ED Formally Rescinds 2023 Guidance Letter on Third-Party Servicers

On October 21, the U.S. Department of Education (ED) announced that it would formally rescind the "Dear Colleague Letter" (DCL) on third-party servicers by November 18, 2024. The announcement was issued through a joint status report and is the result of a lawsuit filed by 2U against ED's third-party servicer guidance issued in 2023.^Footnote1 The DCL, which ED Under Secretary James Kvaal suspended in April 2023, drew widespread criticism from the higher education community due to ED's expansive definition of a third-party servicer. This definition could have drastically altered the third-party landscape for higher education institutions.

In February 2023, the ED office of Federal Student Aid (FSA) published DCL GEN-23-03, "Requirements and Responsibilities for Third-Party Servicers and Institutions." In the DCL, ED provided a new definition for the term "third-party servicer" (TPS) that greatly expanded the current definition in the preexisting TPS regulations that ED enforces. Specifically, the DCL defined a TPS as a provider of "functions or services necessary . . . to provide Title IV-eligible educational programs."^Footnote2 In other words, the guidance could have extended TPS regulatory requirements to any contractual relationship an institution might have with a digital content, software systems, or services provider—requirements that carry new reporting mandates for institutions and reporting and compliance audit mandates for providers. The DCL also would have extended a ban on any foreign-owned or located firm serving as a TPS, which would have sparked considerable disruption in the overall higher education IT marketplace. Taken together, these two requirements in the original DCL would have greatly undermined e-learning at colleges and universities. As such, EDUCAUSE submitted comments soon after the DCL was released, addressing these concerns and urging ED to withdraw the DCL.^Footnote3

In April 2023, Under Secretary Kvaal published a blog post announcing that ED would withdraw the effective date (September 1, 2023) of the original DCL.^Footnote4 In the blog post, Kvaal noted that ED would conduct a "careful review" of the more than one thousand public comments submitted in response to the guidance and issue a revised guidance letter after completing the review. In the revised guidance letter, he stated that the new effective date would fall at least six months after the publication of the guidance, but he did not give a time frame for when the revised guidance letter would be released. In the announcement, Kvaal also stated that it would be more appropriate to consider changes to ED's TPS enforcement through negotiated rulemaking. The effective date was officially withdrawn in a separate May 2023 DCL (GEN-23-08), and no revised guidance has been promulgated since.^Footnote5

Shortly after ED published the TPS guidance, higher education technology company 2U filed a lawsuit challenging the February DCL.^Footnote6 In the lawsuit, 2U claimed that ED lacked the authority to implement this guidance without following procedural rulemaking requirements of the Administrative Procedures Act (APA). Through negotiations to settle this lawsuit, ED and 2U reached an agreement that resulted in the joint status report announcing that DCL GEN-23-03 would be formally rescinded by November 18, 2024.^Footnote7

Looking Ahead

With the joint status report announcing the formal rescission, higher education institutions no longer need to worry about the TPS requirements provided under the DCL potentially coming into play; however, ED may still pursue new regulations on TPSs through negotiated rulemaking. If ED moves forward with new TPS regulations, interested stakeholders will have the opportunity to participate in the rulemaking process via the notice-and-comment period, which will likely give institutions more time to digest the proposed changes before they become effective. ED indicated in the Spring 2024 Regulatory Agenda that it intended to move forward with a proposed rule in June 2025, although whether the Department will take action on the pending agenda item remains to be seen, especially with the incoming Trump administration taking office in January.^Footnote8 EDUCAUSE will continue to monitor for news related to the TPS regulations and keep members apprised with timely updates.

Notes

1. United States District Court for the District of Columbia, "Joint Status Report," 2U, LLC, et al. v. Cardona, et al. October 21, 2024. Jump back to footnote 1 in the text.↩
2. Annmarie Weisman, "(GEN-23-03) Requirements and Responsibilities for Third-Party Servicers and Institutions (Updated May 16, 2023)," U.S. Department of Education Office of Federal Student Aid, updated May 16, 2023. Jump back to footnote 2 in the text.↩
3. EDUCAUSE letter to Miguel Cardona, Secretary, U.S. Department of Education, "Regarding Docket ID ED-2022-OPE-0103," March 7, 2023; Jarret Cummings, "EDUCAUSE and Third-Party Servicer Guidance," EDUCAUSE Review, March 16, 2023. Jump back to footnote 3 in the text.↩
4. James Kvaal, "Update on the Department of Education's Third-Party Servicer Guidance," Homeroom (blog), U.S. Department of Education, April 11, 2023. Jump back to footnote 4 in the text.↩
5. Annmarie Weisman, "(GEN-23-08) Update to Third-Party Servicer Guidance in GEN-23-03," U.S. Department of Education Office of Federal Student Aid, May 16, 2023; Katie Branson, "ED Removes Effective Date for Previously Released Third-Party Servicer Guidance," EDUCAUSE Review, June 8, 2023. Jump back to footnote 5 in the text.↩
6. 2U, Inc. et al v. Cardona et al, (U.S. District Court for the District of Columbia, April 4, 2023). Jump back to footnote 6 in the text.↩
7. "Joint Status Report," 2U, LLC et al. v. Cardona, et al. Jump back to footnote 7 in the text.↩
8. Bailey Graves, "Spring 2024 Regulatory Agenda Highlights," EDUCAUSE Review, August 27, 2024. Jump back to footnote 8 in the text.↩

Bailey Graves is a Senior Associate at Ulman Public Policy.