U.S. Will Withdraw Controversial Outsourcing Guidance

The Education Department is officially planning to rescind its controversial guidance on outside contractors—which never actually took effect—within the next four weeks.

This latest step, announced in a court filing Monday, is largely a formality after the department said in July that it would go through its lengthy rule-making process to change the regulations that govern third-party servicers—entities that colleges and universities contract with to administer or manage financial aid and other programs—rather than issue new guidance.

The department had sought to expand the definition of companies and nonprofit entities that are considered third-party servicers—a designation that would have subjected them to regular audits and the agency’s oversight authority. Under the guidance issued in February 2023, companies involved with student recruiting and retention, as well as those who provided educational content and instruction, would have become third-party servicers. Historically, third-party servicers were those involved with the student loan process and financial aid.

The guidance was part of the department’s multipronged effort to bolster oversight of companies that manage online programs for colleges. By designating online program managers and other companies as third-party servicers, the department sought to gain more insight into the companies’ contracts with colleges as well as more levers for accountability.

However, outcry against the guidance document—known as a Dear Colleague letter—was swift, with colleges and outside organizations accusing the department of overreaching and warning of unintended consequences. Ultimately, the guidance never took effect, and Monday’s filing serves as “the final nail in the coffin,” said Jon Fansmith, senior vice president for government relations and national engagement at the American Council on Education. ACE was one of several organizations that opposed the guidance.

Fansmith said the department could still take other action to address concerns with OPMs, which critics have accused of engaging in aggressive recruiting practices.

“We know it’s an area of interest and it’s an area of concern,” he said. “They’ve done a lot of work on this.”

But the department is running out of time to start and complete the rule-making process before President Biden leaves office in January.

The department also faced a legal challenge to the guidance from 2U, a prominent online program manager that works with hundreds of colleges but filed for bankruptcy this year. 2U, which would’ve been classified as a third-party servicer under the guidance, argued that the change was an “unprecedented claim of authority” that was “contrary to law.” Its lawsuit has been on hold until the department issued an updated Dear Colleague letter.

In a joint status report filed Monday, lawyers for the Education Department said the agency will formally rescind the 2023 guidance by Nov. 18. Once that happens, 2U will then “review the rescission and engage in discussions with the department about potential resolution of the case,” according to the filing.

The Education Department did not respond to a request for comment.

But the guidance was just one part of the department's plan to increase oversight over OPMs and potentially change how outside contractors work with colleges. So, advocates' hope for stronger oversight isn’t dead yet.

The department is also reviewing guidance issued in 2011 that in part allowed outside contractors, including OPMs, to receive a share of tuition revenue in exchange for their services—and that review is still ongoing. Consumer protection advocates and other groups have called on the department to rescind that 2011 guidance, which they say violates a federal ban on paying commissions or bonuses tied to securing enrollment or financial aid.

As of July, the department was still reviewing public comments on the 2011 document and plans to issue revised guidance “no sooner than late this year.”

Madison Weiss, a senior policy analyst for higher education at the left-leaning think tank the Center for American Progress, urged the department to rescind that 2011 guidance, which created an exemption to the federal ban on incentive compensation and has led to “unfair recruiting practices.”

“The federal government can address this by eliminating the exception and warning universities to stop these deceptive methods or risk losing their Title IV funding,” she said. “Removing this loophole is essential to protecting the integrity of higher education, as students are currently suffering from these predatory tactics.”