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Dept. of Education: Third-Party Servicer Changes

Beginning with a February 15, 2023 “Dear Colleague” letter (GEN-23-03), the Department of Education (ED) announced changes to its rules with respect to third-party servicers (TPS).  In their own words, ED said, “to bring more transparency into the contractors who work closely with institutions of higher education (institutions) on Title IV program management and delivery, particularly in the critical areas of recruitment and marketing.”

Following numerous reviews by ED of contracts/agreements between institutions and outside entities, they determined that “most activities and functions performed by outside entities on behalf of an institution are intrinsically intertwined with the institution’s administration of the Title IV programs and thus the entities performing such activities are appropriately subject to TPS requirements.”

The Department stated that it “…is revising its guidance concerning 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. The Department is aware that a large and growing industry has developed to provide one or more of these services as a means of transitioning academic programs into a distance education format and expanding enrollment. Companies providing such services are sometimes referred to as "online program managers," or OPMs.”

This letter, GEN-23-03, listed what services would be considered activities of third-part servicers, required more transparent reporting with respect to these relationships, and identified categories of activities (including new services) that constitute the administration of Title IV aid programs.

ED also included activities that are not subject to the TPS requirements under the guidance:

The Department does not consider contracts involving the following activities to constitute third-party servicer relationships:  

  • Study abroad programs.  

  • Recruitment of foreign students not eligible for Title IV aid.  

  • Clinical or externship opportunities that meet requirements under existing regulations because they are closely monitored by qualified personnel at an institution.  

  • Course-sharing consortia and arrangements between Title IV-eligible institutions to share employees to teach courses or process financial aid.   

  • Dual or concurrent enrollment programs provided through agreements with high schools and local education agencies, which are exempt because they do not involve students receiving Title IV aid.   

  • Local police departments helping to compile and analyze crime statistics, unless they write or file a report on behalf of an institution for compliance purposes.  

  • The Department will identify any other services that fall into this category as we review comments.   

A TPS is any entity or individual that administers, any aspect of an institution's participation in the Title IV programs. 34 C.F.R. §668.2.  In general, a TPS performs functions or services necessary…

·       For the institution to remain eligible to participate in the Title IV programs;

·       To determine a student's eligibility for Title IV funds;

·       To provide Title IV-eligible educational programs;

·       To account for Title IV funds;

·       To deliver Title IV funds to students; or

·       To perform any other aspect of the administration of the Title IV programs or comply with the statutory and regulatory requirements associated with those programs.

Ultimately, ED is expanding its definition of “third-party servicers.”  Schools were not allowed to contract with a TPS if the servicer (or its subcontractors) is located outside 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.  Other prohibitions include:

  • TPS’s may not have been limited, suspended, or terminated by ED within the preceding five years;

  • Cannot have, during the servicer’s two most recent audits, an audit finding that resulted in the servicer being required to repay an amount greater than five percent of the funds that the servicer administered under the Title IV programs for any award year; or

  • Must not have been cited during the preceding five years for failure to submit audit reports required under Title IV of the Higher Education Act in a timely fashion.

The original deadline for compliance was May 1, 2023.  That was commuted to September 1, 2023.  Then, on May 16, 2023, GEN-23-08 was issued that summarizes:

This letter removes the effective date of third-party servicer guidance in Dear Colleague Letter GEN-23-03, which will not go into effect, and removes the prohibition on contracts between institutions and foreign-owned or operated third-party servicers.

 

In addition, in GEN-23-08, ED comments: “We are aware that many institutions and companies have already begun to analyze their contracts in anticipation of reporting and compliance deadlines, and we understand the concerns that can cause. Therefore, we are providing additional time for institutions and companies to come into compliance, and the September 1, 2023, date is no longer in effect. Specifically, we plan to issue a final revised DCL with an effective date at least six months after its publication to allow institutions and third-party servicers covered by the final guidance to meet any reporting requirements. Deadlines for audit and contractual requirements will follow, starting with the institution’s first fiscal year that begins after the effective date for the reporting requirements.”

At this point, it would seem to make sense for institutions to watch for ED’s “final revised Dear Colleague Letter” on this subject. And to communicate with your TPS about what changes/updates they are planning for your benefit.

 

Written by

David C. Moja, CPA www.mojacompany.com

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.

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