Expanded Department Of Education Regulation Is Executive Overreach Part Deux

When I first heard the list of Oscar nominees for Best Picture, there were more familiar titles than usual: Avatar, Top Gun, Elvis, Tar, and Steven Spielberg’s The Fabelmans. Then there was one that sounded like The Banshees of Ed Sheeran. Hard to believe that one got made, I thought, let alone nominated for an Academy Award.

It turns out the movie is called The Banshees of Inisherin. I felt so bad I actually watched it. It’s a beautiful little film about two friends – one moody, the other simple – a hundred years ago on a small island off the coast of Ireland. The film’s ambition is so modest, I can summarize the plot in one line: moody friend decides he no longer wants to associate with simple friend for no apparent reason. Hijinks ensue.

One day this week over breakfast I described Banshees to my 14-year-old son Hal as he noshed on an egg bagel with cream cheese. Hal eats a lot of bagels, every single one of them egg. Halfway through the bagel, Hal dropped it, saying he no longer liked egg bagels, but couldn’t articulate why. Together, we improvised a version of the movie that would be scarcely less Oscar-worthy: The Bagels of Inisherin (Irish Hal no longer wants to eat egg bagels for no apparent reason).

President Biden is of Irish descent, so he may well have ancestors from Inisherin. That could explain last week’s Dear Colleague letter from the Department of Education concerning third-party servicers, which upended American higher education for no apparent reason.

Department of Education (ED) regulations define third-party servicers (TPS) as companies or organizations that contract with colleges “to administer… any aspect of the institution’s participation in any Title IV… program.” All the examples provided in regulation relate to processing or managing financial aid applications and funds. As a result, a TPS is required to jump through a bunch of hoops. Fair enough, right? Well according to last week’s Dear Colleague letter (“the Letter”), because ED has had an epiphany that “most activities and functions performed by outside entities on behalf of an institution are intrinsically intertwined with the institution’s administration of… Title IV,” any company or organization that does pretty much anything for a college is now subject to TPS requirements.

Anything, you ask? How about marketing, recruitment, enrollment, attendance, retention, healthcare, communications, courseware, supplemental materials, work-based learning, last-mile training, chatbots, assessments, clinical rotations, legal services, staffing services, consulting services, and “the provision of software” to effect any of this? The list is long, the exceptions few. And it’s not just companies: if state systems perform any of these functions for a Title IV-eligible institution, the system is a TPS. As one commentator noted, “if it breathes on Title IV, it is a TPS.”

So what? Well for one, in order “to protect the interests of institutions, taxpayers, and students,” the Letter bans any foreign TPS. No TPS can be “located outside of the United States or… owned or operated by an individual who is not a U.S. citizen or a lawful U.S. permanent resident.” There’s no wiggle room. Off the bat, hundreds of internationally-owned companies providing services to U.S. colleges and universities are poised to lose the U.S. market. Sorry Pearson, sorry D2L. International agents utilized by something like half of all U.S. colleges are also out-of-bounds unless they never recruit a single Title IV-eligible student.

Second, a TPS must have an independent auditor conduct an annual audit and file with ED. Audits must confirm the TPS is acting in compliance with all laws and regulations. This made sense when TPS involved financial aid processing. And it still made sense in 2015 and 2016 when successive Dear Colleague letters clarified financial aid service providers must comply with data privacy rules. But what does it mean to audit marketing companies or online course developers? Because ED hasn’t updated its audit guides, it’s not clear. For now, expect a lot of legal time and expense searching for any potentially relevant rule, investigating, and confirming compliance, and verifying that the TPS has established effective internal controls.

Third, a contract with a TPS must include a provision making it “jointly and severally liable” for any Title IV violation connected with its services. This means a TPS could be on the hook for the full amount of any penalty imposed by ED for any violation. So, a TPS that does exactly what a college client asks could be liable e.g., marketing company builds website including data on placement rate or alumni satisfaction – data from college turns out to be wrong leading to a borrower defense to repayment claim. President Biden’s ED has demonstrated an eagerness to impose penalties as a result of misrepresentation. Now companies that do business with colleges may be asked to share the pain. One expert told me “lawyers are going to have a field day with this.”

Unlike The Banshees of Inisherin, it’s possible to fathom a reason for the Letter’s appearance. In 2019, a volley of reports from progressive interest groups and critical articles painted online program managers (OPMs), which launch online degree programs (primarily master’s degrees) and share tuition revenue, as the new “predatory” for-profit colleges. Then last summer’s GAO report criticized ED for lax monitoring of OPMs. In an attempt to avoid rebuke and regulation, some OPMs sought to move away from revenue share to fee-for-service. Progressives within ED seeking to reign in OPMs recognized TPS as a way to block their escape, ensuring OPMs wouldn’t avoid liability for misrepresentations or other misdeeds, and lazily cast the widest possible TPS net. The fact that the new TPS rules were appended to an ED press release on OPMs is an obvious tell.

Another tell is the way ED did it. When President Obama’s ED promulgated (for-profit-college-targeting) gainful employment rules, it did so through a notice of proposed rulemaking (NPRM) process, providing time and opportunity for the benighted sector to weigh in, challenge the regulation in court, and ultimately delay implementation until the administration turned over. A Dear Colleague letter risks none of this. It simply says: this is our new understanding of the (unchanged) regulations; ignore our understanding at your peril. To add insult to injury, whereas a new regulation promulgated through an NPRM process can be challenged in court, there’s no way to challenge a Dear Colleague letter unless and until ED brings an enforcement action against you. Until then, enjoy living under a cloud of potential enforcement and liability! Then, likely recognizing how diabolical this is, ED added “at the same time, the Department will accept public comment on the guidance through the Regulations.gov website for 30 days.” I spoke to a bunch of lawyers and experts on this point. None of them had ever seen a comment period on a Dear Colleague letter: another tell.

If student loan forgiveness was President Biden’s original sin of executive overreach in higher education, the Dear Colleague letter is executive overreach part deux. And as it seems highly likely that the Supreme Court will strike down student loan forgiveness after it hears oral arguments next week, there’s a deeper connection between the two.

In The Banshees of Inisherin, the behavior of the characters is so odd, it seems motivated by external forces. Indeed, a mysterious old woman foretells the (very limited) events. So it is with President Biden’s Department of Education. Motivated by student loan forgiveness, young voters were key to blocking an expected red wave in last year’s midterm election. Fearing a fierce reaction when something young voters think they have is taken away, ED is doing everything possible to cushion the loan forgiveness blow and prove the Biden administration’s progressive bona fides. This includes extending the Covid repayment moratorium for a ninth time, forgiving student loan debt wherever possible, making income-driven repayment dramatically less expensive, and now regulating the entire sector via TPS.

Imagine if President Biden had somehow promised Medicare for All via executive action. Then, facing defeat in court, the administration attempted to cushion the blow by attempting to regulate every company providing products or services touching any patient at every hospital, healthcare system, and physician’s practice receiving Medicare or Medicaid dollars. Something like 10% of the economy would be up in arms. Although higher education is much smaller, TPS could prove to be the undoing of this administration’s progressive banshees. In stark contrast to the gainful employment assault on for-profit colleges, the 2019 OPM articles never sparked a fire, and expensive online master’s degrees are already withering on the vine thanks to shorter skills-based offerings and earn-and-learn pathways. Where’s the outrage? (There’s more outrage over student outcomes at traditional non-selective colleges, hence student loan forgiveness.) Moreover, there’s no constituency for regulating college mental health service providers, learning management systems, or hundreds of other products and services.

Most important, while traditional colleges and universities were comfortably insulated from gainful employment, TPS will be a major headache for each and every one. According to the Letter, colleges must report all “new” TPS contracts to ED by May 1. General counsels will be working overtime to redo all contracts to comply with TPS requirements. And the regulatory tax may cause companies – particularly small businesses – to abandon higher education altogether, which will create problems for schools and students. The international ban alone will require every accredited institution to scramble to find made-in-the-USA alternatives. At best, last week’s Dear Colleague letter is confusing. At worst, it will have a chilling effect; investment and innovation in American higher education could go to a bagel-shaped zero.

By winning the 2020 election and not losing in 2022, President Biden has safeguarded American democracy. The bill is now coming due. We knew it would be expensive (student loan forgiveness), but we thought the story would be as boring as The Banshees of Inisherin. No one imagined plot twists that could set back a sector already struggling with affordability, completion, employability, and public opinion.

As Michael Goldstein, managing director at Tyton Partners, told me, “the invitation to comment at the end of the notice is very unusual for the issuance of subregulatory guidance and signals a recognition that this radical extension of TPS will have significant consequences. There are many good reasons to take up this offer.” If ED’s Dear Colleague letter gets your Irish up, please comment here before March 17.