Fontbonne University Options Program's Administration of Title IV Federal Student Aid Programs FINAL AUDIT REPORT ED-OIG/A07-A0031 September 2002 Our mission is to promote the efficiency, U.S. Department of Education effectiveness, and integrity of the Office of Inspector General Department’s programs and operations. Kansas City, Missouri Office 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, if requested, to members of the press and general public to the extent information contained therein is not subject to exemptions in the Act. Fontbonne University Options Program’s Administration of the Title IV Student Financial Assistance Programs Table of Contents Executive Summary ....................................................................................... 1 Audit Results.................................................................................................. 3 Finding 1 - The University Contracted With an Organization That Received Payments Based on the Number of Students Enrolled in the Options Program.................................................................................. 3 University Comments and OIG Response ................................ 6 Finding 2 - The University's Academic Year for Its Options Program Did Not Provide the Required Instructional Hours........................... 10 University Comments and OIG Response .............................. 13 Background .................................................................................................. 20 Audit Scope & Methodology....................................................................... 21 Statement on Management Controls............................................................ 24 University Comments to Draft Report......................................................... 25 Fontbonne University Options Program’s Administration of the Title IV Student Financial Assistance Programs Executive Summary Fontbonne University (the University) is a private, nonprofit liberal arts institution that offers undergraduate degrees to its students. Our objectives were to determine whether the University complied with the Higher Education Act (HEA) and applicable regulations pertaining to (1) the prohibition against the use of incentive payments for recruiting activities, and (2) course length. We found that: • The University violated the statutory prohibition on the use of incentive payments based on success in securing student enrollments. The University contracted with the Institute for Professional Development (IPD) to provide recruiting and accounting services for students in its Options program, a program for nontraditional students. In accordance with the terms of the contract, IPD received payments based on the number of students enrolled in the Options program. In addition, IPD paid its recruiters based on the number of students enrolled in the program. Because the University did not comply with the HEA and regulations by paying incentives to IPD based on success in securing enrollments, the University must return $10,154,935 in Federal Stafford loan funds, $214,625 in Pell Grant funds, and $89,839 in Supplemental Educational Opportunity Grant (SEOG) funds disbursed on behalf of students who were improperly recruited for its Options program. • The University’s academic year for its Options program did not provide the number of instructional hours required by the HEA and the regulations. The HEA states that an academic year must contain a minimum of 30 weeks of instruction. The regulations for programs not using semester, trimester, or quarter systems require a minimum of 12 hours of instruction per week. These regulations are commonly known as the 12-Hour Rule. The University did not ensure that its Options program provided the required amount of instructional time. Because the University’s academic year did not provide the required number of instructional hours, the University disbursed funds to students who were not eligible for all or part of the funds. We determined that the University ED-OIG A07-A0031 Page 1 improperly disbursed $1,892,066 in Stafford loans, and $90,025 in Pell Grant funds to its students.1 We recommend that the Chief Operating Officer, Federal Student Aid (FSA) require that Fontbonne University: • Confirm that the University has amended and/or terminated its contractual relationship with IPD to eliminate payments based on success in securing student enrollment.2 • Establish an academic year for its Options program that satisfies the requirements of the 12-Hour Rule. • Return $10,459,399 in Title IV funds disbursed to students who were improperly recruited to lenders and the Department. • Return $1,982,091 in Title IV funds that were in excess of the amounts the students were entitled, to lenders and the Department as a result of not being in compliance with the 12-Hour Rule.3 1 The dollars we determined as improperly disbursed are duplicative of the dollars we determined as improperly disbursed in the incentive-based payments finding. 2 Subsequent to our field work, the University informed us that, effective July 2, 2001, it terminated its relationship with IPD. 3 The amounts identified to be returned are duplicative of the amounts to be returned for students who were improperly recruited. Only those amounts not returned as a result of our first finding should be returned to lenders and the Department. ED-OIG A07-A0031 Page 2 Audit Results We determined that the University needed to improve its administration of the Title IV programs. We found that the University violated the statutory prohibition on the use of incentive payments for recruiting based on success in securing enrollments when it paid the Institute for Professional Development a percentage of tuition for all students enrolled in the Options program. In addition, the University’s academic year for its Options program did not provide the required number of instructional hours as defined in the HEA and the regulations. Finding No. 1 – The University Contracted With an Organization That Received Payments Based on the Number of Students Enrolled in the Options Program Fontbonne University entered into a contract with IPD that provided for incentive payments to IPD based on success in securing enrollments for the Options program. In addition, IPD’s recruiters received payments based on their success in enrolling students. The HEA expressly prohibits any type of incentive payment based directly or indirectly on success in securing enrollments. As a result of incentive payments to IPD, the University is liable for all Title IV funds awarded to students in the Options program who were improperly recruited for the period July 1, 1997, through July 2, 2001. Institutions Participating in the Title IV Programs Must Not Provide Payments for Securing Enrollments The HEA, Sections 487(a) and 487(a)(20) require that: In order to be an eligible institution for the purposes of any program authorized under this title, an institution . . . shall . . . enter into a program participation agreement with the Secretary. The agreement shall condition the initial and continuing eligibility of an institution to participate in a program upon compliance with the following requirements: . . . The institution will not provide any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities or in making decisions regarding the award of student financial assistance . . . . ED-OIG A07-A0031 Page 3 The regulations at 34 CFR 668.14(b)(22) codify the statutory prohibition on incentive payments based on securing enrollment. By entering into a program participation agreement, an institution agrees that . . . [it] will not provide, nor contract with any entity that provides, any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities or in making decisions regarding the awarding of student financial assistance. IPD Received Payments Based on Student Enrollment in the Options Program The University entered into a contract with IPD that provided for incentive payments to IPD based on success in securing student enrollments for its Options program. The contract stated that IPD shall: • Recruit students to enroll in the courses of study in the program. • Provide representatives to recruit students for the program covered under this agreement. • Provide an initial average enrollment of sixteen students per learning group on an academic year basis. • Submit to the University a sufficient number of qualified applicants for admission to the programs such that a minimum of 200 and a maximum of 1,500 students are enrolled in courses of study each academic year. • Collect, on behalf of Fontbonne University, all tuition, application fees, book and material fees, and other fees applicable to the programs. • Maintain the official program accounting books and records. Book, material, application, and prior learning assessment fees were remitted in full to the University. Tuition was divided between the parties on a weekly basis -- during the scope of our review, in accordance with the contract, the division was 55 percent to the University and 45 percent to IPD (the first two months of the audit period the split was 50/50). A separate agreement covered general education courses taken by Options students; the split was 60 percent to the University and 40 percent to IPD. The University Violated the HEA by Paying IPD Based on Success in Securing Enrollments for the Options Programs Which Resulted in $10,459,399 Improperly Disbursed Title IV Funds Because the University did not comply with the HEA and regulations by paying incentives to IPD based on success in securing enrollments for its Options program, the University must return all Title IV funds that were disbursed on behalf of students enrolled in the Options program who were improperly recruited. Since the University paid incentives for each student enrolled in the Options program, all students in the Options program were improperly recruited. The University must return all Title IV funding that it disbursed for the Options program for the period July 1, 1997, through ED-OIG A07-A0031 Page 4 July 2, 2001 (the date the contract was terminated). For the audit period July 1, 1997, through June 30, 2000, we determined that the amount of Stafford loan, Pell Grant, and SEOG funds improperly disbursed was $10,154,935, $214,625, and $89,839 respectively. IPD’s Compensation Plans for Recruiters Based Salary and Bonuses on the Number of Students Enrolled in the Options Program Our review of IPD’s compensation plans for fiscal years 1998-2000 disclosed that IPD provided incentives to its recruiters through salary levels that were based on the number of students recruited and enrolled in the programs. Recruiters were assigned a salary within the parameters of performance guidelines (i.e., knowledge of basic policies and procedures, organization and communication skills, and working relationships). An annual goal of at least 100 students was established for each fiscal year, and performance was assessed on a regular basis throughout the year. Formal evaluations were completed biannually and, after the first six months of employment, salary was determined on an annual basis. The recruiter’s success in recruiting students who enrolled in the Options program determined whether the salary was adjusted upward, downward, or remained the same. In addition, the FY 1998 and 1999 compensation plans called for the payment of bonuses, based on the number of students recruited, for recruiters hired prior to September 1, 1998. The bonuses increased as the number of students recruited increased, and ranged from $1,344 for 100-149 students to $29,600 for over 200 students. The FY 1999 plan indicated that recruiters hired on or after September 1, 1998, who achieved 100 or more starts by the end of the fiscal year were entitled to a one-time bonus of $1,500. Recommendations We recommend that the Chief Operating Officer for FSA require the University to: 1.1. Confirm that it has amended and/or terminated4 its present contractual relationship with IPD to eliminate incentive payments based on student enrollment. 1.2. Return to lenders the Stafford loan funds of $10,154,935 disbursed from July 1, 1997 through June 30, 2000. Also, the University should repay the Department the interest and special allowance costs incurred on federally subsidized loans. 1.3. Return to the Department $214,625 of Pell Grant, and $89,839 of SEOG funds disbursed to students enrolled in the Options program during the period July 1, 1997 through June 30, 2000. 1.4 Determine the amounts of Stafford loan, Pell Grant, and SEOG funds improperly disbursed since the end of our audit period and return the funds to lenders and the Department. 4 Subsequent to our field work, the University informed us that, effective July 2, 2001, it terminated its relationship with IPD. ED-OIG A07-A0031 Page 5 University Comments and OIG Response The University did not agree with our conclusions and recommendations. The following is a summary of its comments and our response to the comments. The full text of the University’s comments is enclosed. Fontbonne disagreed with the logic and conclusion of the finding. The University stated that: • Fontbonne's agreement to share revenue with IPD was not based on IPD's success in securing enrollments, but was based on IPD's development and assistance in administering the Options program. • Fontbonne University's payments to IPD were based in part on the volume of services that IPD provided to Fontbonne in connection with the Options program. • IPD's share of the tuition revenue decreased as enrollment increased. • The Department's regulations do not prohibit tuition sharing agreements and the Department has not issued any guidance that would notify Fontbonne that its tuition sharing arrangement with IPD somehow violated federal law. • IPD's recruitment of students was not tantamount to admissions or enrollment since Fontbonne alone was responsible for making decisions respecting admissions in accordance with its admissions criteria. • Fontbonne's Options program maintained an average 76.5 percent completion rate during the audit period. This rate is 20 percent higher than the average completion rate of 4-year institutions. As such, the University's agreement with IPD did not encourage IPD to aggressively recruit or encourage Fontbonne to admit students unqualified to pursue postsecondary education, which is the harm the HEA seeks to avoid. Fontbonne University's Payments To IPD Were Based in Part on the Volume of Services That IPD Provided to Fontbonne in Connection With the Options Program The University stated that nothing in the legislative or regulatory history of the incentive compensation rule supports the notion that the rule was intended to regulate institutions' routine business arrangements with outside vendors where services are contracted for on a licensed basis or based on the volume of services provided, such as the agreement with IPD. The IPD agreement compensated IPD for creating the adult education model, helping Fontbonne establish the Options program, and providing a wide variety of professional services to the University. In reaching its conclusion that the agreement with IPD violated the prohibition against incentive compensation, the OIG ignores the significant non-enrollment related services performed by IPD under the agreement. Instead, the OIG describes the agreement as if it covered only recruitment and student accounting functions. ED-OIG A07-A0031 Page 6 OIG Response The OIG did not overlook or ignore the fact that IPD provided other services to Fontbonne University under the terms of the agreement. In our draft audit report, we acknowledged that IPD provided additional services, such as accounting. Since it was not within the scope of our audit, we did not determine the extent of additional services under the agreement that were actually provided by IPD at the request of Fontbonne and at IPD’s cost. We did verify that the revenue to IPD was generated only by the success in securing enrollments for which IPD was performing recruiting services. This constitutes the statutory violation of providing a commission, bonus, or other incentive payment based directly or indirectly on the success in securing enrollment. While we recognize that IPD logically had to incur expenses to provide the program accounting services, and any additional services that may have been provided by IPD, these expenses are not relevant in determining whether the structure of the revenue allocation is a violation of the HEA. No compensation was to be provided to IPD unless IPD was successful in recruiting and securing student enrollment. The agreement also included a minimum enrollment guarantee that, if not achieved, would result in a reduction in revenue to be allocated to IPD, despite other services that might have been provided. This further emphasizes that the revenue stream is completely generated by, and dependent on, student enrollment. Fontbonne does not dispute that the payments it made to IPD were based on a percentage of the tuition and fees paid by students enrolled in the Options program. Fontbonne likewise does not dispute that IPD was responsible for recruiting students. Nor does Fontbonne dispute that some portion of the amount it paid to IPD was directly related to IPD's success in recruiting students for enrollment in the Options program. Our audit report did not focus on what other services may have been provided by IPD because once IPD became responsible for recruiting students, even among other activities, and received compensation from Fontbonne based on the number of students enrolled in the program, Fontbonne was in violation of the HEA. The HEA at § 487(a)(20) states: The institution will not provide any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting . . . . [Emphasis added.] Once recruiting was added to the services to be provided under the contract, compensation based on enrollment was no longer permitted. IPD had responsibility for recruiting students for enrollment, and was paid under the contract only on the basis of its success in recruiting students for enrollment regardless of what other services it may have been providing. Whether or not the revenue allocation was intended to provide compensation for other services is not relevant since the allocation violates the law. ED-OIG A07-A0031 Page 7 The IPD Agreement Provided That IPD Received Decreasing Percentages of Revenues as More Students Enrolled in the Options Program The University stated that the declining percentages of revenue confirm that the revenue allocation is apparently tied at least in part to IPD's cost of providing various services which, due to economy of scale, presumably rise in smaller increments as the Options program's student population reaches certain threshold levels. As the number of Options students increased, IPD would be able to perform many of its contractual responsibilities at a lower per-capita cost, enabling it to share such savings with the University. If the allocation of revenue was intended to pay IPD solely for recruiting and enrollment services, the IPD agreement would not have provided for a decreasing percentage share. OIG Response The reduction in the incentive percentage upon reaching certain enrollment levels does not negate the conclusion that the revenue allocation (at whatever percentage) is an improper incentive. The incentive does not become proper by being reduced below a certain percentage amount. Regardless of the percentage amount, IPD was paid additional compensation directly tied to each additional enrollment. The Incentive Compensation Rule Does Not Prohibit Tuition Sharing Agreements. The OIG Has No Legal Authority for Using the Incentive Compensation Rule as a Basis for Regulating Legitimate Business Transactions Unrelated to Enrollment Services The University stated that the OIG's effort to clarify existing law by assessing a liability against Fontbonne based on the OIG's "clarified" interpretation of the law violates Fontbonne's due process rights because the University did not have adequate notice that its conduct would be deemed prohibited. Further, such action is outside the scope of the OIG authority because it is not within the OIG's authority to establish Department of Education policy. The OIG's role is limited to enforcing existing law as written and interpreted by the Department. The OIG is pursuing its interpretation of the incentive compensation rule despite the Department's apparent disagreement with that interpretation. The draft audit report cites no statutory, regulatory or nonregulatory guidance, or other legal authority to support the proposition that the tuition sharing arrangement violated the incentive compensation rule. The University did not know, and could not have known, that the allocation of revenue in the IPD agreement would be construed as a violation of the incentive compensation rule because no such pronouncement or interpretation had ever been published and disseminated to Title IV- participating institutions. OIG Response Our audit objective (clearly stated to Fontbonne and in our workpapers) was to determine compliance with the HEA and the regulations governing incentive payments, not to ED-OIG A07-A0031 Page 8 clarify or interpret existing law. The HEA does not excuse or permit incentive payments for recruiting activities depending on the type of contractual arrangement that creates them. Any incentive payment based directly or indirectly on success in securing enrollment is prohibited. The contract with IPD included recruiting activities with compensation determined by IPD's success in recruiting students for enrollment, on a per student basis. The HEA prohibition (§ 487(a)(20)) on incentive payments is clear. The institution will not provide any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting . . . . [Emphasis added.] The University signed a program participation agreement (PPA) committing it to comply with the HEA and regulations. The contract clearly indicated that IPD was to be an entity engaged in student recruiting on behalf of the University. The contract also clearly showed that compensation to IPD was a percentage of the tuition revenue based on IPD’s success in recruiting students for enrollment. IPD Recruiter Salaries Do Not Violate the Prohibition Against Incentive Compensation The University stated that it was unable to respond directly because it was not aware of IPD's compensation plans and had no involvement with IPD's internal payroll or salary structure. Because the subject of IPD's internal compensation structure was within the exclusive domain of IPD, the University provided comments prepared by IPD to address the issue of recruiter salaries. IPD stated that its compensation plans based recruiter salaries on factors or qualities that are not solely related to success in securing enrollments. It also stated that the prohibition in §487(a)(20) did not extend to salaries. Even if salaries were included, IPD stated that salaries could be based on merit or success in securing enrollment as long as enrollment was not the sole factor. OIG Response Contrary to IPD’s representation, the compensation plan we reviewed did not include factors other than enrollment to adjust recruiter salaries. According to the compensation plan, recruiters’ salary and bonuses were determined annually by how many students they enrolled in the programs. Annual salary and bonuses would increase, decrease, or remain the same in accordance with predetermined tables that directly tied students enrolled to particular salary and bonus amounts. The salary and bonus tables did not include factors other than enrollment. The requirements of § 487(a)(20) cannot be avoided by labeling improper incentive compensation as a salary. ED-OIG A07-A0031 Page 9 The OIG’s Recommendation to Disallow All Title IV Funds Received by the University for Options Program Students is Unwarranted and Is Inconsistent With Applicable Law and Regulations The University stated that no basis exists to support that a violation of any of the innumerable PPA requirements warrants such an extreme sanction as a wholesale disallowance of all Title IV funds. OIG Response The University incorrectly characterized our recommendation for monetary recovery as a sanction. We are not proposing that the University be fined. We are recommending that the Department recover funds disbursed in violation of the HEA. Finding No. 2 – The University’s Academic Year for Its Options Program Did Not Provide the Required Number of Instructional Hours We found that the University did not establish and implement adequate management controls to support the number of instructional hours to meet the statutory definition of an academic year for its Options program. The University disbursed Title IV funds to students who were not eligible for all or part of the funds. We determined that the University improperly disbursed $1,892,066 in Stafford loan funds, and $90,025 in Pell Grant program funds to its Options students.5 Nonterm Institutions Must Provide a Minimum of 360 Hours of Instructional Time in an Academic Year Section 481(a)(2) of the HEA states that the term academic year shall: [R]equire a minimum of 30 weeks of instructional time, and, with respect to an undergraduate course of study, shall require that during such minimum period of instructional time a full-time student is expected to complete at least 24 semester or trimester hours or 36 quarter hours at an institution that measures program length in credit hours . . . . The regulations at 34 CFR § 668.2(b) clarify what constitutes a week of instructional time. [T]he Secretary considers a week of instructional time to be any week in which at least one day of regularly scheduled instruction, examinations, or preparation for examinations occurs . . . . For an educational program using 5 The dollars we determined as improperly disbursed are duplicative of the dollars we determined as improperly disbursed in the incentive-based payments finding. ED-OIG A07-A0031 Page 10 credit hours but not using a semester, trimester, or quarter system, the Secretary considers a week of instructional time to be any week in which at least 12 hours of regularly scheduled instruction, examinations, or preparation for examinations occurs . . . . These regulations, commonly known as the 12-Hour Rule, require the equivalent of 360 instructional hours per academic year (12 hours per week for 30 weeks). Institutions were required to comply with the 12-Hour Rule as of July 1, 1995. In the preamble of the Federal Register dated November 29, 1994, the Secretary explained that an institution with a program that meets less frequently than 12 hours per week would have to meet for a sufficient number of weeks to result in the required instructional hours. For example, if an institution decided to establish an academic year for a program with classes that met for 10 hours per week, the classes would need to be held for 36 weeks to result in 360 hours. The University measured its Options educational program in credit hours, but did not use a semester, trimester, or quarter system. The Options program consisted of a series of courses for which a student generally received three credit hours per course. The University defined its academic year as 24 credit hours in 45 weeks. To comply with the 12-Hour Rule, the University needed to provide 8 hours of instruction per week for each week in its 45-week academic year to equal 360 hours per year. The University Did Not Have Adequate Management Controls to Ensure That Students Received the Required 360 Hours of Instruction For Each Academic Year Management controls are the policies and procedures adopted and implemented by an organization to ensure that it meets its goals which, as applicable to this situation, are compliance with laws and regulations. According to the Options student handbook, students were required to meet for four hours per week in regular classes, and an additional four hours per week in study groups. The University counted the study group time for purposes of the 12-Hour Rule. We determined that the University did not establish and implement management controls to ensure that study group meetings were regularly scheduled and occurred. We reviewed the University’s policies applicable to the Options program. It was the University’s policy that an instructor be present at regular classes, take attendance, and forward attendance records to the Options office at the end of each class. As stated in the faculty and student handbooks, any absence (including arriving late and leaving early) from a class resulted in a loss of class participation points which factored into the final grade determination (this was not at the discretion of the faculty member). If a student missed more than 50 percent of the classes, the student received a failing grade. The University did not apply these policies to study groups. In addition, the University did ED-OIG A07-A0031 Page 11 not monitor the location of study groups and, according to the Director of Faculty, it usually was not aware of the meeting dates and times.6 We statistically selected a sample of 60 student/class combinations from a universe of 12,766 unique student/class combinations. A student/class combination is defined as an Options student and all the study group hours required for each class taken by that student during our audit period. We found that the University could not provide evidence that the required number of study group hours were regularly scheduled and occurred for any of the required hours in our sample. From our sample results, we estimate that the University had no statistically significant support that study group hours were scheduled and occurred. Based on review of the University’s written policies and procedures, review of study group records, and interviews with University officials, we determined that the University did not provide adequate assurance that study groups were scheduled and occurred to meet the requirements of the 12-Hour Rule. Failing to Comply With the 12-Hour Rule Resulted in the University Improperly Disbursing $1,982,091 of Title IV Funds To Its Options Students Because the University did not ensure that study group meetings were regularly scheduled and occurred as required, the meetings do not qualify for inclusion in the 12- Hour Rule calculation. As a result, the University-defined academic year of 45 weeks only provided 180 hours of the required minimum of 360 hours of instructional time (four hours of instruction per week for 45 weeks equals 180 hours of classroom hours). In order to meet the 360-hour requirement, the University’s academic year would need to be 90 weeks in length. By using an academic year of 45 weeks rather than 90 weeks for awarding Title IV funds, the University disbursed amounts to students that exceeded the maximum amounts for an academic year allowed under the Stafford loan and Pell Grant programs. We determined that the University improperly disbursed $1,982,091 of Title IV funds to Options students. The students included in this amount had Stafford loan and Pell Grant disbursements during our audit period July 1, 1997, through June 30, 2000. • Stafford Loan Limits. Title 34 CFR § 682.603(d) stipulates that an institution may not certify a loan application that would result in a borrower exceeding the maximum annual loan amounts specified in 34 CFR § 682.204. We determined that $1,892,066 in Stafford loan disbursements exceeded the annual loan limits. • Pell Grant Maximum. Title 34 CFR § 690.62(a) specifies that the amount of a student’s Pell Grant for an academic year is based upon schedules published by the Secretary for each award year. The payment schedule lists the maximum amount a student could receive during a full 6 Subsequent to our audit period, the University adopted policies and procedures for students to maintain study group attendance records (including meeting locations) and submit them weekly to the faculty member. The faculty member was required to monitor adherence to the 50 percent attendance requirement. ED-OIG A07-A0031 Page 12 academic year. We determined that $90,025 in Pell Grant disbursements exceeded the maximum amount allowed. Institutions were required to comply with the 12-Hour Rule as of July 1, 1995. Because the University’s academic year for its Options program did not meet the requirements of the 12-Hour Rule, the University has improperly disbursed Title IV funds for students for Stafford loan and Pell Grants awarded during the period July 1, 1997 through June 30, 2000. Recommendations We recommend that the Chief Operating Officer, FSA require the University to: 2.1. Immediately develop an academic year for its Options program that satisfies the requirements of the 12-Hour Rule as a condition for continued participation in Title IV programs. 2.2. Return to lenders the Stafford loan funds disbursed that exceeded the loan limits for an academic year. We determined that the amount was $1,892,066 for students who had loans with beginning dates between July 1, 1997 through June 30, 2000. Also, the University should repay the Department the interest and special allowance costs incurred on federally subsidized loans. 2.3. Return the Pell Grant funds disbursed to students that exceeded the allowable award for an academic year. We determined that the amount was $90,025 for students who had Pell Grants with grant periods during July 1, 1997, through June 30, 2000. NOTE: The amounts identified to be returned in this finding are duplicative of the amounts to be returned for students who were improperly recruited. Only those amounts not returned as a result of our first finding should be returned to lenders and the Department. University Comments and OIG Response The University did not agree with our conclusions and recommendations. The following is a summary of the University's comments and our response to the comments. The full text of the University's comments is enclosed. In summary, the University stated that: • The law and the regulations do not define regularly scheduled instruction, nor has ED issued any guidance respecting the definition of regularly scheduled instruction. ED-OIG A07-A0031 Page 13 • The University had adequately documented its compliance with the 12-Hour Rule. • Fontbonne is not required to produce attendance records of study group meetings. • There is no statutory or regulatory basis for the OIG's requirement that the University "ensure that study group meetings were taking place" through the presence of an instructor. • Fontbonne was not required to control where its study groups met. • Fontbonne substantially complied with a rule that even the Department has labeled "unworkable". • The recommended liability is based on an erroneous methodology and excludes significant amounts of time that count toward compliance with the 12-Hour Rule. • Additional hours spent by students in preparation for examinations are includable under the 12-Hour Rule. The Law and the Regulations Do Not Define Regularly Scheduled Instruction, Nor Has ED Issued Any Guidance Respecting the Definition of Regularly Scheduled Instruction The University stated that the OIG reached its conclusion that Fontbonne did not comply with the 12-Hour Rule based on its erroneous assumption that Fontbonne is required to exercise an undue amount of control over the instructional process and take attendance at each instance of instruction. The law permits an institution to count as a week of instruction any week in which it provides at least 12 hours of regularly scheduled instruction. The regulations do not define "regularly scheduled instruction" except to exclude "periods of orientation, counseling, vacation, or other activity not related to class preparation or examination". OIG Response We determined that the University did not establish and implement adequate internal controls to ensure that study group meetings were actually scheduled and occurred as required by the University. On August 10, 2000, the Department issued a Notice of Proposed Rulemaking (NPRM) concerning, among other items, changes to the 12-Hour Rule. In the NPRM, the Department stated, “[i]t was never intended that homework should count as instructional time in determining whether a program meets the definition of an academic year, since the 12-hour rule was designed to quantify the in-class component of an academic program.” The University Adequately Documented Its Compliance With the 12-Hour Rule The University stated that its handbooks required students to meet in study groups at an agreed-upon location for four hours per week of instructional activities. The student handbook stated that study groups function as mutual support mechanisms ED-OIG A07-A0031 Page 14 through which students can learn from the professional expertise of their peers. The handbook also stated that it is essential that study groups meet outside of the required class time for at least four hours to discuss and prepare assignments and share learning resources. Students were clearly on notice that study groups were a required instructional activity, study groups were to meet four hours a week, and students would be graded in part based on their study group performance. The University stated that the faculty handbook clearly supported its position that the study group meetings constituted regularly scheduled instruction. Individual professors controlled what materials the groups were to cover in their meetings and the product the students were to arrive at by the conclusion of the meeting. The faculty handbook also stated that the faculty member is responsible for monitoring the study group performance and identified two forms to be used for this purpose. OIG Response Although the faculty handbook identified various monitoring activities that the faculty must perform, we determined that the University did not establish and implement adequate internal controls to ensure that study group meetings were actually scheduled and occurred as required by the University. Contrary to the University's comments, we did not conclude that the study groups did not qualify as "regularly scheduled instruction". On August 10, 2000, the Department issued a Notice of Proposed Rulemaking (NPRM) concerning, among other items, changes to the 12-Hour Rule. In the NPRM, the Department stated, “[i]t was never intended that homework should count as instructional time in determining whether a program meets the definition of an academic year, since the 12-hour rule was designed to quantify the in-class component of an academic program.” Based on our review of the University's controls, we concluded that the University did not provide sufficient evidence to support that the study groups were in fact regularly scheduled and occurred. Fontbonne Is Not Required To Produce Attendance Records of Study Group Meetings The University stated that it strongly encouraged attendance at study group meetings (despite the lack of a legal requirement) by telling students that participation was mandatory and students would be graded based on performance and attendance. Fontbonne was able to produce some attendance records (for calendar year 1999)7 as one or two professors maintained records that they were not required to maintain under law or University policy. These limited records (i.e., the weekly study group report) demonstrated that students generally attended their study group sessions for the requisite period of time. There is no basis for assuming that additional records would show a contrary trend. Although Fontbonne University had no duty to maintain attendance records during the relevant period and encouraged its instructors to maintain such records only while the potential for a grade appeal existed, the weekly study group reports 7 In Section III.D of its response to our audit report, Fontbonne stated that "Because these forms address the concerns the OIG raised respecting faculty confirmation of study group attendance, there should be no liability associated with the period in which Fontbonne employed the weekly study group reports." ED-OIG A07-A0031 Page 15 contradict the OIG's assertion that Fontbonne did not ensure that study group sessions occurred on a regular basis. OIG Response We are not attempting to establish an attendance requirement. The regulations at 34 CFR § 668.24(a)(3) state: (a) An institution shall establish and maintain on a current basis, any application for title IV, HEA program funds and program records that document – (3) Its administration of the title IV, HEA programs in accordance with all applicable requirements; … It is incumbent on the University to demonstrate that it is in compliance with the 12-Hour Rule. We conducted two sample reviews of study group records (which included calendar year 1999) and requested that the University provide us with available documentation to support that meetings were scheduled and occurred. During our initial work to obtain an understanding of internal controls, we judgmentally selected two study groups to review. Fontbonne provided us with weekly study group reports that documented all of the required 96 individual student study group hours for one study group in one course. The University provided no weekly study group reports for other study groups in that course. Subsequently, we statistically selected 60 student/class combinations to review. Fontbonne did not provide any documentation for the required individual student study group hours in this sample. As the documentation for 96 hours is statistically insignificant (.0003 of the 315,580 individual student study group hours in the total population), it had no impact on our conclusion that the University was not in compliance with the 12-Hour Rule. To address the University's statement that the weekly study group reports maintained by two instructors demonstrated that the students attended their study group sessions, we examined the reports for documentation. As the reports were submitted for groups and the composition of the groups may have changed during the courses, our analysis was based on required group hours, not individual student study group hours. The documentation maintained by the two instructors for calendar year 1999 was for eight courses (excluding the study group identified above) and included 36 study groups. 43 percent of the required hours were not documented. In addition, we found instances of groups not meeting for the required four hours; starting times listed with no ending times; unspecified meeting dates; and meetings that took place by faxes, emails, and phone calls, with no times specified. Review of the additional study group weekly reports did not affect our conclusion that Fontbonne was not in compliance with the 12-Hour Rule. ED-OIG A07-A0031 Page 16 There is No Statutory or Regulatory Basis for the OIG's Requirement That the University "Ensure That Study Group Meetings Were Taking Place" Through the Presence of an Instructor The University stated that the draft report suggests that the study group meetings did not constitute regularly scheduled instruction because no instructor was present at the meetings. There is no requirement that a professor must be present in the room for regularly scheduled instruction to occur OIG Response Our determination that an instructor was not present at study group meetings was a result of our review of the University’s overall internal control over study groups. We did not state that an instructor must be present for a study group to qualify as instruction. If an instructor had been present at study group meetings, we would have considered this as evidence of a strong control. Fontbonne Was Not Required to Control Where Its Study Groups Met The University stated that the OIG suggests that the study group meetings did not constitute regularly scheduled instruction because the University did not control the meeting place. The OIG does not cite any statute, regulation, or ED guidance to support its assertion. OIG Response Our audit report did not state that the study team meetings must be held at locations controlled by the University. During our review, we considered the University’s monitoring of study group locations as one possible element of the University’s internal control system, and we determined that this control was weak because the University was generally not aware of where study group meetings were held. Fontbonne Substantially Complied With a Rule That Even the Department Has Labeled "Unworkable" The University stated that the underlying basis for the 12-Hour Rule and its continued applicability to the Title IV programs are presently in serious doubt, particularly as applied to nontraditional educational programs such as the University's Options Program. The HEA requires a minimum of 30 weeks of instructional time; however, the 12-hour per week requirement was added by regulation and therefore does not have any statutory basis. The recently introduced Internet Equity and Education Act of 2001 effectively eliminates the 12-Hour Rule. The Department most recently expressed its lack of confidence in the 12-Hour Rule as a meaningful measure of quality instruction in the final negotiated rulemaking sessions held in April 2002. ED-OIG A07-A0031 Page 17 OIG Response The University was required to comply with the HEA and the regulations in effect during our audit period. The 12-Hour Rule was a regulatory complement to the statutory definition of an academic year, and the University acknowledged it was required to comply with it. As with any other regulation, the University must be able to document that it is in compliance. Accordingly, the University must be able to document that it scheduled and provided 360 hours of instruction for full-time students. The OIG's Calculation of Liability Does Not Give Appropriate Credit for Time Spent in Traditional Courses The University stated that the procedure the OIG used to calculate the liability is flawed because the OIG's formula misstates the number of hours of instruction claimed by Fontbonne when packaging student financial aid awards. A majority of Options students supplemented their schedule with "traditional" classes. The OIG correctly recognized that these students attended an increased number of hours of regularly scheduled instruction through these supplemental classes but did not properly account for the additional instructional hours in its liability calculation. Fontbonne disagreed with the assumption of 12.5 hours of instruction per credit hour and instead believed that the OIG should have assigned 15 instructional hours per credit hour, since under the regulatory definition of an academic year, traditional classes are assumed to meet one hour per week per credit hour and Fontbonne's traditional semesters are 15 weeks in duration. It was incorrect to include in the denominator of the formula used to determine the allowable Pell funds the number of "traditional" instructional hours the student completed because Fontbonne did not in fact claim these additional hours in establishing its academic year or awarding Title IV funds. OIG Response The associate director of financial aid informed us that a three-credit-hour traditional course consisted of 37.5 instructional hours. We divided the 37.5 by three to arrive at the 12.5 hours of instruction per credit hour. The preliminary recommended Pell liability in the draft report was obtained by using the actual Options hours plus traditional hours in the denominator of the formula. Subsequently, we determined that the denominator should be a nonvariable 360 hours, as this is the number of instructional hours in the school's definition of an academic year for the Options program. As a result, we reduced the recommended liability by $399. Additional Hours Spent by Students in Preparation for Examinations Are Includable Under the 12-Hour Rule The University stated that some Options courses utilize traditional examinations, in addition to the study group presentations and other graded activities. The audit report ignores the additional hours spent by students in those courses preparing for examinations, although the 12-Hour Rule explicitly permits time spent in "preparation for ED-OIG A07-A0031 Page 18 examinations" to be counted towards compliance. Because there is no requirement for supervision of the exam period, any calculation under the 12-Hour Rule must presume, by the simple fact that the exams occurred, that students in those courses were expected to spend, and did spend, additional time preparing for exams. OIG Response The University defined its academic year as consisting of a minimum of four hours per week in classroom workshops, and four hours per week in study group meetings. If individual students spent additional time in preparation for examinations or homework- type activities, it would not be relevant to the University’s compliance with the 12-Hour Rule. Students were required to spend four hours per week in study group meetings. Our review focused on whether the University had documentation to show that these group meetings were regularly scheduled and occurred. ED-OIG A07-A0031 Page 19 Background Fontbonne University (the University) is a Catholic liberal arts University sponsored by the Sisters of St. Joseph of Carondelet. The main campus is located in St. Louis (Clayton), with off-campus sites located at South County and Fenton, Missouri. The University received its last full accreditation in 1993 by the North Central Association (NCA) of Colleges and Schools. The Options program is designed for nontraditional working adults. During our audit period, 900 students attended classes in the Options program. During the scope of our review, Fontbonne offered three degrees through its Options program: (i) bachelor of business administration (BBA), (ii) master of business administration (MBA), and (iii) master of management (MM). Students were required to have a minimum of 54 semester credits to be accepted in the BBA, and the BBA core (44 credits) could be completed in 22 months. A total of 128 semester hours were required for the BBA degree (the remaining credits consisted of free-choice electives which could be acquired through a variety of methods). The MBA could be completed in 24 months, and the MM in 18 months. Small groups (cohorts) of 16 to 22 adults registered in advance and progressed through the curriculum together. Classes met formally one night each week for four hours, and courses were taken sequentially one at a time. Study groups consisting of three to five students from the same cohort were expected to meet weekly outside of class for four additional hours to discuss and prepare group assignments. On May 1, 1991, the University contracted with IPD for marketing and accounting support while Fontbonne provided curriculum, facilities, and faculty. During our review, tuition revenue was split 55 percent to the University and 45 percent to IPD (except for the first two months which were 50/50, and for general education traditional courses taken by Options students which were split 60/40). Book, material, and application fee revenue was remitted in full to Fontbonne. The University participated in the Federal Family Education Loan, the Federal Pell Grant, the Perkins Loan, and the SEOG programs for its Options students. The U.S. Department of Education reported a 3 percent default rate for Fontbonne University for fiscal year 1998. ED-OIG A07-A0031 Page 20 Audit Scope and Methodology The objectives of the audit were to determine compliance with the HEA and Title IV regulations in the areas of recruitment of students and student enrollment, and course length. We focused our review on the following areas. • The University’s contract with IPD, and the University’s Program Participation Agreement with the Department of Education. • Required hours of instruction in an academic year. To accomplish our objectives, we reviewed the University’s policies and procedures for its Options program, accounting and bank records, and student financial assistance and academic files. We reviewed the University’s contract and additional agreements with IPD, IPD’s compensation plans for its recruiters, and the University’s Program Participation Agreement with the Department. We reviewed the audit reports for the three years ended June 30, 1999, prepared by the University’s Certified Public Accountants, and the program review report for the two award years ended June 30, 1995, prepared by OSFA’s Institutional Participation and Oversight Service. We reviewed the most recent report prepared by the University’s accrediting agency. We interviewed University and IPD management officials and staff. We reviewed documentation for two nonstatistically selected study groups, and 60 statistically (randomly) selected student/class combinations. For the statistical sample, we defined the universe as consisting of 12,766 unique student/class combinations. The statistical sample was equally distributed into three separate strata for each award year in our audit period. The desired confidence level was defined as 90 percent with a precision of + or – 20 percent. We determined that, if there were 1000 documented hours in the total universe, the probability was 96.8 percent (sampling risk) that we would have found at least one hour. We relied extensively on computer-processed data extracted by the University from its database of Title IV academic records for use in analyzing student attendance and for identifying SEOG disbursements. We used an extract of payment and award data from the Department’s National Student Loan Data System (NSLDS) to identify disbursements for Pell Grants and Stafford loans as NSLDS data was more complete than the University’s electronic data. We tested the accuracy, authenticity, and completeness of the data by comparing source records to computer data, and comparing computer data to source records. Based on these tests and assessments, we concluded that data were sufficiently reliable to be used in meeting the audit’s objectives. ED-OIG A07-A0031 Page 21 The audit covered the 1997-98, 1998-99, and 1999-2000 financial aid award years (July 1, 1997, through June 30, 2000). We performed fieldwork on-site at the University’s offices in St. Louis, Missouri, during the periods September 26-29, 2000, December 18- 21, 2000, January 31 through February 1, 2001, and August 30-31, 2001. We conducted our exit conference with the University on June 26, 2001. We issued our draft report on April 19, 2002. The University responded to the draft report on June 17, 2002. We conducted the audit in accordance with government auditing standards appropriate to the scope of review described above. Methodology Used to Determine the Title IV Funds Improperly Disbursed by the University for the Commissioned Sales Finding We identified total disbursements of $10,154,935 Stafford loan, $214,625 Pell Grant, and $89,839 SEOG funds by the University during the period July 1, 1997, through June 30, 2000.8 The University provided electronic files containing information on Options students who received disbursements for Stafford loans, SEOG and Pell Grants during our audit period. We used the information contained in these files and information extracted from NSLDS to determine the improperly disbursed funds. Methodology Used to Determine the Title IV Funds Improperly Disbursed by the University for the Course Length Finding The University defined its academic year as 45 weeks; therefore, a typical student enrolled in only study-group related courses received 180 hours of instruction per academic year as the study groups did not qualify for inclusion in the 12-Hour Rule calculation. Because some Options students took traditional semester-based courses that were not study-group related, it was necessary to convert the number of weeks of instruction to allowable instructional hours for each Options student. A student was given credit for four hours of instruction for each week of class related to the Options program, and 12.5 hours for each credit earned for a traditional course. The effect of this calculation was to increase the 180 allowable instructional hours in the University’s definition of an academic year by the amount of traditional hours of instruction taken. Stafford Loan Disbursements Made in Excess of the Amounts Allowable for an Academic Year. For each student who received Stafford loan funds during the period July 1, 1997, through June 30, 2000, we assigned an initial academic level and applicable loan limit(s) based on the first loan(s) guaranteed during our audit period. We then compared the disbursements for each 360-hour period to the applicable Stafford loan limits as set forth in 34 CFR 682.204 and identified the amounts that exceeded the limits. We identified $1,892,066 in disbursements that exceeded the annual limits. Pell Grant Disbursements Made in Excess of Amounts Allowable for an Academic Year. We identified the funds disbursed for Pell Grants during the period July 1, 1997, through June 30, 2000. Pell Grants are awarded using schedules published annually by the Secretary of Education. To determine the amount of Pell Grant funds that a student may 8 We determined that Perkins Loans were not material to our review. ED-OIG A07-A0031 Page 22 receive in a payment period, institutions without standard terms multiply the maximum amount shown on the schedules by a specified fraction. The numerator of the fraction is the number of credit hours in a payment period, and the denominator is the number of credit hours in an academic year. Since the University used the credit hours for a 45- week academic year rather than a 90-week academic year as the denominator, the Pell Grant award was overstated by one-half, or 50 percent. An adjustment was necessary to allow for those Options students that took traditional semester-based courses. For each student that received Pell Grant disbursements during our audit period, we calculated the number of allowable and the number of claimed instructional hours for each award year. For those Options students that took traditional semester-based courses, we converted the number of credits earned to allowable instructional hours and combined them with the allowable classroom hours. If a student’s total allowable instructional hours were 217, then the amount of Pell improperly disbursed for that student would be 40 percent (one minus 217/360) of the amount actually disbursed during that award year. We identified $90,025 in Pell Grant disbursements that exceeded the maximum amount allowed. ED-OIG A07-A0031 Page 23 Statement on Management Controls As part of our review, we gained an understanding of the University’s management control structure, as well as its policies, procedures, and practices applicable to the scope of the audit. Our purpose was to assess the level of control risk for determining the nature, extent, and timing of our substantive tests. We assessed the significant controls in the following categories: • Data Reliability • Student Enrollment • Institutional Eligibility • Institutional Adherence to the Definition of an Academic Year Because of inherent limitations, a study and evaluation made for the limited purpose described above would not necessarily disclose all material weaknesses in the management controls. However, our assessment disclosed significant management control weaknesses which adversely affected Fontbonne University’s ability to administer the Title IV programs included in its Options program. These weaknesses included incentive-based payments for student enrollment that violated the statutory prohibition on commissioned sales, and inadequate control over the amount of time spent in instruction that violated the requirements of the 12-Hour Rule. These weaknesses and their effects are fully discussed in the Audit Results section of this report. ED-OIG A07-A0031 Page 24 Appendix Fontbonne University's Response to the Draft Report ED-OIG A07-A0031 Page 25 REPORT DISTRIBUTION SCHEDULE Audit Control Number A07-A0031 No. of Copies Auditee Dr. Dennis C. Golden, President 1 Fontbonne University 6800 Wydown Boulevard St. Louis, MO 63105-3098 Action Official Teresa Shaw, Chief Operating Officer 4 Federal Student Aid U.S. Department of Education Regional Office Building, Room 4004 7th and D Streets, SW Washington, D.C. 20202 Other ED Officials (electronic copy) William D. Hansen, Deputy Secretary 1 John Danielson, Chief of Staff 1 Eugene Hickok, Under Secretary 1 John Gibbons, Director, Communications 1 Jack Martin, Chief Financial Officer 1 Clay Boothby, DAS, Legislation and Congressional Affairs 1 Laurie M. Rich, AS, Intergovernmental and Interagency Affairs 1 Philip Maestri, Director, Financial Improvement and Post Audit Operations, OCFO 1 Michelle Douglas and Carolyn Adams, OGC 1 L'Wanda Rosemond, General Operations Team 1 Charles Miller, Post Audit Group, OCFO 1 Headquarters and Regional Audit Managers 1 each
Fontbonne University Options Program's Administration of Title IV Federal Student Aid Programs.
Published by the Department of Education, Office of Inspector General on 2002-09-30.
Below is a raw (and likely hideous) rendition of the original report. (PDF)