Federal Outsourcing Guidance Prompts Concern of Unintended Consequences

Higher education associations, study abroad organizations, colleges and universities, and others are calling on the Department of Education to rescind guidance issued earlier this year that would expand the definition of outside companies that are subject the department’s oversight.

The department wrote a Dear Colleague letter in February that said any entity involved with the administration of an institution’s federal student aid is considered a third-party servicer, which puts them under the department’s oversight authority and subjects the companies’ contracts with institutions to regular audits. Historically, third-party servicers were involved with the student loan process and financial aid.

Commenters said the new guidance would jeopardize study abroad programs and international student enrollment and have a host of other unintended consequences, including possibly disrupting educational services. Some organizations said the guidance was a critical step to protect students. More than 1,000 comments were submitted last week before the comment period on the guidance closed.

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“We have serious concerns about the consequences that are likely to follow if the [Dear Colleague letter] is left in place, including the potential for significant disruption and termination of critical education services to students and the reallocation of funds from educational purposes to compliance efforts,” American Council on Education president Ted Mitchell wrote in a letter on behalf of 85 other higher education associations.

ACE urged the department to rescind the letter and use the negotiated rule-making process to make changes to the regulations for third-party servicers.

The department was particularly interested in outside companies involved with student recruiting and retention, the provision of software products and services involving federal financial aid administration, and the provision of educational content and instruction.

That Dear Colleague letter was supposed to go into effect immediately, but the department has since said the letter wouldn’t take effect until Sept. 1 after multiple groups expressed concern about the new guidance.

The change in guidance is part of the department’s efforts to gather more information about and increase oversight of online program managers’ contracts with colleges and universities. The guidance formally made the online program managers third-party servicers, which would mean those companies and others than fall under the expanded definition could be held “jointly and severally liable” for any violation of federal law or regulations.

The department has held two listening sessions in the last month and received 270 written comments about the current incentive-compensation guidance, which exempted third-party servicers from the federal ban on institutions of higher education providing a commission or bonuses to individuals or entities based on securing enrollment or financial aid as long as they provide a bundled set of services.

That exemption allowed a company to receive financial benefits for enrolling students as long as the university client also pays for other services, such as technology support, in addition to student recruitment.

A number of online program managers and universities argued in favor of keeping the exemption in place, while consumer protection advocates urged the department to change its guidance and remove the so-called bundled services exemption. The department has not announced any next steps yet on the exemption.

Consumer protection organizations and student advocacy groups have said that new third-party servicers definition is key to increasing oversight of the online program managers. Critics have accused some of those companies of engaging in aggressive recruiting practices and questioned the legality of their business practices.

“As institutions outsource a growing number of functions to third-party providers, this guidance ensures that institutions are transparent about these relationships and their terms, that third parties clearly understand their obligations (including complying with incentive compensation limitations and regulations governing substantial misrepresentations), and that the department has the information it needs to conduct oversight regarding [third-party servicer] arrangements,” wrote Sameer Gadkaree, president of the Institute for College Access and Success.

Guidance Affects Other Programs

Organizations involved with study abroad, international education and health education were particularly concerned about how the proposed guidance could affect their programs.

The guidance says that an institution can’t contract with a third-party servicer that’s located outside the United States or owned by an individual who is not a U.S. citizen or lawful resident.

Study abroad organizations said that would mean U.S. institutions wouldn’t be able to partner with foreign universities or offer workforce development programs if they include placement at a foreign-owned organization.

“Through its expanded definition of servicers and subcontractors, the new guidance will effectively make such programs off limits to all students who rely on Title IV funding to pay for the cost of study abroad, including those who receive Gilman Fellowships, Perkins Loans, and Pell Grants,” the American Councils for International Education wrote in their comment. “This proposed regulation comes at a time when access to sufficient financial aid is the single greatest obstacle faced by U.S. students seeking to study overseas today.”

The University of Maryland Baltimore County urged the department to exclude “study abroad programs, international partnerships, and international student recruitment and retention” from the third-party servicers definition.

“The new expanded interpretation of [third-party servicers] would have far-reaching, unintended consequences detrimental to our institution’s global engagement efforts,” UMBC wrote in its comment. “If the guidance is left unchanged, our long-standing bilateral exchange relationships with other higher education institutions would be terminated.”

UMBC and other universities said the guidance could hinder international student recruitment because they work with foreign companies to assist in recruitment efforts.

Ohio Wesleyan University wrote in its comment that its international student enrollment could decline by at least 50 percent if the new guidance takes effect as planned.

“Today, it is more important than ever that our higher education system is well-connected around the world with a vibrant international exchange of students, faculty, and ideas,” Ohio Wesleyan president Rock Jones wrote. “To continue to maintain and enhance these connections, we urge the department to rescind the proposed guidance regarding higher education institutions’ use of third-party servicers.”

Other universities raised concerns about whether their current contracts for learning management systems would be allowed under the new guidance. The State University of New York at Fredonia and other campuses in the system contract with Canada-based software company D2L, which owns the Brightspace learning management system.

“This would require us to develop our own [learning management system] or find a provider locally, which would be a prohibitively costly endeavor, especially under such a short deadline,” Fredonia officials wrote in their comment. “This is just one example of the many ways this guidance could impact our operations and our ability to provide high quality and affordable higher education to New York State residents, United States citizens, and others.”

Several commenters connected to the health-care industry and programs at colleges said the guidance would place additional burdens on the medical facilities that colleges and universities partner with to give students clinical experience.

“College of the Albemarle Health Sciences and Wellness Programs division believes the definition of who is a third-party servicer is ambiguous and could be interpreted to include the clinical settings where much of health science education programming takes place,” College of Albemarle officials wrote in a comment.

Officials at the College of Albemarle, a community college in North Carolina, added that the guidance would make it more difficult to recruit and retain clinical sites.

“The proposed language could have a devastating effect on many health science programs for clinical placement, and impact professions which are already experiencing a severe healthcare shortage,” the college’s comment says.