulations governing third-party servicers and to issue revised guidance on the incentive compensation rule by the end of the year.
Institutions of higher education (IHEs) and companies providing services to them (including so-called online program managers or OPMs) should take careful note of these announcements as each may have significant implications for all public, nonprofit and for-profit institutions and their service providers in the area of outsourcing assistance with recruitment, curriculum and other services.
Third-Party Servicers
The Department released updated third-party servicer (TPS) guidance via its Dear Colleague Letter GEN-23-03 published on February 15, 2023. This guidance redefined what constitutes a "third-party servicer." It revoked all prior TPS guidance that institutions and their contracting partners (including OPMs) had relied upon. The DCL broadened the definition of a TPS to include any organization that contracts with institutions, not just those involved in the administration of financial aid services. Under the then-proposed guidance, any entity or individual deemed to be a TPS would have, among other things, had to agree to be jointly and severally liable to the Department with the IHE and submit annual compliance audits to the Department. On May 16, 2023, the Department delayed indefinitely that February 2023 guidance.
The Department now appears ready to proceed with an expansion of the TPS regulations through negotiated rulemaking. This process will lead to formal regulations, which will be published in the Code of Federal Regulations. In announcing the new rulemaking, Under Secretary Kvaal stated:
We believe this approach, which was suggested by many commenters, will allow the Department to use the negotiated rulemaking process to collaborate with the affected community on these issues. We will consider clarifying the scope of third-party servicer rules in several areas, including software and computer services, student retention, and instructional content. In addition to considering the definition of third-party servicers, we may also consider audit requirements; an application process; reporting, financial, past performance, and other compliance requirements; and other ideas proposed by the community. (Emphasis added.)
The Department remains focused on revising institution/service provider relationships, despite its previous misstep attempting to regulate this area by use of informal guidance. We can expect the Department to initiate the formal rulemaking process as early as fall 2024, focused on the areas highlighted in Under Secretary Kvaal's announcement above.
Incentive Compensation Guidance
Under Secretary Kvaal also announced that the Department intends to publish new guidance on the incentive compensation rule sometime this year. The Higher Education Act 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 the Obama-era 2011 Dear Colleague Letter GEN-11-05. This guidance, among other things, created an exception for third-party service providers if they provide a set of "bundled services." The Department indicated that since issuing the 2011 guidance, it has observed a significant growth in the number of students recruited by entities operating under the bundled services exception. In its February 15, 2023, Dear Colleague Letter, the Department announced that it would hold virtual listening sessions on the impact of its guidance on this issue, including how the exception has affected the growth of online enrollment and associated federal student loan debt.
The Department held the listening sessions and received more than 250 comments from institutions, companies, faculty and consumer advocates. In Under Secretary Kvaal's update on the Department's regulatory efforts, he stated, "We continue to review those comments and plan to issue revised guidance no sooner than late this year." Based on this, it appears that the Department is likely to move forward with revised guidance before the end of 2024.
Conclusion
We recommend that all IHEs, OPMs, TPSs and entities providing services to IHEs participate in the upcoming negotiated rulemaking process. Additionally, stakeholders should be on the watch for additional Department guidance related to the bundled services exception to the incentive compensation ban.
For More Information
If you have any questions about this Alert, please contact any of the attorneys in our Higher Education Group or the attorney in the firm with whom you are regularly in contact.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.