oversight

Capella University's Compliance with Selected Provisions of the Higher Education Act of 1965 and Corresponding Regulations

Published by the Department of Education, Office of Inspector General on 2008-03-07.

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

Capella University’s Compliance with Selected Provisions of
  the Higher Education Act of 1965 and Corresponding
                       Regulations


                                 FINAL AUDIT REPORT





                                    ED-OIG/A05G0017 

                                       March 2008



Our mission is to promote the
efficiency, effectiveness, and                          U.S. Department of Education
integrity of the Department's                           Office of Inspector General
programs and operations
                        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
                                                                 Chicago/Kansas City/Dallas Audit Region


                                                     March 7, 2008

Mr. Michael Offerman
President
Capella University
225 South 6th Street, 9th Floor
Minneapolis, MN 55402

Dear Mr. Offerman:

Enclosed is our final audit report, Control Number ED-OIG/A05G0017, entitled Capella
University’s Compliance with Selected Provisions of the Higher Education Act of 1965 and
Corresponding Regulations. 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
Education Department official, who will consider them before taking final Departmental action
on this audit:

                                  Lawrence A. Warder
                                  Acting Chief Operating Officer
                                  Federal Student Aid
                                  U. S. Department of Education
                                  Union Center Plaza, Room 112G1
                                  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 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.

                                               Sincerely,

                                               /s/

                                               Gary D. Whitman
                                               Regional Inspector General
                                               for Audit


Enclosures
                                              TABLE OF CONTENTS 


                                                                                                                               Page

EXECUTIVE SUMMARY ...........................................................................................................1


BACKGROUND ............................................................................................................................3



AUDIT RESULTS .........................................................................................................................4



          FINDING NO. 1 – The University Determined Incorrectly the Amounts 

                          to Be Returned to the Title IV, HEA Programs.............................4



          FINDING NO. 2 – The University Disbursed Title IV, HEA Program 

                          Funds to Students Who Were Not Enrolled .................................10



          FINDING NO. 3 – The University Did Not Always Maintain 

                          Documentation to Substantiate Loan Exit 

                          Counseling .......................................................................................14



          FINDING NO. 4 – The University Disbursed FFEL Program Funds to a 

                          Student Enrolled in an Unapproved Program .............................16



OTHER MATTERS ....................................................................................................................17



OBJECTIVES, SCOPE, AND METHODOLOGY ..................................................................18



Enclosure 1: Disbursements to Students Who Were Not Enrolled.........................................21



Enclosure 2: University Comments on the Draft Audit Report .............................................22

Final Report
ED-OIG/A05G0017                                                                           Page 1 of 31


                                 EXECUTIVE SUMMARY 



The objectives of our audit were to determine whether Capella University (University) complied
with selected provisions of the Higher Education Act of 1965, as amended (HEA), and
regulations governing (1) the return of Title IV, HEA program funds; (2) Federal Family
Educational Loan (FFEL) and Federal Pell Grant (Pell) disbursements; (3) institutional
eligibility; (4) program eligibility; and (5) student eligibility. Our initial audit period covered the
period July 1, 2004, through June 30, 2005 (2004-2005 award year). Because we identified
instances of non-compliance during the 2004-2005 award year, we expanded our audit for
objectives (1) and (2) to include the 2002-2003 and 2003-2004 award years.

The University generally complied with the provisions of the law and regulations governing
institutional eligibility, program eligibility, and student eligibility. However, it did not comply
with the provisions of the law and regulations governing

1.	 The return of Title IV, HEA program funds. The University did not return all funds disbursed
    on behalf of students who dropped before the first day of class of the payment period. The
    University used the midpoint of the academic quarter (payment period) as the withdrawal
    date for all students who unofficially withdrew, even when the University lacked
    documentation of the student’s attendance during the payment period. As a result, for the
    2002-2003 through 2004-2005 award years, the University returned to the Title IV, HEA
    programs about $588,000 less than it should have returned. We recommend the Acting Chief
    Operating Officer (COO) for Federal Student Aid (FSA) require the University to review its
    files and return the improperly retained Title IV, HEA program funds; revise its policy for
    returning Title IV, HEA program funds; identify other incorrect calculations for withdrawals
    after the 2004-2005 award year; and recalculate and return those amounts. We also
    recommend that the Acting COO for FSA consider fine proceedings against the University
    under 34 C.F.R. § 668.84.

2.	 FFEL and Pell disbursements. The University disbursed Title IV, HEA program funds
    (FFEL and Pell) to students who were not enrolled in an eligible program at the time of the
    disbursement. As a result, the University had the use of about $3.5 million in federal funds
    every quarter for 2 to 10 days, and the Department may have made unnecessary interest and
    special allowance payments related to these funds. We recommend the Acting COO for FSA
    require the University to develop and implement policies and procedures to provide
    reasonable assurance that funds are not disbursed to students who are not enrolled.

3.	 Exit Counseling. The University could not provide support to show it conducted exit
    counseling for 2 of the 25 students in our sample who had ceased at least half-time study at
    the University. In addition, the University performed exit counseling 11 to 18 months after 3
    other students stopped attending. We recommend the Acting COO for FSA require the
    University to implement its revised policies for exit counseling.
Final Report
ED-OIG/A05G0017                                                                     Page 2 of 31


4.	 Disbursing funds only to students enrolled in an eligible program. The University disbursed
    $1,891.50 of FFEL Program funds to one student enrolled in an ineligible program. We
    recommend the Acting COO for FSA require the University to return the $1,891.50 to the
    lender; identify any other students who received Title IV, HEA program funds for enrollment
    in an ineligible program; and return the funds to the Department or lender.

A draft of this report was provided to the University for review and comment on August 23,
2007. We received the University’s response, including three separate attachments, on
September 25, 2007. In its response, the University partially concurred with Finding No. 1, did
not concur with Finding No. 2, and concurred with Findings Nos. 3 and 4. We summarized the
University’s comments and our responses following each finding. Based on our analysis of the
University’s comments and additional documentation, we made minor revisions to Finding No.
1, Recommendation 1.1, and Recommendation 3.1.

The entire narrative of the University’s comments is included as Enclosure 2. Because of the
voluminous nature of and the inclusion of personally identifiable information (that is,
information protected under the Privacy Act of 1974, 5 U.S.C. § 552a) in the attachments to the
University’s comments, we have not included them in Enclosure 2. Copies of the University’s
attachments, less the personally identifiable information, are available on request.
Final Report
ED-OIG/A05G0017                                                                     Page 3 of 31


                                     BACKGROUND 



Founded in 1993, the University is a proprietary school headquartered in Minneapolis,
Minnesota, and owned by Capella Education Company. According to its web site, the
University provides education to more than 14,500 students in 50 states and over 60 foreign
countries. It is accredited by the Higher Learning Commission and is a member of the North
Central Association of Colleges and Schools. The University provides all of its instruction
online and does not have any “brick and mortar” classroom facilities. The University currently
offers more than 700 online courses that are part of certificate, undergraduate, and graduate
degree programs in more than 80 specialized areas of study. As of January 2006, approximately
83 percent of students were enrolled in graduate or doctoral level programs.

The purpose of the programs authorized by Title IV of the HEA is to provide financial assistance
to students attending eligible postsecondary and higher education institutions. The University
participates in two Title IV, HEA programs: Pell and FFEL. The Pell Program helps financially
needy students meet the cost of their postsecondary education. The FFEL Program enables
students or their parents to receive low-cost loans to pay for the costs of attendance at
postsecondary education schools.

Approximately 70 percent of the University’s revenue is derived from Title IV, HEA program
sources. For the 2002-2003, 2003-2004, and 2004-2005 award years, the University received
Title IV, HEA program funding as follows:

      Award Year               Pell                FFEL                    Total
    2002-2003                   $387,531            $75,268,410            $75,655,941
    2003-2004                   $650,952           $111,865,469           $112,516,421
    2004-2005                 $1,114,374           $138,918,174           $140,032,548
    Totals                    $2,152,857           $326,052,053           $328,204,910
Final Report
ED-OIG/A05G0017                                                                        Page 4 of 31



                                      AUDIT RESULTS 



The University generally complied with the provisions of the law and regulations governing
institutional eligibility, program eligibility, and student eligibility. However, for the 2002-2003
through 2004-2005 award years, the University did not comply with the provisions of the law
and regulations governing the return of Title IV, HEA program funds and FFEL and Pell
disbursements. The University did not return all Title IV, HEA program funds disbursed on
behalf of students who dropped before their first day of class for the payment period (Finding
No. 1); disbursed Title IV, HEA program funds to students who were not enrolled in an eligible
program at the time the disbursement was made (Finding No. 2); did not document that it
performed exit counseling for all students receiving FFEL Program funds during the 2004-2005
award year (Finding No. 3); and disbursed Title IV, HEA program funds to a student who was
enrolled in an ineligible program (Finding No. 4).

For Finding No. 1, the University returned to the Title IV, HEA programs about $588,000 less
than it should have returned. For Finding No. 2, the University had the use of about $3.5 million
in federal funds for 2 to 10 days in every quarter even though it never should have received those
funds, and the Department might have incurred additional interest and special allowance costs
for those FFEL Program funds.

In response to the draft of this report, the University partially concurred with Finding No. 1, did
not concur with Finding No. 2, concurred with Finding No. 3, and concurred with Finding No. 4.
The University did not agree with our understanding of the criteria for Finding No. 1, and it did
not agree with the definition of “disbursed” we used for Finding No. 2. The University’s
response indicated that corrective actions had been taken for Finding No. 1, Finding No. 2, and
Finding No. 3, and that it considered Finding No. 4 to be an isolated occurrence. The corrective
actions included enhanced procedures for identifying students due refunds, improvements to a
pre-disbursement eligibility report, and implementation of a new improved, software system.

After reviewing the University’s comments, we revised Finding No. 1 and Recommendation 1.1,
reducing the number of instances of noncompliance described in Finding No. 1 and reducing the
recommended amount that should be recovered. We also revised Recommendation 3.1 to reflect
the University’s development of revised procedures for exit counseling. We made no other
changes to our findings or recommendations.


FINDING NO. 1 – The University Determined Incorrectly the Amounts to Be
                Returned to the Title IV, HEA Programs

The University did not return all funds disbursed on behalf of students who dropped before their
first day of class for the payment period. The University used the midpoint of the academic
quarter (payment period) as the withdrawal date for all students who left school without
providing official notification to the University (unofficially withdrew). The University used the
midpoint even when it lacked documentation that the student engaged in academic activity
Final Report
ED-OIG/A05G0017                                                                                          Page 5 of 31
during the payment period. By always using the midpoint of the payment period as the student’s
withdrawal date, the University retained approximately 50 percent of the Title IV, HEA program
funds it received on behalf of the students for whom it lacked documentation of academic
activity, even though the University was required to return all Title IV, HEA program funds for
those students.

According to 34 C.F.R. § 668.21

                    (a)(1) If a student officially withdraws, drops out, or is expelled 

           before his or her first day of class of a payment period, all funds paid to 

           the student for that payment period for institutional or noninstitutional 

           costs under the Federal Pell Grant, FSEOG [Federal Supplemental 

           Educational Opportunity Grant], and Federal Perkins Loan programs are 

           an overpayment. 

                    (2) The institution shall return that overpayment to the respective 

           title IV, HEA programs in the amount that the student received from each 

           program. 

                    (b) For purposes of this section, the Secretary considers that a 

           student drops out before his or her first day of class of a payment period if

           the institution is unable to document the student’s attendance at any class 

           during the payment period. 1


For FFEL Program loans, pursuant to 34 C.F.R. § 682.604(b)(2)

                   (i) Except in the case of a late disbursement under paragraph (e) of 

           this section or as provided in paragraph (b)(2)(iii) or (iv) of this section, a 

           school may release the proceeds of any disbursement of a loan only to a 

           student, or a parent in the case of a PLUS loan, if the school determines 

           the student has continuously maintained eligibility in accordance with the 

           provisions of § 682.201 from the beginning of the loan period for which 

           the loan was intended. 

                                           . . . . . . .

                   (iv) If, prior to the transmittal of the proceeds of a disbursement to
           the student, the student temporarily ceases to be enrolled on at least a half-
           time basis, the school may transmit the proceeds of that disbursement and
           any subsequent disbursement to the student if the school subsequently
           determines and documents in the student’s file—
                   (A) That the student has resumed enrollment on at least a half-time
           basis;
                   (B) The student’s revised cost of attendance; and
                   (C) That the student continues to qualify for the entire amount of 

           the loan, notwithstanding any reduction in the student’s cost of attendance 

           caused by the student’s temporary cessation of enrollment on at least a 

           half-time basis. 



1
    All regulations cited are from the July 1, 2004 edition of the Code of Federal Regulations, unless otherwise stated.
Final Report
ED-OIG/A05G0017                                                                                     Page 6 of 31
Also, in accordance with 34 C.F.R. § 682.604(d)(4)

         If the school is unable for any other reason to document that a registered
         student attended school during the period of enrollment for which the loan
         is made, the school must . . . return to the lender—
                 (i) Any loan proceeds credited directly by the school to the 

         student’s account; and 

                 (ii) The amount of payments made directly by the student to the 

         school, to the extent that they do not exceed the amount of any loan 

         proceeds delivered by the school to the student. 


To determine if the University maintained documentation to support student attendance for the
payment period and correctly determined the amount it should have returned to the Title IV,
HEA programs, we reviewed the records for (1) 166 students randomly selected from a list of
225 students shown as unofficial withdrawals during the 2002-2003 award year, (2) 162 students
randomly selected from a list of 221 students shown as unofficial withdrawals during the 2003-
2004 award year, and (3) all 319 students shown as unofficial withdrawals during the 2004-2005
award year. The University did not have evidence to support attendance for the payment period
and incorrectly determined the amount it should have returned to the Title IV, HEA programs for
69, 88, and 232 of the students, respectively. (See Table 1.)

Based on our review, we estimate that the University retained about $588,000 in Title IV, HEA
program funds ($10,000 Pell and $578,000 FFEL) for the 389 students who dropped out of
school before their first day of class for the payment periods during the 2002-2003, 2003-2004,
and 2004-2005 award years.

Table 1
                                                                                                        Total Title
                        Title IV,    Unofficial    Title IV,                  Pell Grant     FFEL        IV, HEA
          Unofficial      HEA       Withdrawals      HEA         Instances      Funds        Funds        Funds
Award Withdrawals       Universe      Tested        Sample        of Non-    Improperly    Improperly   Improperly
 Year     (Universe)    Amount       (Sample)      Amount       compliance    Retained      Retained     Retained
2002-        225        $371,244        166        $276,951          69           $0        $173,556    $173,556*
2003
2003-        221        $231,423         162         $170,968        88         $1,579       $133,117 $134,696**
2004
2004-        319        $351,774         319         $351,774       232         $8,662       $271,583     $280,245
2005
Total        765        $954,441         647         $799,693       389        $10,241       $578,256     $588,497
* We are 90 percent confident that the University retained $173,556 +/- $15,249 in Title IV, HEA funds for the 2002-
2003 award year.
**We are 90 percent confident that the University retained $134,696 +/- $8,791 in Title IV, HEA funds for the 2003-
2004 award year.

The University’s procedures for determining the amount of funds to return to the Title IV, HEA
programs were not adequate. University officials informed us that, to identify unofficial
withdrawals, all faculty members are required to indicate whether a student receiving a failing
grade of “F” was given such a grade due to inadequate academic performance or failure to
participate in the course. If the faculty member indicates that the student failed to participate, the
University determines that the student unofficially withdrew. It is the University’s policy to use
Final Report
ED-OIG/A05G0017                                                                       Page 7 of 31
the midpoint of the payment period as the withdrawal date when determining the amount of Title
IV, HEA program funds to return for all unofficial withdrawals. However, for the students we
tested, whom the University identified as unofficial withdrawals, the University’s documentation
did not show that the students engaged in academic activity during the quarter. Absent evidence
of academic activity, the University should be returning all Title IV, HEA program funds for that
payment period, not calculating a refund using the midpoint of the payment period as the
withdrawal date.

During our audit, the University disagreed with our assertion that its documentation did not
support the students’ attendance. It stated that the documentation it has for students—for
example, a student’s agreement to a faculty expectation sheet, introduction to the teacher or other
students, or general questions about the homework process—was adequate to document
attendance for the purposes of 34 C.F.R. §§ 668.21 and 682.604(d)(4). However, these
documents do not indicate any academic engagement. None of the information we reviewed for
these students indicated that they attended class or engaged in any academic activity for the
purpose of learning its subject.

Recommendations

We recommend the Acting COO for FSA

1.1	 Require the University to review its files and return the amount of Title IV, HEA funds
     improperly retained for students who dropped before their first day of class for the 2002-
     2003, 2003-2004, and 2004-2005 award years. We estimate that the University will need
     to return $10,000 to the Department and $578,000 to lenders.
1.2	 Require the University to review records for students who unofficially dropped out during
     the 2005-2006 and 2006-2007 award years; determine which students did not attend during
     the quarter of the withdrawal; calculate the amount of Title IV, HEA funds the University
     retained but should have returned to the Title IV, HEA programs; and return those amounts
     to the Department and lenders, as appropriate.
1.3	 Require the University to revise its policy for returning Title IV, HEA program funds to
     provide reasonable assurance that it returns all Title IV, HEA program funds for students
     who unofficially withdraw with no documentation of attendance for the payment period.
1.4	 Consider fine proceedings pursuant to 34 C.F.R. § 668.84 because the University failed to
     return the correct amount of Title IV, HEA program funds for all students who unofficially
     withdrew.

University Comments

The University partially agreed with the finding and stated that it had implemented and
established new procedures to reduce the likelihood of the noncompliance in the future. The
University agreed with 203 of 389 instances of noncompliance we found and agreed it
improperly retained $278,883. Based on a review of the Office of Inspector General (OIG)’s
audit documentation, the University divided the instances of noncompliance we identified into
three categories: (1) instances of noncompliance with which the University agreed; (2) instances
for which the University provided additional data, to demonstrate that the University had
complied under the criteria presented in our report (though the University disagreed with our
understanding of the criteria); and (3) instances with which the University disagreed, based on its
Final Report
ED-OIG/A05G0017                                                                                      Page 8 of 31
disagreement with our understanding of the criteria. Table 2 below summarizes the University’s
division of noncompliance into three categories.

Table 2
                                                                                                  Total Title
                                                                                                   IV, HEA
           Students     Title IV, HEA   Students     Title IV, HEA   Students     Title IV, HEA     Funds
Award      Classified       Funds       Classified       Funds       Classified       Funds       Improperly
 Year      as Type 1      Received      as Type 2      Received      as Type 3      Received       Retained
 2002-
 2003          48         $89,987            1           $765             21         $41,623          $89,987
 2003-
 2004          68         $78,914            3          $1,734            20         $21,837          $78,914
 2004-
 2005          87        $109,982          128         $152,710           18         $18,366         $109,982
 Total        203        $278,883          132         $155,209           59         $81,826         $278,883
The University concurs it improperly retained funds for students classified as Type 1, but disagrees that it
improperly retained funds for students classified as Type 2 and Type 3. The amounts shown in the column,
“Total Title IV, HEA Funds Improperly Retained” are actual funding amounts received by the students in our
samples.

The University stated it was their understanding, based on prior communications with the OIG
audit team, that due to time constraints surrounding the draft report, the audit team was not able
to consider and reflect in its draft report all course room activity of all students listed in the work
papers. The University also stated that it was their understanding that the audit team intended to
consider this additional information following receipt of the University’s response to the draft
report. As such, the University included comments as to the activities of each student in the
course room.

The University stated that our report applies a heightened standard of academic engagement
which is not supported by the regulations. Under 34 C.F.R. §§ 668.21 and 682.604(d)(4), a
school is only required to demonstrate that a student attended school during the enrollment
period; the regulations do not include a requirement to demonstrate academic engagement.

The evidence that the University provided is adequate to show that the students attended school.
The University stated

        Students attend classes by posting information to virtual course rooms and
        participating in online class dialogue with faculty and fellow students.
        Demonstrating attendance in this context, however, is not significantly
        different from a bricks and mortar setting. When a student posts his or her
        profile to the course room, poses questions to a faculty member, or agrees
        to a faculty expectation sheet, the student has attended the class every bit
        as much as – if not more than – a student who signs into the first day of
        class at a bricks and mortar institution and otherwise sits silently through
        one or more lectures.

The University believes that procedural changes it implemented in April 2006, to ensure that
students are engaged before funds are delivered, have prevented and will continue to prevent
further instances of the non-compliance with which it agreed, as identified in its first category.
Final Report
ED-OIG/A05G0017                                                                                   Page 9 of 31
OIG Response

Prior to issuing the draft report, we reviewed all available information provided by the
University supporting student attendance for this finding. The University spent considerable
time trying to extract information from its computer systems that would support student
attendance, but was having difficulty obtaining all needed information due to various technical
issues. We informed the University that any additional information supporting student
attendance could be provided in response to the draft report and would be considered prior to
issuance of the final report. The University did provide additional information in response to the
draft report that was not available to us prior to the issuance of the draft report.

Based on the additional information provided by the University, we revised Finding No. 1 and
Recommendation 1.1 to reflect our acceptance of additional documentation for 5 of the 132
students included in the University’s second category. We also accepted additional
documentation to reclassify 4 of the students from the University’s second category to the
University’s third category. However, the University did not provide adequate documentation to
show that the remaining students in the second category attended during the quarter: the
University either provided the same information we reviewed previously, or we were unable to
verify the University’s new information using its course room software.

In our finding, we accepted evidence of students’ submitting assignments, discussing the course
work and/or assignments, and asking questions specific to the course work and/or assignments as
evidence that the online student was academically engaged in course room activity. However,
we do not agree that other documentation provided by the University with its comments—
documentation for students’ agreements to faculty expectation sheets, introductions to the
teachers or other students, or general questions about the homework process—is adequate to
show that students in the University’s third category attended class. These activities, which
occurred after class started, are more consistent with a student’s registration or orientation than
with a student’s attendance. Table 3 summarizes the information for the students we tested.

Table 3
                                                                                                 Total Title
                                                                                                  IV, HEA
             Students      Title IV,       Students      Title IV,   Students       Title IV,      Funds
 Award      Classified HEA Funds Classified HEA Funds Classified HEA Funds                       Improperly
  Year      as Type 1      Received       as Type 2     Received     as Type 3      Received      Retained
  2002-
  2003          48          $89,987            0            $0           21          $41,623      $131,610
  2003-
  2004          68          $78,914            0            $0           20          $21,837      $100,751
  2004-
  2005          87         $109,982          123        $146,699         22          $23,565      $280,246
  Total        203         $278,883          123        $146,699         63          $87,025      $512,607
Note: The amounts shown in the column, “Total Title IV, HEA Funds Improperly Retained” are actual funding
amounts received by the students tested in our samples. The amounts do not include projected amounts for the
2002-2003 and 2003-2004 award years as shown in Table 1.

In its comments, the University said, “[T]o satisfy the ‘attendance requirement,’ a bricks and
mortar institution would thus only have to demonstrate that a student was present in the
classroom.” If a bricks and mortar institution documented a student’s introduction to his or her
Final Report
ED-OIG/A05G0017                                                                                 Page 10 of 31
teacher, an agreement to faculty expectations, or general questions about the homework process,
such documentation would not necessarily be evidence that the student had been present in the
classroom. Being present in a classroom requires a greater commitment by a student to
participate in the learning process, and this greater commitment should be evident in the
documentation of the University’s students’ attendance.

The University’s classes are not conducted within the same structure as traditional classes, and
the same assumptions for traditional classes may not apply to online classes. Each class at the
University has a start date and an end date, and there may be deadlines for homework or project
submissions, but there are typically no specific hours during which the class meets for
instruction. Comments and messages may be posted at any time by a student in the University’s
“online classroom,” but without considering the content of those messages, there is no assurance
that the student has actually attended the class for the purpose of receiving instruction in its
subject.

The University stated that its procedural changes have prevented and will continue to prevent
errors resulting in improper retention of Title IV, HEA program funds from and after the date of
full implementation in the Summer 2006 quarter. Our testing was performed on students who
withdrew prior to the April 2006 implementation of the new modifications. However, the
process described by the University calls for the engagement check to be performed after federal
funds are received. This means that federal funds would still be requested and received for
students who may no longer be attending school. Funds received for students determined to be
ineligible would then need to be returned to the Department and/or FFEL lenders. If the
University would run the eligibility check before requesting federal funds, it would be able to
avoid requesting funds for students who are no longer attending.


FINDING NO. 2 – The University Disbursed Title IV, HEA Program Funds to
                Students Who Were Not Enrolled

The University disbursed Title IV, HEA program funds (FFEL and Pell) to students who were
not enrolled in an eligible program at the time of the disbursement. We reviewed the records2 for
205 randomly selected students for whom the University made Title IV, HEA program
disbursements during the 2002-2003, 2003-2004, and 2004-2005 award years.3 The University
made 27 disbursements of Title IV, HEA program funds to 20 of the 205 students even though
the students stopped attending during a previous payment period, were not enrolled in any
classes for the applicable payment period, and were not charged tuition for the payment period
for which funds were disbursed.

A student is eligible to receive Title IV, HEA program assistance if the student is “a regular
student enrolled, or accepted for enrollment, in an eligible program at an eligible institution.” (34
C.F.R. § 668.32 (a)(1)(i)) To receive a FFEL or Direct Loan Program loan, the student must
attend at least half-time. (34 C.F.R. § 668.32(a)(2))

2
 Student records reviewed included correspondence, return to Title IV calculations, and billing histories.
3
 We reviewed the records for 110 randomly selected students for whom the University made Title IV, HEA
disbursements during the 2004-2005 award year; 55 randomly selected students for the 2003-2004 award year; and
40 randomly selected students for the 2002-2003 award year.
Final Report
ED-OIG/A05G0017                                                                                       Page 11 of 31
As we stated in Finding No. 1, except in the case of a late disbursement, a school may release the
proceeds of any disbursement of a loan if the school determines the student has continuously
maintained eligibility in accordance with the provisions of 34 C.F.R. § 682.201 from the
beginning of the loan period for which the loan was intended. If, prior to the transmittal of the
proceeds of a disbursement to the student, the student temporarily ceases to be enrolled on at
least a half-time basis, the school may transmit the proceeds of that disbursement and any
subsequent disbursement to the student if the school subsequently determines and documents in
the student’s file that the student has resumed enrollment on at least a half-time basis. (34 C.F.R.
§ 682.604(b)(2))

Of the 27 improper disbursements, 7 were for the payment period immediately following the
payment period the student last attended, 12 were for the payment period following one full
payment period of inactivity, 7 were for the payment period following two full payment periods
of inactivity, and 1 was for the payment period following five full payment periods of inactivity.
(See Enclosure 1.) The 27 disbursements totaled $81,018 ($80,343 FFEL and $675 Pell). The
disbursements were made for the Winter 2004 through Spring 2006 payment periods. The
students’ billing histories showed students’ accounts were credited for the amounts of the
disbursements, and the University’s records indicated accounts receivable was credited and cash
debited on the same dates as the disbursements and for the same amounts as the disbursements.
After determining the students were not registered for classes for the payment period, the
University returned the funds within 2 to 10 days of the dates of the disbursements. (See
Enclosure 1.)

Based on the sample results (20 of 205 students), we estimate that about 10 percent4 of all the
disbursements made during the 2002-2003 through 2004-2005 award years should not have been
made because students were not registered for classes for the applicable payment period. The
University earns interest on all funds deposited in its bank account. That interest (referred to as
an allowance by the University’s bank) is used to offset fees charged by the bank to the account.
By receiving Title IV, HEA program funds to which students are not entitled, the University is
earning interest on Title IV, HEA program funds prior to returning the funds to the Department
and FFEL lenders.

During the 2004-2005 award year, the University received about $140 million in Title IV, HEA
program funds. Using our estimate of 10 percent to identify the portion of this amount that
should not have been disbursed because students did not register for classes, the University had
the use of about $3.5 million in federal funds every quarter for 2 to 10 days ($140 million times
10 percent equals $14 million; $14 million divided by 4 quarters equals $3.5 million per quarter).
The Department may have paid interest benefits and special allowance on the improperly
disbursed FFEL Program funds, and the disbursements may have resulted in other unnecessary
payments. For example, because the University did not cancel all future FFEL disbursements
after the borrowers stopped attending, the borrowers might have been treated as if they had
stayed in school, and the dates on which the borrowers entered repayment on their loans might
have been delayed.




4
  The estimated percentage is not based on a statistical projection and, therefore, our sample results might not be
representative of the universe of disbursements.
Final Report
ED-OIG/A05G0017                                                                         Page 12 of 31
The University disbursed Title IV, HEA program funds to students who were not enrolled in an
eligible program at the time of the disbursement, in part, because it implemented a “continuous
enrollment policy.” Under its continuous enrollment policy, the University considers a student
to be enrolled once he or she begins attendance. The University considers the student to be
enrolled until the student officially notifies the University that he or she is ceasing attendance, or
the University drops the student because he or she ceased attending for at least three consecutive
payment periods. The University schedules disbursements of Title IV, HEA program funds for
each of the student’s four payment periods for the award year at the beginning of the student’s
academic year. According to the University’s Director of Financial Aid, if a student stops
attending, the remaining scheduled disbursements are not canceled because the student could
return for a future payment period. The University does not cancel future loan disbursements
because it would have to reinstate the loans if a student were to return.

Insufficient staffing of the University’s financial aid office may have also been a cause for its
making disbursements to students who were not enrolled. In the 2002-2003 and 2003-2004
award years, the financial aid office employed six people. From the 2002-2003 to the 2004-2005
award year, Title IV, HEA program funding increased approximately 85 percent with the student
population increasing almost 117 percent, but the University added only 1 employee to its
financial aid office—a 17 percent increase in staff.

Recommendations

We recommend the Acting COO for FSA require the University to

2.1	 Develop and implement policies and procedures to provide reasonable assurance that funds
     are not disbursed or delivered to students after they have ceased attending.
2.2	 Periodically evaluate the size of its financial aid office staff and ensure that it has sufficient
     staff to administer its Title IV, HEA programs.

University Comments

The University disagreed with this finding, stating that it complied with applicable regulations
and that the disparity between the OIG’s and the University’s position centers on the definition
of “disbursed”.

       The University’s accounting system requires that it associate Title IV 

       funds with a particular student in order to run the eligibility check. A 

       student’s anticipated Title IV disbursement amount is allocated to the 

       student in order to perform the eligibility check, but the corresponding 

       funds are not actually “disbursed” from the Capella’s Federal Funds 

       account to the student. While it may appear on the student’s billing 

       history that the student received Title IV funds, the “credit” is meant to 

       only show that the funds were received so that the eligibility check can be

       run and does not indicate an actual transfer of funds. 


The University claims that each of the 20 students identified in our finding was matriculated in
the University and enrolled in an eligible program, but the University identified each of the 20
students as not having registered for a course in the identified quarter. Therefore, the students
Final Report
ED-OIG/A05G0017                                                                          Page 13 of 31
did not receive Title IV disbursements for such period. For each of these students, the University
electronically received Pell and FFEL funds into its federal funds account, but it determined that
the students were not registered, even though such students were otherwise enrolled in an
eligible program and had completed coursework during a previous academic quarter. The
University asserts that it did not disburse the Pell and FFEL funds from its federal funds account
to the students (i.e., the funds were not credited to any student’s account), the students did not
have access to the funds, and the funds never left the University’s federal funds account. Any
returns of funds were made in accordance with regulations and, therefore, caused no harm to
either the federal government or FFEL lenders.

OIG Response

We did not change our finding or recommendations. The University’s assertion that it did not
disburse funds to students because students did not have access to the funds is without merit.
Under 34 C.F.R. § 668.164(a)(1), a disbursement is made when the student’s account is credited:

       [A]n institution makes a disbursement of title IV, HEA program funds on
       the date that the institution credits a student’s account at the institution or
       pays a student or parent directly with—
               (i) Funds received from the Secretary;
               (ii) Funds received from a lender under the FFEL Programs; or
               (iii) Institutional funds used in advance of receiving title IV, HEA 

       program funds. 


Neither the regulations nor other guidance issued by the Department qualify this date based on
the student’s access to the funds in his or her account.

Additionally, the University’s assertion that it did not disburse funds to students because the
funds never left the University’s federal funds account is without merit. There cannot be a
disbursement from the federal account to the operating account, because the University uses a
single account for both its operating account and federal funds account. All federal funds are
deposited into the operating/federal funds account and remain there until such time as the
University chooses to move the funds.

The University received Pell and FFEL funds for students into its operating/federal funds
account for subsequent disbursement to students, and the students’ billing history reflected the
credit of federal funds to their accounts. Though the University retained control of the federal
funds prior to returning the funds to the Department or FFEL lenders for students later
determined to be ineligible, the University disbursed the funds: it received the funds on behalf of
students and credited the students’ accounts for the amount of the funds received. The
University debited cash and credited accounts receivable for the amount of federal funds
received. University officials informed us the only time cash associated with federal funds
moves is when it is drawn into the operating/federal funds account, when the student receives a
stipend for living expenses, when funds are transferred to the investment account, or when the
funds are returned to the lender. There is no movement of cash when crediting students’
accounts.
Final Report
ED-OIG/A05G0017                                                                       Page 14 of 31
If we were to accept the University’s position that the credits of Title IV, HEA program funds
shown in the student’s billing history do not represent true disbursements of Title IV, HEA
program funds, we would have to question the accuracy and reliability of the billing history as a
record of the student’s financial transactions. It would not be possible for the University, the
Department, or anyone else to distinguish between a credit of Title IV, HEA program funds
made to run the required student eligibility check and a credit of Title IV, HEA program funds
used to pay for the student’s costs of attendance.

The University maintains the students in question were enrolled in eligible programs, but also
agrees that the students were not registered for classes for the quarter. Under the definition of
“enrolled,” in 34 C.F.R. § 668.2, students who are not registered for classes are not considered to
be enrolled:

       Enrolled: The status of a student who . . . [h]as completed the registration
       requirements (except for the payment of tuition and fees) at the institution
       that he or she is attending . . . .


FINDING NO. 3 – The University Did Not Always Maintain Documentation to
                Substantiate Loan Exit Counseling

The University could not provide support to show exit counseling was performed for all students
who received FFEL Program funds and later withdrew from the University. We reviewed the
academic and financial aid records for 50 students randomly selected from a universe of 13,182
who received FFEL Program funds during the 2004-2005 award year. Of those 50 students, 25
ceased at least half-time study at the University. The University could not provide support to
show it conducted exit counseling for 2 of the 25 students. In addition, the University performed
exit counseling 11 to 18 months after 3 other students stopped attending.

Pursuant to 34 C.F.R § 682.604(g)

               (1) A school must ensure that exit counseling is conducted with
       each Stafford loan borrower either in person, by audiovisual presentation,
       or by interactive electronic means. In each case, the school must ensure
       that this counseling is conducted shortly before the student borrower
       ceases at least half-time study at the school. . . . If a student borrower
       withdraws from school without the school’s prior knowledge or fails to
       complete an exit counseling session as required, the school must ensure
       that exit counseling is provided through either interactive electronic means
       or by mailing written counseling materials to the student borrower at the
       student borrower’s last known address within 30 days after learning that
       the student borrower has withdrawn from school or failed to complete the
       exit counseling as required.
                                       . . . . . . .

              (4) The school must maintain documentation substantiating the 

       school’s compliance with this section for each student borrower. 

Final Report
ED-OIG/A05G0017                                                                      Page 15 of 31
Failure to provide exit counseling could increase the risk that students will default on their FFEL
Program loans. Increased FFEL defaults result in additional costs to the Department for default
claims presented by guaranty agencies.

The University’s procedures for loan exit counseling were not adequate. The procedures in
effect during our audit period did not indicate when exit counseling should be performed. Also,
the University’s current Financial Aid Management System (FAM) does not provide reasonable
assurance that the University will maintain evidence of exit counseling. According to the
Financial Aid Director, retrieving data from FAM can be cumbersome due to the lack of system
integration within FAM. The dates entered into this system to reflect exit counseling
performance are award year specific and do not roll forward based on status. The Financial Aid
Director also informed us that the University will be utilizing PeopleSoft as its financial aid
management tool starting in the 2007-2008 award year. The process of notifying students will be
automated, and the new system should allow financial aid to more easily track performance of
exit counseling.

Recommendation

We recommend the Acting COO for FSA require the University to

3.1 Implement its exit counseling policies and procedures to provide reasonable assurance that
    exit counseling will be performed in a timely manner and documented for all students
    receiving FFEL Program funds.

University Comments

The University acknowledges that the exit counseling was performed late in the three cited
instances, but it was nonetheless performed. With respect to the two students for whom exit
counseling cannot be documented, the University considers these instances to be isolated
occurrences.

Starting with the 2007-2008 financial aid year, the University will use PeopleSoft as its financial
aid management tool. This integrated system will allow Financial Aid to more easily track the
performance of exit counseling and the process for notifying students will be automated.

OIG Response

We reviewed the University’s planned work flow process, under which it would use PeopleSoft
software to identify students who require exit counseling. If implemented, the new software
should improve the University’s ability to provide support for exit counseling. Once
implemented, the University should test the new system to ensure that its student borrowers
receive exit counseling in a timely manner and that the exit counseling is documented. We
revised our recommendation for Finding No. 3 to ask for the implementation, rather than the
development and implementation, of the revised procedures for exit counseling.
Final Report
ED-OIG/A05G0017                                                                    Page 16 of 31
FINDING NO. 4 – The University Disbursed FFEL Program Funds to a Student
                Enrolled in an Unapproved Program

According to 34 C.F.R. § 668.32(a)(1)(i), a student is eligible to receive Title IV, HEA program
funds if that student is “a regular student enrolled, or accepted for enrollment, in an eligible
program at an eligible institution.” During the 2004-2005 award year, the University disbursed
$1,891.50 in FFEL Program funds to one student enrolled in an ineligible program.

We reviewed the Department’s Eligibility Certification Approval Report and identified
certificate programs administered by the University that were not approved by the Department.
We reviewed the academic and financial aid records for 22 students randomly selected from a
universe of 180 who received Title IV, HEA program funds during the 2004-2005 award year
while enrolled in an ineligible certificate program. Twenty-one of the 22 students were also
enrolled in an eligible program during the same period they were enrolled in the ineligible
program, thereby earning a Title IV, HEA disbursement for their enrollment in the eligible
program. However, the University disbursed FFEL Program funds to one student enrolled only
in an unapproved program.

Recommendations

We recommend the Acting COO for FSA require the University to

4.1 Return $1,891.50 to the lender.
4.2 Determine if any of the remaining 158 students received Title IV, HEA program funds while
    enrolled in only an ineligible program, and return any improperly disbursed Title IV, HEA
    program funds to the Department and lenders, as appropriate.

University Comments

The University concurred with our finding and considered it an isolated occurrence. The
response states that, as part of an effort to update the University’s Eligibility Certification
Approval Report (the “ECAR”), the University deleted from the ECAR certain programs that are
no longer offered by the University. The program in question, which had been an approved and
eligible program, was one of the programs deleted.

OIG Response

We have not changed our finding or recommendations. The University can support its assertion
that the disbursement was an isolated occurrence by determining if any of the remaining 158
students received Title IV, HEA program funds while enrolled in only an ineligible program.
Such a determination, which would only require identifying the students in the ineligible
program who received Title IV funds, should not be excessively burdensome.
Final Report
ED-OIG/A05G0017                                                                     Page 17 of 31


                                     OTHER MATTERS 



Review of Financial Aid Histories

According to 34 C.F.R. § 668.19(a)

       Before an institution may disburse title IV, HEA program funds to a student who
       previously attended another eligible institution, the institution must use information it
       obtains from the Secretary, through the National Student Loan Data System (NSLDS) or
       its successor system, to determine—
               (1) Whether the student is in default on any title IV, HEA program loan;
               (2) Whether the student owes an overpayment on any title IV, HEA program grant
       or Federal Perkins Loan . . . .

For the 2004-2005 award year, University officials informed us that the University used
worksheets to document the reviews of information obtained through NSLDS. However, the
University did not always maintain those worksheets in the students’ financial aid files because
its policies and procedures did not require the reviews to be documented before disbursing Title
IV, HEA program funds to students. The University began retaining the worksheets for part of
the 2004-2005 award year and all of the 2005-2006 award year. The University’s policy now
requires the worksheets to be documented in the students’ financial aid files before Title IV,
HEA program funds can be disbursed.

Notification That Bank Account Contains Federal Funds

Pursuant to 34 C.F.R. § 668.163(a)(2)

       For each bank or investment account that includes title IV, HEA program funds,
       an institution must clearly identify that title IV, HEA program funds are
       maintained in that account by—
               (i) Including in the name of each account the phrase “Federal Funds”; or
               (ii)(A) Notifying the bank or investment company of the accounts that
       contain title IV, HEA program funds and retaining a record of that notice; and
               (B) Except for a public institution, filing with the appropriate State or
       municipal government entity a UCC-1 statement disclosing that the account
       contains Federal funds and maintaining a copy of that statement.

The University uses a single bank account, and that account is used to receive federal funds.
Although the University notified the bank that the account contained Title IV, HEA program
funds, the account title did not contain the word “Federal,” and the University did not file a
Uniform Commercial Code (UCC)-1 statement with the appropriate State or municipal
government entity disclosing that its bank account contained federal funds. After we brought the
matter to the attention of University officials, the University worked with its bank to revise the
name on the account. The account now properly discloses that it contains federal funds.
Final Report
ED-OIG/A05G0017                                                                      Page 18 of 31


                       OBJECTIVES, SCOPE, AND METHODOLOGY 



The objectives of our audit were to determine whether the University complied with the HEA
and selected regulations governing (1) return of Title IV, HEA program funds; (2) FFEL and Pell
disbursements; (3) institutional eligibility; (4) program eligibility; and (5) student eligibility.

Our initial audit period covered the period July 1, 2004, through June 30, 2005 (2004-2005
award year). Because we identified instances of non-compliance during the 2004-2005 award
year, we expanded our audit for objectives (1) and (2) to include the periods July 1, 2002,
through June 30, 2003 (2002-2003 award year), and July 1, 2003, through June 30, 2004 (2003-
2004 award year).

To achieve our objectives, we performed the following procedures.

1.	 Reviewed selected provisions of the HEA, regulations,5 and FSA guidance applicable to the
    audit objectives.
2.	 Identified the amount of Title IV, HEA program funds the University received on behalf of
    its students during the 2002-2003, 2003-2004, and 2004-2005 award years.
3.	 Reviewed the University’s web site, the Department’s Distance Education Demonstration
    Program web page, various other web sites, and organizational charts for the University and
    Capella Education Company to gain an understanding of the University’s history and
    organization.
4.	 Reviewed Report on Compliance with Specified Requirements Applicable to the SFA
    Programs, for the years ended December 31, 2002, 2003, and 2004, prepared by Virchow
    Krause & Company, LLP Minneapolis, Minnesota.
5.	 Obtained and reviewed evidence, including state authorization, institutional accreditation,
    and Department certification, supporting the University’s institutional eligibility.
6.	 Obtained and reviewed evidence, including program participation agreements, program
    descriptions in catalogs and applications, and program approval by a recognized accrediting
    agency, supporting the eligibility of the University’s programs.
7.	 Reviewed written policies and procedures and interviewed University officials to gain an
    understanding of the University’s internal control structure, policies, procedures, and
    practices applicable to the administration of its Title IV, HEA programs.
8.	 Reviewed the records (academic and financial aid) for 50 randomly selected Pell recipients
    and 50 randomly selected FFEL recipients to determine if students met the general student
    eligibility and program-specific eligibility requirements for the 2004-2005 award year. We
    randomly selected 50 of 801 Pell recipients and 50 of 13,182 FFEL recipients as recorded in
    NSLDS.
9.	 Reviewed the records (academic and financial aid) for 205 randomly selected Title IV, HEA
    program funds recipients to determine if the University disbursed Title IV, HEA program
    funds only to students enrolled in eligible programs during the 2002-2003, 2003-2004, and
    2004-2005 award years. We randomly selected 40 of 6,444 students who received Title IV,

5
    Code of Federal Regulations, July 1, 2002, 2003, and 2004 editions.
Final Report
ED-OIG/A05G0017                                                                                    Page 19 of 31
    HEA program funds during the 2002-2003 award year; 55 of 10,107 students who received
    Title IV, HEA Program funds during the 2003-2004 award year; 55 of 801 students who
    received Pell funds during the 2004-2005 award year; and 55 of 13,182 students who
    received FFEL Program funds during the 2004-2005 award year as recorded in NSLDS.
10. Reviewed the records (correspondence, student transcripts, and billing histories) for 25 of
    159 randomly selected students that NSLDS showed as having leaves of absences during the
    2004-2005 award year and 50 of 151 randomly selected students shown by the University’s
    records as having leaves of absences during the 2004-2005 award year to determine if the
    University had adequate support for students with leaves of absences.
11. Reviewed the records (correspondence, return to Title IV calculations, billing histories, and
    Scholarnet6 records) for 100 randomly selected students7 to determine whether the University
    (a) identified all students for whom funds should have been returned to the Title IV, HEA
    programs; (b) correctly calculated the amount of funds that should have been returned to the
    Title IV, HEA programs; and (c) returned Title IV, HEA program funds in a timely manner.
12. Reviewed the records (return to Title IV calculations, billing histories, transcripts, and
    Course Room links for classroom activity) for (a) 166 students randomly selected from a list
    of 225 students the University’s records showed as unofficially withdrawing from the
    University during the 2002-2003 award year; (b) 162 students randomly selected from a list
    of 221 students the University’s records showed as unofficially withdrawing from the
    University during the 2003-2004 award year; and (c) all 319 students the University’s
    records showed as unofficially withdrawing from the University during the 2004-2005 award
    year. We used stratified random sampling techniques to select our samples for the 2002-2003
    and 2003-2004 award years.8
13. Reviewed additional student attendance information, provided by the University in response
    to the draft report, to determine whether it was sufficient to reduce the number of students we
    originally considered ineligible based on inadequate documentation of attendance.

We relied, in part, on data provided to us by University officials. We used the data for drawing
our samples to test the University’s compliance with the requirements for returning Title IV,
HEA program funds. Specifically, we used the University’s data for unofficial withdrawals and
leaves of absence. The University uses several different computer systems to record enrollment,
application, academic, and financial information for its students. To ensure the reliability of the
data, we used information from the Department’s NSLDS and Common Origination and
Disbursement (COD) system to corroborate data such as student enrollment and Pell and FFEL
financial information provided by the University. We also used hard copy documents provided
by students to the University as a source for corroborating enrollment and financial information

6
  Scholarnet is an online application and loan processing product that allows schools to exchange FFEL and private
loan information with any lender. Scholarnet allows schools to receive guarantee responses and disbursement
information electronically and import and export CommonLine data to and from any CommonLine-compliant
financial aid management system. The University uses Scholarnet and provided us information retrieved from
Scholarnet for verification that refunds were paid.
7
  We randomly selected (1) 25 of 48 students shown in NSLDS as students, other than students who graduated
within 30 days of the loan period begin date, who had stopped attending at least half-time; (2) 25 of 711 students
shown in NSLDS as students who had stopped attending at least half-time and also had evidence of a loan
cancellation; and (3) 50 of 39,274 students from a drop list provided by the University for the 2004-2005 award
year. The drop list contained students who dropped individual classes as well as students who left the University.
Therefore, students could appear on the list more than once during the award year.
8
  Students could withdraw more than once within an award year, thereby increasing their chances of being selected
for our samples.
Final Report
ED-OIG/A05G0017                                                                  Page 20 of 31
provided by the University via its various computer systems. Based on these tests, we concluded
the data the University provided us were sufficiently reliable for our purposes.

We performed our audit work at the University’s office in Minneapolis, Minnesota, and our
Chicago, Illinois, and Kansas City, Missouri, offices from April 2006 through January 2007. We
discussed the results of our audit with University officials on January 10, 2007. Our audit was
performed in accordance with generally accepted government auditing standards appropriate to
the scope of the review described above.
Final Report
ED-OIG/A05G0017                                                                                  Page 21 of 31


   Enclosure 1: Disbursements to Students Who Were Not Enrolled 

                                                                              Number of Fully
                    Last Payment Period in         Payment Period             Inactive Payment   Number of
                    Which Student Was in           Disbursement Was           Periods Since      Days Funds
Student             Attendance                     Made                       Last Attendance    Were Held**
1                   Fall 2004                      Spring 2005                        1                9
2                   Fall 2004                      Spring 2005                        1                3
3*                  Summer 2005                    Winter 2006                        1                3
3*                  Summer 2005                    Spring 2006                        2                5
4                   Fall 2004                      Spring 2005                        1                8
5                   Fall 2004                      Spring 2005                        1                9
6                   Winter 2006                    Spring 2006                        0               10
7                   Summer 2005                    Spring 2006                        2                5
8                   Summer 2005                    Spring 2006                        2                7
9                   Fall 2005                      Spring 2006                        1                5
10                  Summer 2004                    Spring 2005                        2                7
11                  Spring 2005                    Fall 2005                          1                4
12*                 Fall 2005                      Winter 2006                        0                3
12*                 Fall 2005                      Spring 2006                        1                9
13                  Fall 2005                      Winter 2006                        0                8
14*                 Summer 2004                    Winter 2005                        1                5
14*                 Summer 2004                    Spring 2005                        2                3
15*                 Summer 2005                    Winter 2006                        1                8
15*                 Summer 2005                    Spring 2006                        2                5
16                  Winter 2004                    Spring 2004                        0                8
17                  Winter 2006                    Spring 2006                        0                5
18*                 Fall 2004                      Winter 2005                        0                2
18*                 Fall 2004                      Spring 2005                        1                5
19                  Summer 2002                    Winter 2004                        5                3
20*                 Summer 2004                    Fall 2004                          0                5
20*                 Summer 2004                    Winter 2005                        1                3
20*                 Summer 2004                    Spring 2005                        2                5
*Same student had more than one disbursement.
** Number of days from the date of disbursement to the date the funds were returned.
Final Report 

ED-OIG/A05G0017                                        Page 22 of 31 





   Enclosure 2: University Comments on the Draft Audit Report 

Final Report
ED-OIG/A05G0017                                                                                                                                                                                                                                  Page 23 of31




                                                               CAPELLA EDUCATION 

                                                                                            COM               P~"'}: 





                                September 25. 2007



                                MI". Oery Whitman
                                Ac.ting Reglona1Inspf'.ctor Genernl fot Aud~1
                                US I)Clpartment of education, Office of Inspector Ge neral
                                Citigroup Center
                                500. West Madison Stleet. SuRe 1414 

                                Chicago,IL 60061 


                                Re: Draft Audit Repoti Control Numbar ED..QIGJA05G0017

                                Oaa. Mf. Whitman:

                                Enolosed is. Capella's re~pons9 to th0 draft audit reportfo!warded by
                                you to Dr. Michael Oftorman of Cape!la by lalter da tad Aug USl :23, .2007.
                                I wo uk! be remi$s :f I did not ~)(.pless OU r appre ciation for the 'Way in
                                which your staff, and in pl:lrtic:ular Mr. Roedel, kept tiS inforrfIGd about
                                the progress mthe audit and sought our input to botter undlllrslomd our
                                policie!! snd practices.

                                In the enclosure Vie 118\'0 restated from your draft repo/t each finding.
                                We h.we thl7n provided Ca~l~a'5 tesponse to each fi:1ding.

                                I~ you have any questions about our response. please feel free to
                                .contact me electronically at JID!9.tnom@capella.edu. or by telephone at
                                612-&77-5470.

                                 Sincerely,




                                 (-:lregoty 

                                 Vice President. Governmental Affairs 

                                 Gs-naral Couns~1 and Secretaty 





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Final Report
ED-OIG/A05G0017                                                                       Page 24 of 31
FINDING NO. 1 – The University Determined Incorrectly the Amounts to Be Returned to
                the Title IV, HEA Programs

Finding:

The University did not return all funds disbursed on behalf of students who dropped before their
first day of class for the payment period. The University used the midpoint of the academic
quarter (payment period) as the withdrawal date for all students who left school without
providing official notification to the University (unofficially withdrew). The University used the
midpoint even when it lacked documentation that the student engaged in academic activity
during the payment period. By always using the midpoint of the payment period as the student’s
withdrawal date, the University retained approximately 50 percent of the Title IV, HEA program
funds it received on behalf of students for whom it lacked documentation of academic activity,
even though the University was required to return all Title IV, HEA program funds for those
students.

Capella University Response:

Capella University (“Capella” or “the University”) has implemented various procedures to
monitor and identify unofficial withdrawals. The University has also established processes to
secure notification that a student has unofficially withdrawn and to perform Return to Title IV
calculations for such students.

The University’s policies and procedures for unofficial withdrawals require all faculty members
to indicate whether a student receiving a failing grade (i.e. “F”) was given such a grade due to
inadequate academic performance or failure to participate in the course. If the faculty member
indicates that the student failed to participate, Capella determines that the student unofficially
withdrew and performs a Return to Title IV calculation using the midpoint of the payment period
pursuant to 34 C.F.R. 668.22(c)(1)(iii).

In April 2006, the University enhanced its procedures to better ensure student engagement prior
to disbursing Title IV funds to students who are registered for the payment period. Under the
enhanced procedures, Capella monitors course room activity at the beginning of each payment
period, and incident to that monitoring, generates an engagement eligibility report for each Title
IV-eligible student who registered for the payment period. This engagement check is done at the
time federal funds are received into the Capella’s Federal Funds account and prior to disbursing
such funds to the student. If the eligibility engagement report shows that a registered student is
not engaged (i.e. the student has not had any presence in the course room), the University
notifies the student that his or her Title IV disbursement will not be applied to his or her account
and the Title IV funds are returned to their appropriate sources. This engagement eligibility
check is also part of the University’s proactive outreach to its online students. Capella uses the
report to gather information on students who, for one reason or another, are struggling with
participation, and then provides appropriate academic support services.

For the Summer 2006 quarter, the first quarter for which the University fully implemented its
enhanced procedures, the engagement eligibility report process was performed on approximately
9,000 students. The process identified only 75 students who were registered for courses and
otherwise eligible for Title IV funds, but had not engaged in their courses. Of the 75 students
Final Report
ED-OIG/A05G0017                                                                        Page 25 of 31
identified and provided notice by the University, 70 students subsequently engaged in their
courses. The remaining 5 students withdrew from their courses and Capella returned the
pertinent Title IV funds prior to disbursing such funds to the students. The University expects
that it will continue to see very low levels of non-participation at the time Title IV funds are
disbursed, and will continue to also verify engagement at the time grades are provided by faculty
members.

Capella has reviewed the audit team work papers that support the findings contained in Table I
on page 6 of the draft report. Based on that review, the University segments the cited instances
of alleged noncompliance into three categories: (i) those instances for which we agree with the
findings of the OIG; (ii) those instances for which we are providing additional data
demonstrating that the University properly handled each cited instance; and (iii) those instances
for which we respectfully submit that the OIG has applied an unsupported requirement of
“engagement” where pertinent regulations require only “attendance” and, as a result, erroneously
determined that the University incorrectly handled those instances.

Attached hereto as Attachment 1 are the audit team work papers supporting the findings
contained in Table I. Capella has annotated the work papers by inserting as “1,” “2” or “3”
following the last name of each student, and in certain instances, by describing course room
activities of students for whom it is alleged that the University improperly retained Title IV
financial aid amounts. In the cases of those students annotated with a “1,” the University agrees
with the OIG’s finding that Title IV amounts were improperly retained. The University believes
that the procedural changes described in the third and fourth paragraphs of the Response to this
Finding No. 1 have prevented and will continue to prevent errors resulting in improper retention
of Title IV funds, from and after the date of full implementation in the Summer 2006 quarter.

In the cases of those students annotated with a “2,” the University believes the course room
activities of those students for the quarters in question were sufficient to demonstrate attendance,
and even “engagement” as apparently defined by the draft audit report. As a result, Capella
believes that it properly handled Title IV funds in those instances. It is the University’s
understanding, based on prior communications with the OIG audit team, that due to time
constraints surrounding the draft report, the audit team was not able to consider and reflect in its
draft report all course room activity of all students listed in the work papers. It is Capella’s
further understanding that the audit team intended to consider this additional information
following receipt of the University’s response to the draft report. As such, for the students
annotated with a “2,” the University has included on Attachment 1 comments as to the activities
of each student in the course room. The University will provide to the OIG such additional
documentation as may be requested to corroborate the University’s position with respect to these
students.

In the cases of those students annotated with a “3,” the University respectfully disagrees with the
OIG as to the appropriate regulatory standard for determining whether a full or partial return of
Title IV funds is required. As noted by the OIG draft report, 34 C.F.R. § 668.21 provides, in
pertinent part, that “[i]f a student officially withdraws, drops out, or is expelled before his or her
first day of class of a payment period, all funds paid to the student for that payment period. . . are
an overpayment.” And “[f]or purposes of this section, the Secretary considers that a student
drops out before his or her first day of class of a payment period if the institution is unable to
document the student’s attendance at any class during the payment period” (emphasis added).
Final Report
ED-OIG/A05G0017                                                                       Page 26 of 31
Additionally, 34 C.F.R. § 682.604(d)(4) provides, in pertinent part, that “[i]f the school is unable
for any other reason to document that a registered student attended school during the enrollment
period for which the loan is made, the school must . . . return to the lender – (i) Any loan
proceeds credited directly by the school to the student’s account . . .” (emphasis added).

With respect to the group of students annotated with a “3,” the University asserts that it has
correctly applied the pertinent regulatory requirements based on student attendance. For each of
these students, the University is able to document the student’s attendance in the course room,
generally in the early part of the quarter in question. Such documentation was provided to the
audit team. The OIG report, however, rejects the attendance documentation for these students
and instead subjects the University to a heightened standard of “academic engagement,” which
we believe has no basis in pertinent statute or regulation.

In the context of a “traditional” institution with a physical campus (a so-called “bricks and
mortar” institution), attendance is readily discernable from a student’s physical presence in a
classroom. Under both 34 C.F.R. § 668.21 and 34 C.F.R. § 682.604(d)(4), as cited in the draft
report, to satisfy the “attendance requirement,” a bricks and mortar institution would thus only
have to demonstrate that a student was present in the classroom.

As the draft audit report correctly states, Capella is an entirely online institution and therefore
does not maintain physical classrooms. Students attend classes by posting information to virtual
course rooms and participating in online class dialogue with faculty and fellow students.
Demonstrating attendance in this context, however, is not significantly different from a bricks
and mortar setting. When a student posts his or her profile to the course room, poses questions to
a faculty member, or agrees to a faculty expectation sheet, the student has attended the class
every bit as much as – if not more than – a student who signs into the first day of class at a bricks
and mortar institution and otherwise sits silently through one or more lectures. The draft audit
report, however, rejects Capella’s documentation of attendance and imposes a heightened
standard of “academic engagement.”

The University’s concerns with this heightened standard are several. First, as noted above, the
pertinent regulations reference only “attendance” and Capella has provided probative evidence
that students began attending their courses. To require additional evidence of “academic
engagement” changes the standard set forth in both 34 C.F.R. § 668.21 and 34 C.F.R. §
682.604(d)(4). We are aware of no statutory or regulatory basis for this standard, regardless of
whether an institution conducts its courses online or in a bricks and mortar classroom.
Moreover, the University has conformed its financial aid administrative practices to existing
regulatory requirements. The retroactive application of a previously unannounced standard,
through a compliance audit, is fundamentally unfair to institutions under audit, such as Capella in
this case. If there are to be additional, heightened standards imposed upon institutions, we
believe that such new requirements must be promulgated through proper administrative
rulemaking procedures, including appropriate notice and comment.

Second, from a public policy standpoint, the decision as to what constitutes “academic
engagement” can be a highly subjective analysis, thus complicating the coherent and consistent
administration of the Title IV programs. While Capella does not concede that anything more
than attendance is required under the regulations at issue, we would also assert than many of the
students annotated with a “3” were in fact “academically engaged,” for example, by asking
Final Report
ED-OIG/A05G0017                                                                       Page 27 of 31
questions about the homework process and otherwise engaging with professors and fellow
students. The OIG rejects such activities as insufficient to demonstrate engagement, under what
we believe amounts to be an unwritten and ambiguous standard. Perhaps because of these very
concerns about subjectivity, the applicable regulations set forth the more objective and
understandable standard of “attendance,” which the University in turn believes it satisfied with
respect to students annotated with a “3.”

Notably, certain other Department regulations that are unrelated to this Finding No. 1 reference a
form of “academic engagement” standard that is not present in either 34 C.F.R. § 668.21 or 34
C.F.R. § 682.604(d)(4). Under the separate requirements of 34 C.F.R. § 668.22(c)(3), for
example, an institution that is not required to take attendance (such as Capella) may, at its option,
determine a previously enrolled student’s withdrawal date was the student’s last date of
documented attendance at an “academically related activity.” The fact that the Department did
not incorporate a similar “academically related activity” concept into the language of 34 C.F.R. §
668.21 or 34 C.F.R. § 682.604(d)(4), but instead promulgated a standard of “attendance,” is
further evidence in our opinion that the OIG audit report seeks to impose upon Capella a
requirement that is not supported by existing regulations.

To conclude, prior to commencement of this OIG audit, the University was preparing to
implement the procedural modifications described in the third and fourth paragraphs of its
Response to this Finding No. 1, and in fact did implement those modifications beginning in April
2006. Based on subsequent testing done by the University, including the testing described in the
fourth paragraph of the Response to this Finding No. 1, the University believes that errors made
in prior aid years will not reoccur.
Final Report
ED-OIG/A05G0017                                                                       Page 28 of 31
FINDING NO. 2 – The University Disbursed Title IV, HEA Program Funds to Students
                Who Were Not Enrolled

Finding:

The University disbursed Title IV, HEA program funds (FFEL and Pell) to students who were
not enrolled in an eligible program at the time of the disbursement. We reviewed the records for
205 randomly selected students for whom the University made Title IV, HEA program
disbursements during the 2002-2003, 2003-2004, and 2004-2005 award years. The University
made 27 disbursements of Title IV, HEA program funds to 20 of the 205 students even though
the students stopped attending during a previous payment period, were not enrolled in any
classes for the applicable payment period, and were not charged tuition for the payment period
for which funds were disbursed.

Capella University Response:

The University respectfully disagrees with this finding and believes that it complied with
applicable Department of Education regulations. The disparity between the OIG’s apparent
position on this Finding No. 2 and the University’s belief that it is in compliance seems to turn
on the definition of “disbursed.”

Contrary to the audit report’s assertions, Capella did not “disburse” Title IV, HEA funds to
students identified by this Finding No. 2. Each of the 20 pertinent students was matriculated in
the University and enrolled in an eligible program, but was further identified by Capella as not
having registered for a course in the identified quarter and therefore received no Title IV
disbursements for such period. For each of these continuing students, the University
electronically received Pell and FFEL funds into its Federal Funds account for subsequent
disbursement to the student’s account. When Capella determined that the students were not
registered for the pertinent academic quarter, even though such students were otherwise enrolled
in an eligible program and had completed coursework during a previous academic quarter, the
University did not disburse the Pell and FFEL funds from its Federal Funds account to the
students (i.e., the funds were not applied to any student’s account).

The University’s accounting system requires that it associate Title IV funds with a particular
student in order to run the eligibility check. A student’s anticipated Title IV disbursement
amount is allocated to the student in order to perform the eligibility check, but the corresponding
funds are not actually “disbursed” from the Capella’s Federal Funds account to the student.
While it may appear on the student’s billing history that the student received Title IV funds, the
“credit” is meant to only show that the funds were received so that the eligibility check can be
run and does not indicate an actual transfer of funds. If the student is determined to be ineligible,
the funds are returned from the Federal Funds account to either the Department or the applicable
lender, as required under 34 C.F.R. § 668.167(b). None of the pertinent students gained access
to Title IV funds in connection with this process.

Capella constantly monitors its compliance with 34 C.F.R. §§ 668.32(a)(1)(i) and 668.32(a)(2),
and performs monthly internal audits regarding its timely return of FFEL funds to lenders for
matriculated students who fail to attend a particular academic quarter. The University also
utilizes a pre-disbursement eligibility report (Attachment 2 to this Response) in an attempt to
Final Report
ED-OIG/A05G0017                                                                       Page 29 of 31
limit the amount of Title IV funds that are received into its Federal Funds account which may
have to be returned, although any such returns that are necessary are made in accordance with all
applicable regulations and therefore cause no harm to either the federal government or FFEL
lenders. The pre-disbursement eligibility report takes into account the University’s most current
registration data for a pending academic term, along with other Title IV eligibility criteria (e.g.,
academic progress, enrollment status), and compares such data against the pending disbursement
roster provided by Great Lakes Higher Education Corporation, the University’s designated
guaranty agency. The intent of this proactive procedure is to prevent, as much as possible, FFEL
lenders from delivering Title IV funds via electronic transfer into the University’s Federal Funds
account for continuing matriculated students who have not registered for the pending quarter or
have otherwise become ineligible. However, as previously stated, any Title IV funds delivered
by the lenders which cannot be subsequently disbursed to students are returned in full
compliance with 34 C.F.R. § 668.167(b).
Final Report
ED-OIG/A05G0017                                                                     Page 30 of 31
FINDING NO. 3 – The University Did Not Always Maintain Documentation to
                Substantiate Loan Exit Counseling

Finding:

The University could not provide support to show exit counseling was performed for all students
who received FFEL program funds and later withdrew from the University. We reviewed the
academic and financial records for 50 students randomly selected from a universe of 13,182 who
received FFEL program funds during the 2004-2005 award year. Of those 50 students, 25
ceased as least half-time study at the University. The University could not provide support to
show it conducted exit counseling for 2 of the 25 students. In addition, the University performed
exit counseling 11 to 18 months after 3 other students stopped attending.

Capella University Response:

The University does conduct exit counseling for students who receive FFEL funds and who later
withdraw from school. The University currently tracks three types of students who are required
to receive exit counseling information: (1) students who withdraw both officially and
unofficially, (2) students who drop to less than half-time enrollment and are reported to the
Department via the National Student Clearinghouse, and (3) students who are disenrolled for
cause. The University acknowledges that the exit counseling was performed late in the three
cited instances, but it was nonetheless performed. With respect to the two students for whom
exit counseling cannot be documented, the University considers these instances to be isolated
occurrences.

Because of the lack of system integration within the University’s current Financial Aid
Management System, the dates entered into the system to reflect exit counseling performance are
award-year specific and do not roll forward based on status or may be captured in another
system. The University readily acknowledges that retrieving this data from the current Financial
Aid Management System can be cumbersome and may have proven to be difficult during the
audit process. However, starting with the 2007-08 financial aid year, the University will be
utilizing PeopleSoft as its financial aid management tool. This integrated system will allow
Financial Aid to more easily track the performance of exit counseling for all three of the student
populations identified above, and the process of notifying these various populations will be
automated. Included with this Response at Attachment 3 are workflow diagrams outlining the
procedures under the new PeopleSoft financial aid management system.
Final Report
ED-OIG/A05G0017                                                                    Page 31 of 31
FINDING NO. 4 – The University Disbursed FFEL Program Funds to a Student Enrolled
                in an Unapproved Program

Finding:

According to 34 C.F.R. § 668.32(a)(1)(i), a student is eligible to receive Title IV, HEA program
funds if that student is “a regular student enrolled, or accepted for enrollment, in an eligible
program at an eligible institution.” During the 2004-2005 award year, the University disbursed
$1,891.50 in FFEL program funds to one student enrolled in an ineligible program.

Capella University Response:

The University agrees with this Finding. As part of an effort to update the University’s
Eligibility Certification Approval Report (the “ECAR”), the University deleted from the ECAR
certain courses no longer offered by the University. The course in question, which had been an
approved and eligible course, was one of the courses deleted. Unfortunately, after the University
announced that the course was being discontinued, several students requested permission to take
the course, citing hardships if not allowed to complete the course. The University granted those
requests, and one of the students who took the class did so by utilizing FFEL program funds.

The University believes this mistake was an isolated occurrence, caused primarily by the
University’s desire to continuously maintain an accurate ECAR and to provide timely updates
toward that end.