Guidance on Outsourcing Spurs Anxiety About ‘Collateral Damage’

Update, 9 a.m. EST Tuesday: The Education Department announced this morning that in response to “confusion” about the guidance discussed below, the Dear Colleague Letter will not take effect until Sept. 1, rather than immediately as of Feb. 15. The department will also delay the start of the 30-day comment period on the guidance until today.

 

Officials in the Biden administration—and the think tank analysts who often feed them ideas—have made no secret of their disdain for the companies many colleges hire to recruit students for and operate their online academic programs, which government officials and analysts often believe can drive up the price of higher education and draw students to low-value academic programs at subpar institutions.

So no one was remotely surprised that the U.S. Education Department’s recent guidance expanding the definition of what it means to be a “third-party servicer” for institutions that receive federal financial aid funds put online program management companies, or OPMs, squarely in the center of the bull’s-eye.

What was surprising—breathtaking, even—for many observers was how expansively the department broadened the definition, to include contracting with specific institutions on such things as “monitoring academic engagement and/or daily attendance”; “assessing student learning, including through electronic means”; and “performing individualized and interactive financial aid counseling.”

They marveled at just how many companies, nonprofit organizations and even state government entities could be caught up in the much wider net. Some described them as “collateral damage” in the administration’s pursuit of OPMs.

“The department is looking at the world as ‘OPM, OPM, OPM,’” said Russell Poulin, executive director of the WICHE Cooperative for Educational Technologies. “But, oh my God, this is going to hit so many other things.”

Interviews with roughly two dozen lawyers, lobbyists, company officials, campus administrators, policy analysts and association leaders revealed a mix of confusion, concern and outright amazement at the scope of the new guidance and its potential impact on companies and other organizations that help colleges recruit, educate or retain students, and on the institutions themselves. (Many of those interviewed preferred to talk without their names attached, given their uncertainty about the guidance’s impact and their fear of drawing unwanted scrutiny to their organizations or clients.)

The first formal pushback came late last week in the form of a letter from dozens of higher ed groups urging the department to extend both the 30-day comment period on the guidance (which took effect immediately) and the proposed May 1 deadline for colleges to begin reporting their relationships with providers they believe meet the new guidelines.

Less visibly, the guidance sent an untold number of companies and other organizations into a tizzy trying to understand whether the guidance applied to them and how it might affect their work.

Some cited potential procedural problems with the guidance, saying it was the latest in a string of federal attempts (going back several presidential administrations) to “legislate through guidance” rather than through changes in law or even formal regulatory processes. Some said they expected legal challenges trying to invalidate the guidance if the administration didn’t withdraw or significantly revise it.

More substantively, some worried that being swept up by the administration’s expansive definition of third-party servicers could subject their organizations to expensive and timely reporting requirements and, possibly, put them on the hook for financial penalties if they fail to report relationships with outside providers.

Even many of those who generally support the administration’s desire to rein in online program managers were surprised that the Education Department broadened the third-party servicer definition to touch virtually any entity that contracts with colleges to retain students and provide a wide range of software. But they also played down the potential impact on most organizations, expressing confidence that the administration would enforce the guidance—should it remain as broad—in a way that focuses on its original target.

What Was the Department Trying to Do?

The Education Department’s guidance on third-party servicers was released this month in conjunction with a related announcement that it would seek public comment on a federal policy that since 1992 has largely restricted colleges from paying recruiters based on how many students they enroll. Revenue-sharing agreements with recruiters can be exempted from the ban if the provider “bundles” nonrecruitment services with the recruitment work it does, under 2011 guidance from the Obama administration that many consumer advocates believe has enabled online program managers and others to evade the intent of the restriction on incentive compensation.

The department had signaled its intent to reconsider and possibly withdraw the 2011 guidance on “bundled services,” and many analysts had expected some action along those lines. But the decision to open a whole new line of attack using the definition of “third-party servicer” seemed to come out of the blue.

The Higher Education Act has for decades given the Education Department the ability to regulate any third-party servicer that contracts to administer federal financial aid funds with a postsecondary institution eligible for those funds. Historically, the definition of what qualified an entity as a third-party servicer was narrowly drawn to include direct involvement with federal aid funds, and most of the third-party servicers were student loan originators, processors or collectors.

Entities deemed to be third-party servicers must make their contracts and annual audits available to the government, and colleges are required to report all such relationships. In 2016, the department issued guidance interpreting the statute to bar foreign-owned companies from being third-party servicers, presumably to limit international influence on federal financial aid dollars. (This restriction takes on added significance now, as discussed below.) (Note: This paragraph was updated from an earlier version to clarify that the prohibition on foreign-owned servicers was not in the underlying statute.)

Many companies that work in the higher education space, including some of the online program managers, have gone out of their way to avoid being deemed third-party servicers, in part to limit the documents they have to make public. So most of the publicly available information about the relationships between companies that recruit and market on behalf of colleges has come from contracts collected through Freedom of Information Act requests from public universities.

“People at the department were surprised how little information they had about the contractors doing a lot of work for schools,” said Robert Shireman, director of higher education excellence and senior fellow at the Century Foundation, who wrote the 2011 guidance while he worked in the Obama Education Department.

In an interview Monday, an Education Department official (federal agencies often decline to attribute public comments to specific individuals) said the agency had seen “lots of inconsistency” in how colleges and companies reported on third-party servicers.

“We’d have situations where one school would report a company as a third party, and the company wouldn’t” report itself as one, the official said.

Someone at the department appears to have decided that by expanding the third-party servicer definition to include more of the services that many online program management companies fold into their “bundles”—helping students apply to enroll at institutions, providing instructional content, working to retain students—the government could require all of them to turn over their contracts. That could give it greater sight lines into darker corners of how colleges work with outside entities.

“If you’re trying to make this a more efficient industry, where there is more transparency around pricing and value, bringing all these OPM contracts to light isn’t a terrible thing,” said Ben Kennedy, whose firm, Kennedy and Company, advises colleges on online strategy and other issues.

John Katzman, founder and CEO of Noodle, is in the unusual position of running a company that helps colleges manage their online programs but being a vocal critic of the revenue-sharing model that many such companies use (and Noodle has used in the past).

Katzman believes that the expensive digital marketing that colleges (and their corporate partners) do on Google, Facebook and LinkedIn to stock online programs with students is driving up the cost of higher education, and he supports the department’s attempt to draw that out.

“If you’re involved in marketing and recruiting at all, there shouldn’t be any place to hide the money,” he said. “We should see your contract, see your audit.”

Katzman said the department could have focused its regulatory efforts more directly on companies that market for student recruitment, rather than significantly expanding the range of services that make providers susceptible to the third-party guidance. “The folks who are working on retention, on learning and curriculum design, generally aren’t where the problem is,” he said. “There’s a huge hole in the bottom of the boat where the water’s coming in, and that’s marketing. That’s what they should be fixing.”

Who Is Included?

The hundreds or potentially thousands of companies, nonprofit groups and state agencies that operate in those additional spaces couldn’t agree more. “The broadened definition of a [third-party servicer] appears to cover entities that are beyond the common understanding of that term,” the American Council on Education and other higher ed groups said in their letter last week asking the department to delay implementation of the guidance.

The letter listed entities that the groups thought could be considered third-party servicers under the department’s expansive definition, including:

• a college that provides courses and instruction to another institution as part of an intercollege consortium;
• an online extension campus providing services to another campus of the same university;
• an institution in a state system providing services to other institutions in the system;
• a hospital providing clinical experiences and educational programing for nurses and other medical professionals;
• a local police department helping to compile and analyze campus crime statistics;
• a nonprofit organization providing student engagement;
• retention services or tools to improve outcomes for at-risk students;
• publishers providing online materials and study guides; and
• technology providers developing adaptive courseware solutions.

If it seems like that list includes a lot of entities that don’t engage in the types of the behavior the Biden administration wants to crack down on, officials at many of the groups think so, too.

Many of those potentially affected parties are puzzling their way through the guidance to gauge whether it applies to them. One official at a state university that helps its peer institutions deliver online learning started off a call with a reporter assuming that the guidance didn’t apply to the institution but by the end of the call suspected that it did. The entity helps to market online programs and directs students to its peer institutions.

Another official in a state university’s central office wondered aloud if the centralized open educational resources it provides to public colleges, or financial aid counseling and other services the system offers to help students at its member colleges stay enrolled, would trigger the guidance.

“We’re doing lots of things to help retain students so they can complete, and a lot of those things appear to be problematic in the department’s eyes,” this official said.

Analysts in various sectors speculated about entities that might be affected. Phil Hill, an analyst and blogger, hypothesized that the guidance “obviously” applies to “textbook publishers and courseware providers” and well as “the entire assessment market.” Hill and others speculated that the guidance could affect companies that provide learning management systems (which often include attendance, assessment and student notification tools) and companies like Guild Education and Ed Assist that matchmake between corporate employees and college programs.

When it comes to admissions, several experts said they believed organizations like the Posse Foundation and Questbridge, which help bring low-income students to selective colleges, might be considered third-party servicers under the new definition.  

While several observers said they believed the department had carelessly overshot in its efforts to target the online program managers, some perceived greater purposefulness in the agency’s actions. One lobbyist said that the department, with its close ties to faculty unions, “really hates that other entities are doing any form of instruction,” which might explain the guidance’s focus on any company that provides “instruction or mandatory tutoring” or “supplementary academic support to students” that is a required part of an academic program.

Poulin, of WCET, said the department’s guidance reflects a larger “distrust of anything that has to do with digital learning … They seem to see distance learning, even without an OPM, as going after money … They don’t seem to like analytics; they don’t like third-party content.”

The senior Education Department official said companies and colleges should keep in mind that the determination of whether an entity is a third-party servicer “can be very contract-specific.” Just because an organization operates in one of the spaces that is included in the new guidance, the official said, “doesn’t guarantee that every single entity that falls into that broad category” is a third-party servicer. “We recommend that you submit questions and comments, submit the third-party form, and go through the process. Some of the places where people are worried don’t need to be.”

Gauging the Guidance’s Impact

The Education Department official minimized the potential downsides of being deemed a third-party servicer.

“People seem to view [being] a third-party servicer as some kind of black mark,” the official said. “It’s not inherently a bad thing.”

Katzman, the Noodle founder, struck a similar note. “If we made this easy enough and inexpensive enough to adhere to, if we as a group work on a reporting structure that is straightforward, this is just not that hard,” he said.

Katzman speculated that the costs to third-party servicers of filing their contracts and conducting the required annual audits could cost most organizations “some tens of thousands of dollars a year, if we set up a process that makes sense.” Colleges would also absorb the costs and time demands of reporting their third-party relationships. 

Others weren’t quite so sanguine. “Compliance will be massively expensive and drive consolidation across the ecosystem,” Jeff Conlon, co-founder of Everspring Partners, another online program provider, tweeted this month. “Innovation will be stifled.”

Officials at several nonprofit organizations that focus on college access and success said that if their organizations were deemed to be third-party servicers, a few “tens of thousands of dollars” could tax their small budgets and staffs.

The impact could extend beyond reporting requirements, too. Two law firms that work with colleges, Duane Morris and McGuireWoods, noted that the law requires third-party servicers to agree by contract with their educational partner to be “jointly and severally liable” to the Education Department for any federal violations the institution commits. Big companies might seek to indemnify their campus partners from any liability, but smaller players might not want or be able to do that.

The reverse would also be true, Duane Morris noted: the institution would be liable for any violation committed by the third-party servicer.

One higher education lawyer who requested anonymity speculated that the Education Department—having found itself unable to recoup money from failed for-profit higher education providers such as Dream Center—“wants as many people liable for bad outcomes as possible … They want as many entities as possible when things go wrong.”

The third-party servicer rules also threaten to impose a fine of as much as $67,000 for any violation—conceivably even inadvertent ones. That could apply to a college or university that neglected to report some entities it works with as third-party servicers, or to organizations that haven’t historically fallen under the third-party servicer guidelines and fail to report themselves as such.

Some of these situations might be worst-case scenarios, but several experts said that worries about them could create a chilling effect that could lead some organizations to stop contracting with colleges or vice versa.

The International Effect

One other area of the new guidelines has created a significant stir: the prohibition on colleges contracting with foreign-owned or operated companies as third-party servicers.

The Biden administration did not add the clause to its new guidance; it was put into place through guidance in 2016. But the significant broadening of the scope of the department’s definition of third-party servicer means that the prohibition could apply to a much larger group of companies, including (conceivably) publishing companies like Pearson, learning management systems like Brightspace by D2L, and others.

D2L went so far as to publish a statement that its learning management system is “outside the scope of the updated, non-binding guidance.” D2L, it said, does not “operate on behalf of institutions to deliver instruction; control educational content, course materials, or curriculum; assess student learning; advise students; establish any attendance interventions or notification rules; recruit or assist students in their enrollment applications; or maintain, view, or update any Title IV-related records.”

The company noted the ambiguousness of the department’s guidelines, however, and the company’s services include attendance-taking tools and a “student success system” that “helps to drive learner retention by using predictive analytics and machine learning techniques to give instructors advanced knowledge of both learners who are struggling and those who may need additional challenges to keep them engaged.”

By some readings, at least, some of those services could appear to be captured in the guidance’s language that characterizes as third-party servicers entities that conduct “activities designed to keep an individual enrolled at an institution eligible for Title IV aid,” including “monitoring academic engagement and/or daily attendance” and “conducting outreach to students regarding attendance or academic engagement.”

Officials at several other foreign-owned companies were troubled by the guidance.

David Sherwood, CEO and co-founder of BibliU, a U.K.-based “learning enablement” platform that provides electronic textbooks and engagement tools, said its lawyers were still analyzing the guidance and hadn’t yet concluded whether it applied to the company.

Regardless, he said via email, “this guidance will be very detrimental to the U.S. education sector and economy. BibliU is a great example; we have dozens of U.S.-based staff and 20+ U.S. customers who could be detrimentally impacted by this.

“I can understand why the department is wary of rogue nations integrating and potentially spying on higher education institutions, but a blanket prohibition on foreign ownership is not the best way to solve for this. A lot of unintended consequences.”