Clarity from 2U Lawsuit into Next Steps for TPS Guidance

2U mostly wins argument for an expedited ruling once ED releases new DCL

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On to the update.

The higher education community seems to have breathed a sigh of relief when the US Department of Education (ED) released a blog post describing upcoming changes to its guidance on third-party servicers (TPS). The blog post was published on April 11th, and it declared that many aspects of EdTech were not considered (by them) as TPS activities: study abroad, international student enrollment not eligible for Title IV funds, some computer software and services that are not tied to recruitment and marketing. Further the post said that ED would remove the foreign ownership restriction and set the effective date to be at least six months after the release of a revised Dear Colleague Letter (DCL).

A sigh of relief is appropriate as long as institutions, vendors, and others are aware that the issue is not dead. It will revive - most likely through a revised DCL sometime this summer or early fall - and it will still impact most concerned parties. And there is very little chance that ED will fully rely (1) on negotiated rule making that would not be effective until mid 2025.

In an On EdTech+ post I argued that the 2U lawsuit against ED and Secretary Miguel Cardona was important to watch.

While many higher ed advocacy organizations are calling for a full rescission of the DCL 23-03 followed by proper rulemaking to address its real concern, that recommendation would require ED to face down enormous political pressure. And all indications I have seen are that ED is trying to thread the needle and find a way to partially change the guidance.

In other words, the 2U lawsuit may be the determining factor whether ED will go back to the drawing board and get input from the community or whether ED will try to edit enough of the DCL to calm critics while satisfying activist politicians. I would pay attention.

Thanks to the court documents for that case, we now have additional clarity into the next steps in this process.

tl;dr - The judge mostly (2) sided with 2U’s argument and ordered an expedited process once ED files a revised DCL, meaning that we should have a ruling from the court in less than two months.

Relevant History

The key events leading up to the judge’s recent order:

  • February 15th: ED releases DCL 23-03 that expanded the definition of what activities are considered as TPS-related, thus requiring institutions to report contracts and modify contract terms. The DCL is effective immediately with a compliance date of May 1, 2023 for reporting of TPS-related contracts.

  • February 28th: ED delays the effective date of DCL guidance to September 1, 2023, with institutional reporting due that same day. This change was based on growing public pushback, and ED extends opportunity for public comments on the guidance through March 30, 2023.

  • March 30th: The public commenting period ends, with roughly 1,100 comments submitted. Our analysis showed that fewer than 1% of comments supported the new guidance, mostly from the activist think tanks and foundations behind the guidance.

  • April 4th: 2U files a lawsuit against ED, alleging that ED’s “claim has no footing in the Higher Education Act (HEA), and it marks a complete reversal of the Department’s own settled interpretation of the relevant statutory provisions, as set forth in longstanding regulations and guidance documents.”

  • April 11th: ED issues a blog post notifying of future changes to the guidance, described above.

  • April 21st: 2U and ED issue status report on their positions for the next steps, largely driven by the changes arising from the April 11th blog post and the desire of the court expressed on April 14th for an expedited process.

Arguments for Expedition

The key issue in the status report that led to last week’s order was how to handle the next steps once ED issues a revised DCL. 2U’s key argument was that ED leadership has made clear that it intends to classify OPMs like 2U as TPS in any new guidance, and therefore an expedited process should be set even before the revised DCL is issued. One key argument was that Under Secretary James Kvaal sent a letter to Representative Bobby Scott (one of those in congress pressuring ED to take action) on April 14th, three days after the ED blog post, (one of those in congress pressuring ED to take action) with an update. And in this letter Kvaal referred to DCL 23-03 as an active guidance document.

Additionally, on February 15, 2023, the Department published a Dear Colleague Letter that updated various existing guidance to institutions that contract with a third-party servicer (TPS) to administer any aspect of the institution’s participation in the student assistance programs authorized under Title IV of the Higher Education Act of 1965. Among other topics, the guidance clarifies when a company or other third party that provides recruitment services for colleges will be considered a TPS. OPMs that provide recruitment services, among others, will fall into this category. The updated guidance will ensure the Department has greater transparency into, and more data on, any OPM that is a TPS.

ED’s key argument was that they don’t know what’s going to happen:

As Defendants explained at the April 14 status conference, and as the Department of Education’s April 11 announcement made clear, the challenged guidance, DCL GEN-23-03, is not in effect and will never go into effect in its current form.5 Final revised guidance does not exist yet—even within the Department. The Department has just begun a months long process of carefully reviewing the more than 1,000 comments it received from the community and developing new guidance. Not knowing what that guidance will say before having undergone that process, Defendants—like Plaintiffs—can only speculate as to what the administrative record for any final revised guidance will consist of and what, if anything, Plaintiffs will challenge with respect to that guidance.

Our Offer

One note: it took our crack staff less than three weeks to analyze the 1,100 comments, which we have shared in a public Google Sheet. ED is welcome to download that file and use our analysis to help with their process.

The Order

The judge’s ruling was emphatic and simple [emphasis added].

MINUTE ORDER: This case is hereby STAYED pending the Government’s issuance of an updated Dear Colleague Letter. Plaintiffs have agreed to withdraw their [9] Motion for a Stay or Preliminary Injunction. Within two weeks of issuing the updated DCL, the Department shall provide Plaintiffs with the administrative record. Within ten days after receiving the administrative record, Plaintiffs shall file an amended complaint (if necessary) and a Motion for a Stay/Preliminary Injunction under Rule 65(1)(2), or, In the Alternative, for Expedited Summary Judgment. See Fed. R. Civ. P. 65(1)(2). Within ten days after the filing of Plaintiffs’ Motion, the Department shall file an Opposition to Plaintiffs’ Motion. The Government’s deadline for filing an Answer to any amended complaint will be stayed pending further order from the Court. Within seven days after the filing of Defendant’s Opposition, Plaintiffs shall file their Reply. The Court will promptly schedule a motions hearing thereafter. SO ORDERED. Signed by Judge Trevor N. McFadden on 4/25/2023. (lctnm1)

Put into plain English - once the revised DCL is issued, expect a ruling in less than two months, and more likely in six weeks. 

2U’s lawsuit already means that we have a fairly tight schedule by the court to issue a ruling after the revised DCL is released, thus removing the strategy of ED running out the clock by issuing new guidance and then delaying judicial action for months and months, leading to de facto regulation.

What to Expect

Guessing what is going to happen involves just that - guesswork. But the next steps are becoming more clear thanks to the court records from this lawsuit.

Sometime this summer, I would expect to see a revised DCL along the contours described in the April 11th blog post. Focused more tightly on activities tied to marketing and student recruitment, without a foreign ownership provision, and excluding study abroad and clinical placement for medical programs.

Six to eight weeks later, in early to mid Fall, I would expect a ruling from the court that either strikes down the DCL guidance or requires ED to make additional edits and possibly to force a regulatory process. Of course the ruling may refuse to take action. My money is on the first two, but we shall see.

If the revised DCL survives, higher education institutions will likely need to have reviewed their relevant vendor contracts and reported to ED by the first few months of 2024.

(1) By “will not fully rely”, I mean that ED will not wait on negreg before issuing a revised DCL. They seem to be considering a confusing both / and approach, with a new DCL to be followed by additional changes that go through negreg.

(2) By “mostly sided”, I mean that even before we see a revised DCL the judge agreed to set an expedited schedule with one round of review. The judge did not agree to all of 2U’s specific time period requests or to have ED submit the administrative record of the original DCL now.

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