U.S. Department of Education Postpones Effective Date of New Third-Party Servicer Guidance and Reporting Obligations

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Earlier this week, the U.S. Department of Education (the “Department”) announced that it is postponing the effective date of new third-party servicer guidance and servicer reporting obligations to September 1, 2023. As we detailed in our February 17, 2023, Client Alert, the new guidance and reporting requirements were outlined in Dear Colleague Letter GEN-23-03 (“DCL”) issued on February 15 and updated on February 16.

The DCL significantly expands the types of services that, if provided to an institution by a third party, are sufficient to deem the service provider a third-party servicer. Covered services under the new guidance include the provision of recruiting and marketing services, computer and systems services, student retention activities, and curriculum content development and delivery. The DCL includes tables outlining the services and functions that create a third-party servicer relationship, along with some exceptions.

Contracts between institutions and third-party servicers must conform to specific requirements outlined in 34 C.F.R. § 668.25. Importantly, contracts must include joint and several liability arising from violations of Title IV program regulations. The DCL specifies that institutions may not enter into agreements with third-party servicers that are located outside the United States or that are owned or operated by individuals who are not U.S. citizens or permanent residents, in addition to other restrictions outlined in Section 668.25.

Institutions are required to report their third-party servicers to the Department via the e-Application within 10 days of signing a new agreement or significantly modifying an existing agreement. Each third-party servicer is subject to annual compliance audits that must be provided to the Department within six months after the close of the servicer’s fiscal year.

The latest announcement amending the DCL gives institutions and third-party servicers until September 1, 2023, to amend any existing contracts or other agreements to comply with the Department’s requirements. Institutions have until September 1 to report all of their third-party servicers to the Department. And, finally, the Department will accept comments on the new guidance until March 30. Comments may be filed at www.regulations.gov under Docket ID ED-2022-OPE-0103.

The DCL has created substantial uncertainty and concerns for institutions and service providers alike. The extension of the effective date gives institutions and newly designated third-party servicers additional time either to modify their existing agreements to comply with the regulatory requirements or to consider whether their commercial arrangements can be modified to avoid creating a third-party servicer relationship. We are happy to talk with institutions and servicers about these new requirements and compliance obligations.