Home Features Financial Aid What are the School Responsibilities When Outsourcing With a Third-Party Servicer?
What are the School Responsibilities When Outsourcing With a Third-Party Servicer?

What are the School Responsibilities When Outsourcing With a Third-Party Servicer?


By Sandi O’Connell, Vice President of Operations, Financial Aid Services, Inc.

A third-party servicer (TPS) can be a great resource to any institution that is trying to manage Title IV programs within their means without comprising compliance and efficiency. There are many types of third-party servicers out there, and they are highly regulated by the U.S. Department of Education just like the institutions themselves.

For the basis of this article, we will be discussing the type of third-party servicer that acts more like an outsourced financial aid department for the federal programs such as Pell Grants, direct student loans, and campus-based programs. This type of servicer assists with determining student and institutional eligibility, as well as, offering support in the delivery of student funds and consulting on policies and procedures.

Federal regulations define third-party servicers as an entity or individual that administers any aspect of an institution’s participation in the Title IV programs, including, but not limited to, services and functions necessary:

  • For the institution to remain eligible to participate in the Title IV programs,
  • To determine a student’s eligibility for Title IV funds,
  • To account for Title IV funds,
  • To deliver Title IV funds to students, or
  • To perform any other aspect of the administration of the Title IV programs.

To protect the interest of institutions, taxpayers, and students, an institution may not contract with a third-party servicer to perform any aspect of the institution’s participation in a Title IV program if the servicer (or its subcontractors) is located outside of the United States and/or is owned or operated by an individual who is not a U.S. citizen or national, or a lawful U.S. permanent resident. This prohibition applies to both foreign and domestic institutions.

To protect student data – PII, the institution must also ensure that its contract with a third-party servicer, contains procedures governing the use and maintenance of any education records shared with the individual or entity, including specific procedures for governing the use and re-disclosure of personally identifiable information (PII) from education records. The institution must be able to access all records needed to comply with applicable record retention requirements.

If the third-party servicer or the institution terminates a contract, the institution must be able to take possession of all records in the servicer’s possession pertaining to the institution’s participation in the Title IV programs.

The PII from education records provided to a TPS is limited to the PII that is necessary for the TPS to perform Title IV functions or services the TPS has contracted to perform on behalf of the institution.

Selecting a legitimate, trustworthy TPS – schools must do their homework

Even though the Department of Education has oversight authority over third-party servicers that perform Title IV functions on behalf of the institution, the Department does NOT list, endorse or approve third-party servicers. Therefore, an institution must use an abundance of caution when choosing a third-party servicer (ex: financial aid consulting firms, financial aid management software, and/or the electronic data storage systems it utilizes to assist in the administration of the Title IV programs.) The Institution has a fiduciary responsibility to ensure the policies, procedures, products, and systems that the servicer utilizes are compliant with applicable laws and regulations. This includes the requirement that an institution be able to access all records (paper or electronic) created or maintained by a third-party servicer and make those records readily available to the Department for review. The institution must also implement appropriate safeguards to protect student records and ensure any information shared from education records is only used for the purpose(s) for which the information was disclosed. The institution will be held responsible for any liability incurred as a result of software deficiencies, incorrect consulting advice, lost or damaged records, and/or third-party servicer violations.

The institution should also make sure the TPS:

  • Has not been limited, suspended, or terminated by the Department within the preceding five years;
  • Has not had, during the servicer’s two most recent audits, a finding that resulted in the servicer being required to repay an amount greater than 5 percent of the funds that the servicer administered under the Title IV programs for any year; or
  • Has not been cited during the preceding five years for failure to submit audit reports required under Title IV in a timely fashion.

A quick visit to the website http://www.sam.gov can help an institution make these determinations. Keep research results in your records!

More tips on selecting a TPS

A servicer’s reputation and years in business can be a clue into its integrity and legitimacy, so be sure to ask around! Institutions should obtain references of the servicers they are thinking of using just as they would for a job applicant. Ask those referenced institutions if they have had clean audits and program reviews in the past years of using the servicer. The servicer has an annual compliance audit requirement just like the institutions. An institution looking at a servicer should ask for the last few years of the servicer compliance audit reports and review the report for findings. Also, ask the servicer what kind of training its staff undergoes and how they stay updated on regulations and procedures. Has the servicer ever undergone a program review with the Department of Education? How did that go? What were the findings and how were they corrected?

Institution must be sure it appropriately contracts with third-party servicers for its own protection

If an institution finds a TPS it is comfortable with, it must get a contract in place to start working together. It is a law that an institution must enter into a contract with a third-party servicer. That contract must clearly describe the services and functions the servicer is responsible for providing on behalf of the institution. Don’t assume these functions.


Don’t forget to let the Department of Education know when you go into a contract or get out of a contract with a third-party servicer. You must notify the Department of Education within 10 days of the date you enter into, modify, or terminate a contract with a servicer to administer any aspect of participation in the Title IV programs. This notification can be done through the Application for Approval to Participate in the Federal Student Financial Aid Programs (E-App) website at http://www.eligcert.ed.gov.

What to look for in a third-party servicer contract

A TPS contract must contain specific language where the TPS agrees to:

  • Be jointly and severally liable with the institution for any violation of Title IV requirements resulting from the functions performed by the servicer;
  • Comply with all applicable statutory, regulatory, and other Title IV requirements;
  • Refer any suspicion of fraudulent or criminal conduct in relation to the institution’s Title IV program administration to the Department’s Office of the Inspector General;
  • Confirm student eligibility and return Title IV funds (if required) when a student withdraws if the servicer disburses funds; and
  • Return all records related to the servicer’s administration of the institution’s participation in the Title IV programs to the institution, and if the servicer disburses or releases Title IV funds, return all unexpended Title IV funds to the institution, if the contract with an institution is terminated, or the servicer ceases to perform any functions prescribed under the contract.

Institutions must ensure that its contracts accurately and specifically detail the functions that the servicer (or its subcontractor(s), if applicable) performs on behalf of the institution, and those functions that are required to be completed by the institution.

The contract must identify the third-party servicer by its legal name and include any other name the servicer does business as (d/b/a). The contract must provide the physical address and primary phone number of the servicer’s primary location, as well as the name, title, phone number, and email address of the president or chief executive officer of the entity. If a third-party servicer subcontracts any of its contractual responsibilities, the contract must identify the subcontractor and clearly describe the functions performed on behalf of the servicer and institution by the subcontractor.

In addition, institutions are subject to the information security requirements established by the Federal Trade Commission (FTC) for financial institutions. Institutions must take reasonable steps to select and retain service providers that are capable of maintaining appropriate safeguards to protect customer information and require service providers by contract to implement and maintain such safeguards.

Finally, the institution must require the third-party servicer to agree to comply with all aspects of the Family Educational Rights and Privacy Act (FERPA) with regard to the third-party servicer’s receipt and use of any education records provided by the institution.

Institutions are strongly encouraged to include provisions in its contract with a third-party servicer to terminate the contract immediately, without penalty, if the institution is notified that the Department has imposed an emergency, limitation, suspension, or termination action with regard to a servicer’s ability to contract with the institution to administer any aspect of its participation in the Title IV, HEA programs or the servicer has been debarred, suspended, or voluntarily excluded government-wide from participation in covered transactions.

How to maximize your third-party servicer’s value to your institution

Knowledge is power. Having a good liaison (such as a Financial Aid Administrator, Compliance Officer and or Business Office Personnel) at your institution who has Title IV program knowledge and that can properly communicate with your TPS regularly and bring information back into the school will help the institution maximize the value the TPS offers in consulting, processing and training and auditing. The institution’s staff members that work directly with the TPS should undergo training with the TPS to learn the policies and procedures and contracted services. If the TPS has annual update workshops, the institution’s liaison should plan to attend and obtain proof they participated. The institution should be sure its liaison receives all emailed communications and acts on them.

Keep in mind that the TPS is operating under strict regulations by the Department of Education just like the institution. Therefore, if the TPS requires certain procedures or documents from the institution, it is in the institution’s best interest to cooperate within reason. Most third-party servicers are now checking student eligibility more intensely and will be requiring specific documentation in student financial aid files in order to disburse funds.

If the institution liaison ever feels uncomfortable or unsure of what the TPS is asking of the institution, it should communicate to the TPS about it. Most good third-party servicers will contact the regional Department of Education offices or the Third-Party Servicing Group at the Department of Education if anything is questionable. For example, this is especially important during an institution annual compliance audit. Many times an auditor will issue a finding that is really not a finding. It is usually the third-party servicer experts who question the auditor’s finding(s) and perhaps disagrees with it. The TPS will usually engage their ED contacts, as well as CFR and the FSA Handbook, to be sure of a finding’s legitimacy and then pass on their information to the institution.

Lastly, if it seems the TPS staff is not accessible or if there is something it could do to make the relationship more workable, be sure to speak up just as you would with internal staff at the institution.

Most good third-party servicers desire to work closely with the institution and its staff, since the outsourced and shared functions are very significant in the success of the school and its students. Because of this close working partnership, many institutions have long lasting relationships with their third-party servicers that span decades, due to the efficiency and cost savings and expert trust they benefit from. If the institution ever has a FAA leave or a turnover issue at the FAA level, it is never as scary when a third-party servicer is backing the institution. The institution should always contact the TPS immediately upon learning of a FAA leaving or desire to leave the institution’s employment. The TPS can insert safeguards during the transition and even continue processing as the school goes through the process of replacing a FAA. The servicer then can train incoming FAA’s on the institution’s responsibilities.

It is important that the institution keeps the third-party servicer abreast of any notices from the Department of Education, auditors or accreditors sent to the institution’s president, owner or FAA. In most cases not only can the TPS assist with the nature of the notice, but it actually must get involved. An institution has a powerful ally and experienced executive assistant in a third-party servicer. Be sure to use that resource wisely.

Electronic Announcement Posted March 8, 2017, Updated Third-Party Servicer Questions and Answers.

Dear Colleague Letter GEN 15-01 published January 9, 2015, and Dear Colleague Letter GEN 16-15

Regulations at 34 CFR 668.2 (definition of third-party servicer); 34 CFR 668.23, 668.25; and Dear Colleague Letters GEN 12-08 and GEN 15-01

Sandi O'Connell

SANDI O’CONNELL is the Vice President of Operations and Owner of a Third Party Servicing firm called Financial Aid Services (FAS) in Salem NH that has been assisting institutions across the country with their Title IV program processing and consulting for over 38 years. Sandi has worked in just about every role at FAS since joining her dad’s business in 1990 after graduating college with a B.S. in Business Management. Sandi has visited numerous schools to train FAA’s and perform Title IV program assessments/student financial aid file reviews and has presented at many seminars and workshops. Sandi produces and edits the monthly compliance newsletter exclusively for FAS clients.

Contact Information: Sandi O’Connell // Vice President of Operations/Owner // Financial Aid Services, Inc. // 603-328-1550 // Sandi@fasinc.net // www.FinancialAidServices.com



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