Many schools believe that using a third party financial aid servicer protects them from compliance problems. The surprising truth is that often the likelihood of compliance problems actually increases when schools engage a third party processor. At the most recent FSA conference in Atlanta, ED was very clear that they do not endorse or approve third party servicers, and only recently began auditing them in program reviews.

The U.S. Department of Education has found as part of their third party servicers program reviews that many servicers share the same kinds of findings and violations and institutions that contract with third parties to perform some aspect of administering aid to students, are severally liable for any issues resulting from their servicers improper practices and shortfalls.

ED put together a top 16 list of findings common among third party servicers citing too many problems that put schools at risk.

If you use a third party servicer now or are considering using one, be sure to ask them for a copy of their most recent program review report before you get locked into a contract that may be difficult to break.

  1. Inadequate Contract / Written Policies and Procedures
  2. Inadequate Record Keeping
  3. Failure to Maintain Adequate Audit Trail
  4. Failure to Perform Proper Reconciliation
  5. Satisfactory Academic Progress Deficiencies
  6. Failure to Resolve Conflicting Information
  7. Verification Violations
  8. Student Credit Balance Deficiencies
  9. Return of Title IV Deficiencies
  10. Leave of Absence Deficiencies
  11. COD – Inaccurate/Untimely Reporting
  12. NSLDS – Inaccurate/Untimely Reporting
  13. Entrance/Exit Counseling Deficiencies
  14. Inadequate Notices and Authorizations (Required Disclosures)
  15. Failure to Report Third-Party Servicer
  16. Standards of Administrative Capability

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In January 2015, the U.S. Department of Education published Dear Colleague Letter GEN 15-01 which provided guidance for institutions which contract with “Third-Party Servicers” to provide outsourced services such as Default Management and Financial Aid Disbursement processing. At the time, the Department was concerned that a number of third party servicers were telling institutions that they were not in fact a third party servicer so as to avoid oversight and audit requirements. Recently, the Department published a FAQ which provides much needed clarity in defining what exactly a third-party servicer is and examples of the type of functions and services they perform.

A third-party servicer is 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.

If your institution uses a consultant to do any of the following, you should review the Q & A to determine if it is necessary to report your contracted relationship to ED:

  • Processing FAFSA Applications, Providing Financial Aid Counseling
  • Determining Student Eligibility; Verification, SAP Evaluation, Calculating Awards, Packaging, R2T4, Reconciliation
  • Processing, Certifying, Originating FSA Awards, Including Advanced or Reimbursement Funding Preparation
  • Preparing or submitting E-App, FISAP, IPEDS or Enrollment Reporting to NSLDS
  • Preparing consumer information disclosures, Security Reports, Biennial review of drug & alcohol abuse prevention programs, graduation and transfer rates, job placement rates, gainful employment disclosures, entrance / exit loan counseling, preferred lender lists
  • Default prevention, default aversion
  • Cash Management
  • Perkins loan servicing or collection.


For more details you can read the full Q&A here: