Action Alert: U.S. Department of Education Makes Important Announcements relating to Incentive Compensation Rules and Third-Party Servicer Rules
Background and Context
In January, The U.S. Department of Education (ED or the Department) released its 2023 regulatory agenda for new rulemaking that included a number of provisions of interest – for example, amendments to regulations on state authorization, the definition of distance education, accreditation, and third-party servicer. At the time, the general understanding was that the Department would address any questions about the incentive compensation regulations through sub-regulatory guidance and address amendments to the third-party servicer (TPS) regulations through the expected negotiated rulemaking process.
This week, the Department has announced its intention to review the 2011 incentive compensation Dear Colleague Letter (IC DCL), as expected, through a sub-regulatory process, but it also announced a new unanticipated guidance letter expanding the coverage of its TPS regulations. Under this new sub-regulatory guidance, third parties who provide services like recruitment, retention, or instruction – as examples - may be covered by the TPS regulation even if those providers do nothing directly related to the processing of actual Title IV funds.[1] This guidance is effective immediately, with reporting updates required to be made by May 1. In addition, the Department is indicating that it also still intends to commence a rulemaking on amendments to TPS regulations.
The following provides details regarding the Department’s processes and timelines on its potential changes to the incentive compensation guidance and on its new TPS guidance, as well as its expected rulemaking processes on TPS and other regulations. (This summary does not seek to summarize the TPS guidance or the implications of either proceeding on the OPM industry.)
Review of Incentive Compensation Guidance (IC DCL)
The Department has announced its interest in reviewing its 2011 IC DCL which allows for revenue sharing arrangements when certain services are bundled together. In its notice included in press release here, the Department indicates that it will hold two virtual listening sessions on March 8 and 9 from 1-4pmET. In addition, it will accept comments through March 16, 2023. The Department specifically seeks input on nine questions listed in its notice.
This process represents an opportunity for all interested parties to provide input.
New DCL on TPS Regulations
Separately, as mentioned above, the Department has issued new sub-regulatory guidance applying existing TPS regulatory oversight to activities not previously believed to be covered under its regulations or under the Higher Education Act. This new guidance can be found here. The Department has indicated that this guidance takes effect immediately, requiring reporting requirements by institutions of such relationships (and also by the third parties) no later than May 1, 2023. In addition, though, the Department is permitting comments to this guidance during the next thirty days (March 16, 2023) and has indicated that it may update or change its new guidance subsequent to the input it receives.
Additional Rulemaking Timeline
As stated above, the Department also still intends to proceed with its broader negotiated rulemaking processes, which will include proposed amendments to the third-party servicer regulations. The Department’s intention is likely to make its new sub-regulatory guidance and any other amendments more “permanent” through regulation.
The next steps for the rulemaking processes will include public hearings (likely April), a notice of intention to convene a negotiated rulemaking(s), and then three months of negotiations, likely this summer. Given the calendar, It is unclear that any new regulations would meet the statutory November 1 deadline for a July 2024 effective date, meaning that it is possible the effective date for any new regulations in these or other areas could slip until July 1, 2025. Regarding TPS compliance, this means TPS entities will therefore comply with the regulations under the interpretations of the new guidance by May 1 and then later be subject to any adjustments made through rulemaking.
Participating in Public Hearings and Filing Comments
Parties impacted by these developments should strongly consider participating in the Department’s hearings and comment periods. It is important to inform the Department of the higher education community’s experience in these areas so it more fully understands the breadth of the impact various changes to regulations or guidance might have and so that it has the opportunity to develop sound public policy.
[1] In the Higher Education Act’s definition of third-party servicer, there is catch-all phrase that seems more narrowly constructed than the Administration’s interpretation. The Act includes parties that administer “any aspect of an institution’s student assistance programs”. This is most often interpretated as meaning activities related to the actual disbursement and administration of the Title IV funds and not activities relating to other eligibility aspects of participating in Title IV programs. With this guidance, it appears even activities unrelated to the administration of federal funds or even to eligibility requirements might be considered to trigger TPS requirements.
This Alert should not be considered or relied upon as legal advice. Please seek counsel for specific questions relating to your organization.