ED Issues Update to Third-party Servicer Proposed Guidance

The U.S. Department of Education (ED) issued guidance in the form of a “Dear Colleague” letter regarding third-party servicers (TPSs). The guidance, which was issued on Feb. 15 and updated on Feb. 28, clarifies that outside entities performing the functions of student recruiting and retention, providing software products and services involving Title IV administration activities or providing educational content and instruction, are defined as a TPS. As such, the institutions that contract with these entities are subject to reporting requirements with respect to the entities, and the 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. In short, the guidance expands the definition of a TPS.

The “Dear Colleague” expands the definition of a TPS to include providers who handle student recruitment and application activities, and who provide consumer information, among other things. (See the non-exhaustive list in the “Dear Colleague” letter of functions and services that, if outsourced by an institution to a third party, would render that third party a TPS subject to the TPS requirements.)

Under the proposed guidance, reporting requirements for TPSs would increase and restrictions on the location of these providers as well as where TPSs store their data, would be instituted, among other restrictions. The guidance would be effective Sept. 1.

The proposed guidance garnered over 1,000 comments. The majority of which expressed concern about the new requirements and confusion over the lack of clarity in some of the requirements. For example, one concern of the medical education community was how would this guidance impact residencies and other clinical training relationships. It was not clear whether hospitals and other clinical training facilities would fall under the proposed TPS definition.

In response to the significant amount of concern regarding the proposed guidance, on April 11, ED issued an update to its TPS guidance. In its update, of importance to the medical education community, ED states that clinical and externship opportunities do fall under the revised TPS definition because they “they are closely monitored by qualified personnel at an institution.” ED also pushed back the proposed guidance’s effective date. “Specifically, [ED] will delay the effective date of the guidance letter, and the September 1, 2023, date will no longer be in effect. The effective date of the revised final guidance letter will be at least six months after its publication, to allow institutions and companies to meet any reporting requirements. Deadlines for audit and contractual requirements will follow in fiscal years that begin after the effective date for the reporting requirements.”

ED notes that it will issue a final guidance letter though there is no date by which their review will be complete. In the meantime, previous “Dear Colleague” letters GEN 12-08, GEN 15-01 and GEN 16-15 (as amended by our March 8, 2017 electronic announcement) will remain in effect.