Ed Department Shakes Up OPMs and Third-Party Servicers: This Is Huge

Update 3/1/2023

The Department of Education has updated the dates previously discussed in this post.

• The effective date of Third-party Servicer Guidance has been updated to September 1, 2023.
• The institution deadline for to report any arrangements with a Third-party Service (TPS) that have not previously been reported to the Department has also been extended to September 1, 2023.
• Entities that meet the definition of a TPS due to the new guidance must submit the Third-Party Servicer Data Form by September 1, 2023.
• The Department is accepting written comments on the guidance through March 30, 2023 through regulations.gov (Docket ID ED-2022-OPE-0103).

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Did you hear that loud noise last Wednesday? For those in the middle of the country, it was the Kansas City Chiefs victory parade. For those in higher education, the U.S. Department of Education created its own rumblings by releasing new guidance with rules about any contracted services and a series of questions about companies helping institutions with online learning. For some time, we have been expecting a change in guidance regarding Online Program Management (OPM) and the revenue-sharing model used by some of those companies. There has been much interest in assuring student consumer protection in this growing industry and in institutional outsourcing. 

Earlier this year, the Department signaled it would hold negotiated rulemaking including “Third-Party Servicers”. We thought OPMs and other contracts would be covered in that process. Instead, the Department issued broad guidance on a wide range of “Third-Party Servicers”. It also announced that it was seeking input on nine questions about OPMs, especially around the OPM revenue-sharing model and its “bundled services exemption.”  

The Announcement Has Impact Throughout the Institution 

We did not expect the large-scale change in guidance regarding almost any service for which an institution might contract. In the PhilonEdTech blog post review of the release, Phil Hill opined:  

“Basically, if a vendor provides software and services enabling in almost any way an academic program eligible for Title IV financial aid, that vendor may be considered a TPS with all of the increased regulations.” 

This could have an impact on contracts for OPMs, tutoring services, retention tracking, student analytics, adaptive learning, learning management systems, contracted instructional design, and (surprisingly) even contracting for financial aid consulting. This regulatory guidance will reach into every corner of an institution. And there were some surprising elements including the exclusion of the use of foreign contractors and the inclusion of services offered to an institution by its own higher education system. 

The Announcement is Confusing – So We Took Our Time 

The bundling in the announcement of new guidance for Third-Party Servicers and a series of questions about OPMs resulted in confusion both for us and for several analyses we have read. Some think that the Third-Party Party Servicers wording is focused only on OPMs. Not so. It covers any contracted service. And there are only two comment opportunities and one action with a short deadline.  If we were confused by their bundling of the two issues in one announcement and some unclear wording, we feel for institutional personnel not used to interpreting this language. 

As a result, we took our time to write this blog post where we tried to interpret at the highest level what is happening and give you some context. This post separates the information about the OPM and Third-Party Servicers impact into two sections. Regarding the term “OPM”, we realize that there are varying models for the provision of online support services that use different names. Some use the “revenue sharing” method of reimbursement while others use a “fee for service” model that does not have payments dependent upon the number of students recruited. For  simplicity, we use the term “OPM” as an all-encompassing moniker.  

Be sure to note that the Third-Party Servicers language will affect everyone and has immediate effect. Take action now.  

Part One:  Participate in the Department’s Call for Input on Online Program Management Rules 

The first part of the Department’s announcement last week had to do with the oversight of Online Program Management (OPM) companies. They are specifically concerned about incentives for “revenue sharing” or “enrollment compensation,” such as paying contractors on a sliding scale based on increased enrollments. One can imagine the distasteful image of bounty hunting such actions raise. 

A Brief History of the Current Rule 

In last week’s announcement, the Department gave a brief history of the issues and their concern:  

“Since 1992, section 487(a)(20) of the HEA has prohibited institutions of higher education (institutions) from providing any commission, bonus, or other incentive payment to individuals or entities based, directly or indirectly, on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities or in making decisions regarding the award of student financial assistance, subject to certain exceptions…” 

The Department cites guidance it issued in 2011 (DCL GEN-11-05) providing its interpretation of regulations relating to the prohibition on incentive compensation. Continuing from the Department’s announcement last week:   

“Under that guidance, direct payments to recruiters based on tuition generation are considered prohibited incentive compensation. However, in the case of a third-party entity that is not affiliated with the institution it serves and is not affiliated with any other institution that provides educational services, the guidance specifies that providing a set of services that includes recruitment (known as bundled services) does not violate the prohibition on incentive compensation as long as the entity does not make prohibited compensation payments to its employees, and the institution does not pay the entity separately for student recruitment services.” 

Commonly known as the “bundled services exception,” many see it as a loophole that allows companies to prioritize profits they get from recruiting over prioritizing whether the institution is the best fit for the student. The Department cites the larger-than-expected impact that the 2011 interpretation: 

“Since issuing that guidance, the number of students who were recruited to institutions by entities operating under this bundled services exception has increased significantly, particularly through online programs operated by third-party entities, including Online Program Managers (OPMs).” 

Concerns Have Been Raised that Online Recruitment Benefits Companies and Not Students  

There have been plenty of concerns raised about issues with OPMs and companies performing significant services (especially in recruiting) for colleges and universities. There have been times when students have been harmed. There are projections about what might happen to future enrollees if OPMs continue unchecked.  

Here’s a sample of problems, concerns raised, and calls for action: 

• In 2019, “The Creeping Capitalist Takeover of Higher Education”, which wins a gold star for graphics. 
• In 2019, Bob Shireman (former Department of Education staffer who contributed to the 2011 guidance and current WICHE Commissioner) posted: “The Sketchy Legal Ground for Online Revenue Sharing”.  
• In 2020, “Senators Warren and Brown Examine Questionable Business Practices of Largest Managers of Online Degree Programs”.  
• In 2020, Concordia University, Portland closed and one the factors was unsustainable online learning growth expectations and a troublesome relationship with its OPM. 
• In 2021, the Century Foundation published the analysis “The Invasion of the College Snatchers”, which cites how OPMs may be taking over some colleges and wins a gold star for the movie-inspired title. 
• In 2022, three Senators expressed their concerns and asked for data from eight large OPMs and 2U responded. 
• In 2022, the Government Accounting Office conducted research and released a report titled “Higher Education: Education Needs to Strengthen Its Approach to Monitoring Colleges’ Arrangements with Online Program Managers”. (Note by “Education” after the colon, they mean the Department of Education.) 
• In 2023, “The ranking member of the House Appropriations Committee calls for an end to OPM tuition sharing based on enrollment,” calls OPMs the new predators in online learning. 

In brief, there is a worry that OPMs represent a for-profit model operating under the guise of a non-profit or public institution; the proverbial wolf in sheep’s clothing. These concerns were heightened by stories of the OPMs taking large shares of the tuition revenue, aggressive recruiting of students, and institutional lack of control over the program. We have heard stories from members about conflicts with their OPM provider. We work deeply on institutional compliance issues and have seen some examples where actions and advice made us feel uncomfortable. 

On the other hand, while egregious actions make the headlines, they do not seem to be the norm. Institutions have had great success with OPMs. They have been able to develop programs, reach new markets, and educate students who otherwise would have been left behind. In an era of state disinvestment in higher education and lower enrollments, colleges and universities need to act more like a business. Even so, institutions need to maintain their operational integrity and do all they can to protect students as vulnerable consumers. 

Your Opportunities to Provide Input to the Department 

The Department of Education announced opportunities for anyone to give input during “listening sessions” or written comment. Details on how to participate are listed at the end of this post in the section: “Part Three: Comments to Make, Action to Take, and How to Do So”. Quick action is needed as the commenting period ends on March 16. 

According to the Department, the purpose of the comment period is for: 

“…seeking to better understand the impact of the bundled services exception in the context of growing online enrollment and associated Federal student loan debt. The Department is currently reviewing the incentive compensation guidance to determine what, if any, changes to the incentive compensation guidance might be appropriate, particularly regarding the exception for bundled services.” 

Below are the nine specific questions they are asking. While the focus is on the “bundled services exception,” it is clear that (as you will see with the Third-Party Services guidance below) their interest goes well beyond revenue sharing models.  

We sent out a survey to WCET and SAN members about their experiences with OPMs. We will also provide both memberships with further guidance and impressions about the OPM questions asked by the Department and give you suggestions on options to use in submitting your own response.  

The Nine Questions from the Department of Education  

It is important to get comments from all sides of this issue. If your institution has or had an OPM, consider commenting. Some of the questions are hard for institutional personnel to give much insight, so they can be skipped. 

1. What are the benefits and disadvantages of the current incentive compensation exception for bundled services for institutions and students? 

2. How can the Department better identify, define, and address the activities that may raise concerns under the current incentive compensation guidance? 

3. How much of an institution’s spending on a bundle of services provided by a third-party entity is typically allocated to recruitment and related expenses? This will help the Department understand the proportion of the spending in the bundle that goes to recruitment versus a range of services. 

4. How has contracting with a third-party providing services under the bundled services exception impacted enrollment, tuition and fees, the types of programs offered, the modality through which programs are provided, student outcomes, revenues, and expenditures at institutions? How do these results compare to programs not supported by an OPM or students attending in-person at a program that is also supported by an OPM? 

5. How would changing third-party servicer contracts from a revenue-sharing model to a fee-for-service model impact the services, such as recruitment, currently provided to an institution under the bundled services exception? 

6. How do tuition and fees of programs supported by third-party services differ when provided under a revenue sharing model as compared to a fee-for-service model? 

7. To what extent does the bundled services exception impact institutions’ ability to create or expand online education offerings? To what extent would fee-for-service models impact institutions’ ability to create or expand online education offerings? 

8. How might the Department more clearly define what it means to be an unaffiliated third-party for purposes of the incentive compensation guidance to ensure there is no affiliation between the institution and the entity providing services? 

9. What steps can the Department take to better ensure compliance with the prohibition on incentive compensation? 

Part Two: Third-Party Servicer (TPS) Guidance and Opportunity for Public Comments 

Separate but Related 

As mentioned above, a separate but related part of the Department’s February 15 press release is what the Department indicates is “updated third-party servicer guidance”. This guidance can get complicated very quickly, but we are providing an overview and will dive deeper in future messages to members and blog posts. 

Effective immediately, the Department’s updated guidance is intended to clarify what contracted services are considered a third-party servicer (TPS). The guidance includes an updated list of functions that are within the scope of the Department’s oversight as a TPS. In addition to providing further direction to assess when a contracted organization is considered a TPS, the Department is requiring institutions to report by May 1, 2023, any arrangements with a TPS that have not been previously reported to the Department.   

The guidance acknowledges that OPMs are a type of TPS. However, the guidance goes further to describe other agreements that should be considered a TPS. The examples provided are sometimes helpful and often fall short in detailing the extent to which the institution should consider that their contracts fit within the view of the Department as a TPS. Institutions should be aware that the guidance appears to address campus-based functions not just distance education. 

This guidance updates and replaces past guidance provided in Dear Colleague Letters GEN 12-08, GEN 15-01, and GEN 16-15 (as amended by the March 8, 2017 electronic announcement), and those documents are considered rescinded. 

Definition of a Third-Party Servicer (TPS) 

Third-Party Servicer (TPS) is defined by Federal regulation as an entity that contracts with an institution to perform administrative functions on behalf of the institution to address any aspect of the institution’s participation in any Title IV HEA program. The regulation goes on to indicate a long, but noted as non-exhaustive, list of functions that primarily includes processing financial aid applications and payments. The Department, in its new guidance, maintains that most activities by outside entities are subject to Department oversight because the activities are “intrinsically intertwined” with the administration of Title IV. This new guidance provides a list of six functions intended to summarize the long list of functions provided in regulation that would identify the contracted entity as a TPS. Particularly concerning are two of the functions in the guidance that appear to be very broad. These two broad functions below appear to be catch-alls that capture any remaining activities conducted by outside entities as “intrinsically intertwined” with the administration of Title IV and making them a TPS: 

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

These catch all bullets cause us to pause and consider what a colleague shared as “if it breathes on Title IV, it is a TPS”. Based on the guidance language, our colleague’s assessment might be correct! This view could mean in addition to OPMs, Learning Management Systems, state agencies, law firms, and some consultants could be categorized as a TPS. This list could get long! 

Lastly, a non-US entity cannot contract with an institution as a TPS. The guidance explains that contractors located outside of the United States or those owned or operated by an individual who is not a U.S. citizen or national or a lawful U.S. permanent resident cannot contract with an institution as a TPS to perform any aspect of the institution’s participation in a Title IV program. We will seek answers about the impact of this criterion. 

Guidance to Assess Functions of a TPS 

The Department provides a set of tables with two columns with the elements of a Third-Party Servicer vs. Not a Third-Party Servicer to help an institution assess their agreements with outside entities who perform activities in certain topic areas. These topic areas include: 

• Recruitment-and Application-Related Activities. 
• Student and Institutional Eligibility. 
• Consumer Information. 
• Default Prevention. 
• Delivery of Title IV Funds. 
• Computer Services/Software and Record Maintenance. 
• Retention of Students. 
• Instructional Content. 
• Consulting and Auditing. 
• Federal Perkins Loan Program. 

If after review of these topic area explanations you are still unsure whether your contract with an entity is a TPS, the Department directs that you should contact the School Participation Division at CaseTeams@ed.gov. We urge you to keep that email contact handy! Ask them questions, as this guidance is far-reaching, and you will want to understand how the guidance should be implemented at your institution. 

Third-Party Servicer Reporting 

Federal regulation directs the required reporting of a TPS. The guidance reinforces that requirement and highlights key components including: 

• Information must be reported within 10 calendar days of entering a contract with a third party. 
• Report whenever there is a substantial modification to an existing contract or the termination of the contract. 

Because this guidance will cause institutions to re-evaluate their contracts to make new TPS determinations, the guidance provides that institutions have until May 1, 2023, to report any arrangements with a TPS that have not been previously reported. Additionally, entities or individuals that meet the definition of a TPS have until May 1, 2023, to submit the Third-Party Servicer Data Form to the Department or update their existing form. 

Opportunity to Comment 

The Department’s press release provides a mechanism to comment on the TPS guidance that is separate from the OPM-related commenting process, but it is very confusing.  The opportunity to comment about TPS guidance is through a different Docket identification number than the request for information for OPMs regarding incentive compensation. It is important to keep these two parts of the Department’s press release and the two opportunities to comment separate. We provide the details below. 

Department guidance does not typically offer the opportunity to comment. However, the Department is seeking comments regarding the new TPS guidance and indicated in the press release that they will consider those comments and publish any relevant changes based upon that feedback at a later date. The information to submit a public comment about the third-party servicer guidance is offered below. Given the wide-ranging impact of this guidance without any warning or input before releasing it, we think you should consider commenting if you have questions, requests, or suggested changes. 

Part Three:  Comments to Make, Action to Take, and How to Do So 

We know that the Department’s press release, the TPS Guidance, and the Announcement of Listening Sessions about Incentive Compensation for OPMs that followed, are confusing and it is easy to conflate the two different but related issues that the Department wishes to address. We hope that the following helps distinguish the tasks to be completed, inquiries about applicability of TPS oversight, and the opportunities for comment. 

Actions to be taken regarding each aspect of the Department’s Press Release: 

OPM Incentive Compensation 

• Comment Opportunity #1 Regarding Incentive Compensation for OPMs. 
  • Present Comment at the Virtual Listening Session – March 8-9, 2023; 1-4pm ET 
    • Register by sending an email message to margo.schroeder@ed.gov no later than 12:00 p.m., Eastern time, on the business day prior to the listening session at which they want to speak. 
  • Observe the Virtual Listening Sessions – March 8-9, 2023; 1-4pm ET  
    • Registration for those who wish to observe: www2.ed.gov/​about/​offices/​list/​ope/​policy.html. 
  • Submit a written public comment addressing the nine questions posed by the Department regarding incentive compensation for OPMs. Deadline: March 16, 2023. Submit a formal comment. Docket Number: ED-2023-OPE-0030. 

Third-Party Servicer Guidance 

NOTE: These dates have been updated from May to September 2023, and comment period through March 29th, following extensions received from the Department of Education.

• Inquire with the School Participation Division at caseteams@ed.gov if the institution is unsure of whether an individual or entity is subject to the TPS requirements, or any entity or individual directs the institution not to report the entity as a TPS. 
• Report any individual or entity with which it contracts that meets the TPS criteria listed above using the Department’s E-App process.  
  • Institutions to report any arrangements not previously reported by September 1, 2023.
  • Contractors Submit the Third-Party Servicer Data Form to the Department or update their existing form no later than September 1, 2023.  
• Comment Opportunity #2, by written public comment, regarding the third-party servicer guidance. Deadline March 29, 2023. Submit comments via the Federal eRulemaking Portal at Regulations.gov, under Docket ID ED-2022-OPE-0103. 

We urge you to consider public comments to the Department. The issues surrounding Third-Party Servicers including OPMs is slated to be part of the next negotiated rulemaking for which the Department intends to announce in the spring. Your comments as practitioners are important as you can share the impact on the students at your institutions. Your experiences can help inform the next regulatory steps taken. 

Conclusion 

The impact of these announcements can be very widespread and deep across your institution. Make sure that action is being taken as the commenting times are short and the expectation for institutions to report additional services covered by the new guidance has a May 1 deadline.  

Expect further posts on these issues. We will be communicating directly with our SAN and WCET members to gain additional insight on expectations, advice, and impact at the institutions. Please know that SAN and WCET will continue to seek clarification about these actions by the Department and share what we learn. 

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For transparency, we disclose that for-profit corporations and non-profit organizations that will be affected by this guidance are WCET and/or SAN members. Their membership did not influence our analysis. The information and analysis in this blog post are our best understanding and should not be considered to be or used as legal advice. Legal questions should be directed to legal counsel.