Thoughts on ED’s New Guidance on Revenue-Share Arrangements and Third-Party Servicers

We’ve been asked by many colleagues on our campuses about the potential impact of recent Department of Education announcements concerning incentive compensation on bundled services (revenue share) and third-party servicers. Since any associated policy changes could affect a much wider set of services than originally expected, we thought we’d use this space to share what we think are the key points that university leaders across higher education need to understand about the potential impact of recent and anticipated actions by the federal government.

So, where should one begin to get a handle on what’s happening? The key documents worth reviewing include:

• The May 5, 2022, GAO Report: Higher Education: Education Needs to Strengthen Its Approach to Monitoring Colleges’ Arrangements with Online Program Managers
• ED’s Feb. 15, 2023, press release announcing new TPS guidance and review of the incentive compensation ban for college recruiters: U.S. Department of Education Launches Review of Prohibition on Incentive Compensation for College Recruiters
• And, of course, the updated Feb. 28, 2023, ED guidance to institutions that contract with a TPS to administer any aspect of the institution’s participation in the student assistance programs: Requirements and Responsibilities for Third-Party Servicers and Institutions

The ostensible purpose of the ED guidance is to provide oversight of services such as “student recruiting and retention, the provision of software products and services involving Title IV administration activities, and the provision of educational content and instruction.” In particular, the ED is concerned that a “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.” These bundled services are often provided in revenue sharing agreements between institutions and OPMs.

The revenue share agreements are, in fact, one of the primary targets of the new guidance. Currently, OPMs enjoy an exception to a ban on giving “commission[s] or bonuses to individuals or entities based on securing enrollment or financial aid.” The ED is considering removing, or at least creating additional safeguards for, the exception to the ban that enables revenue sharing with third parties (i.e., OPMs) engaged in marketing and recruitment activities as part of a “bundle of services.”

While many consider it unlikely that the ED will decide to end the exemption—and therefore bring all revenue-sharing agreements out of compliance—it is possible that reporting requirements will become significantly more stringent around learner outcomes and costs. At a minimum, institutions should begin to prepare for a significant increase in reporting requirements.

Still, if the bundled service exemption for revenue share arrangements with OPMs for online programs should completely go away (a result we think is at least worth planning for), contracts with OPMs will need to be renegotiated—a not insignificant task.

Either way, the risk to for-profit companies in the online learning space is high. Many of these companies have built their foundation on revenue share contracts. Since many institutions have their financial and strategic investments tied up with OPMs, changes to terms and expectations could have far-reaching implications for financial and operational planning around online programs.

The ultimate effects of the guidance on new and existing revenue sharing models may be considerable—and potentially to the good—but if the latest guidance is implemented, it also has the potential to broaden the scope of federal oversight of TPS at institutions beyond OPM partnerships, potentially impacting everything from dual enrollment programs to student information systems to study abroad.

What this means is that the latest guidance potentially goes beyond areas of university/company OPM contracts to include any product or service necessary for the delivery of Title IV–eligible educational programs. Oversight of OPMs is potentially a good thing, even for the OPMs themselves.

Why is this different? Previously, federal oversight guidance extended only to third-party servicers involved in the direct administration of financial aid for Title IV–eligible programs. The Feb. 15 Dear Colleague letter from ED added a new area of oversight for contracts related to any aspect of the delivery of Title IV–eligible programs. As Phil Hill explains in his must-read “Phil on EdTech” newsletter,

Now programs refer not just to financial aid programs (e.g., Stafford loans) but also to educational programs (e.g., online MBA), an entirely different beast. This phrase has never been in previous ED guidance, and with it, ED now includes learning management, instruction, student retention, basically anything that ED wants to consider as necessary for that educational program.

Minimally, this increased scope could increase the burden placed on institutions with regard to the reporting and management of associated contracts. At the same time, it could prove challenging to identify all impacted partnerships without significant coordination across units. We think it’s crucial that all institutions understand and prepare to be responsive to the guidance offered by ED.

As our current understanding of exactly how reporting and compliance requirements might change between now and the proposed implementation on Sept. 1, 2023, it’s important for universities to begin to think about the potential changes they will need to make to their infrastructure to manage these possible changes.

To get feedback before Sept. 1, the ED has just concluded public listening sessions and is currently accepting comments that address the following nine questions (quoted directly from ED letter):

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?

The above nine questions should also be considered indications of how seriously the department will be examining the current bundled services exemption.

The ED’s timeline for the public comment period “to improve guidance on the incentive compensation prohibition” is tight. It included listening sessions that were held last week (March 8 and 9) and now a request for written comments to be submitted via the Federal eRulemaking portal, due by March 16. (Note: the deadline for public comment on third-party servicers guidance is March 29).

However this ultimately plays out, colleges and universities should be thinking now about how to engage in careful, deliberate, and robust planning around the shifting regulatory environment involving both revenue-share arrangements and third-party servicers. Those who have seen online learning as a discrete service rather than a core capacity may find themselves struggling to be as agile and strategic as they will need to be with these upcoming changes.