Legal Warning | Department of Education Expands Interpretation of Definition of “Third Party Service” (and Announces Incentive Compensation Review)

RENEW: On April 11, the Department of Education (Department) published a blog post updating the latest Dear Colleague Letter (DCL) Third Party Services (DCL) issued on February 15, 2023 (updated February 28, 2023). Our February 15 DCL summary is below.

In a blog post, the Department announced it was in the process of developing an updated DCL (after receiving more than 1,000 comments on the February version), but “would like to highlight some important information that [it] think about[s] society should immediately realize it.” Specifically, the Dinas (1) identified several activities that did not trigger TPS regulations; (2) noted its intention to remove the guiding provisions relating to foreign ownership of TPS; and (3) noted its intention to provide clarification based on public comments submitted last month. Instead of the (now defunct) September 1, 2023, February DCL effective date, the blog post notes that the guidance’s future effective date will be at least six months after the revised DCL is published.

RENEW: On February 28, 2023, the Department updated the Dear Colleague Letter issued on February 15, 2023 to set a future guidance effective date, extend the public comment period, and extend reporting deadlines for institutions and third-party service providers. The new effective date is September 1, 2023. Institutions will be required to report any arrangements with third party service providers that have not been reported to the Department, and entities that meet the definition of third party service providers will be required to submit Third Parties. -Form Party Servant Data to the Department by September 1, 2023. In addition, the comment period was extended and now closes on March 30, 2023.

Wednesday’s U.S. Department of Education Associate Letter announcing the Department’s expanded interpretation of the definition of a Third Party Service Provider to include a new set of vendors providing student recruitment and retention services, certain software products and services related to Federal Student Assistance Title IV administrative activities, and content. education and instruction. Specifically, the new interpretation includes a “catch-all” provision that captures all vendors who “carry out other aspects of administering a Title IV program or complying with statutory and regulatory requirements related to the program.”

The plain language reading of this new guide covers a very broad range of products and services not previously considered to be covered as activities of Third Party Service Providers. If colleges and universities contract with vendors for these products and services, both the school and the vendor must comply with the Third Party Service Provider rules. The Department’s new guidelines are initially effective immediately. However, on February 28, 2023 the Department extended the effective date to September 1, 2023.

Colleges and universities have until September 1, 2023 to report any arrangements with Third Party Services that have not previously been reported to the Department. Institutions must also: (1) ensure their Third Party Services contract includes the specified terms; (2) obtain a signed certification form from each Third Party Provider; and (3) ensure their Electronic Applications are updated to identify any Third Party Service Providers. Specifically, Departmental guidelines stipulate that, upon request, agencies must provide copies of their contracts (and any modifications) to the Department, which may, where possible, open those contracts for public release under the Federal Freedom of Information Act (FOIA).

Vendors covered by the Department’s new interpretation of Third Party Service Providers: (1) are responsible for compliant contracts; (2) must submit to the Department or update the Third Party Services Data Form; and (3) must meet the annual audit requirements. Third Party Services are also subject to obligations such as: incurring shared and multiple responsibilities with schools related to Title IV activities, enhancing data privacy and security responsibilities, and reporting to the Office of the Inspector General of the Department of information related to agencies involved in criminal offenses in connection with the program Title IV.

The department announced that it is accepting public comments about Wednesday’s guidance on for 30 days (through Thursday, March 30).

Also this week, the Department announced it would be holding virtual listening sessions on March 8 and 9, 2023, regarding the rules related to the prohibition of incentive compensation from the Higher Education Act (HEA), specifically the ambiguous “package services” exception permitted by the Department. since 2011. Institutions frequently rely on this exception in compiling compensation for entities involved in recruiting and retention efforts—which the Department has now announced will oversee as Third Party Service Provider activity.

Departmental Authority to Oversee Third Party Services

HEA defines “Third Party Services” as:

any individual, any State, or any private, for-profit or not-for-profit organization, contracting with—

(1) any higher education institution which is qualified to administer, either through manual or automated processes, any aspect of that institution’s student assistance program under this subsection and part C of subchapter I chapter 34 Title 42; or

(2) each guarantee agent, or qualified lender, to manage, whether through manual or automated processing, every aspect of the guarantee agent or lender’s student loan program under part B of this subchapter, including origin, underwriting, monitoring , processing, servicing, or collecting loans.

See 20 USC § 1088(c). However, in Wednesday’s guidelines, the Department concluded that, “the vast majority of activities and functions performed by outside entities on behalf of an institution are intrinsically related to the institution’s administration of a Title IV program.” From these readings, the Department reasoned that recruitment, retention, provision of software to perform Title IV functions, and provision of educational content or instruction trigger the requirement of a Third Party Service Provider. Whether such an expanded description conforms to the definition in the HEA and the existing Departmental regulatory definitions in all respects is debatable.

What This Means for You

Most higher education institutions and many higher education vendors will be affected by this week’s guidance, whereby many widely used vendors not previously treated as Third Party Service Providers will be included in the newly announced description, without clarification from the Department. In the short term, we recommend that institutions take inventory of their arrangements with all outside vendors providing products or services in the following areas:

  • Recruitment/retention;
  • Software products and services related to Title IV compliance where the provider has access to certain information identified in the guide and/or performs “Title IV activities” for the institution; And
  • Educational content/instruction (most commonly, Online Program Manager, but, under the general understanding of the broad new guidelines, possibly other entities such as learning management system providers or schools in a consortium setting).

Institutions should also consider communicating with potentially covered vendors, citing guidance and seeking feedback on the vendor’s compliance with (or plans to comply with) Third Party Service Provider requirements. Finally, covered institutions and vendors should ensure that they comply with any applicable Third Party Service Provider rules in the future.

Given the broad and immediate compliance impact of these new guidelines, agencies should also consider participating in the Department’s upcoming listening sessions and public comment opportunities.

contact us

For assistance with Third Party Service Provider compliance or other issues related to Title IV Federal Student Aid, please contact Annie Cartwright, Abby Felter, Hayley Hanson, Julie Miceli, Lisa Parker, or your Husch Blackwell attorney.