Dive Brief:

• 2U is suing the U.S. Department of Education over its most recent guidance regulating the relationships between colleges and their third-party contractors.
• The online program manager, or OPM, filed suit against the department on Tuesday and said the department's new guidance radically redefines the definition of a third-party servicer, something 2U said the agency lacks the unilateral authority to do.
• Third-party servicers — companies that administer any part of colleges’ Title IV federal financial aid programs — share liability for federal student aid and must meet additional regulatory requirements. Under the Education Department's new definition, OPMs that provide colleges with recruiting and retention services, as well as educational content, will broadly be considered third-party servicers

Dive Insight:

Hundreds of U.S. colleges use OPM services to start and run online programs, often trading upfront capital from the companies for a portion of their programs' revenue. But controversy surrounds the fast-growing sector, and the Education Department's increased oversight into OPMs has been in the works for some time. 

Last year, the U.S. Government Accountability Office, an auditing agency for Congress, called on the department to more thoroughly assess colleges’ OPM contracts to ensure they follow federal law and don't rely on abusive recruiting practices.

With the release of the new guidance in February, the Education Department initially told colleges they would have to report on their OPM contracts by May. Shortly thereafter, it bumped the deadline back to September given the new rules' complexity.

But 2U's lawsuit alleges the department overstepped its power by independently rewriting the Higher Education Act's definition of a third-party servicer. The suit was filed in U.S. District Court for the District of Columbia.

"2U cares deeply about our partnerships with leading non-profit colleges and universities across the nation," Matthew Norden, chief legal officer at 2U, said in a statement. "We believe this recent action by the Department of Education will not only impinge on our ability to serve their students, but also ultimately hurt their quality of education."

The Education Department declined to comment on pending litigation Wednesday. 

According to 2U's lawsuit, the department's broadened definition "imposes an expansive and onerous regulatory regime on companies that facilitate online educational programming and related services for brick-and-mortar colleges and universities but have no role in administering federal financial aid." 

2U would face substantial and irreparable harm if it is classified as a third-party servicer in the eyes of the department, according to the lawsuit. The OPM said it would be forced to amend current contracts, undergo "burdensome and intrusive" audits and pay nonrefundable compliance costs.

The company would also be forced to cut off its South African subsidiary due to the guidance's ban on foreign-owned and foreign-based subcontractors.