oversight

Star Technical Institute's Upper Darby School's Compliance with the 90 Percent Rule.

Published by the Department of Education, Office of Inspector General on 2008-08-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

            Star Technical Institute's Upper Darby School's 

                 Compliance with the 90 Percent Rule 





                               FINAL AUDIT REPORT 





                                        ED-DIG/A03H0009
                                          August 2008

Our mission is to ensure equal access                     U.S Department of Education
to education and to promote                               Office of Inspector General
educational excellence throughout                         Philadelphia, PA
the nation.
                                         NOTICE

  Statements that managerial practices need improvements, as well as other conclusions and
   recommendations in this report, represent the opinions of the Office of Inspector General.
 Determinations of corrective action to be taken will be made by the appropriate Department of
                                       Education officials.

   In accordance with the Freedom of Information Act (5 U.S.C. § 552), reports issued by the
Office of Inspector General are available to members of the press and general public to the extent
              information contained therein is not subject to exemptions in the Act.
                                    UNITED STATES DEPARTMENT OF EDUCATION
                                            OFFICE OF INSPECTOR GENERAL

                                                                                     Audit Services, Region III-Philadelphia

                                                           August 15,2008

Karen Manin, President
Star Technical Institute
Centennial Center, Suite 101A
175 Cross Keys Road
Berlin, NJ 08009-9908

Dear Ms. Manin:

Enclosed is our final audit report, Control Number ED-OIGIA03H0009, entitled, "Star Technical
Institute's Upper Darby School's Compliance with the 90 Percent Rule." This report
incorporates the comments you provided in response to the draft report. If you have any
additional comments or information that you believe may have a bearing on the resolution of this
audit, you should send them directly to the following Department of Education official, who will
consider them before taking final Departmental action on this audit:

                                           Lawrence Warder
                                           Acting Chief Operating Officer
                                           Federal Student Aid
                                           U.S. Department of Education
                                           Union Center Plaza, Room 112G I
                                           830 First Street, N.E.
                                           Washington, D.C., 20202

It is the policy of the U.S. Department of Education to expedite the resolution of audits by
initiating timely action on the findings and recommendations contained therein. Therefore,
receipt of your comments within 30 days would be appreciated.

In accordance with the Freedom of Information Act (5 U.S.C. § 552), reports issued by the
Office ofInspector General are available to members of the press and general public to the extent
information contained therein is not subject to exemptions in the Act.


                                                                 Sincerely,

                                                                 lsi
                                                                 Bernard Tadley
                                                                 Regional Inspector General for Audit

Enclosure


 The Department of Education's mission is to promote student achievement and preparation for global competitiveness by fostering educational
                                                   excellence and ensuring equal access.
                                      TABLE OF CONTENTS 




~~<:lJllI~ SlJlVI~1{ ................................................................................         1


BA<:KGROlJND.............................................................................. '" ............ 3 


AlJDIll ~S1JI.llS ..............•.......•.................................................................... 4 


        FINDING - Star llechnical Institute's lJpper Darby School Did 

                  Not <:omply with the 90 Percent Rule ......... '" ............................. 4 


OBJE<:nv~, S<:OP~,          AND lVI~llHODOLOG1{ .................................................. 20 


~N<:LOSlJ~:        Star llechnical Institute's <:omments on the Draft Audit Report ...... '" 24 

Final Report
ED-OIG/A03H0009                                                                                        Page 1 of36



                                     EXECUTIVE SUMMARY 



The purpose of our audit was to determine whether Star Technical Institute's (STI) Upper Darby
school complied with the 90 Percent Rule, Section 102(b)(1)(F) of the Higher Education Act of
1965, as amended (HEA), and had sufficient, reliable accounting records to support its 90
Percent Rule calculations for the fiscal years (FYs) ended December 31, 2003, 2004 and 2005.

Section 102(b)(1 )(F) of the HEA requires that proprietary institutions derive at least 10 percent
of their revenues from non-Title N sources. Conversely, no more than 90 percent oftotal
revenue could be derived from the Title N programs. The institutional eligibility requirement is
commonly referred to as the 90 Percent Rule. As specified in 34 Code of Federal Regulations
(C.F.R.) § 600.5(d), a school must determine and certify its revenue percentages using the
following formula for its latest complete fiscal year:


          Title IV, HEA programfimds the institution used to satisfY its students' tuition,fees. and other
                                      institutional charges to students


          The sum ofrevenues including title IV, HEA program funds generated by the institution from
        tuition, fees, and other institutional charges for students enrolled in eligible programs as defined
        in 34 CFR 668.8; and activities conducted by the institution, to the extent not included in tuition.
            fees, and other institutional charges, that are necessary for the education or training ofits
                               students who are enrolled in those eligible programs.

STI reported in the notes to its FY 2003, 2004 and 2005 audited financial statements that its
Upper Darby school met the 90 Percent Rule with 89.35 percent, 89.48 percent, and 89.29
percent of its revenue from Title N sources, respectively. We determined that STI's Upper
Darby school did not comply with the 90 Percent Rule, did not have sufficient, reliable
accounting records to support its 90 Percent Rule calculations, and that it received 96.16 percent,
94.67 percent, and 92.67 percent of its revenue from Title N funds during those years,
respectively.

We found that STI's Upper Darby school improperly ­

    • 	 Included $202,925 and $105,447 in sales of written off accounts receivable sold to a
        related party as non-Title N revenue in its FY 2003 and 2004 90 Percent Rule
        calculations, respectively;
    • 	 Included $70,925 of student payment revenue that was paid by the four shareholders of
        STI's parent corporation as non-Title N revenue in its FY 2005 90 Percent Rule
        calculation;
    • 	 Excluded $48,900 and $54,200 in institutional fees from the numerator of its FY 2004
        and 2005 90 Percent Rule calculations, respectively;
    • 	 Included $1,613 in tuition receipts for a student that attended its Roosevelt, P A school as
        non-Title N revenue in its FY 2004 90 Percent Rule calculation; and
Final Report
ED-DIG/A03H0009                                                                             Page 2 of36

     • 	 Included $1,839 for a student's scheduled Sallie Mae disbursement that was never
         received as non-Title IV revenue in its FY 2005 90 Percent Rule calculation.

Institutions that fail to satisfy the 90 Percent Rule lose their eligibility to participate in Title IV
programs on the last day of the fiscal year covering the period that the institution failed to meet
the requirement. [34 C.F.R. § 600.40(a)(2)] Consequently, STI was ineligible to participate in
the Title IV programs for the period January 1,2004, through December 31,2006.

We recommend that the Acting Chief Operating Officer for Federal Student Aid (FSA)­

    • 	 Initiate action under 34 C.F.R. § 668.86(a)(1) to terminate STI's Upper Darby school
        from participation in the Title IV programs.
    • 	 Require that STl's Upper Darby school return $9,830,436 in Federal Pell Grant program
        (pell), Federal Supplemental Educational Opportunity Grant program (FSEOG), and
        Federal Direct Loan (Direct Loan) program funds to the U.S. Department of Education
        (the Department) that its Upper Darby school received from January I, 2004, through
        December 31, 2006.
    • 	 Require STl's Upper Darby school to return all Title IV monies received after December
        31,2006, if the Secretary has not made a determination under 34 C.F.R. § 600.5(g) that
        the school demonstrated compliance with all eligibility requirements for at least the fiscal
        year ended December 31, 2006.

STI did not concur with most of the Finding and it did not concur with the recommendations.
STI did concur with two of the exceptions identified in the Finding. We considered STl's
comments; however, our Finding and recommendations remain unchanged. STI's comments are
sununarized at the end of each exception.

Except for information protected under the Privacy Act of 1974 (5 U.S.C. § 552a), the full text of
STI's comments is included as an Enclosure to this report. Because of the voluminous nature of
the attachments to STI's comments, we have not included them in the Enclosure. Copies ofthe
attachments are available on request.
 Final Report
 ED-OIG/A03H0009                                                                    Page 3 of36



                                     BACKGROUND 


STI was founded in 1979 and is a proprietary institution operating in New Jersey, Peunsylvania,
and Delaware. STI had three main campuses (each with its own OPE ID number) and four
additional locations as follows­

    •   STI Stratford, New Jersey (main campus, OPE ID 02586900)
    •   STI Lakewood, New Jersey (additional location of Stratford, NJ)
    •   STI Dover, Delaware (additional location of Stratford, NJ)

    •   STI Upper Darby, Peunsylvania (main campus, OPE ID 02539900)
    •   STI Egg Harbor Township, New Jersey (additional location of Upper Darby, PA)

    •   STI North East Philadelphia, Peunsylvania (main campus, OPE ID 02615400)
    •   STI Edison, New Jersey (additional location of North East Philadelphia, PA)

STI was accredited by the Accrediting Commission of Career Schools and Colleges of
Technology. STI's Upper Darby school was licensed by the Pennsylvania Department of
Education State Board of Private Licensed Schools. The institution offered training in
computers, allied health, business, and technology. STI is owned by Nerak Enterprises,
Incorporated (Nerak), a New Jersey corporation.

STI's Upper Darby school received initial approval to participate in the Title N programs in
December 1987 and its current approval expires on December 31, 2008. STI's Upper Darby
school participated in the following Title N programs: Pell, FSEOG, and Direct Loan. During
the period January 1, 2003 through December 31,2005, STI's Upper Darby school received
$9,694,084 in Title N funds.
 Final Report
 ED-OlGIA03H0009                                                                                        Page 4 of36



                                             AUDIT RESULTS 



Our audit disclosed that STI's Upper Darby school did not comply with the 90 Percent Rule, did
not have sufficient, reliable accounting records to support its 90 Percent Rule calculations, and
that it received 96.16 percent, 94.67 percent, and 92.67 percent of its revenue from Title N
funds during FYs 2003, 2004, and 2005, respectively. Therefore, STI was ineligible to
participate in the Title N programs.

STI did not concur with most of the Finding and it did not concur with the recommendations.
STI did concur with two of the exceptions identified in the Finding.

Finding - Star Technical Institute's Upper Darby School Did Not Comply with the 90
          Percent Rule

STI's Upper Darby school was ineligible to participate in the Title N, Student Financial
Assistance (SFA) programs from January 1, 2004, through December 31,2006, because it
received more than 90 percent of its revenue from Title N sources during the FYs ended
December 31, 2003, 2004, and 2005. Based on funding data obtained from the Department,
STI's Upper Darby school received $9,830,436 in Pell, FSEOG, and Direct Loan funds during
the ineligible years ($3,230,402, $3,540,502, and $3,059,532, during FYs 2004, 2005, and 2006,
respectively). We determined that STI had included ineligible non-Title IV amounts in its FY
2003, 2004, and 2005 90 Percent Rule calculations and improperly excluded eligible Title N
amounts in its 90 Percent Rule calculations for FY 2004 and 2005.

Proprietary Schools Are Required to Generate at Least 10 Percent of Their Revenue from Non­
Title N Sources

Section 102(b)(1 )(F) of the REA specifies that a proprietary institution of higher education is "a
school that ... has at least 10 percent of the school's revenues from sources that are not derived
from funds provided under title N, as determined in accordance with regulations prescribed by
the Secretary." Conversely, no more than 90 percent of total revenue may be derived from the
Title N programs. This institutional eligibility requirement is codified at 34 C.F.R.
§ 600.5(a)(8). Pursuant to 34 C.F.R. § 600.5(d)(1)­

       An institution satisfies the requirement contained in paragraph (a)(8) of this
       section by examining its revenues under the following formula for its latest
       complete fiscal year:

          Title IV, HEA program fonds the institution used to satisfY its students' tuitionJees, and other
                                       institutional charges to students


          The sum ofrevenues including title IV, HEA program fonds generated by the insU'tution from
        tuitionJees, and other institutional charges for students enrolled in eligible programs as defined
        in 34 CFR 668.8; and activities conducted by the institution, to the extent not included in tuition,
           fees, and other institutional charges, that are necessary for the education or training ofits
                              students who are enrolled in those eligible programs.
Final Report
ED-DIG/A03H0009                                                                        Page 5 of36

Pursuant to 34 C.F.R. § 600.5(d)(2) an institution must use the cash basis of accounting in 

reporting Title IV, HEA, program funds in the numerator and revenues generated in the 

denominator of the 90 Percent Rule calculation. 


On July 15, 1999, the Department published proposed regulations to amend the regulations that
govern institutional eligibility for and participation in the SFA programs authorized under Title
IV ofthe HEA. In the preamble the Secretary stated that ­

       Under the cash basis of accounting revenue is recognized by an entity when that
       entity receives cash, i.e., when there is an inflow of cash to the entity. ... As a
       result, in order for an institution to recognize revenue under the cash basis of
       accounting, that revenue must represent cash received from a source outside the
       institution. [Federal Register, Volume 64, No. 135, page 38276]

Consequently, institutions may only include revenue from sources independent of the institution
that is accounted for on the cash basis of accounting in the denominator of the calculation.

On October 29, 1999, the Department published the final regulations to amend the regulations
that govern institutional eligibility for and participation in the SFA programs authorized under
Title IV of the HEA. In the preamble, the Secretary discussed the sale of institutional loans for
the purpose of the 90 Percent Rule calculation ­

       Revenue generated from the sale of non-recourse institutional loans to 

       unrelated parties would be counted as revenue in the denominator of the 

       90/10 calculation to the extent of actual proceeds. [Federal Register, 

       Volume 64, Number 209, page 58610] 


Accordingly, revenue from the sale of institutional loans is included in the 90 Percent Rule
calculation only when it is received from an unrelated party.

The regulations at 34 C.F.R. § 600.31(b)(2) define "control" and "ownership" ­

       Control. Control (including the terms controlling, controlled by and 

       under common control with) means the possession, direct or indirect, of 

       the power to direct or cause the direction of the management and 

       policies ofa person, whether through the ownership of voting 

       securities, by contract, or otherwise. ... Person includes a legal person 

       (corporation or partnership) or an individual. 


       Ownership or ownership interest. (1) Ownership or ownership interest 

       means a legal or beneficial interest in an institution or its corporate 

       parent, or a right to share in the profits derived from the operation of 

       an institution or its corporate parent. 

 Final Report
 ED-orGIA03H0009                                                                                    Page 6 of36

 STI Improperly Included Sales of Written-Off Student Accounts Sold to a Related Party as
 non-Title IV Revenue in its Upper Darby School's FY 2003 and 2004 90 Percent Rule
 Calculations

 STI improperly included $202,925 and $105,447 of revenue in its Upper Darby school's 90
 Percent Rule calculations for FY 2003 and 2004, respectively. These funds, which were from
 the sale of previously written-off student accounts receivable, were received from United
 Financial Group, Inc. (United), which was owned by a related party with a controlling and
 ownership interest in STI. The regulations provide that revenues included in the calculation are
 limited to revenues generated for the training of students and received from Title IV sources or
 from sources independent of the institution. By definition, funds received from a related party
 cannot on their face be considered independent of the institution.

Financial Accounting Standard 57, paragraph 3 provides-

         Transactions involving related parties cannot be presumed to be carried out on an
         arm's-length basis, as the requisite conditions of competitive, freemarket dealings
         may not exist. Representations about transactions with related parties, if made
         shall not imply that the related party transactions were consummated on terms
         equivalent to those that prevail in arm's length transactions unless such
         representations can be substantiated. 1

Nerak owned and operated STI. The President of STI owned 100 percent of the voting stock in
Nerak and 81.9 percent of its non-voting stock. The President of STI also owned 100 percent of
United, a collection agency used by STI. The one and only United employee was paid from
STI's payroll account.

The President of STI had direct control of and a majority ownership interest in both STI and
United, resulting in STI and United being related parties. In December 2006, STI's independent
public accountant issued revised FY 2003 and 2004 financial statements to disclose STI's sale of
student accounts to United as a related party transaction. 2

STI's President, Vice-President, and Chief Financial Officer (CFO) signed a statement
confirming the following regarding the sales of STI's student accounts to United-

         In evaluating the Upper Darby school's 90-10 calculations for 2003 and 2004
         STI's CFO determined that Upper Darby needed to generate cash receipts and that
         selling the school's accounts receivable to UFG [United] was a way to manage
         the 90-10 ratio.




I The Statement of Financial Accounting Standards No.57, Related Party Disclosures, was published in March 1982, 

by the Financial Accounting Standards Board (FASB). FASB standards are considered to be generally accepted 

accounting principles. 

2 As of June 2007, STI had not submitted the revised financial statements to the Department. On June 6, 2007 the 

OIG forwarded the revised statements to the Departtnent's Office of Federal Student Aid. 

 Final Report
 ED-OIG/A03H0009                                                                         Page 7 of36

        In Fiscal Years 2003 and 2004 STI sold some ofits Egg Harbor and Upper Darby
        schools' accounts receivable, at a discount rate to UFG [United] as follows:

        School         Fiscal Year    Accounts Receivable Sold      Discount Fees Paid

        Upper Darby    2003                   $29,748                       $7,101
        Egg Harbor     2003                   $173,177                      $42.353
        [Totals                               $202,925                      $49,454]

        Upper Darby    2004                  $45,178                        $19,938
        Egg Harbor     2004                  $60,269                        $22,821
        [Totals                              $105,447                       $42,759]

        STI's CFO determined the specific student accounts that were sold from Upper
        Darby and Egg Harbor to UFG [United]. In 2003 and 2004 the accounts sold
        included accounts for the same student debt that UFG [United] was already
        collecting on. UFG [United] wrote checks to STI for the full amount of the
        accounts receivable purchased. STI then wrote checks back to UFG [United] for
        the discount fees.

       The total amount of accounts receivable sold from STI to UFG [United] is
       included as revenue (the total amount of accounts receivable sold is not netted
       against the discount fee paid) in Upper Darby's fiscal year 2003 and 2004 90-10
       [Percent Rule] calculations.

All of the student accounts sold from STI's Upper Darby and Egg Harbor schools to United were
for students that had dropped out or graduated from STI with a balance due on their accounts.
STI had written-off the balances due on these student accounts as uncollectible prior to selling
them to United. We found that in FY 2003, United purchased $126,984 of the $202,925 in
student accounts from STI on December 10 - just three weeks prior to the end of the institution's
fiscal year.

In FY 2003 and 2004 United purchased the student accounts for 76 percent ($202,925 - 49,454 /
$202,925) and 60 percent ($105,447 - 42,759/ $105,447), respectively, of the student account
balances that STI had written-off. This was in spite of the fact that according to United's
Collection History Report, United had collected less than 1 percent on Upper Darby and Egg
Harbor student accounts that had been written-off.

The common ownership of STI and United, STI officials' statement that the sale of student
accounts was a way to manage the 90-10 ratio, United's purchase of the student accounts for
amounts far exceeding its recovery history, and the date of the December 10, 2003 sale all
support the conclusion that the $202,925 and $105,447 in sales of student accounts do not
represent revenue to STI from a source that is outside the institution and were not arm's-length
transactions. As a result, the sales should be excluded from STI's Upper Darby school's FY
2003 and 200490 Percent Rule calculations. We reduced the denominators ofthe FY 2003 and
2004 90 Percent Rule calculations by the amounts of the proceeds from the sales, as shown in
Tables I and 2 on page 16.
 Final Report
 ED-OI G/A03 H0009                                                                     Page 8 of36

 STl's Comments:

STI did not concur that the sales of its Upper Darby and Egg Harbor schools' student accounts to
United should be excluded from its Upper Darby school's FY 2003 and 2004 90 Percent Rule
calculations. STI's response explained ­

    • 	 Though STI Upper Darby and United are related through common ownership, the
        payments made by United were valid because United is a separate corporation, the
        purchases were made on a non-recourse basis, payment amounts were reasonable, and the
        proceeds were an in-flow of revenue. Had STI known that United's purchases were to be
        excluded from the calculation, it could have sold its receivables to other, unrelated
        companies. STI's independent audits did not note any problems with the purchases by
        United, and it is unfair to penalize STI many years after it "made a reasonable
        interpretation of an ambiguous 90-10 regulation and proceeded in good faith ...."

    • 	 The Draft Report misplaced significance on STI's practice of writing-off the student
        account balances for all of its out of school students. The fact that STI had written-off
        the student accounts that were sold to United did not mean that the proceeds of the sales
        of these student accounts could not be included in its 90 Percent Rule calculations.

    • 	 The 90-10 regulations did not declare that the sales of tuition receivables should be
        excluded from the 90 Percent Rule calculation, and there was no guidance from the
        Department as to the conditions and circumstances under which proceeds from the sales
        of student accounts couId be included in the calculation. The Department did not reject
        or question STI's Upper Darby school's 90 Percent Rule calculations included in STI's
        FY 2003 and 2004 financial statements. The exclusion of United's payments from STI's
        Upper Darby school's FY 2003 and 2004 90 Percent Rule calculations at this late date
        would deprive STI's Upper Darby school of any compensation for educational services it
        provided years ago. The Statement of Financial Accounting Standards No.57 did not
        require or support the conclusion that United's student account payments must be
        excluded from STI's Upper Darby school's 90 Percent Rule calculations.

OIG's Response:

Our finding and the exception remains unchanged. Based on the Department's guidance cited in
the report and the facts in this finding, STI has not shown that it complied with the regulations.

STI noted in its response that, "Star does not dispute that Star Upper Darby and United are
related through common ownership ...." As noted in our finding, the preamble to the July 15,
1999, Notice of Proposed Rulemaking clarifies that, under the regulations, institutions may
include only revenue from sources independent of the institution that is accounted for on the cash
basis of accounting in the denominator of the 90 Percent Rule calculation. Pursuant to 34 C.F.R.
§ 600.5 (d)(2), institutions are required to use the cash basis of accounting when they perform the
90 Percent Rule calculation. The Department has the authority to interpret this provision, and it
does that in the preamble.
 Final Report
 ED-OIG/A03H0009                                                                         Page 9 of36

In connection with the issue of institutional loans, scholarships and transactions in general, the
Secretary has stated that transactions will be evaluated to determine whether they are valid and
not part of a scheme to artificially inflate an institution's tuition and fee charges and whether the
transactions are artificial in nature.

Since SIrs Upper Darby school and United were related parties and the purchase by United was
of accounts receivable that had been specifically determined to be of no value to SII, we stand
by our conclusion that the sales of student accounts were not a valid in-flow of revenue and
should be excluded from SIrs Upper Darby school's FY 2003 and 200490 Percent Rule
calculations.

Contrary to SIr s assertion, the report did not state that the proceeds of the sales of student
accounts could not be included in SIrs Upper Darby school's 90 Percent Rule calculations
because the accounts had been written-off prior to selling them to United. Ihe significance of
the fact that SII had written-off the student accounts that were sold to United is that the
valuation of the student accounts by SII was inconsistent with the amounts paid by United for
them, indicating that the sales were not arms-length transactions and did not represent revenue
from a source that was independent of the institution. STI sold the student accounts receivable in
FYs 2003 and 2004 for a net 76 percent and 60 percent of their face value, respectively.
However, prior to selling the student accounts receivable, which STI previously had written-off,
STI should have revaluated the accounts receivable. SII did not provide any information to
show that it revaluated these accounts or to show the basis of its revaluation of these accounts to
establish the equivalency of an arms-length transaction.

SIrs actions further indicate that these transactions were part of an intentional effort to
artificially inflate non-litle IV revenue. United wrote checks (United's sole employee was on
the payroll of STI) to STI for the full amount of the written-off student accounts receivable. STI
then included the full amount of the checks in the 90 Percent Rule calculation and wrote checks
back to United for the discount fees, resulting in lower, net purchase price.

SIrs statement that when SII Upper Darby's FY 2003 and 2004 audited financial statements
were filed with the Department, it did not reject or question the 90 Percent Rule calculations in
those audits is misleading. Ihe FY 2003 and 2004 financial statements were submitted to the
Department in February 2005 and June 2005, respectively, and did not include a disclosure
regarding the sale of student accounts receivable. Iherefore, the Department would not have had
reason to question the 90 Percent Rule calculations. As noted in this audit report, in December
2006, SIr s independent public accountant issued revised FY 2003 and 2004 financial
statements to disclose SIrs sale of student accounts to United as a related party transaction.
Consequently, the Department was not aware ofthe related party transaction at the time the
financial statements were submitted. In fact, SII did not submit the revised financial statements
to the Department.

Statement of Financial Accounting Standards Number 57 supports our conclusion that the receipt
of funds from SIrs sales of student accounts to United cannot be considered funds received
from a source independent of SII. The standard requires that "Representations about
transactions with related parties, if made, shall not imply that the related party transactions were
consununated on terms equivalent to those that prevail in arm's-length transactions unless such
representations can be substantiated. As stated above, STI did not provide any evidence to
 Final Report
 ED-OIG/A03H0009                                                                     Page 10 of36

substantiate that the sales of previously written-off accounts were on terms equivalent to those
between unrelated parties.


STl's Upper Darby School's FY 2005 90 Percent Rule Calculation Included as Student
Payment Revenue Funds Received from the Shareholders of STl's Parent Corporation

In FY 2005, STI included $226,578 recorded as student payment revenue in its Upper Darby
school's 90 Percent Rule calculation. Through interviews with STI students we determined that
$31,448 of the student payment revenue was not paid to STI by the students. According to STI's
records, the student payment revenue was derived from cash and check payments received from
students for institutional charges, which STI would deposit into its bank accounts.

On a weekly basis, each of STI's schools completed a "Deposit Log", which identified that
week's student payments deposited to an STI bank account. The "Deposit Logs" included the
following information for each payment ­

    •   the date of receipt,
    •   a receipt number,
    •   the student name and SSN,
    •   the amount of the receipt, and
    •   a transaction description.

We contacted students with payments over $500, listed in STI's FY 2005 Upper Darby and Egg
Harbor schools' "Deposit Logs," to verify the accuracy of the student payment data.

STI's FY 2005 Upper Darby and Egg Harbor schools' "Deposit Log" records showed the
following student payment information-

                 Number of Students With      Number of Student    Total Amount of Student
   School         Payments Over $500         Payments Over $500     Payments Over $500
 Upper Darby               23                       29                     $61,358
 Egg Harbor                36                        54                   $132,614
   Totals                  59                        83                   $193,972

We were able to contact 18 of the 59 students with payments of $500 or greater during FY 2005.
We were told by 11 of the 18 students that they had not made the payments that were recorded in
the "Deposit Log" and credited to their student account cards. Further, 4 of the II students
verified in writing that they had not made the payments. For one student with two payments
over $500, the student confirmed, in writing, making one payment, but not making the other.
The following tables summarize the payment data for the students contacted.


                   Number of Students        Number of Student     Total Amount of Student
   School        Contacted With Payments    Payments Over $500      Payments Over $500
                        Over $500
 Upper Darby                14                       17                    $35,487
 Egg Harbor                 4                         7                    $14,442
   Totals                   18                       24                    $49,929
 Final Report
 ED-OIG/A03H0009                                                                       Page II of36

                      Number of Students       Number of Payments        Total Amount of
     School          Contacted That Denied       Over $500 That      Payments Over $500 That
                   Making Payments Over $500    Students Denied      Students Denied Making
                                                    Making
  U1'Jl"r Darb:L               8                       9                     $21,001
  Egg Harbor                   3                       3                     $10,447
     Totals                   11                       12                    $31,448

In addition, STI's records indicated that for four of the twelve payments three students claimed
they had not made ­

    •   one payment for $4,795 was made over five years after the student had dropped,
    •   two payments totaling $5,160 were made over six years after the student had dropped,
        and
    •   one payment for $4,002 was made over seven years after the student had dropped.

During our exit conference, on January 17, 2008, we explained to STI officials that we were
unable to verify the accuracy of the $31,448 in student payments for 11 of the 18 students
contacted. On February 1,2008, STI's CFO provided our office with a written response to the
issues discussed at the exit conference. Regarding the $31,448 in student payments the CFO
explained ­

        The reason that OIG was unable to obtain confirmation directly from students that
        they had made these payments is that the payments were made on their behalf to
        the institution by ... the four shareholders ofNerak, Enterprises, Inc., the
        corporation which owns Star Upper Darby. Every month during fiscal 2005,
        these individuals withdrew cash from their personal savings and checking
        accounts and pooled their funds to make gifts on behalf of various former students
        of Star Upper Darby, who still had unpaid balances on their accounts with the
        institution.

On February 4, 2008, STI's CFO provided our office with a listing by student and amount of all
the FY 2005 student payments made by the shareholders on behalf of former students. The
listing included 30 payments totaling $70,925 made on behalf of27 students. All 27 of the
students' account balances had been written-off as uncollectible prior to being paid by the
shareholders. The 12 payments, totaling $31,448, that former students had denied paying were
included as part of STI' s listing.

Institutions may include revenue only from sources independent of the institution that is
accounted for on the cash basis of accounting in the denominator of the 90 Percent calculation.
[Federal Register, Volume 64, No. 135, July 15, 1999, page 38276]

Also, in the preamble to the October 29, 1999 final regulations to amend the regulations that
govern institutional eligibility for and participation in the SFA programs authorized under Title
IV of the HEA the Secretary stated that, " ... funds donated to the institution by related parties
may not count for purposes of the 90/10 calculation." [Federal Register, Volume 64, Number
209, page 58610]
Final Report
ED-OlOIA03H0009                                                                          Page 12 of36

STI included the $70,925 as non-Title IV revenue in its Upper Darby school's FY 2005 90
Percent Rule calculation. Since the payments were made by the four shareholders of the
corporation that owned STI, the payments did not represent revenue to STI from a source that
was independent of the institution. Consequently, as shown in Table 3 on page 16, we reduced
the denominator of the FY 2005 90 Percent Rule calculation by $70,925, the amount of the
student payment revenue that was paid by the shareholders.

STl's Comments:

STI did not agree that the $70,925 in payments made by the shareholders on behalf of former
students should be excluded from its Upper Darby school's FY 2005 90 Percent Rule
calculation. STI's response explained­

    • 	 The gifted funds qualify for inclusion, since the payments represent funds from sources
        outside the institution that were paid to cover tuition charges for students, similar to a gift
        from a family member or a stipend or grant from a state agency or external scholarship
        fund. Although the payments came from the after-tax resources of the four Nerak
        shareholders, who are admittedly related to the institution through their share of
        ownership and the 1999 preamble declares that gifts made by related parties must be
        excluded, there is no such prohibition in the statute or regulation. The language of the
        statute and regulation control here and tuition payments by an institution's shareholders
        from their personal resources represent an inflow of revenues from outside of the
        institution and funds from a source other than the Title IV programs.

OIG's Response:

Our finding and the exception remains unchanged. Based on the Department's guidance cited in
the report and the facts in this finding, STI has not shown that it complied with the regulations.

STI noted in its response that the payments came from the after-tax resources of the four Nerak
shareholders, who are admittedly related to STI's Upper Darby school through their share of
ownership. As noted in our finding, the preamble to the July 15, 1999, Notice of Proposed
Rulemaking clarifies that, under the regulations, institutions may include only revenue from
sources independent of the institution that is accounted for on the cash basis of accounting in the
denominator of the 90 Percent Rule calculation. Pursuant to 34 C.F.R. § 600.5(d)(2), institutions
are required to use the cash basis of accounting when they perform the 90 Percent Rule
calculation. The Department has the authority to interpret this provision, and it does that in the
preamble.

Since the four Nerak shareholders and STI's Upper Darby school were related parties we stand
by our conclusion that the payments did not represent revenue to STI from a source that was
independent ofthe institution and should be excluded from STI's Upper Darby school's FY 2005
90 Percent Rule calculation.

In connection with the issue of institutional loans, scholarships and transactions in general, the
Secretary has stated that transactions will be evaluated to determine whether they are valid and
not part of a scheme to artificially inflate an institution's tuition and fee charges and whether the
Final Report
ED-OIG/A03H0009                                                                          Page 13 of36

transactions are artificial in nature. STI's other arguments are not pertinent to a determination of
whether it has complied with the criteria.


STI Improperly Excluded Institutional Fees from the Numerator of its Upper Darby
School's FY 2004 and 2005 90 Percent Rule Calculations

STI improperly excluded $48,900 and $54,200 in fee revenue from the numerator of its Upper
Darby school's FY 2004 and 2005 90 Percent Rule calculations, respectively. STI did properly
include the fee revenue in the denominator. The regulations at 34 CFR § 600.5( d)(I) require that
Title lV, HEA program funds the institution used to satisfy its students' tuition, fees, and other
institutional charges to students are included in the numerator and denominator of the 90 Percent
Rule calculation.

STI charged all of its students $100 for institutional fees. The fees were included on STI's
enrollment agreements, as part of the cost of tuition. STI's CFO explained that its independent
public accountant had informed STI that the fees should be excluded from the 90 Percent Rule
calculation. The CFO stated that the fee revenue was calculated by multiplying the number of
new enrollments at its Upper Darby and Egg Harbor schools during each FY by $100. STI did
not maintain a general account that identified the fee revenue.

The regulations at 34 C.F.R. § 600.5(e)(2) state-

        With regard to the [90 Percent] formula contained in paragraph (d)(I) of this
        section ­

        In determining the amount of title IV, HEA program funds received by the
        institution under the cash basis of accounting ... the institution must presume that
        any title IV, HEA program funds disbursed or delivered to or on behalf of a
        student will be used to pay the student's tuition, fees, or other institutional charges
        ". and therefore must include those funds in the numerator and denominator.

Therefore, as shown in Tables 2 and 3 on page 16 we have added the fee revenue of $48,900 and
$54,200 to the numerators of the FY 2004 and 2005 90 Percent Rule calculations, respectively.

STl's Comments:

STI explained that its initial approach with the institutional fees was not to include them in either
the numerator or the denominator ofthe 90 Percent Rule calculation. However, as a result of a
mathematical process error the fees were left in the denominator but removed from the
numerator. STI stated that it now recognized and agreed that the institutional fees paid in FY s
2004 and 2005 should be included in both the numerator and denominator of its Upper Darby
school's 90 Percent Rule calculations. However, STI stated that some students paid the
institutional fees prior to any Title IV disbursement with cash payments made from their
resources or those of their families. STI explained that the amount offees paid directly by
students from resources other than Title IV was $3,390 in FY 2004 and $1,803 in FY 2005. STI
claimed that the $3,390 offee income for FY 2004 and $1,803 offee income for FY 2005, while
properly included in the denominators of its Upper Darby school's 90 Percent Rule calculations
Final Report
ED-OIG/A03H0009                                                                        Page 14 of36

should not be included in the numerators of the calculations since these amounts came from
student resources.

STI also asserted that the "presumption provision" under 34 C.F.R. § 600.S(e)(2) is inconsistent
with the stated premise of the 90-10 statute and should not be applied to STI's Upper Darby
school's FY 2004 and 2005 90 Percent Rule calculations.

OIG's Response:

Our finding and the exception remains unchanged. The regulations at 34 C.F.R. § 600.5(e)(2)
require that the institution must presume that Title IV funds are used to pay the students tuition,
fees, or other institutional charges with no provision for the timing of a student's payments.
STI's comments do not provide a basis for considering the fees to have been paid with anything
other than Title IV funds.

STI's argument that the "presumption provision" under 34 C.F.R. § 600.S(e)(2) is inconsistent
with the stated premise ofthe 90-10 statute provides no basis to exclude STI from the
requirements ofthe regulation.


STI Improperly Included Tuition Receipts for a Student that Attended its Roosevelt, PA
School as Non-Title IV Revenue in its Upper Darby School's FY 200490 Percent Rule
Calculation

We noted that a $1,613 tuition payment, made in December 2004, by a student that attended
STI's Roosevelt, PA, school was erroneously included as tuition revenue in its Upper Darby
school's FY 2004 general ledger tuition account. As a result, the $1,613 was improperly
included as non-Title IV revenue in STI's Upper Darby school's FY 200490 Percent Rule
calculation.

The student's account card and diploma indicated that she had attended STI's Roosevelt, PA,
school. In addition, we were told by the student that she had enrolled, attended and graduated
from the Roosevelt, PA school. STI's Roosevelt, PA, school is a main campus with an
additional location in Newark, NJ; it is not a part of STI's Upper Darby school.

The regulations at 34 C.F.R. § 600.S(e)(4) state-

       With regard to the [90 Percent] formula ... [w]ith regard to the denominator,
       revenue generated by the institution from activities it conducts, that are necessary
       for its students' education or training, includes only revenue from those activities
       that­
           (i) Are conducted on campus or at a facility under the control of the
                institution ...

Since the tuition payment was for another school, we reduced the denominator of the FY 2004
90 Percent Rule calculation by the $1,613 Roosevelt tuition payment, as shown in Table 2 on
page 16.
 Final Report
 ED-OIG/A03H0009                                                                                  Page 15 of36

 STl's Comments:

STI concurred with the exception and agreed that the $1,613 Roosevelt tuition payment should
be excluded from the denominator ofSTI's Upper Darby school's FY 200490 Percent Rule
calculation.


STI Included a Disbursement that Was Never Received as Non-Title IV Revenue in its
Upper Darby School's FY 2005 90 Percent Rule Calculation

STI erroneously included $1,839 for a student's scheduled Sallie Mae disbursement as non-Title
IV tuition revenue in its FY 2005 Upper Darby school's 90 Percent Rule calculation. The $1,839
Sallie Mae disbursement was not received by the school.

STI's CFO agreed that the scheduled Sallie Mae disbursement had not been received by the
school. STI made an adjusting entry in January 2006 to the Upper Darby school's general ledger
tuition account to reduce tuition receipts by $1,839; however, it did not revise its 90 Percent Rule
calculation.

An institution must use the cash basis of accounting in determining whether it satisfies the 90
Percent Rule. Under the cash basis of accounting an institution may recognize revenue only
when it receives cash. [34 C.F.R. § 600.5(d)(2) and the Preamble from the July 1999 Notice of
Proposed Rulemaking as cited at pages 4 and 5]

Consequently, we reduced the denominator of the FY 2005 90 Percent Rule calculation by
$1,839, as shown in Table 3 on page 16.

STl's Comments:

STI concurred with the exception and agreed that $1,839 should be excluded from the
denominator of STI's Upper Darby school's FY 2005 90 Percent Rule calculation.


                                    STI's 90 Percent Rule Calculations

STI reported in the notes to its FY 2003, 2004, and 2005 audited financial statements that its
Upper Darby school met the 90 Percent Rule with 89.35 percent, 89.48 percent, and 89.29
percent of its revenue from Title IV sources, respectively.3 Based on our analysis, STI received
96.16 percent, 94.67 percent, and 92.67 percent of its cash revenue from Title IV sources during
the FYs 2003,2004, and 2005, respectively, and therefore, did not comply with the 90 Percent
Rule.




3 STI's CFO provided us with the amounts it used in its 90 Percent Rule calculations. The FY2005 90 Percent
calculation was 89.26 percent; however, 89.29 percent was reported in its FY 2005 financial statements.
 Final Report
 ED-OIG/A03H0009                                                                                        Page 16 of36

                                               TABLE 1 

                         STI and OIG Calculated Percentages of Title IV Revenue 

                                 January 1, 2003 to December 31, 2003 



        Funding Source            STI Calculation             Funds from                       OIG
                                                             Related Party                  Calculation
 Title IV Receipts                        $2,564,623                                               $2,564,623
 Non-Title IV Receipts                      $305,360                   ($202,925)                    $102,435
 Total Revenue'                           $2,870,183                                               $2,667,058
 Title IV Revenue as a
 Percent of Total Revenue             89.35%                                                   96.16%



                                               TABLE 2 

                         STI and OIG Calculated Percentages of Title IV Revenue 

                                 January 1, 2004 to December 31, 2004 


    Funding Source             STI         Funds from       Institutional     Roosevelt            OIG
                            Calculation   Related Party         Fees           Tuition          Calculation
                                                                              Payment
Title IV Recei pts           $2,590,165                          $48,900                           $2,639,065
Non-Title IV Receipts         $255,627         ($105,447)                        ($1,613)            $148,567
Total Revenue'               $2,894,692                                                            $2,787,632
Title IV Revenue as a
Percent of Total             89.48%                                                              94.67%
Revenue



                                               TABLE 3 

                         STI and OIG Calculated Percentages of Title IV Revenue 

                                 January 1,2005 to December 31,2005 


   Funding            STI         Payments Denied      Institutional        Disbursement            OIG
    Source        Calculation       By Students            Fees                 Not              Calculation
                                                                              Received
Title IV            $3,185,809                              $54,200                                 $3,240,009
Receipts
Non-Title IV         $329,137              ($70,925)                                ($1,839)         $256,373
Receipts
Total               $3,569,146                                                                     $3,496,382
Revenue 4
Title IV
Revenue as a        89.26%                                                                        92.67%
Percent of
Total Revenue




'The STI calculated Total Revenue amount does not equal the sum of the Title IV Receipts and Non-Title IV
receipts because the Title IV institutional fee revenue was included in the denominator, but was improperly excluded
from the numerator ofthe 90 Percent Rule calculation.
Final Report
ED-orO/A03H0009                                                                          Page 17 of36

Institutions that fail to satisfy the 90 Percent Rule lose their eligibility to participate in Title IV
programs on the last day of the fiscal year covering the period that the institution failed to meet
the requirement. [34 C.F.R. § 600.40(a)(2)] To regain its eligibility an institution must
demonstrate compliance with all eligibility requirements for at least the fiscal year following the
fiscal year that it failed to comply with the 90 Percent Rule. [34 C.F.R. § 600.5(g)]

STI also violated the rules of Title IV program eligibility by not complying with its program
participation agreement.

The regulations at 34 C.F.R. § 668.14(b)(I) state-

        By entering into a program participation agreement, an institution agrees that ­

        It will comply with all statutory provisions of or applicable to Title IV of the
        HEA, [and] all applicable regulatory provisions prescribed under that statutory
        authority ...

Pursuant to 34 C.F.R. § 668.86(a)(I)­

        The Secretary may limit or tenninate an institution's participation in a Title IV,
        HEA program ... if the institution ...
           (i) Violates any statutory provision of or applicable to Title IV of the HEA,
               any regulatory provision prescribed under that statutory authority ...

                                         Recommendations

We recommend that the Acting Chief Operating Officer for FSA:

1.1 	   Initiate action under 34 C.F.R. § 668.86(a)(l) to tenninate STI's Upper Darby school
        from participation in the Title IV programs.
1.2 	   Require STI to return $9,830,436 in Pell, FSEOO, and Direct Loan funds to the
        Department that its Upper Darby school received from January 1, 2004, through
        December 31, 2006.
1.3 	   Require STI's Upper Darby school to return all Title IV monies received after December
        31,2006, ifthe Secretary has not made a detennination under 34 C.F.R. § 600.5(g) that
        the school demonstrated compliance with all eligibility requirements for at least the fiscal
        year ended December 31, 2006.

STl's Comments:

STI did not concur with the Draft Report recommendations. Regarding Draft Report
Recommendation 1.1 STI's response stated­

    • 	 The Recommendation asks the Department to terminate STI's Upper Darby school from
        participation in the Title IV programs because it failed the 90-10 Rule in FY s 2003, 2004,
        and 2005. However, the 90-10 regulation 34 C.F.R. § 600.5(g), only requires an
        institution failing the 90-10 Rule in any given year, to be excluded for one subsequent
        year (the "Exclusion Year"), after which the institution may apply to be readmitted to the
 Final Report
 ED-orG/A03R0009                                                                       Page IS of36

        Title IV programs if it meets the 90-10 Rule during the Exclusion Year and satisfies
        institutional eligibility requirements. This is the approach the Department has followed
        with institutions that have lost Title IV eligibility due to failing the 90-10 Rule.

STI stated that the Draft Report Recommendations 1.2 and 1.3 are not consistent with
Department regulations and practice. STI's response explained ­

    • 	 Regarding Recommendations 1.2 and 1.3 the liability for Title IV aid disbursed is in error
        and must be revised to be consistent with the Department's practice of only requiring
        payment on the "loss" portion of loan funds. In addition, any liability for Title IV funds
        would also have to be reduced by the amount of the "teachout credit" to which STI's
        Upper Darby school would be entitled under 34 C.F.R. § 66S.26.

In addition, STI commented that, "orG did not audit or otherwise review Star Upper Darby's
Title IV funds percentage for fiscal years 2006 and 2007, even though Star invited the orG to do
so and Star also submitted a revenue breakdown to the orG for each of those years."

STI also stated that, "The 90-10 statute, 20 U.S.C. § 1002 (b)(I )(F), both on its face and as
interpreted and applied in the Draft Report, violates the Equal Protection Clause of the
Fourteenth Amendment to the United States Constitution."

OIG's Reply:

Contrary to STI's assertions, our recommendations are consistent with the applicable laws and
regulations cited. Regarding STI's comments on Draft Report Recommendation 1.1, our
recommendation to initiate action to terminate STI's Upper Darby school is not pursuant to 34
C.F.R. § 600.5(g), but is based on STI's violation of the terms of its participation agreement
pursuant to the requirement under 34 C.F.R. § 66S.S6(a)(I) which provides for the Secretary to
terminate an institution for any violation of the REA or regulations. STI improperly calculated
and reported compliance with the 90 Percent Rule for three years and received Title IV funds for
years in which it was in fact ineligible. The remedy of sitting out a year under 34 C.F.R. §
600.5(g) applies only to schools that accurately and timely report non-compliance with the 90
Percent Rule. In this case, STI's actions indicated that it engaged in intentional conduct that
artificially inflated non-Title IV revenue.

Concerning STI's comments on Draft Report Recommendations 1.2 and 1.3, during the audit
resolution process, the Chief Operating Officer for FSA will determine whether or not to use the
Department's loan loss formula or "teachout credit" to determine the amount of the liability.

Regarding STI's comment that the orG did not review its Upper Darby school's FYs 2006 and
2007 90 Percent Rule calculations, those FY s were not within the scope of our audit and
therefore not reviewed. The audit report recommendations are based on our review of STI's
Upper Darby school's 90 Percent Rule calculations for FYs 2003, 2004 and 2005. We saw no
need to expand our audit period to include later years.

Concerning STI's comment that the 90 Percent Rule provision in the REA is unconstitutional, a
similar claim was rejected by the court in Ponce Paramedical College, Inc., v. United States
Final Report
ED-OlGIA03H0009                                                                Page 19 of36

Department of Education, 858 F. Supp. 303, 314-5 (D.P.R. 1994) (predecessor 85-15 Rule "does
not offend the Constitution").
 Final Report
 ED-OlGIA03H0009                                                                     Page 20 of36



                   OBJECTIVE, SCOPE, AND METHODOLOGY 



The purpose of our audit was to detennine whether STI's Upper Darby school complied with the
90 Percent Rule, Section 102(b)(1)(F) of the HEA, and had sufficient, reliable accounting
records to support its 90 Percent Rule calculations for the FYs ended December 31, 2003, 2004,
and 2005.

To accomplish our audit objective, we perfonned the following procedures ­

     • 	 Reviewed selected provisions of the HEA, regulations, and FSA guidance applicable to
         the audit objective.
    • 	 Reviewed STI's website and school catalog to gain an understanding of its history and
         organization.
    • 	 Reviewed STI's Upper Darby school's Eligibility and Certification Approval Report and
         its Program Participation Agreement.
    • 	 Reviewed STI's Financial Statements and STI's Upper Darby school's Compliance Audit
         Reports for the FYs ended 2003,2004, and 2005.
    • 	 Interviewed STI's CFO to gain an understanding ofSTI's policies and procedures for
         preparing its 90 Percent Rule calculations.
    • 	 Interviewed United's Administrator to gain an understanding of United's debt collection
         procedures.
    • 	 Obtained STI's Upper Darby school's FY 2003, 2004, and 2005 90 Percent Rule 

         calculations and supporting detail, including its accounting records. 

    • 	 Analyzed the composition of the numerators and denominators for STI's Upper Darby
         school's 90 Percent Rule calculations.
    • 	 Recalculated the 90 Percent Rule calculations for STI's Upper Darby school.

To achieve our audit objective, we relied, in part, on the computer-processed data in STI's Excel
spreadsheet calculations for its Upper Darby school's FY 2003, 2004 and 2005 90 Percent Rule
percentages. The Excel spreadsheets listed STI's year-to-date receipts, refunds, and net receipts
by funding category and showed the 90 Percent rule percentage. The funding categories are as
follows­

   • 	 Title N (pell, FSEOG and Direct Loan)
   • 	 Non-Title N (Private Payments, Job Training Partnership Act (JTPA), United 

       Collections, and Fees) 

   • 	 Title N and Non-Title N (Stipends)

We verified the completeness of the data by comparing the totals for all of the funding categories
for the 90 Percent Rule calculations to the totals per STI's Upper Darby and Egg Harbor schools'
corresponding general ledger accounts. We also compared the Title N categories to the Title N
    Final Report
    ED-OIGI A03H0009                                                                                 Page 21 of36

    data in the Department's Grants Administration and Payments System. 5 We verified the
    authenticity of the data by comparing the supporting detail for the Excel spreadsheet 90 Percent
    Rule calculations to the accounting records and other supporting documentation. Specifically,
    we used the data contained in STI's Upper Darby and Egg Harbor schools' generalledJSer
    accounts as our sampling universe for testing its compliance with the 90 Percent Rule. We
    randomly selected sample transactions for review as follows­

       • 	 Reviewed 2 FY 2004 JTPA credit record transactions totaling $14,744 that represented
           costs for 3 JTPA recipients from the universe of 18 credit records, totaling $77,565,
           recorded in STI's Upper Darby and Egg Harbor schools' FY 2004 General Ledger
           Tuition Accounts?

       • 	 Reviewed 2 FY 2005 JTPA credit record transactions totaling $13,561 that represented
           costs for 10 JTPA recipients from the universe of25 credit records, totaling $115,595,
           recorded in STI's Upper Darby and Egg Harbor schools' FY 2005 General Ledger
           Tuition Accounts.'

       • 	 Reviewed 20 FY 2004 Stipend debit record transactions totaling $4,545 that represented
           costs for 19 Stipend recipients from the universe of 2,856 debit records, totaling
           $449,618, recorded in STI's Upper Darby and Egg Harbor schools' FY 2004 General
           Ledger Account, Stipends. 8

       • 	 Reviewed 20 FY 2005 Stipend debit record transactions totaling $5,041 that represented
           costs for 18 Stipend recipients from the universe of2,031 debit records, totaling $331,229,
           recorded in STI's Upper Darbl and Egg Harbor schools' FY 2005 General Ledger
           Accounts, Stipends and L&T.

       • 	 Reviewed the records for 20 FY 2004 refunds, totaling $44,665, from the universe of 153
           refunds, totaling $289,870, recorded in STI's Upper Darby and Egg Harbor schools'
           FY2004 Subsidiary Trial Balance Refund Reports. 9

       • 	 Reviewed the records for 20 FY 2005 refunds, totaling $34,204, from the universe of 209
           refunds, totaling $389,967, recorded in STI's Upper Darby and Egg Harbor schools'
           FY2005 Subsidiary Trial Balance Refund Reports. 9



5 Due to time constraints, we did not compare the FY 2003 funding category totals to the corresponding general 

ledger accounts. 

6 Due to time constraints, FY 2003 testing was only performed on the private payment funding category. For FYs 

2004 and 2005 we did not perform tests of the United collections funding category due to the small dollar amount. 

Also, we could not perform tests of the Fees funding category as the amounts were not supported by the general 

ledger. 

'Records reviewed included JTPA agreements, copies of the JTPA checks, and student account cards. 

S Records reviewed included copies of the stipend checks and student account cards. In FY 2005 STI began paying 

one time lump sum stipend payments from its general ledger account L&T and paying weekly stipend payments 

from its general ledger account Stipends. 

9 Records reviewed included Return to Title IV calculations, state refund calculations, copies of the refund checks, 

STI's Federal Pell and Direct Loan bank accounts, data in the Department's Common Origination and Disbursement 

computer system, and student account cards. 

 Final Report
 ED-OlGIA03H0009                                                                            Page 22 of36

 We reviewed the records for the entire universe ofFY 2003,2004, and 2005 private payments.
 The universes are as follows I 0 ­

                                                        FY2003

                            School             Number of Payments              Amount
                        Upper Darby                   57                          $50,556
                        Egg Harbor                    117                        $197,992
                        Totals                        174                        $248,548

                                                       FY2004 


                           School              Number of Payments              Amount
                       Upper Darby                    106                         $70,942
                       Egg Harbor                     150                        $117,917
                       Totals                         256                        $188,859

                                                       FY 2005 


                           School             Number of Payments               Amount
                       Upper Darby                   134                          $82,747
                       Egg Harbor                    155                         $152,736
                       Totals                        289                         $235,483

We also judgmentally selected and contacted students with payments equal to or greater than
$500 to corroborate the accuracy and validity of the payments as follows­

       • 	 For FY 2004 we contacted 5 students, whose STI records showed had made 10
           payments, totaling $20,535, from the universe of21 students with 30 payments totaling
           $51,515; and
       • 	 For FY 2005 we contacted 18 students, whose STI records showed had made 24
           payments, totaling $49,929, from the universe of 59 students with 83 payments totaling
           $193,972.

Based on our preliminary assessment, we concluded that the computer-processed data included
in STI's Excel spreadsheet calculations for its Upper Darby school's FY 2003,2004 and 2005 90
Percent Rule percentages were sufficiently reliable for the purpose of our audit.

We did not perform a review of internal controls or rely on internal controls to accomplish our
audit objective.

We performed our audit work at STI's corporate office in Berlin, NJ from June 18,2007 through
June 22, 2007, and from October 17,2007 through October 18,2007. We discussed the results
of our audit with STI officials on January 17,2008. Our audit was performed in accordance with



10   Records reviewed included STI Deposit Logs and bank account statements.
Final Report
ED-OIG/A03H0009                                                                   Page 23 of36

generally accepted government auditing standards appropriate to the scope of the review
described above.
Final Report
ED-OIG/A03H0009                                Page 24 of36




ENCLOSURE: Star Technical Institute's Comments on the 

               Draft Audit Report 

Fina! Report
ED-OIGIA03H0009                                                                     Page 25 of36




                                                TECHNICAL INSTITUTE
                                           May IS, 2008
Via Email
Bernard. tadleY@ed.gov
Mr. Bernard Tadley
Regional Inspector General for Audit
Office of the Inspector Genera!
U.S. Department of Education
The Wanamaker Building
100 Penn Square East, room 502
Philadelphia, PA 19107

                Re: Star Technical Institute - Upper Darby, OPE ID No. 02539900:
                Draft OIG Audit Report, Control Number Ed-OIG/A03H0009

Dear Mr. Tadley:

        Star Technical Institute - Upper Darby ("Star" or "Star Upper Darby") has reviewed the
Draft Audit Report issued on April 15,2008 by the Office ofInspector General, Control Number
ED-OIG/A03H0009, entitled "Star Technical Institute's Upper Darby School's Compliance with
the 90 Percent Rule" (the "Draft Report" or "DR"). Based on determinations about certain
revenue components, the Draft Report concludes that Star Upper Darby failed to comply with the
90 Percent Rule in fiscal years 2003, 2004 and 2005. For the reasons stated in this response, we
disagree with this overall conclusion and we ask that your office reconsider and revise the
underlying determinations and recommendations which are discussed below in this response.

                                         I. Introduction

       Star does not object to two of the Draft Report's proposed conclusions:

       (i) 	    Cash paid by a student at the Star Technical Institute - Roosevelt campus should
                be excluded from the 90-10 calculation for Star - Upper Darby; and

       (ii) 	   A Sallie Mae private loan acknowledgement report disbursement was received by
                the institution but an actual disbursement was not received due to an error made
                by the lender, and thus this disbursement should also be excluded from the 90-10
                calculation.

       Star, however, strongly disagrees with three other conclusions in the Draft Report:
                                        CORPORATE OFFICES
                               (856) 719-0300 ph -(856) 719-8755 fax 

                                   Centennial Center -Suite 101A 

                                      Berlin Cross Keys Road 

                                          Berlin, NJ 08009 

                                       www.starinstitute.com 

Final Report
ED-OIG/A03H0009                                                                       Page 26 of36

        (i) 	     Proceeds from the sale oftuition receivables to United Financial Group, Inc.
                  ("United") should be excluded from the Star Upper Darby's 90-10 calculations
                  for fiscal years 2003 and 2004 (the "Sales Finding");

        (ii) 	    Cash gifts made on behalf of former students by shareholders of Star's owner,
                  Nerak Enterprises, Inc. ("Nerak"), should be excluded from Star - Upper Darby's
                  90-10 calculation for fiscal 2005 (the "Gifts Finding"); and

        (iii) 	   Book and supply charges paid with Title IV funds should be included in the 90-10
                  calculation (the "Fees Finding").

Star also disagrees with the Draft Report's recommendations that: (a) the Federal Student Aid
Office (FSA) should terminate the Title IV eligibility of Star Upper Darby's fiscal year 2005;
and (b) Star should be required to pay $9,830,436 for Title IV funds received by Star Upper
Darby students during fiscal years 2004, 2005 and 2006.

         In addition to the specific conclusions and recommendations referenced above, Star
objects to the Draft Report's general observations that an institution carmot count non-Title IV
cash receipts in the 90 Percent or 90/1 0 Rule calculation unless those receipts are from "sources
independent of the institution" (DR at 5) and that an institution carmot count the proceeds from
the sale of institutional loans in the 90 Percent calculation unless that sale was made to "an
unrelated party." Id. Neither the language nor the purpose of the 90/10 statute supports such
limitations upon non-Title IV revenue includible in the in the 90/1 0 calculation. The stated
congressional premise for the 90% limitation - originally an 85% limitation - was that
institutions offering a quality education should be able to attract some minimal level oftuition
revenues from sources other than the Title IV programs. See Career College Ass 'n v. Riley, 70
F.3d 637,1995 WL 650151, at *2 (D.C. Cir. 1995).

         Even ifthe premise of the 90/1 0 Rule is sound (see discussion below in Section VII
questioning the validity of the premise), cash revenue from a related party - such as a company
affiliated with an institution or shareholders of the company owning the institution - is revenue
from a source other than the Title IV programs and is revenue contributed because the related
person or entity regarded the institution's educational programs as being worthy of funds
contributed either to pay tuition or to purchase tuition receivables. While, as noted by the Draft
Report, the 1999 preamble to the 90/1 0 regulation does observe that sales of tuition loans or
receivables must be to "an unrelated party" in order to be counted in the 90-10 calculation, the
90-10 regulation does not contain any such limitation. See 34 C.F.R. § 600.5 (d) - (e). Indeed, to
the contrary, the regulation suggests that proceeds from any sale of loans can be included in the
90/1 0 calculation, since it states broadly that institutions may include "the amount of loan
repayments received by the institution during the fiscal year," 34 C.F.R. § 600.5 (d)(3)(i), and
proceeds from the sale ofloans are essentially "repayments" ofloans.

       Before addressing the reasons why Star disagrees with the Sales Finding, the Gifts
Finding, the Fees Finding and the recommendations, Star believes that a brief review of Star
Upper Darby's programs, students, regulatory metrics and student outcomes will contribute to a
more complete and correct understanding of Star Upper Darby's compliance with what the Draft
Report terms the "90 Percent Rule," i.e., the requirement, under 20 U.S.C. § 1001 (b)(1)(F) and
 Final Report
 ED-orG/A03H0009                                                                       Page 27 of36

 34 C.F.R. § 600.5 (a)(8) & (d)(1), that a for-profit institution receive no more than 90.0% of its
 revenues for tuition and related charges from the Title IV federal financial assistance programs.

                                   II. Star Upper Darby - Profile

         Star was founded in 1984 and over the years it has been owned and operated as a family
business. Star acquired the Star Upper Darby institution approximately 15 years ago, and,
throughout the period of its ownership by Star, the institution has participated in the Title IV
financial aid programs. Star Upper Darby, during all time periods relevant to the Draft Report,
has consisted of an Upper Darby, Pennsylvania main campus and an Egg Harbor, New Jersey
branch campus. In addition to the Star - Upper Darby institution, Star owns two other
freestanding institutions: (1) Star Roosevelt (OPE ID No. 02615400) with a main campus in
Philadelphia (at 9121 Roosevelt Boulevard) and a branch campus in Newark, New Jersey and (2)
Star Stratford (OPE ID No. 02586900) with a main campus in Stratford, New Jersey and branch
campuses in Lakewood, New Jersey and Dover, Delaware. Altogether there are three Star
institutions, all owned by Nerak, with seven campuses.

        Star Upper Darby's main campus is located in an urban area that is populated primarily
by low income families and, as a consequence, well over 90% of the institution's students
qualify for some level of Pell Grant assistance and more than 80% of its students have what is
known as a Pell zero EFC index that qualifies them for the maximum Pell Grant available
relative to their costs of attendance. Star - Upper Darby offers these low income students the
opportunity to gain new careers with increased wages by acquiring vocational skills through
short-term allied health and technology programs averaging around 10 months in length. These
programs are competitively priced, such that students qualifying for maximum Title IV grant and
loan aid - which is well over 80% ofthe student body - can pay 100% of the institution's
charges with Title IV funds. These same students, at the Upper Darby campus, also receive a
small state grant and institutional loans. Because Star Upper Darby serves so many low income
students receiving maximum Title IV funds that equal 100% of the institution's charges, Star
Upper Darby's Title IV funds percentages have always been in the upper 80s.

        What is most important about Star Upper Darby's service to low income students is that
the institution has achieved remarkable results despite the significant challenges faced by these
students, with graduation rates averaging over 60% and placement rates averaging over 75%. If
Star Upper Darby was not serving these students, many of them likely would be stuck in low
income entry level unskilled jobs and on government welfare rolls. Star's commitment to its
students is also evidenced in its reinvestment of substantial amounts of revenue to improve
physical plant and educational programs. In 2003, Star reinvested $336,212 out of net income of
$700,805 in new capital equipment and also paid $1,320,065 in Title IV credit balances to
students for their use in meeting personal expenses. In 2004, reinvested $406,911 in capital
equipment on net income of only $366,983 and paid $1,317,514 in Title IV credit balances to
students. And in 2005, Star reinvested $532,732 in new equipment on net income of only
$330,381 and paid $895,509 in Title IV credit balances to students. Clearly, Star has made
service to its students its foremost priority.

         Other than the Draft Report's conclusion that Star Upper Darby failed to comply with the
90 Percent Rule for fiscal years 2003 to 2005, Star Upper Darby has earned good marks from all
of its regulators. In 1995, for example, the institution's accrediting body, the Accrediting
Final Report
ED-OIG/A03H0009                                                                      Page 28 of36

Commission for Career Schools & Colleges of Technology (ACCSCT), recognized the
institution as a "School of Distinction," and, in the fall of2007, the FSA Region III case team
completed a program review of the institution (begun in July 2006) with no monetary liabilities
and no umesolved findings. Star Upper Darby would not be facing the disputed 90-10 findings in
the Draft Report if FSA regulations had stated that receivable sales to related collection agencies
will always be disallowed no matter what the terms of the transactions and that tuition cash gifts
by shareholders of an institution will always be disallowed. Had Star been aware that OIG held
the view that non-Title IV revenue of this nature never can be included in the 90-10 rule, there
were several alternative actions Star could have taken to keep its Title IV percentage below
90.1 %, including raising tuition, selling receivables to completely umelated parties, soliciting
scholarship funds from umelated parties such as foundations, and merging all seven Star
campuses into a single OPE ID number which would have yielded a single 90-10 score below
90.1% for all of the fiscal years at issue here (because several of the other Star campuses have a
more economically diverse student body including students who do not qualify for maximum
Title IV aid and also students who also have access to higher state aid in New Jersey).

                                     III. The Sales Finding

        The Draft Report states that payments made to Star Upper Darby during fiscal years 2003
and 2004 by United, for the purchase of institutional loans (or tnition receivables) should be
excluded from Star Upper Darby's 90-10 calculations for those years, because United is related
by ownership to Star, inasmuch as Star's president and principal shareholder also possessed the
majority ownership of United (DR at 6). Star does not dispute that Star Upper Darby and United
are related through common ownership, but Star does dispute the conclusion that the Draft
Report reaches based on this common ownership. Specifically, Star disagrees with the Draft
Report's assertion that Financial Accounting Board Standard 57 requires the exclusion of the
payments made by United to Star Upper Darby.

         Significantly, the Draft Report does not dispute that United made payments to Star Upper
Darby for actual purchases of receivables. During an exit interview, the OIG representatives
acknowledged that, if United were not related to Star Upper Darby, OIG would not contest the
inclusion ofthe payments in the 90-10 calculation. These payments by United totaled $202,925
in fiscal 2003 and $105,447 in fiscal 2004. There is no dispute that, ifthese payments are kept in
the 90-10 calculations of Star Upper Darby, as the institution's CPA has determined they should
be, then Star Upper Darby's 90-10 ratio for fiscal 2003 and fiscal 2004 does not exceed 90.0%.
For the reasons outlined below, Star requests the OIG to reconsider the Sales Finding to provide
that the proceeds of receivables sales to United can be included in the 90-10 calculation.

       First, there are significant facts demonstrating that the payments made to Star Upper
Darby by United for non-recourse purchases of receivables were valid payments that should be
included in the 90-10 calculations for Star Upper Darby:

       (1) 	       United was and is a legitimate and separate New Jersey corporation engaged
                   in the student loan collection business.

                      (a) United was formed and incorporated on January 7, 2000. Star has
                      previously submitted to OIG copies of United's federal and New Jersey
 Final Report
 ED-OIOIA03H0009                                                                       Page 29 of36

                        corporate tax returns for the years 2003 and 2004, attesting to the fact that
                        United is a legitimate separate business entity.

                        (b) United is not a postsecondary institution and did not provide any
                        services to, or have any involvement with, Star Upper Darby other than
                        collection of institutional loans and purchase of institutional loans.

                        (c)United has an employee that performs collection functions, including
                        sending correspondence and making phone calls to student account
                        debtors.

        (2) 	       United's loan purchases were made on a non-recourse basis and the prices
                    which United paid to Star Upper Darby, after deduction of substantial
                    discount fees paid by Star Upper Darby (ranging from around 24% to 40%),
                    were manifestly reasonable and market value, in light of the fact the loans
                    which United purchased were loans on which students had been making
                    payments and continued to make payments, as reflected in a United loan
                    collection status report previously provided to OI O.

        (3) 	       The non-recourse sale proceeds were an in-flow of revenue to the institution,
                    which enhanced the institution's assets.

        (4) 	       There were other companies, unrelated to Star Upper Darby, to which it could
                    have sold its student tuition receivables, including EFS, TFC, RRI,
                    Transworld and Capital Collections.

        (5) 	       Star Upper Darby's independent auditors, who have experience with
                    institutions of higher education and the Title IV programs, did not note any
                    problems with these sales during their audits of the 2003 and 2004 fiscal
                    years.

If OIO now ignores the foregoing facts or interprets them as insufficient to qualifY the United
loan purchase payments for inclusion in the 90-10 calculations for Star Upper Darby's fiscal
years 2003 and 2004, then Star will be severely and unfairly penalized by a demand for
repayment of millions of dollars of Title IV funds many years after Star made a reasonable
interpretation of an ambiguous 90-10 regulation and proceeded in good faith to teach hundreds of
students largely dependent on federal financial aid. During fiscal 2003 to 2005, Star Upper
Darby paid substantial operating costs in order to provide educational training to over 1488
students, of which over 60% graduated. If these Title IV funds have to be repaid now, Star will
not be able to obtain payments from these students served so many years ago, which means Star
will suffer an enormous financial loss.

        Second, the Draft Report misplaces significance on Star's write off practice and the
overall performance of all Star institutional loans - factors that do not control whether proceeds
actually received for the specific loans that were sold are includible in the 90-10 calculation. The
fact that Star Upper Darby had a practice of writing off on its books receivables for students
following their withdrawal from school does not mean that these loans had no value or that the
proceeds of the sale of the loans to United cannot be included in the 90-10 calculation.
 Final Report
 ED-OIG/A03H0009                                                                        Page 30 of36

Regardless of the low overall collection rate on all Star out of school loans, the loans which Star
sold to United were former loans that had recent performance history. And Star's practice of
writing off all out of school student loans was simply a very conservative practice which it
voluntarily adopted, but that voluntary practice did not deprive Star Upper Darby of the right to
recognize proceeds actually paid for the performing loans which it sold to United.

       Third, in addition to the foregoing significant facts, the following legal factors also 

warrant inclusion of the United payments in the 90-10 calculations of Star Upper Darby: 


        I. 	 The 90-10 regulations do not declare that sales of tuition receivables to a company
             related to the seller institution should be excluded from the 90-10 calculation, and
             instead, as noted above, the regulations broadly state that any loan repayments
             received during the fiscal year - which includes proceeds of sales of loans - can be
             included in the 90-10 calculation. 34 C.F.R. § 600.5 (d)(3)(i).

        2. 	 Other than the passing reference, in the 1999 preamble to the 90-10 regulations, that
             proceeds of sales of institutional loans to unrelated parties can be included in the 90­
             10 regulation, there was no guidance from the DOE to institutions as to the conditions
             and circumstances under which proceeds of sales of student loan receivables can be
             included in the 90-10 calculation.

        3. 	 When Star Upper Darby's 2003 and 2004 audited financial statements were filed with
             the DOE, it did not reject or question the 90-10 calculations in those audits. Star
             Upper Darby reasonably relied on the DOE's acceptance of these audits and made
             decisions about its business, including to whom it could properly sell tuition
             receivables.

        4. 	 Exclusion of the United payments from Star Upper Darby's 2003 and 200490-10
             calculations at this late date, based on the retroactive application of a previously
             unpublished interpretation of the regulation, would deprive Star Upper Darby of any
             compensation for substantial educational services it provided years ago to hundreds
             of students, all on the basis of a standard of conduct about which it was not given
             notice during the years in question. This is inequitable and punitive.

        5. 	 Financial Accounting Standards Board ("FASB") No. 57, paragraph 3, does not
             mandate or support the conclusion that the United loan purchase payments must be
             excluded from Star Upper Darby's 90-10 calculations. Instead, F ASB 57 merely
             provides that transactions with related parties cannot be presumed to be on an arms
             length basis in the absence of substantiation. For purposes of inclusion of loan
             proceeds in the 90-10 calculation, the regulation does not require a showing that the
             amount paid for purchase of a loan is an "arms length" amount, but rather only that
             the payment was made by a party outside of the institution. Moreover, the substantial
             discounts that United received on the purchase price for performing loans (ranging
             from 24% to 40%) is evidence that United applied a standard market credit analysis in
             setting a price for the loans.

        In light of all of the facts and legal factors outlined above, we strongly believe that the
only reasonable and fair application of the provisions of the 90-10 statute and regulation to Star
 Final Report
 ED-orOIA03H0009                                                                      Page 31 of36

 Upper Darby's 90-10 ratios for fiscal 2003 and fiscal 2004 is to keep the United receivable
 payments in the 90-10 calculations for those fiscal years.

                                         IV. The Gifts Findings

        The Draft Report states that $70,925 of tuition payments booked by Star Upper Darby
during fiscal year 2005 should be removed from the 90-10 calculation for that fiscal year,
because these payments were made by the four shareholders of Nerak on behalf of various
former Star Upper Darby students who had unpaid account balances with the institution. The
Draft Report concludes that these gifted funds must be excluded from the 90-10 calculation for
fiscal 2005 because they did not come from "sources independent of the institution" and the
preamble to the 1999 regulations stated that "funds donated ... by related parties may not count
for purposes ofthe 90/10 calculation." DR at 9.

        There is no dispute that, if these gifted funds are kept in Star Upper Darby's fiscal 2005
90-10 calculation, the institutions' Title IV percentage is below 90.1%. And, as with the United
purchases of institutional loans, there is no dispute that these cash gifts were actually made to
Star Upper Darby by the four Nerak shareholders - (Names Redacted) - and were made by
them from their personal resources. These cash gift payments were reported in the institution's
deposit logs, which were reviewed by oro during its audit work. Every month during fiscal
2005, the Nerak shareholders withdrew cash from their personal savings and checking accounts
and pooled their funds to make gifts on behalf of various former Star Upper Darby students with
unpaid account balances. Students selected included graduates and dropped students for whom a
considerable amount of awarded Title IV aid was returned by Star under the requirements of the
federal regulations.

         Star continues to believe that the gifted funds qualify for inclusion in the 90-10
calculation for fiscal 2005, since the payments represent funds from sources outside the
institution that were paid to cover tuition charges for students, similar to a gift from a family
member or a stipend or grant from a state agency or external scholarship fund. The gifted funds
here did not come from institutional revenues or bank accounts, but instead came from the after­
tax resources of the four Nerak shareholders. While the four shareholders are admittedly related
to the institution through their share of ownership and a quoted passage in the 1999 preamble
declares that gifts made by related parties must be excluded, there is no such prohibition in the
statute or regulation. We believe that the language of the statute and the regulation control here
and that tuition payments by an institution's shareholders from their personal resources represent
an inflow of revenues from outside of the institution and funds from a source other than the Title
IV programs. Accordingly, we urge 010 to rescind its conclusion about exclusion of these cash
payments and to instead conclude that these amounts should be kept in the 90-10 calculation for
fiscal 2005.

                                      V. The Fees Finding

        The Draft Report states that application fee payments totaling $48,900 in fiscal 2004 and
$54,200 in fiscal 2005 were made by students and included by Star Upper Darby in the
denominator (all tuition and related charges revenue), but not the numerator, of the 90-10
calculations for those fiscal years. According to the Draft Report, all of these fee payments also
should have been included in the numerator of the 90-10 calculation, apparently on the basis that
 Final Report
 ED-OIG/A03H0009                                                                         Page 32 of36

the funds used to pay these fees must be presumed to come from Title IV aid awarded to
stndents, since the total of all awarded Title IV aid for these stndents equaled or exceeded the
total of tuition and institntional charges for the stndents in question and the 90-10 regulation, 34
C.F.R. § 600.5 (e) (2), states that schools must presume that all Title IV funds disbursed were 

applied to institutional charges, even if the stndents made cash payments from their own 

resources. 


        Star's initial approach with the application fees was to not include them in either the
numerator or the denominator of the 90-10 calculation, because Star mistakenly believed that the
fees should be excluded completely, since they are not tuition. Apparently, as a result of a
mathematical process error, however, the fees were left in the denominator but removed from the
numerator. Upon reviewing the Draft Report's discussion ofthe fees and the provisions of the
refund regulation, 34 C.F.R. § 600.5 (d)(l), Star now recognizes and agrees that application fees
are identified as an express revenue component to be included in the 90-10 calculation, both in
the denominator and the numerator. However, Star believes that not all of the $48,900 offees
paid in fiscal 2004 and the $54, 200 offees paid in fiscal 2005 should be included in the
numerator, because some students paid the $100 institntional application up front, prior to any
Title IV disbursement, with cash payments made from their resources or those of their family.
The amount of fees paid directly by students from resources other than Title IV was $3,390 in
fiscal 2004 and $1,803 in fiscal 2005.

        As noted above in Part II, in each ofthe years at issue here, Star Upper Darby made
substantial payments of Title IV funds directly to stndents, which reflected, in part, the fact that
the stndents had paid application fees and, in some cases, a portion of their tuition charges, from
their personal resources. The broad presumption to the contrary in the 90-10 regulation is plainly
inconsistent with the stated premise of the 90-10 statute, which is that institutions offering
education of reasonable quality will be able to attract tuition payments from sources other than
the Title IV programs. In short, the "presumption" provision of the 90-10 regulation is contrary
to law and, therefore, should not be followed and applied to Star Upper Darby's 90-10
calculations for fiscal 2004 and 2005.

        In conclusion, $3,390 of fee income for fiscal 2004 and $1,803 offee income for fiscal
2005, while properly included in the denominator, should not be included in the numerator of the
90-10 calculations since these amounts came from student resources and the OIG should revise
its conclusion accordingly concerning the fee payments.

             VI.     OIG Recommendations on Liability Calculation & Eligibility Impact

        If the Sales, Gifts and Fees revenues are included in the 90-10 calculation in the manner
outlined above, then Star Upper Darby complied with the 90-10 Rule for fiscal years 2003, 2004
and 2005, just as it reported in each of its timely filed audited financial statements for those fiscal
years - audits to which DOE never objected. If OIG, however, should continue to maintain any
of the positions outlined in the Draft Report concerning the Sales Finding, the Gifts Finding and
the Fees Finding, then, based on those revenue determinations, Star Upper Darby's revenues
from the Title IV programs likely will exceed 90.0% for one or more of fiscal years 2003, 2004
and 2005.
Final Report
ED-OIG/A03H0009                                                                        Page 33 of36

        The Draft Report, proceeding on the basis of these underlying revenue determinations,
reaches the overall conclusion that Star Upper Darby failed to satisfy the 90-10 Rule in each of
fiscal 2003, 2004 and 2005 and that such failures amounted to violations ofa provision of Star
Upper Darby's program participation agreement. And, based on this overall conclusion, the Draft
Report makes the following recommendations to the DOE:

        (1) Require Star Upper Darby to pay back to the Title IV programs and lenders all of the
Title IV aid disbursed by the institution in each fiscal year following a failing 90-10 year, i.e.,
fiscal 2004, 2005 and 2006;
        (2) Terminate the existing Title IV eligibility of Star Upper Darby; and
        (3) Require Star Upper Darby to pay back to the Title IV programs and lenders all of the
Title IV aid disbursed by the institution in fiscal 2006 and later time periods if Star Upper Darby
cannot demonstrate that its Title IV aid percentage was not above 90.0% in fiscal 2006. (DR at
13-14)

         Star strongly believes that the Draft Report's underlying conclusions on the Sales
Findings, the Gifts Finding and the Fees Finding are in error and should be rescinded and revised
for the reasons discussed above. But, even if OIG should decline to revise anyone of more of
those underlying determinations, such that Star Upper Darby's Title IV aid percentage is over
90.0% for any ofthe fiscal years 2003, 2004 and 2005, the Draft Report's Recommendations (1)
to (3) are not consistent with DOE regulations and practice.

                                 A. Liability for Title IV Funds

         With regard to Recommendations 1 and 3 regarding liability for Title IV aid disbursed
during ineligible years (following a fiscal year failing the 9011 0 test), DOE requires payment in
full of grant funds but only the so-called 'loss' portion ofloan funds. Under DOE's long
standing practice, summarized in (Name Redacted) July 17,1996 memorandum (see enclosure
I), an institution that disbursed loan funds to ineligible students, programs or locations is
obligated to repay only the 'loss' amount which is equivalent to the institution's historical cohort
default rate percentage (for the time period covered by the finding) multiplied by total loan
disbursements, plus an amount to cover subsidies and interest paid to lenders on defaulted
subsidized loans. Thus, the Draft Report's Recommendations (I) and (3), proposing that Star be
required to pay back 100% of all Title IV aid, are in error and must be revised to be consistent
with DOE practice on recovery ofloan funds.

         In addition to the loan liability adjustment required by the loan loss formula, the amount
of any liability that Star might have for Title IV funds disbursed in fiscal 2004, 2005 and 2006
would also have to be reduced by the amount ofthe 'teachout' credit to which Star Upper Darby
would be entitled under 34 C.F.R. § 668.26 for previously awarded grant funds earned by
students in the payment period following loss of institutional eligibility and for previously
awarded loan funds earned by students in the loan period following loss of institutional
eligibility. See 2007-08 Federal Student Aid Handbook, Vol. I, Chap. 12, at pp 2-166 to 2-167
(enclosure 2). Star has not calculated the amount ofthe teachout credit, but could do so in the
event that the DOE were to make a final audit determination that Star Upper Darby failed to
satisfy the 90-10 Rule in any of the fiscal years 2003, 2004 or 2005.
 Final Report
 ED-orO/A03H0009                                                                           Page 34 of36

                                            B. Title IV Eligibility

         The Draft Report's Recommendation (2) asks the DOE to terminate the existing Title IV
eligibility of Star Upper Darby based on the Draft Report's conclusion that Star Upper Darby
failed the 90-10 Rule in fiscal years 2003, 2004 and 2005. But the 90-10 regulation, 34 C.F.R., §
600.5 (g), only requires an institution failing the 90-10 Rule in any given year, to be excluded for
one subsequent year (the "Exclusion Year"), after which the institution may apply to be
readmitted to the Title IV programs if it meets the 90-10 Rule during the Exclusion Year and
satisfies institutional eligibility requirements, and this is exactly the approach which the DOE has
followed with institutions that have lost Title IV eligibility due to failing the 90-10 Rule. Thus,
even if the Draft Report's conclusions that Star Upper Darby failed the 90-10 Rule in each of
fiscal years 2003, 2004 and 2005 were valid and were accepted by the DOE, if Star Upper Darby
did not receive more than 90.0% of its tuition revenues in Fiscal 2006 and it otherwise continues
to meet institutional eligibility requirements, there is no basis for terminating the institution's
existing Title IV eligibility.

         oro did not audit or otherwise review Star Upper Darby's Title IV funds percentage for
fiscal years 2006 and 2007, even though Star invited the oro to do so and Star also submitted a
revenue breakdown to the oro for each ofthose years. Star is confident that the institution did
not receive more than 90.0 % of its tuition revenues from Title IV program funds during fiscal
years 2006 and 2007, since the institution had no sales of institutional loans to United or gifts
from shareholders during those years and instead enjoyed increased student referrals from Title
III state workforce agency and also had Sallie Mae loans available to students during those years.
This 90-10 compliance, coupled with Star Upper Darby's continuing satisfaction of all other
Title IV eligibility conditions, qualifies the institution for renewal of its Title IV eligibility in the
year immediately following the last Exclusion Year and the continuation thereafter of Title IV
eligibility and participation. Accordingly, the Draft Report's Recommendation (2) should be
rescinded completely, as there is no basis for recommending the termination of the existing Title
IV eligibility of Star Upper Darby.

                VII. The 90 Percentage Statute, As Applied, is Unconstitutional

         The 90-10 statute, 20 U.S.C. § 1002 (b)(1 )(F), both on its face and as interpreted and
applied in the Draft Report, violates the Equal Protection Clause of the Fourteenth Amendment
to the United States Constitution. As Congressmen (Names Redacted) observed in an April 30,
2004 letter (see enclosure 3), "the '90-10' ratio is completely arbitrary" and "fundamentally
unfair to some of our nation's neediest students and the schools that serve them." Id at 2 & 4.
The statute is irrational, discriminatory and unfair in its design and application and does not ­
and cannot ever - achieve its announced goal of assuring institutional quality. The rule is not
designed to account for factors that have nothing to do with academic quality but can control
whether or not more than 90% of an institution's tuition revenues come from Title IV aid, such
as the state in which an institution is located, the length and costs of its programs, the income
level of its students, and the extent to which the institution's programs involve revenue
generating services to the public.

        Some institutions, regardless of the quality oftheir programs, can assure that they
receive no more than 90% of their tuition revenues from the Title IV programs simply as a result
of being in a state where substantial state aid is available to their students or as a result of
Final Report
ED-OI G/A03 H0009                                                                      Page 35 of36

offering programs that have a clinic component - such as a beauty school salon floor - which
generates revenue from services offered to public. But other institutions, like Star Upper Darby,
though they offer high quality academic programs, will struggle or fail to keep their percentage
of Title IV aid at or below 90.0% because they are in states where little or no state aid is
available, they offer programs not involving any revenue generating services for the public, or all
oftheir programs are low priced non-degree programs and the schools are based in urban areas
where they serve low income minority students who qualify for Title IV aid that in most cases
exceeds their tuition charges. This is evidenced by the large Title IV credit balances paid to
students, as noted in Part II above.

         The 90-10 Rule, thus, effectively penalizes for-profit institutions like Star Upper Darby,
which choose to locate their campuses in low income urban areas and to offer short non-degree
skills programs in order to conveniently serve low income students who need to gain vocational
skills to improve their wage earning capability. Indeed, the best approach that an institution like
Star Upper Darby could use to assure compliance with the 90-10 Rule would be to move its
campus away from low income urban areas or to increase its program tuition to the point where
such low income students carmot pay 90% or more of their tuition and fees with Title IV aid.
Neither of these alternatives serves the best interests of students or fulfills the announced goal of
the 90-10 statute. In short, this statute is inherently and irreparably flawed. It discriminates
against poor students - on the basis oftheir indigency and residential patterns associated with
their indigency - by driving for-profit postsecondary educational institutions away from urban
areas and other economically depressed areas to suburban areas less convenient to poor students
but accessible to middle class students who do not qualify for as much Title IV aid. Low income
minority students are harmed by the 90-10 Rule, while middle and upper class students suffer no
harm and instead benefit by having a greater number of convenient higher education choices.
This rule has no redeeming value and is unconstitutional because it discriminates based on
income class and is not rationally related to its stated purpose.

        The sad legacy of the 90-10 Rule is that, instead of helping students by supposedly
weeding out illegitimate for-profit institutions which waste federal funds and do not deliver
meaningful educational services, the Rule here is threatening an institution that has been
effectively serving poor citizens in Pennsylvania and New Jersey with affordable and relevant
educational training programs, as attested by completion rates averaging over 60% and
placement rates averaging over 70%, which exceed the outcomes achieved by many public
institutions. And the reason Star Upper Darby has struggled with the mandate that no more than
90.0% of its tuition revenue come from Title IV aid is exactly because it has chosen to serve the
population most in need of Title IV aid and to serve those neediest of students with affordable
programs whose tuition could be paid almost completely with Title IV aid. This story has been
repeated with other institutions that are geographically located in areas where the poorest of the
poor live, be that inner city neighborhoods or economically depressed areas like the decaying
rust belt of some Midwest communities or the struggling agricultural areas of western
Mississippi or southern Texas. Institutions that dare to serve the poorest of the poor, and to offer
relevant skills training programs at prices which can be met almost entirely with Title IV aid,
will face difficulty in meeting the 90-10 Rule, no matter how good the quality is of their
programs, faculty and student services.
Final Report
ED-OIG/A03H0009                                                                    Page 36 of36

                                       VIII. Conclusion

       Thank you in advance for giving time and consideration to the facts and legal points
outlined above. We believe that this response demonstrates that the Draft Report's findings and
recommendations should be revised and that Star Upper Darby satisfied the 90 Percent Rule or
90/10 Rule in fiscal years 2003, 2004 and 2005, and we are prepared to answer any questions
you may have concerning the foregoing facts and information.

                                                    Very truly yours, 

                                                    Star Technical Institute - Upper Darby 


                                            By             lsi
                                                       Karen Manin, President


cc: 	   Mr. Patrick Howard, Director
        Student Financial Assistance Advisory & Assistance Team
        Pat.howard@ed.gov

        Mr. Ray Mangin 

        Ray.mangin@ed.gov 


        Ron Holt, Esq. 

        rholt@browndunn.com