oversight

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)

                    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