Third-Party Servicer Guidance: Updates for Institutions and Servicers

Title IV Common Findings Corner

The Department of Education recently released GEN-23-03, a “Dear Colleague Letter,” to redefine and clarify its position on which organizations that contract with institutions are subject to Third-Party Servicer (TPS) requirements and responsibilities. The letter includes regulations that define what a third-party servicer is – and many of the Department’s conditions that qualify as TPS functions don’t naturally fall under that definition.

As a result, schools and certain organizations that contract with schools are concerned over these regulations. Many schools utilize a TPS to help with processing, awarding and administering Title IV programs, and the administration of “any aspect” of the school’s Title IV participation may leave some questioning whether an organization or entity is appropriately reported as a TPS. The Department, fortunately, provides tables of activities and functions that would subject a third-party to the requirements, as well as a list of potential exceptions. The Department’s letter and tables are helpful, but we’ll touch on a few areas in which some further analysis may be needed.

Student Retention

“Conducting activities designed to keep an individual enrolled at an institution eligible for Title IV aid.” 

Within the Department’s set of tables is a list of activities and roles that would separate what is subject to TPS requirements. The Retention of Students segment is the only area within these tables that does not list any potential exceptions. This is where interpretations get tricky: there are blanket activities noted that would constitute an entity as a TPS, but there are none listed that wouldn’t. Think about all the retention-related activities or options a school may provide students, which can be done outside of the institution and contracted with a separate organization. Mental health awareness and support comes to mind, local community outreach and health centers, or essentially any service an outside entity provides to achieve the main goal of keeping students in school.

Computer Services

Previously, the Department’s guidance stated that computer service providers were exempt from the TPS requirements if it did not have view or update access to student-level data and was not performing Title IV-related activities on behalf of the school. The updated language now states the computer service providers cannot have access or control over the system, as opposed to just the data.

However, it is probably safe to assume that there aren’t many providers that do not have control over the system it developed and provides support for. More clarification may be needed from the Department, as student management systems and providers make sense for the TPS requirements, but it’s not clear whether systems where database companies are used and provide upgrades/system updates qualify.

What this Means for Schools and Entities Subject to Third-Party Servicer Requirements

Financial aid offices are front and center on these subjects. However, these requirements now expand to just about all other offices at a school – including the business office, technology and information systems, recruitment, student services, and legal counsel – far beyond just financial aid. The Department requires an institution to list third-party servicers in the servicer information section of their Eligibility and Certification Approval Report. When adding them via the E-App process, this is the school’s notification to the Department that the school has entered into a contract with a TPS.

Servicers are required to submit a TPS data form if it fulfills the definition of a TPS. This form collects data to validate TPS information that is reported to the Department by institutions. It is required to be updated and submitted by the TPS within 10 days from the date of any critical logistics changes, but also when a servicer adds or terminates a contract with an eligible Title IV institution.

Schools will need to work with its outside entities, organizations and individuals to determine if TPS requirements are needed. If a servicer falls into that category, there is specific contract verbiage required, which could mean a contract needs rewritten. Most importantly, within that wording, it states that “the servicer must agree to be jointly and severally liable with the institution for any violation of Title IV requirements resulting from the functions performed by the servicer.” That means that the Department may seek repayment for Title IV violations from the institution, TPS or both.

Not only does this affect the contracts and split possible or potential liability, but the TPS is then also subject to student information data security regulations and may be required to submit an annual compliance audit. All of which seems to lead to more costs, unfortunately. If identified servicers need to change policies, contracts, improve safeguards for data, and have compliance audits performed, it will most likely lead to higher costs on the institutional side as well.

An Institution’s Next Steps

As organizations evaluate what these regulations mean for them, consider the following questions:

• What if a school has an agreement with a local not-for-profit that provides free periodic mental health checks for its students? Does that fall under student retention?
• What if a school has an outside individual gather placement data?
• What about the company a school uses for disseminating promotional materials?

The questions could be endless – fortunately, the Department extended its original effective date of this guidance to September 1, 2023 to make sure eligible institutions and third-party servicers have a clear understanding and a reasonable amount of time to comply with the requirements.

The information gathered in the Department’s review highlights the need for an updated list of functions and activities that fall within the scope of the TPS requirements. This updated guidance was released to provide the Department full transparency on the data of companies that work with institutions in areas that relate to Title IV. It also ensures the Department and auditors have the ability to review these companies’ compliance with federal rules and regulations. There is plenty of time now to get ahead of the game, so reach out to the appropriate contacts you have, but keep tabs on the subject, as there is likely more to come.

If you have any questions on the impact to your organization, please contact our Title IV experts.