Applicants With Defaulted Student Loans Continue To Receive Financial Aid FINAL AUDIT REPORT Audit Control Number 06-70004 June 1998 Our mission is to promote the efficient U.S. Department of Education and effective use of taxpayer dollars Office of Inspector General in support of American education Dallas, TX UNITED STATES DEPARTMENT OF EDUCATION OFFICE OF INSPECTOR GENERAL 1999 Bryan Street, Suite 2630 DALLAS, TEXAS 75201-6817 214-880-3031 June 23, 1998 MEMORANDUM TO : David Longanecker Assistant Secretary Office of Postsecondary Education FROM : Daniel J. Thaens Western Area Manager Dallas, Texas SUBJECT: Final Audit Report--APPLICANTS WITH DEFAULTED STUDENT LOANS CONTINUE TO RECEIVE FINANCIAL AID Audit Control Number 06-70004 You have been designated primary action official for this report. Please provide the Office of the Chief Financial Officer - Audit Follow-up Branch and the Office of Inspector General - Advisory and Assistance Team, Student Financial Assistance with semiannual reports on corrective actions until all such actions have been completed or continued follow-up is unnecessary. In accordance with the Freedom of Information Act (Public Law 90-23), reports issued by the Office of Inspector General are made available, if requested, to members of the press and general public to the extent information contained therein is not subject to exemptions in the Act. Copies of this audit report have been provided to the offices shown on the distribution list enclosed in the report. We appreciate the cooperation given us during our review. If you have any questions concerning this report, please call me at 214-880-3031. OUR MISSION IS TO ENSURE EQUAL ACCESS TO EDUCATION AND PROMOTE EDUCATION EXCELLENCE THROUGHOUT THE NATION TABLE OF CONTENTS EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 AUDIT RESULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 HOW THE CURRENT PROCESS WORKS . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 GAO REPORTED THE ISSUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 THE DEPARTMENT IDENTIFIED THE ISSUE AND TOOK ACTION . . . . . 3 MORE NEEDS TO BE DONE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 THE DEPARTMENT’S RESPONSE TO DRAFT AUDIT REPORT . . . . . . . . . 6 ADDITIONAL OFFICE OF INSPECTOR GENERAL COMMENTS . . . . . . . . 7 BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 OBJECTIVE, SCOPE, AND METHODOLOGY . . . . . . . . . . . . . . . . . . . . . . . . 8 STATEMENT ON MANAGEMENT CONTROLS . . . . . . . . . . . . . . . . . . . . . . 9 APPENDIX EXECUTIVE SUMMARY Students who are ineligible because they have defaulted loans continue to be awarded student financial aid. Applications for financial aid are not rejected although Department records show an applicant has defaulted on a student loan or received a grant overpayment. Instead, applicants’records are flagged and school officials are responsible for taking the appropriate action. This reliance on schools has not always prevented ineligible students from receiving additional aid. We estimate that 3,278 ineligible students received $11.9 million of award year 1996-97 student financial aid. The Department took action after our audit period to improve controls and has plans to provide additional guidance to schools about how to resolve the eligibility of applicants with flagged records. We are recommending that the Department implement planned additional actions and monitor the effectiveness of these actions on at least an annual basis. If the actions are not effective, we recommend the Department take stronger action to include rejecting applications for financial aid for all applicants who are identified as having a defaulted loan or grant overpayment. The Department agreed that its procedures may have been inadequate in the past and that the primary cause of the problem was inappropriate and incomplete documentation obtained by schools. However, the Department disagreed with our original recommendation to reject flagged applications. Officials stated that rejecting applications is premature given the additional steps taken and planned to address the problem. We changed our recommendations to give the Department additional time to evaluate the effectiveness of its actions. If ineligible students continue to receive aid, the Department should then consider rejecting flagged applications. The Department’s response is summarized following our recommendations and included in total as an appendix to the report. Audit Control Number 06-70004 Page 2 AUDIT RESULTS Our review disclosed that some students in default continued to receive additional student financial aid (SFA). Based on our review of 250 student records at 18 schools visited for the 1994-95 award year, school officials either took no action or the action taken was inadequate to resolve defaulted loan flags for 32 percent of the students. The General Accounting Office (GAO) also reported in July 1995 and the Department determined from a review in September 1995 that this problem existed. The Department made changes that took effect in the 1995-96 award year to enhance the process. However, additional steps are still needed because our review of 400 students for the 1996-97 award year disclosed that 56 students (14 percent) who were in default continued to receive SFA. HOW THE CURRENT Students apply for SFA by submitting a Free Application for PROCESS WORKS Federal Student Aid to the Central Processing System (CPS). The end result of the application process is a Student Aid Report (SAR) which is mailed to the student or an Institutional Student Information Record (ISIR) which a school can obtain electronically. For an otherwise eligible student to receive aid, the school must receive a SAR/ISIR that contains an eligible Expected Family Contribution (EFC) amount. Rejected SARs/ ISIRs do not contain an EFC and cannot be used to award aid. Section 484 of the Higher Education Act of 1965, as amended, states that applicants who default on a student loan or receive a grant overpayment are ineligible for additional financial aid. The CPS uses the National Student Loan Data System (NSLDS) to screen applicants for defaults and overpayments. If an applicant has a default or overpayment according to NSLDS data, a SAR/ISIR is issued which may contain an eligible EFC along with a flag alerting the school that the applicant is not eligible for aid until the default or overpayment issue is resolved. Regulation 34 CFR 668.16 (f) requires schools have a system for determining if students are eligible for SFA. Department guidance in SFA handbooks and Dear Colleague letters require schools to resolve default and overpayment flags by obtaining documentation that shows students have repaid the defaulted loans or taken other Audit Control Number 06-70004 Page 3 appropriate action prior to awarding SFA. If the school determines students are eligible, it can award SFA based on the initial SARs/ISIRs received. Our review at the 18 schools disclosed that 80 (32 percent) of the 250 students whose 1994-95 SAR/ISIR had a loan default or grant overpayment flag were ineligible to receive $96,868 of Pell Grants. We did not determine the amount of loans awarded to the students. The schools either took no action to resolve the flags even though they were made aware of the students’default status prior to disbursing aid, or the actions taken were inadequate. Inadequate actions by the schools included accepting copies of one or more canceled checks or letters received in a prior year as evidence of the applicants’eligibility. GAO REPORTED The GAO issued a report in July 1995, Student Financial Aid: Data Not Fully Utilized to Identify Inappropriately THE ISSUE Awarded Loans and Grants, which concluded that the default screening process was aimed only at identifying ineligible students and had not effectively prevented them from getting additional aid. GAO reported that the number of loans to ineligible students with prior defaults increased from 10,450 in fiscal year 1990 (before the screening) to 12,134 in fiscal year 1993 (after the screening was implemented). The 12,134 loans totaled $33 million (the Pell Grant amount for the students was not identified). GAO noted that Department officials advised that the NSLDS match, which should provide for more timely identification of defaulters, would not prevent all ineligible students from receiving aid because schools would still be responsible for ensuring compliance. THE DEPARTMENT A Department review of defaulters who received new loans in August and September 1995 disclosed that simply IDENTIFIED THE flagging applicant records was not always effective. The ISSUE AND TOOK Department reviewed a sample of 59 students from a ACTION universe of 6,811 loan recipients and found that 12 (20 percent) students with flagged records were ineligible to receive $102,172 in new loans. Five of the 12 ineligible students received $28,900 of loans in the following year. Audit Control Number 06-70004 Page 4 The Department concluded that the institutions did not perform proper verification to ensure that the students were eligible for additional financial aid. Action taken to improve the process included identifying defaulted loans on the SARs/ISIRs and clarifying instructions to schools regarding applicants’eligibility. MORE NEEDS There have been improvements to the screening process since our review of the 1994-95 award year data at the 18 TO BE DONE schools. For example, beginning in 1995-96 the Department began listing defaulted loans on the SAR/ISIR. However, the process has not changed in one important respect. The flagged SAR/ISIR is not rejected, it still may contain a valid EFC and an award can be made without certification that the flagged transaction was resolved. As a result, the Department continued to rely on school officials to prevent ineligible students from receiving additional SFA. Our review of the nationwide sample of 400 recipients from a universe of 23,412 Pell Grant recipients whose 1996-97 SAR/ISIR identified a default or overpayment disclosed that 56 (14 percent) were ineligible. The 23,412 recipients were awarded $108.4 million in SFA, including $40.1 million in Pell Grants and $68.3 million in guaranteed student loans. We estimated 3,278 ineligible recipients received $11.9 million in aid by projecting the sample results to the universe of 23,412 recipients. We are 90 percent confident that the amount of aid that ineligible recipients received would not be less than $8.4 million or more than $15.4 million. Most of the 56 ineligible students were awarded aid because the schools had not taken appropriate action to resolve defaulted loans listed on the students’SARs/ISIRs. We contacted the 54 schools that awarded aid to the 56 ineligible students to determine what actions the schools took to resolve the defaults. Most of the schools provided either no documentation of action taken before aid was awarded (14 students) or the documentation was inadequate (35 students). Inadequately documented actions included resolving only one of several defaulted loans of a student, Audit Control Number 06-70004 Page 5 accepting documentation on other loans that were not in default (e.g., a previously defaulted loan that was paid in full, loans in repayment, etc.), and using financial aid transcripts as a basis for concluding the defaulted loans did not exist. The schools for the remaining 7 students obtained documentation of the students’eligibility as required. The documentation showed the students had regained eligibility by making timely, consecutive payments on their defaulted loans. However, we found the students had become ineligible before the schools awarded the aid because they stopped making payments on their defaulted loans after providing documentation of their eligibility to the schools. The Department implemented a post-screening process in March 1998 that should help prevent these types of errors from occurring in the future. The process includes identifying students who default on loans after their initial applications have been processed and reporting that information to the schools. The schools will have more current information on the default status of students and should be able to make more accurate eligibility determinations. We found that 86 percent of the sample students were eligible even though their records were flagged with a default. The records were flagged because NSLDS data was not current or contained duplicates. Many of the students’defaulted loans were paid in full or consolidated. Duplicates existed for some students because defaulted loans were consolidated with other loans but the NSLDS retained separate records for the defaulted loans. An effort began in December 1996 to reconcile NSLDS data with guarantee agency data to eliminate duplicates and update student loan data on the NSLDS. The effort should result in more accurate NSLDS data. It should also increase the likelihood that flagged SARs/ISIRs are for ineligible applicants. RECOMMENDATIONS We recommend that the Department: Audit Control Number 06-70004 Page 6 1) Implement additional actions planned to prevent students with loan defaults or grant overpayments from receiving additional SFA as discussed below and conduct an analysis at least annually of the effectiveness of the actions. 2) If this analysis discloses that the actions already taken are not effective, the Department should: a) Reject applications for financial aid for all applicants who are identified as having defaulted loans or grant overpayments; b) Establish a procedure for schools to override the rejected applications if they subsequently determine the applicants are eligible; and c) Require schools to provide a certification to the CPS at the time they perform the override that they have obtained documentation that shows the applicant has appropriately resolved the default or overpayment and regained eligibility for SFA. THE DEPARTMENT’S RESPONSE TO DRAFT AUDIT REPORT Department officials agreed that its procedures to prevent students with defaulted loans or grant overpayments from receiving additional financial aid may not have been adequate in the past. The primary cause of the problem was inappropriate and incomplete documentation obtained by schools to determine if students had a defaulted loan or grant overpayment. Department officials disagreed with our recommendation to reject applications which were flagged as having a prior defaulted loan or grant overpayment. The response stated that rejecting applications is premature given the size and nature of the problem and the additional steps already taken and planned to address the issue. Department officials stated that they have recognized the problem and taken decisive action. Actions mentioned included improvements in the accuracy of default data maintained in the NSLDS, implementation of the post-screening process in March 1998, and the issuance of additional guidance to schools. In addition, the response noted that additional guidance for schools was planned that would strongly and precisely emphasize that schools must take proper action to resolve default or overpayment flags before disbursing aid. The Department said the planned guidance would address the immediate cause of the problem, i.e., schools’failure to take appropriate action and to obtain complete and appropriate documentation that a default or overpayment has been resolved. Further, the Department said that it expected these actions to reduce disbursements of additional aid to students with defaults and overpayments and that it would continue to monitor the issue to ensure that adequate progress was being made. Audit Control Number 06-70004 Page 7 Officials also stated that the size of the problem must be kept in perspective when it comes to identifying and implementing appropriate remedies and sanctions. The response noted that only .09 percent of the total 1996-97 Pell Grant recipients were ineligible as a result of a prior loan default or grant overpayment, and that this amount was not materially significant. The full text of the Department’s response is included as an Appendix to this report. ADDITIONAL OFFICE OF INSPECTOR GENERAL COMMENTS We agree that the actions taken and planned by the Department should help prevent students with loan defaults and grant overpayments from receiving additional aid. As a result, we have changed our recommendation regarding rejecting applications to give the Department additional time to evaluate the effectiveness of these actions. We remain concerned, however, that the actions will not eliminate the problem and are recommending that the Department conduct an analysis for each award year to determine the extent to which schools are disbursing aid to students with defaults or overpayments. If this analysis discloses that ineligible students continue to receive aid, the Department should consider rejecting flagged applications. We do not agree with the Department’s assertion that the percent of ineligible recipients was not materially significant. Our estimate of 14 percent or 3,278 ineligible recipients is based on the universe of the 23,412 recipients whose 1996-97 SAR/ISIR identified a default or overpayment. The Department’s calculation of a .09 percent error rate is based on the universe of 3.8 million Pell Grant recipients in the award year. Only 23,412 of the 3.8 million recipients’records had been flagged. Since our report only addressed how schools resolved flagged records, we believe our estimate of a 14 percent error rate is appropriate. In any event, we remain concerned that schools were able to award an estimated $11.9 million of Pell Grants to ineligible students when the Department had information that those students had a defaulted loan. Audit Control Number 06-70004 Page 8 BACKGROUND Applicants are ineligible for SFA if they have defaulted on a federally guaranteed student loan or received a grant overpayment and have not taken appropriate action to resolve the default or overpayment. The CPS uses the NSLDS to screen all financial aid applications for prior defaults and overpayments. Schools are alerted through the SAR/ISIR if the NSLDS finds a default or overpayment. The applications are not rejected. The Department relies on school financial aid administrators (FAAs) to take appropriate steps to determine the applicants’eligibility for SFA. For award year 1996-97, schools awarded $108.4 million of SFA ($40.1 million in Pell Grants and $68.3 million in student loans) to 23,412 students whose SAR/ISIR was flagged because the NSLDS screen identified a prior default or overpayment. OBJECTIVE, SCOPE, AND METHODOLOGY The objective of our audit was to determine if FAAs appropriately determined eligibility when applicants’SARs/ISIRs contained default or overpayment flags. The audit period covered July 1, 1994 through June 30, 1995, for the 250 student records reviewed at the 18 schools and July 1, 1996 through June 30 1997, for the 400 students in our nationwide sample. To accomplish our objective, we judgmentally selected 18 schools that received Pell Grant funding in 11 states (see Appendix for location of schools and review results). The 18 schools included 10 proprietary, 4 private nonprofit, and 4 public institutions. Five of the schools were selected because they had a high percentage of Pell Grant recipients whose records contained default or overpayment flags. The other 13 schools were selected for other reasons, such as type of school, location, etc. Our audit work at the 18 schools included a review of student records for all 250 Pell Grant recipients whose SAR/ISIR contained a default or overpayment flag. We interviewed school staff and reviewed the schools’student financial aid records. Our audit also included using the Pell Grant Recipient Financial Management System to identify 23,412 Pell Grant recipients in 1996-97 whose records were flagged as having a default or overpayment. We used statistical sampling to select 400 students from the 23,412 universe and obtained loan data for the students from the NSLDS. We contacted guaranty agencies, the Department, and schools to determine if these students were eligible to receive Title IV aid in the 1996-97 award year. We also obtained documentation from the 54 schools that they used as justification for awarding aid to the 56 ineligible students. Audit Control Number 06-70004 Page 9 We relied on computer generated data obtained from the CPS, NSLDS, and the Pell Grant Recipient Financial Management System for background data and to identify the nationwide universes of Pell Grant recipients whose records contained default/overpayment flags. The data was also the basis for our selection of the five schools that had a high percent of recipients with default/overpayment flags in award year 1994-95 and the recipients whose SARs/ISIRs contained the flags in both years. Based on our tests of the 250 student records at the 18 schools and review of the 400 sample students, we believe the data was reliable for the purposes of this audit. We reviewed relevant provisions of the Higher Education Act of 1965, as amended, regulations, and guidance the Department provided to schools in SFA Handbooks, Counselor’s Handbooks, Dear Colleague letters, and other documents. We also interviewed Department officials. Fieldwork was performed at the Department’s Office of Postsecondary Education in Washington, D.C., and at the 18 schools between September 1995 and January 1997. Review of the 400 sample students was done between March 1997 and May 1998. Our review was conducted in accordance with generally accepted government auditing standards appropriate to the scope described above. STATEMENT ON MANAGEMENT CONTROLS As part of our review we assessed the system of management controls, policies, procedures, and practices relating to eligibility determinations for applicants whose SARs/ISIRs identified a defaulted loan or grant overpayment. Our assessment was performed to determine the level of control risk for determining the nature, extent, and timing of our substantive tests to accomplish the audit objective. For the purpose of this report, we assessed and classified the significant management controls into the following categories: -- identifying students with a prior defaulted loan or grant overpayment, and -- preventing students with a prior defaulted loan or grant overpayment from receiving additional financial assistance. Because of inherent limitations, a study and evaluation made for the limited purpose described above would not necessarily disclose all material weaknesses in management controls. However, our assessment identified weaknesses which are discussed in the Audit Results section of this report. APPENDIX ANALYSIS OF PELL GRANT RECIPIENTS WHOSE RECORDS HAD A DEFAULT OR OVERPAYMENT FLAG AT 18 SCHOOLS REVIEWED FOR AWARD YEAR 1994-95 SCHOOL RECIPIENTS WITH INELIGIBLE STUDENTS # LOCATION (1) FLAGGED RECORDS (2) NUMBER PERCENT 1 Baton Rouge, LA 22 2 9% 2 Kansas City, KS 25 17 68% 3 New York, NY 28 7 25% 4 East St. Louis, IL 50 26 52% 5 Detroit, MI 17 0 0% 6 Albany, NY 6 1 17% 7 Cahokia, IL 2 0 0% 8 Canton, MA 2 0 0% 9 Milwaukee, WI 3 0 0% 10 Hialeah, FL 2 0 0% 11 Austin, TX 4 0 0% 12 New Orleans, LA 43 22 51% 13 Merrillville, IN 1 0 0% 14 Santurce, PR 9 4 44% 15 Kansas City, KS 8 0 0% 16 Austin, TX 5 0 0% 17 Kansas City, KS 9 0 0% 18 New York, NY 14 1 7% TOTALS 250 80 32% (1) THE FIRST 5 SCHOOLS WERE SELECTED BECAUSE THEY HAD A HIGH PERCENTAGE OF PELL GRANT RECIPIENTS WHOSE RECORDS CONTAINED DEFAULT OR OVERPAYMENT FLAGS. (2) ALL RECIPIENTS WITH FLAGGED RECORDS AT EACH SCHOOL WERE REVIEWED. DISTRIBUTION SCHEDULE Audit Control Number 06-70004 Copies Action Official David A. Longanecker, Assistant Secretary Office of Postsecondary Education Department of Education ROB-3, Room 4082 7th and D Streets, SW Washington, DC 20202-5101 1 Other ED Offices Diane Rogers, Deputy Assistant Secretary for Student Financial Assistance Programs, OPE 1 Linda Paulsen, Service Director Accounting and Financial Management Service, OPE 1 Secretary’s Regional Representative, Region VI 1 OIG Inspector General 1 Deputy Inspector General 1 Assistant Inspector General for Audit 1 Assistant Inspector General for Investigation 1 Assistant Inspector General for Operations Western Area 1 Special Counsel to IG 1 Regional Inspector General for Investigation 1 RIGA Regions 2, 3, 4, 5, 7, 9 6 Others Jamienne S. Studley, General Counsel (A) Office of General Counsel Department of Education 600 Independence Ave. SW Room 5400 Washington, DC 20202-2100 1
Applicants with Defaulted Student Loans Continue to Receive Financial Aid.
Published by the Department of Education, Office of Inspector General on 1998-06-23.
Below is a raw (and likely hideous) rendition of the original report. (PDF)