HMBR LEGAL ALERT: U.S. Department of Education January 14, 2025 Dear Colleague Letter re: Misrepresentation by External Service Providers
We write to provide HMBR’s perspective on the Dear Colleague Letter issued on January 14, 2025 (“January 2025 DCL”) by the U.S. Department of Education (“Department”), shortly before the end of the Biden Administration.
A. Introduction
The January 2025 DCL sets forth the Department’s “[n]otice of interpretation regarding misrepresentation by third-party service providers.” The primary focus of the January 2025 DCL is to clarify the Department’s views on three types of “false or misleading” statements purportedly made to students by institutions of higher education (“institutions” or “IHEs”) and/or their external service providers (“ESPs”), including online program managers (“OPMs”) (“ESPs/OPMs”), as follows: (i) attributions of employment by ESPs/OPMs at IHEs; (ii) the nature of ESPs/OPMs’ role in student recruitment at IHEs; and (iii) the equivalency of on-line programs supported by ESPs/OPMs and their on-campus counterparts. Importantly, the Department reaffirmed the validity of its March 17, 2011 Dear Colleague Letter Gen-11-05 (“March 2011 DCL”) regarding the “Bundled Services Guidance”—and spoke to the conditions that bundled services arrangements with ESPs/OPMs must meet in order to comply with the Higher Education Act of 1965, as amended (“HEA”). 20 U.S.C. § 1001 et seq. The Department’s reaffirmation of the March 2011 DCL underscores the federal statutory foundation for IHEs that prefer to use a revenue-share contracting model for building and managing online programs.
B. March 2011 DCL – Bundled Services Guidance
The HEA was amended in 1992 to prohibit IHEs from “provid[ing] any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities or in making decisions regarding the award of student financial assistance.” 20 U.S.C. § 1094(a)(20) (“IC Ban”). The IC Ban is implemented by the Department through 34 C.F.R. § 668.14(b)(22).
Prior to July 1, 2011, the Department recognized twelve “safe harbors” that specified certain, permissible activities and arrangements to be carried out by IHEs without violating the IC Ban. These were largely codifications of guidance issued during the Clinton Administration and, as explained by the Department in its letter dated December 4, 2002, “based on common business practices” at the time. On October 29, 2010, the Department published a final rule which amended 34 C.F.R. § 668.14(b)(22) and removed the twelve safe harbors effective July 1, 2011 (“IC Final Rule”). Accordingly, pursuant to 38 C.F.R. § 668.14(b)(22), IHEs are generally prohibited from providing a third party with “any commission, bonus, or other incentive payment based in any part, directly or indirectly, upon success in securing enrollments or in the award of financial aid, to any person or entity who is engaged in any student recruitment or admission activity, or in making decisions regarding the award of funds under Title IV of the HEA.” After publication of the IC Final Rule on October 29, 2010, but before its July 1, 2011 effective date, interested parties sought clarification of the impact of the Department’s rescission of the safe harbor permitting “tuition-sharing arrangements” between IHEs and third parties.
To provide further guidance to IHEs and ESPs/OPMs on the IC Final Rule, the Department issued its March 2011 DCL. Under the IC Final Rule, the March 2011 DCL clarified that the use of tuition as a source of revenue from which compensation is paid to an unrelated third party for a variety of bundled services does not constitute the payment of incentive compensation (“Bundled Services Guidance”). The March 2011 DCL also explained that an unrelated third party may receive payment based upon tuition generated through the provision of bundled services “including marketing, enrollment application assistance, recruitment services, course support for online delivery courses, the provision of technology, placement services for internships, and student career counseling” as long as: (i) the third party does not make prohibited compensation payments to its employees; and (ii) the IHE does not pay the third party separately for student recruitment services provided by the third party. The reason for the Bundled Service Guidance, as the Department elucidated, is to clarify that—consistent with the IC Ban—when an IHE determines the number of enrollments and hires an unaffiliated third party to provide bundled services including recruitment, payment based upon the amount of tuition generated does not incentivize recruiting as it does when the recruiter is determining the enrollment numbers.
C. February 2023 Announcement – Revisiting the Bundled Services Guidance
On February 15, 2023, despite the lack of any legal challenge to the March 2011 DCL in the preceding twelve years, the Department issued an Announcement of Listening Sessions (“February 2023 Announcement”) [Docket ID ED-2023-OPE-0030] “to determine what, if any, changes to the incentive compensation guidance might be appropriate, particularly regarding the exception for bundled services.” 88 FR 10101. While the Department posed several queries regarding the application and impact of the Bundled Services Guidance, it nowhere questioned the legal and even policy foundation for March 2011 DCL.[1]
The February 2023 Announcement generated substantial participation in the listening sessions and submission of many written comments – both in support of and against the Bundled Services Guidance. In near unanimity, IHEs and trade associations representing IHEs were clear about the positive impact of the Bundled Services Guidance and the increased access to quality online programs by both traditional and non-traditional students and the continuing work of serving students consistent with the Bundled Services Guidance. In addition, the revenue-share model allowed IHEs without capital (or with capital deployed elsewhere) to compete and provide such programs to their students.
Thereafter, the Department was silent on the Bundled Services Guidance until July 17, 2024, when the Department posted a blog advising that it was continuing to review the written comments received in response to the February 2023 Announcement and “plan[s] to issue revised guidance no sooner than late [2024].” https://blog.ed.gov/2024/07/update-on-department-of-educations-postsecondary-education-regulatory-work/
D. January 2025 DCL – Reaffirmation of the Bundled Services Guidance
Soon after the November 2024 presidential election, speculation emerged about the fate of the Bundled Services Guidance during the lame duck period before the Trump Administration assumed power. In the closing days of the Biden Administration, the Department ended the speculation by issuing its January 2025 DCL.
Rather than acting to rescind or otherwise diminish the Bundled Services Guidance, the Department characterized the January 2025 DCL as a “remind[er]” to IHEs of their obligations regarding misrepresentation and that such obligations extend to their relationships with ESPs/OPMs. After reviewing the regulatory definitions and interpretations of “misrepresentation” and “substantial misrepresentation,” the Department turned its focus to three discreet examples of misrepresentation involving IHEs and their ESPs/OPMs.
First, the Department discussed the situation in which employees of ESPs/OPMs erroneously present themselves as employees of IHEs or otherwise fail to disclose that they are employees of ESPs/OPMs, not IHEs. This can occur either during phone conversations or through the use of email addresses/signatures/titles associated with the IHEs; thereby leaving the misimpression that the student has been talking to an institution’s “placement specialist,” “placement manager,” “student success advisor,” “student success manager,” “student support specialist,” “admissions counselor,” or “admissions manager” rather than employees of ESPs/OPMs. In the Department’s view, this type of conduct can be “deceptive” and, depending on the circumstances, rise to the level of misrepresentation or substantial misrepresentation.
Second, the Department turned its attention to the scenario in which sales representatives or recruiters of ESPs/OPMs present themselves as “academic counselors” or similar positions. In the Department’s view, such situations “create a high risk of misrepresentation” because the role of ESPs/OPMs’ employees is primarily focused on securing enrollments of, as opposed to counselling, prospective students.
Third, “[a]bsent specific evidence of actual parity with respect to each advertised aspect,” the Department warned IHEs and their ESPs/OPMs “against describ[ing] a program offered by the external service provider as the same as a campus-based program, or to otherwise imply an equivalent identity between the two if they are not equivalent in substantive ways.” The Department went on to recite several factors in which an on-line program may not be equivalent to its on-campus counterpart, such as completion rates, job placement, earnings, licensure, credentials and curriculum.
Finally, and significantly, at footnote 12 in the January 2025 DCL, the Department addressed the continuing validity of the Bundled Services Guidance under the March 2011 DCL—and the consistency of bundled services arrangements with the IC Ban:
“Per governing statutory and regulatory law, and consistent with DCL GEN-11-05, the Department views the incentive compensation ban as prohibiting revenue-sharing for recruitment unless the external service provider provides a bundle of services and certain conditions are met, including that the eligible institution determines admission and program enrollment independent of the external service provider. See DCL GEN-11-05; see also 20 U.S.C. § 1094(a)(20); 34 C.F.R. § 668.14(b)(22). Under this type of permitted bundled services arrangement, to maintain the necessary level of independence, an eligible institution cannot contract out to the external service provider the counseling function, and hence also cannot allow employees of an external service provider to represent themselves as counselors.”
Ultimately, as the Department reminds IHEs and ESPs/OPMs alike in its January 2025 DCL, the prohibition against misrepresentation “applies equally to circumstances where an institution has arranged for an external service provider to exclusively manage functions of online programs, such as recruitment, advising, and clinical placements.”
E. Conclusion
By Issuing the January 2025 DCL, the Department reaffirmed the validity of the March 2011 DCL, and specifically the Bundled Services Guidance. The Department’s reaffirmation of the March 2011 DCL’s Bundled Services Guidance was a welcome development—underscoring decades of consistent federal policy and interpretation of the IC Ban as it relates to bundled services arrangements.
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[1] As a precursor to the February 2023 Announcement, almost one-year earlier on April 5, 2022, the U.S. Government Accountability Office (“GAO”) published a report entitled “[the Department of] Education Needs to Strengthen Its Approach to Monitoring Colleges’ Arrangements with Online Program Managers,” GAO-24-106173. The GAO report found that at least 550 colleges worked with an OPM for program support and issued two recommendations focused primarily on improving Department data collection to better assess the role of OPMs in higher education, both of which were implemented by the Department.