oversight

Sanford-Brown College's (SBC) Compliance with the 90-10 Rule for the 2003 Fiscal Year.

Published by the Department of Education, Office of Inspector General on 2005-11-14.

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

                        UNITED STATES DEPARTMENT OF EDUCATION 

                                       OFFICE OF INSPECTOR GENERAL 

                                               Chicago/Kansas City Audit Region 


                       111 N. Canal St. Ste. 940                            8930 Ward Parkway, Ste 2401
                       Chicago, IL 60606-7297                               Kansas City, MO 64114-3302
                       Phone (312) 886-6503                                 Phone (816) 268-0500
                       Fax (312)353-0244                                    Fax (816) 823-1398




                                                  November 22, 2005


                                                                                 Control Number ED-OIG/A07F0012


John M. Larson
Chairman of the Board, President, and
Chief Executive Officer
Career Education Corporation
2895 Greenspoint Parkway, Suite 600
Hoffman Estates, IL 60195

Dear Mr. Larson:

This Final Audit Report, titled Sariford-Brown College's (SBC) Compliance with the 90-10
Rulefor the 2003 Fiscal Year, presents the results of our audit. The objective of our audit was to
determine whether SBC complied with the 90-10 Rule, Section 102(b)(1)(F) of the Higher
Education Act of 1965, as amended (REA), and had sufficient, reliable accounting records to
support the calculation for the 2003 fiscal year (January 1 through December 31,2003). The 90­
10 Rule states that, to be eligible for Title IV, REA program participation, a proprietary
institution may derive no more than 90 percent of its revenue from the Title IV, REA programs.

For the 2003 fiscal year, SBC did not derive more than 90 percent of its revenue from the Title
IV, REA programs. However, SBC did not have sufficient, reliable accounting records to
support a precise 90-10 Rule calculation in accordance with the regulations. As a result, Career
Education Corporation (CEC), the parent company ofSBC, reported inaccurate 90-10 Rule
information in its 2003 fmancial statements. CEC reported SBC derived 80 percent of its
revenue from Title IV, REA program sources. However, we determined SBC derived more than
80 percent of its revenue from Title IV, REA program sources. We estimate that the actual
percentage was about 82 percent.

In response to the draft of this report, CEC concurred with our finding and recommendations
with the exception of item 3. CEC also concurred that revenue/refund transactions involving
Title IV, REA program funds were misclassified. CEC disagreed with item 3 in the finding,
citing a 1999 ED Policy Interpretation and Guidance Publication as its primary support for its
position regarding classification of institutional charges. CEC's response also outlined planned
corrective actions, which included training and strengthening of procedures for preparing the 90­
10 Rule calculation. In response to recommendation 1.1, CEC outlined revised procedures for
calculating the 90-10 Rule percentage. In response to recommendation 1.2, CEC stated it is


           Our mission is promote the effICiency, effectiveness. and integrity ojthe Department's programs and operations.
Final Audit Report
A07F0012                                                                               Page 2 ofl0

willing to re-calculate the 90-10 Rule percentage for SBC's 2004 fiscal year and report the
percentage to Federal Student Aid.

We summarized CEC's comments after the recommendations and included CEC's comments on
the draft report in their entirety as an Attachment. CEC's comments did not result in a change to
our recommendations. However, after reviewing additional information provided by CEC in
response to the draft report, we reduced the amount of non-institutional revenue that should have
been excluded from the denominator of the calculation (item 3) in the finding from $289,632 to
$128,705.




                                      BACKGROUND 


SBC is a proprietary institution with a main campus in Fenton, Missouri, and additional locations
in the St. Louis, Missouri, metropolitan area. During the audit period, SBC participated in the
Federal Pell, Federal Supplemental Educational Opportunity Grant (FSEOG), Federal Family
Education Loan, and Federal Work Study programs. SBC is accredited by the Accrediting
Council for Independent Colleges and Schools.

CEC purchased SBC in July 2003. CEC is located in Hoffman Estates, Illinois, and is a publicly
traded company that owns and operates campuses that provide private, for-profit, postsecondary
education. As of December 31, 2003, CEC owned and operated 78 campuses that provide
private, for-profit, postsecondary education in the United States, Canada, the United Kingdom,
France, and the United Arab Emirates. According to CEC's financial statements, SBC derived
80 percent ($24,414,580) of its total revenues ($30,636,031) from Title IV, HEA program
sources for its fiscal year ending December 31, 2003.




                                    AUDIT RESULTS 



Finding 	 SBC's 90-10 Rule Calculation Was Not Prepared in Accordance with Federal
          Regulations

CEC did not calculate the percentage of revenue SBC derived from the Title IV, HEA programs
for the 2003 fiscal year in accordance with the federal regulations. In calculating SBC's
percentage, CEC:

1. Included non-cash revenue in the denominator of the calculation;

2. Included its FSEOG matching contribution as revenue in the denominator of the calculation;
Final Audit Report
A07FOOl2                                                                                       Page 3 oflO

3. 	 Included revenue from all charges, including non-institutional charges, in the calculation;

4. 	 Did not apply Title IV, HEA program funds before applying non-Title IV, HEA program
     revenue to tuition and fees (Title IV, HEA program funds were paid to students as a return of
     credit balances and non-Title IV, REA program funds covered tuition and fees); and

5. 	 Misclassified Title IV, HEA program revenue/refund transactions as non-Title IV, REA
     program revenue and non-Title IV, REA program revenue transactions as Title IV, HEA
     program revenue.

Section 102(b)(1)(F) of the HEA provides that a proprietary institution must have "at least 10
percent of the school's revenues from sources that are not derived from funds provided under
title IV, as determined in accordance with regulations prescribed by the Secretary." Pursuant to
34 C.F.R. § 600.5(a)(8), I to be eligible to participate in the Title IV, HEA programs, a
proprietary institution must have "no more than 90 percent of its revenue derived from title IV,
REA program funds."

The following formula for calculating the percentage for an institution's latest complete fiscal
year is found at 34 C.F.R. § 600.5(d)(1):

             Title IV, REA program funds the institution used to satisfy its students'
                      tuition, fees, and other institutional charges to students.

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

Pursuant to 34 C.F.R. § 600.5(e)(l )(iii) and (v), "[t]he institution may not include as title IV,
REA program funds in the numerator nor as revenue generated by the institution in the
denominator .... (iii) The amount of institutional funds it used to match title IV, HEA program
funds, ... or (v) The amount charged for books, supplies, and equipment unless the institution
includes that amount as tuition, fees, or other institutional charges."

The regulations at 34 C.F.R. § 600.5(d)(2) provide that "[a]n institution must use the cash basis
of accounting when calculating the amount of title IV, HEA program funds in the numerator and
the total amount of revenue generated by the institution in the denominator of the fraction ..."
According to 34 § C.F.R. 600.5(e)(2), "[i]n determining the amount of title IV, HEA program
funds received by the institution under the cash basis of accounting ... the institution must
presume that any title IV, HEA program funds disbursed or delivered to or on behalf of a student
will be used to pay the student's tuition, fees, or other institutional charges, regardless of whether


1 Unless   otherwise specified, all regulatory citations are to the July I, 2002, volume.
Final Audit Report
A07F0012                                                                                                 Page 4 of 10

the institution credits those funds to the student's account or pays those funds directly to the
student, and therefore must include those funds in the numerator and denominator."

CEC did not properly calculate the 90-10 Rule percentage for SBC because it did not have
sufficient, reliable accounting records to support a precise 90-10 Rule calculation. Specifically,
CEC's process for preparing the 90-10 Rule calculation does not include procedures to ensure
Title IV, HEA program funds are applied before applying non-Title IV, HEA program revenue to
tuition and fees. When we brought the errors to CEC's attention, CEC's Vice President of
Government Relations informed us that CEC included the non-cash revenue items and FSEOG
matching contribution in the calculation because a new person was assigned the responsibility
for reviewing the calculation and did not fully understand the calculation methodology. In
addition, CEC management chose to classify all charges posted to the students' accounts as
institutional charges in accordance with a January 7, 1999, U.S. Department of Education policy
bulletin. CEC's Vice President of Government Relations also stated that CEC' s conversion to a
new computer system and manual coding errors resulted in (1) Title IV, HEA program funds not
being applied to tuition and fees first and (2) the misclassification ofthe revenue/refund
transactions as non-Title IV, HEA program revenue and non-Title IV, HEA program revenue
transactions as Title IV, HEA program revenue.

As a result of improperly calculating the percentage of revenue SBC derived from Title IV, HEA
program sources, CEC reported inaccurate 90-10 Rule information for SBC in its 2003 financial
statements. CEC reported that SBC derived 80 percent of its revenue from Title IV, HEA
program sources for the 2003 fiscal year. However, we estimate that the revenue SBC derived
from Title IV, HEA program sources was about 82 percent for the 2003 fiscal year. The
following four items increased the percentage of revenue SBC derived from Title IV, HEA
program sources.

    1. 	 CEC included $555,755 of non-cash revenue in the denominator of the calculation.
    2. 	 CEC included $65,413 ofFSEOG matching funds in the denominator ofthe calculation.
    3. 	 CEC included revenue from all charges in the 90-10 Rule calculation, failing to exclude
         $128,705 in non-institutional revenue from the denominator of the calculation.
    4. 	 CEC did not apply an estimated $94,015 in Title IV, HEA program funds before applying
         non-Title IV, HEA program revenue to tuition and fees (Title IV, HEA program funds
         were paid to students as credit balances, and non-Title IV, HEA program funds were
         applied to tuition and fees).2




2 Using information obtained from Campus 2000, we analyzed data for all students receiving Subsidized Stafford
loan funds, a stipend payment coded as Subsidized Stafford loan funds, and non-Title IV loan funds. We identified
94 students who received a total of$94,015 in stipends coded as Subsidized Stafford loan funds. We reviewed the
electronic student ledger cards for 2 of the 94 students to determine if Title IV, REA program funds were applied
before non-Title IV, REA program funds to pay for tuition and fees. We identified $1.45 million in cash
disbursements to students. We only evaluated the appropriateness of claiming the disbursements as Title IV cash
disbursements to students who received non-Title IV loans in addition to Title IV loans. The $94,015 is the total
amount of cash disbursed to students for this group. If the entire $1.45 million were improperly classified as Title
IV cash disbursements to students, the percentage of revenue SBC derived from Title IV, REA program sources
would increase to 87 percent.
Final Audit Report
A07F0012                                                                                                 Page 5 of 10

In addition, CEC misclassified 13 revenue/refund transactions involving Title IV, HEA program
revenue categories. If these 13 transactions had been properly classified, the numerator of the
calculation would have decreased by $2,915. 3

Recommendations

We recommend that the Chief Operating Officer for Federal Student Aid require CEC to:

1.1 	 Establish policies and procedures that ensure it will calculate the percentage of revenue
      derived from the Title IV, HEA programs in compliance with the requirements set forth in
      34 C.F.R. § 600.5.

1.2 Recalculate the 90-10 Rule percentage for SBC's 2004 fiscal year and report the percentage
    to Federal Student Aid.

CEC's Comments

CEC concurred that it did not calculate SBC's 90/10 Rule percentage in strict compliance with
the regulations. CEC agreed that it

    (1) improperly included non-cash revenue in the denominator of the calculation, stating that
        the inclusion of non-cash revenue was primarily a training issue and not consistent with
        the attached procedures [Item 1 in the finding];
    (2) improperly included FSEOG matching contributions in denominator of calculation,
        stating inclusion of non-cash revenue was primarily a training issue and not consistent
        with the attached procedures [Item 2 in the finding];
    (3) erroneously, classified as resulting from Title IV funds, certain stipend payments made to
        students primarily due to a systems conversion issue that has been addressed [item 4 in
        the finding]. CEC included revised procedures for preparing the 90-10 Rule calculation.

However, CEC generally disagreed that it included revenue from non-institutional charges in
SBC's 90/10 Rule calculation [item 3 in the finding]. CEC agreed that application fees for
students who did not start school ($25,548) should be excluded from the denominator of the
calculation but disagreed that revenue from application fees for students that did start school
($44,873) should be excluded. CEC stated that, for students who started school, the fee is a
required fee that is charged to students for processing their application and is an institutional
charge. CEC also disagreed that revenue from credit-by-experience exam fees, miscellaneous
charges, sales tax, and testing fees should be excluded from the calculation. CEC cited 1999 ED
Policy Interpretation guidance regarding calculating institutional refunds as its primary support
for its position that an institution is never compelled by federal law and regulations to classify a
charge as non-institutional if it wishes to classify the charge as institutional.




3 CEC misclassified three non-Title IV revenue transactions totaling $5,109 as Title IV transactions and 10 Title IV
revenue transactions totaling $2,194 as non-Title IV revenue transactions.
Final Audit Report
A07F0012                                                                                 Page 6 of 10

Corrective Action
As part of its response to the draft report, CEC acknowledged that further training is necessary,
and it will strengthen its policies and procedures to ensure it calculates the percentage of revenue
derived from Title IV, HEA programs in compliance with the requirements in 34 C.P.R. § 600.5.
CEC included revised procedures for calculating the percentage with its response. CEC provided
a revised 90/1 0 reporting procedure that includes a step to review the "Null" revenue account for
transactions that were not properly categorized and a step to make appropriate adjustments to the
numerator and/or denominator of the calculation.

OIG Response

We agree with CEC that revenue from the testing fees and miscellaneous charges discussed in its
response may be included as revenue in the denominator of the 90-10 Rule calculation.
Accordingly, we dropped the two categories from item 3 of the finding. We also revised the
dollar amounts included in the finding to reflect actual revenue received instead of the estimated
amounts we included in the draft of this report.

However, we disagree with CEC that revenue from application fees for students who started
school may be classified as institutional revenue. We also disagree with CEC that revenue from
sales tax and credit by experience exam fees may be included as revenue in the calculation.

Application Pees
CEC's assertion that the application fees for students who started school may be included as
revenue in the calculation is contrary to the 90/1 0 Rule regulation. The regulation is clear that
the institution may only include in the denominator of the calculation revenue generated for
students enrolled in an eligible program as defined in 34 C.P.R. § 668.8. At the time the students
paid the application fees, the students were not enrolled at SBC [34 C.P.R. § 600.5(d)(1)].

Sales Tax
We do not agree with CEC's assertion that sales tax is a required expense associated with the
purchase of books and supplies and therefore can be included as revenue in the denominator of
the calculation. By definition, sales tax cannot be a source of revenue and should be excluded
from the calculation. According to Kieso & Weygandt, Eighth edition, Intermediate Accounting,
"revenues are inflows or other enhancements of assets of an entity or settlement of its liabilities
(or a combination of both) during a period from delivering or producing goods, rendering
services, or other activities that constitute the entity's ongoing major or central operations."
Kieso & Weygandt also discuss Sales Taxes Payable as "a liability to provide for taxes collected
from customers but not yet remitted to the tax authority" and include an example of the required
entry. The appropriate accounting entry is to reduce the amount of sales by the amount of the
applicable sales tax when sales and sales tax are not segregated at the time of the sale. The
amount of sales tax is debited to Sales and credited to Sales Taxes Payable. Therefore, Sales
Taxes are not treated as revenue.
Final Audit Report
A07F0012                                                                                 Page 7 of 10

Credit-by-Experience Exam Fees 

We disagree that there is no basis for the institution to demonstrate that the charge is non­

institutional simply because CEC has not chosen to designate the charge as non-institutional. 

The fees were paid so SBC would evaluate activities that occurred prior to the student's 

enrollment at SBC. The fees were not revenue generated by SBC for students while they were 

attending SBC for educationally related activities conducted by the institution [34 C.F.R. § 

600.5(d)(1)]. 


Corrective Action 

CEC stated that it has revised its procedures to ensure that it calculates the 90/10 Rule percentage 

in compliance with the regulations. We analyzed CEC's revised procedures and do not believe 

the procedures will ensure that CEC calculates a precise 90-10 Rule percentage. The revised 

procedures still do not provide reasonable assurance that Title IV, HEA program funds are 

applied to tuition and fees before non-Title IV, HEA program funds (Item 4 of the finding). 

During 2003, SBC misclassified non-Title N stipends paid to students as Title N stipends. Per 

the 90/10 regulation, stipends are to be deducted from revenue for purposes of the calculation. 

Under CEC's revised procedures, Title IV stipends are added back to total revenue 

(denominator) and also included in the numerator. CEC needs a process for determining the 

precise amount of Title IV and non-Title IV funds that are used for tuition, fees, and other 

institutional charges. CEC's proposed corrective action will not satisfy this requirement. 


To illustrate why the revised procedures will not provide reasonable assurance that CEC 

calculates and reports a precise 90-10 Rule percentage, we present the following example: 


       A student receives $5,600 in financial aid, consisting of a $1,100 Federal Pell
       Grant, a $2,000 Federal Subsidized Stafford Loan, a $2,000 Federal Unsubsidized
       Stafford Loan, and a $500 alternative loan (non-Title N). CEC applies $5,000 to
       tuition and fees and pays the student $600 as a stipend ($500 from the alternative
       loan and $100 from the Pell Grant). The student then purchases $100 in books at
       the school's book store. The amount that should be included in the denominator
       ofthe calculation is $5,000 for tuition and $100 for books, and the correct 90-10
       Rule percentage should be 100 percent ($5,100 in Title N funds/$5,100 in total
       revenue). The $500 in alternative loan funds should not be included as revenue in
       the denominator because the alternative loan funds were paid to the student as a
       stipend. Absent a policy for ensuring that Title IV funds are used first to pay
       tuition and fees, and due to the systemic problem with misclassifications, the
       $500 alternative loan revenue could be picked up in CEC's Campus 2000 revenue
       report used to prepare the 90-10 Rule calculation as coming from Title N sources
       when it should have been coded as financed by the alternative loan funds (non­
       Title N). Using CEC's revised procedures for calculating the 90-10 Rule
       percentage, the numerator would include the $5,100 in Title N funds. The
       denominator would include the $5,000 in Title N revenue ($5,100 total Title IV
       funds less $100 paid to the student as a stipend), the $500 in alternative loan
       revenue, the $100 in Pell Grant funds paid as a stipend, and the $100 that the
       student paid for books (total of $5,700). Under its revised procedures, CEC
       would report the percentage of revenue derived from Title N sources as 89.5
Final Audit Report
A07F0012                                                                                 Page 8 of 10

        percent ($5,1001$5,700) instead of the correct percentage of 100. Even ifCEC's
        system did not identify the $500 paid as a stipend from alternative loan funds as a
        Title IV stipend, CEC's calculation would still be incorrect. The process would
        result in tuition of$5,000, books of$100, and a Title IV stipend of$100 to be
        included in the denominator, resulting in a reported percentage of98.1 percent
        ($5,1001$5,200), not the correct percentage of 100.



                     OBJECTIVE, SCOPE, AND METHODOLOGY 



The objective of the audit was to determine whether SBC complied with the 90-10 Rule, Section
102(b)(1 )(F) of the HEA, and had sufficient, reliable accounting records to support the
calculation. Our audit covered SBC's 2003 fiscal year (January 1 through December 31,2003).

To achieve our objective, we:

    • 	 Obtained background information on CEC and SBC, including Title IV, HEA program
        funding data and prior audit reports;
    • 	 Reviewed the Independent Public Accountant's audit documentation regarding
        certification ofCEC's management's assertion on compliance with the 90-10 Rule;
    • 	 Obtained an understanding of CEC's policies and procedures for preparing SBC's 90-10
        Rule calculation for the 2003 fiscal year;
    • 	 Obtained SBC's 90-10 Rule calculation and supporting detail;
    • 	 Analyzed and derived the composition of the numerator and denominator for the 90-10
        Rule calculation for SBC;
    • 	 Compared the 90-10 Rule supporting detail to CEC's and SBC's accounting records; and
    • 	 Obtained an understanding ofSBC's policies and procedures for entering revenue data
        into the Campus 2000 system.

In addition, we relied, in part, on CEC's revenue data. CEC uses computer software called
Campus 2000. To calculate the 90-10 Rule percentage, CEC used a Campus 2000-generated
report titled Cash Receipts Summary by Fund Source (CRSFS). The report lists cash receipts by
fund source and shows the 90-10 Rule percentage. We obtained the data for the CRSFS report.
The data included detailed revenue transactions for 23 fund source categories. To assess the
reliability ofthe data, we performed logic tests and compared CEC's data to the u.S. Department
of Education's data. Based on our tests, we concluded that the data CEC provided was
sufficiently reliable for the purpose of our audit.

To select samples of revenue transactions for review of supporting documentation, we stratified
SBC's 23 fund sources into 3 groups (large, medium, and small) based on total dollar value and
number of transactions within the group. For the large group, we randomly selected 399 revenue
transactions (from a total of 43,384 transactions) andjudgmentally selected another 40 to ensure
coverage of negative transactions within each fund source. For the medium and small groups,
we judgmentally selected 206 revenue transactions (from a total of2,967) to ensure coverage of
Final Audit Report
A07F0012                                                                                Page 9 of 10

all campuses, coverage of large revenue amounts per student, and large refund and stipend
amounts.

Finally, we gained an understanding ofCEC's system of internal control over determining the
amount of revenue SBC derived from the Title IV, HEA programs. We did not assess the
adequacy of CEC' s system of internal control. However, our review of revenue data and
accounting records disclosed instances of non-compliance with federal regulations that led us to
believe weaknesses existed in CEC's system of internal control over preparation of the 90-10
Rule calculation. These weaknesses and their effect are discussed in the AUDIT RESULTS
section of this report.

We conducted our audit work at CEC Headquarters in Hoffman Estates, Illinois; SBC's main
campus in Fenton, Missouri; and SBC's additional locations in St. Charles and Hazelwood,
Missouri, and Collinsville, Illinois. We discussed the results of our audit with CEC officials on
May 4, 2005.

We conducted the audit in accordance with generally accepted government auditing standards
appropriate to the scope of the audit described above.




                            ADMINISTRATIVE MATTERS 



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.

This report incorporates the comments you provided in response to the draft report.· If you have
any additional comments or information that you believe may have a bearing on the resolution of
this audit, you should send them directly to the following Education Department official, who
will consider them before taking final Departmental action on this audit:

                      Theresa S. Shaw, Chief Operating Officer
                      Office of Federal Student Aid
                      U.S. Department of Education
                      Union Center Plaza, Room 112G1
                      830 First Street, N.E.
                      Washington, D.C. 20202

It is the policy ofthe U.S. Department of Education to expedite the resolution of audits by
initiating timely action on the findings and recommendations contained therein. Therefore,
receipt of your comments within 30 days would be appreciated.
Final Audit Report
A07F0012                                                                            Page 10 of 10

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




                                                   Regional Inspector General for Audit
Attachment
                                                                                             ATTACHMENT 

                                                                                                 Page 1 of6



_CAREER
'-1)/ EDUCATION
    COItPOItATION




     August 25, 2005

     Richard J. Dowd 

     Regional Inspector General for Audit 

     U.S. Department of Education 

     Office ofInspector General 

     III N. Canal Street, Suite 940 

     Chicago, IL 60606-7297 


     Control Number ED-OIGI A07-FOOI2

     Dear Mr. Dowd:

     In response to the Draft Report, titled Sanford-Brown College's (SBC) Compliance with
     the 90-10 Rule for the 2003 Fiscal Year, Career Education Corporation concurs that
     certain non-cash revenue (including FSEOG matching funds) was erroneously included
     in the calculation for the 2003 fiscal year (items 1 and 2). Further, Career Education
     Corporation concurs that certain stipend payments made to students were erroneously
     classified as resulting from Title IV funds (item 4). The inclusion ofnon-cash revenue
     was primarily a training issue and not consistent with the attached procedures. The
     misclassification of stipends was primarily a systems conversion issue that has been
     addressed.

     Although Career Education generally concurs with the finding, Career Education
     Corporation does not agree that the amount cited in the finding (item 3) as the amount
     that should have been excluded as non-institutional revenue ($289,632) is accurate. The
     January 1, 1999 Policy Interpretation and Guidance under the "Subject: Calculating
     Institutional Refunds: What Are Institutional Charges?" issued by Policy Development
     DiVision of Federal Student Aid states "an institution is never compelled by federal law
     and regulations to classify a charge as non-institutional if it wishes to classify the charge
     as institutional. However, if an institution wishes to exclude specific charges or costs
     from a refund calculation, it must demonstrate the charges are either non-institutional or
     are designated as excludable costs under the regulations." The institution can find no
     material in either the Code of Federal Regulations (CFR) 34 or Dear Colleague letters
     that state the revenue cited on page 7, item 3, of the Draft Report must be excluded.
     While the amount that the Draft Report indicates should be excluded as non-institutional
     revenue may appear insignificant, the institution believes the charges were appropriately
     included in the denominator. As some items listed may be considered "pass-through"
     charges, it should also be noted that a "pass-through" charge does not necessarily mean it
     is a non-institutional charge. For example, student group health insurance is an
     institutional charge unless "the insurance is required for all students and the coverage

                    2895 GREENSPOINT PARKWAY' SUITE 600. HOFFM~N [STATES· II,UNOIS oOIOS

                            TEL (847) 78\-3600 • FAX (847) 781-3610 •   www.careered.com
                                                                                         ATTACHMENT
                                                                                            Page 2 of6




remains in effect for the entire period for which the student was charged, despite the
student's withdrawal." Thus, the mere fact it is a "pass-through" charge does not
automatically exclude it as an institutional charge.

In addition to disagreeing that the charges cited represent non-institutional revenue that
must be excluded from the calculation, it is further noted that the amounts cited represent
net invoiced amounts rather than cash transactions. Reports indicating the cash receipts
related to these charges are attached.

Specifically,
    • 	 Credit-by-experience exam fees ($600 in the Draft Report) were fees for an exam
        the student takes to demonstrate mastery of coursework for which the student
        receives course credit, if supported by passing the exam. There is no basis for the
        institution to demonstrate the charge is non-institutional.

    • 	 Miscellaneous charges ($55 in the Draft Report) represented bank fees for not
        sufficient funds (NSF) on checks written by students to the school and represent a
        charge incurred by the student to the school.

    • 	 The sales tax ($78,758.29 in the Draft Report) was the sales tax on books and
        supplies purchased by the student. The sales tax is a required expense associated
        with the purchase of the books and supplies. While Sanford-Brown College
        separated the sales tax from the books and supplies charges on the student
        account ledger, the sales tax was a part ofthe books and supplies purchase. The
        institution has no basis to demonstrate the charge is non-institutional.

    • 	 Testing fees ($113,986 in the Draft Report) were primarily fees for special
       , courses that prepare students in certain academic programs (e.g., nursing,
         radiography, and respiratory therapy) to take their board exams. In addition, there
         were fees for required physical examinations taken at Sanford-Brown College­
         Collinsville for students in the medical office administration program. Finally,
         fees at several campuses were related to IT certification exams for students in
         networking programs. These fees are related to preparing students to take board
         exams so they may enter the profession for which they were trained, the cost of
         certification exams so students are better credentialed to enter the job market in
         the profession for which they were trained, or for physical examinations (which
         no longer are classified as testing fees) required in certain academic programs.
         There is no basis to demonstrate these charges are non-institutional.

    • 	 Admissions fees ($96,232.30 in the Draft Report) included both students who
        started schools and those who did not start schools. For students who started
        school, admissions fee is a required fee which is charged to students for
        processing their application. It is acknowledged that only such fees for students
        who actually started schools should be included as students enrolled in an eligible
        program. Therefore, $28,031.89 should be excluded from the denominator as
        that is the difference between cash receipts for admissions fees for all potential
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        students and that received for students who started classes. However, the fees for
        students who started school are institutional charges.

Beyond the adjustment for admissions fees for students who did not start school, as
noted above, the cash receipts represented by payment ofthe charges cited as amounts
that should be excluded from revenue represent appropriate revenue for the 90/1 0
calculation and item 3 should be removed from the Draft Report.

Career Education Corporation does agree that certain student stipend payments were
inaccurately associated with Title IV, HEA program funds. This was primarily due to a
systems conversion issue and has been addressed.

Career Education Corporation acknowledges that further training is necessary based on
the findings and has proceeded to strengthen the procedures as noted in the
recommendation to "establish policies and procedures to ensure that it will calculate the
percentage of revenue derived from the Title IV, HEA programs in compliance with the
requirements set forth in 34 C.F.R. 600.5." Attached are revised procedures relative to
the calculation of 90-10.

While Career Education is willing "re-calculate the 90-10 Rule percentage for SBC's
2004 fiscal year and report the percentage to Federal Student Aid," we shall await a
response from the U.S. Department ofEducation regarding submission of the re­
calculated percentage if it does not reach the 90% threshold.

Please contact me ifyou have questions or require additional information.



s~~
John M. Larson
Chairman of the Board, President, and Chief Executive Officer

Enclosures
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-. .'"

                                         9011 0 Reporting
         To be eligible for participation in the federal student aid programs, a proprietary
         institution may derive no more than 90% of its revenue from Title IV funds. A school
         must determine its revenue percentages using the following formula for its latest
         complete fiscal year:

         Title IV Funds (excluding LEAP and FWS) used for tuition, fees, and other institutional
         charges to students
         The sum of revenues generated by the school from tuition, fees, and other institutional 

         charges for students enrolled in eligible training programs plus school activities necessary 

         for the education or training of students enrolled in those eligible programs 


         A proprietary institution must use the cash basis of accounting in determining whether it 

         satisfies the 90/10 Rule. Under the cash basis of accounting, revenue is recognized when 

         received. In order for an institution to recognize revenue under the cash basis of 

         accounting, that revenue must represent cash received from a source outside the 

         institution. 


         Title IV Funds (Numerator) 

         For purposes of determining the 90/1 0 calculation, the following funds are considered 

         Title IV: Federal Pell Grants, Federal SEOG (federal share only), Federal Stafford Loans 

         (Subsidized and Unsubsidized), Federal Perkins Loans, and Federal PLUS Loans. 


         The totals do not include refunds paid to or on behalf of students who have withdrawn, 

         dropped out, been expelled, or otherwise failed to complete the period of enrollment. 

         However, in figuring what Title IV funds were used to pay tuition, fees, and other 

         institutional charges, an institution must assume that any Title IV funds disbursed or 

         delivered to, or on behalf of, a student were used for such costs, regardless of whether the 

         institution credits those funds to the student's account or pays them directly to the 

         student, unless those costs were otherwise paid by grant funds provided by nonfederal 

         public agencies, grant funds provided by independent private sources, funds from 

         qualified government agency job training contracts, or funds received from a prepaid 

         state tuition plan. Therefore, stipends to students are appropriate only to the extent such 

         stipends were for Title IV funds that exceeded tuition, fees, and other institutional 

         charges (less grant funds provided by nonfederal public agencies, grant funds provided 

         by independent private sources, funds from qualified government agency job training 

         contracts, or funds received from a prepaid state tuition plan) for the fiscal year. 


         Revenues (Denominator) 

         In addition to tuition, fees, and other institutional charges (e.g., books and supplies) 

         (Note: the tuition, fees, and other institutional charges totals do not include refunds paid 

         to or on behalf of students who have withdrawn, dropped out, been expelled, or otherwise 

         failed to complete the period of enrollment.), an institution may only include revenue 

         generate by the institution from activities it conducts that are necessary for it education or 

         training These activities must be conducted on campus or at a facility under the control 

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of the institution; performed under the supervision of a member ofthe institution's
faculty; and required to be performed by all students in a specific educational program at
the institution. Examples of such activities would be restaurant revenue at schools with
culinary programs, if the preceding conditions are met or message therapy clinic revenue
at schools with message therapy programs, if the preceding conditions are met.

Institutional grants in the form of tuition waivers do not count as revenue because no new
revenue is generated. Therefore, such fund sources as institutional grants, institutional
scholarships, or staff grants (or employee grants) are excluded from revenues. One
exception is donations from a related party to create restricted accounts for institutional
scholarships, but only the amount earned on the restricted account and used for
scholarships would count as revenue in the denominator.

Loans made by a private lender that are in any manner guaranteed by the institution are
known as recourse loans. The proceeds from recourse loans may be included in the
denominator of an institution's 90/10 calculation for the fiscal year in which the
revenues were received, provided that the institution's reported revenues are also reduced
by the amount of recourse loan payments made during that year. Therefore, total
revenues from Recourse Loans and ELF Loans must be reduced by the amount of
recourse loan payments made by the institution (or CEC) during the fiscal year for those
loans.

Process for determining 90/10 calculation
The CampusVue Cash Receipts Summary by Fund Source report is used to calculate the
90/1 0 percentage for each OPE ID within the CEC system. The OPE ill often includes
the main campus and affiliated additional locations. The transaction dates selected in the
report match the fiscal year (e.g., 1/1/04 through 12/31/04 for the 2004 fiscal year).
School statuses selected in the report include only statuses for students who attended the
school (e.g., original enrollments would not be included as they did not attend classes at
the school). Fund sources selected in the report should exclude non-cash fund sources as
described above.

Once the report is run, the numerator should be the Title IV Grand Totals using the Net
received column (i.e., before Stipends). The denominator should be the Grand Total
using the Net Received less Stipends column plus the Total Stipends for the Title IV
funds (since the Title IV Stipends were not excluded from the numerator, they must be
added back into the denominator). Also, if a school includes both the federal share and
the institutional match in the SEOG fund, it must reduce both the numerator and
denominator by 25% of the Net Received (e.g., if $12,000 of SEOG includes a federal
share of $9,000 and an institutional match of $3,000, only $9,000 is included in the
numerator and denominator). Finally, recourse loans in the denominator are to be
reduced by the amount of recourse loan payments made during the fiscal year by the
school or CEC on behalf of the school.

Once the appropriate adjustments have been made to the Cash Receipts by Fund Source
report, the Student Fund Source (i.e., Null account) should be reviewed to determine
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those transactions that are not properly categorized and make appropriate adjustments to
the numerator and/or denominator (maintaining the documentation to support the
adjustments). Also, the other revenue (e.g., restaurant revenue or massage therapy clinic
revenue as described above) may be added to the denominator. This process will provide
the most conservative calculation of 90/10, as it does not include any Title IV stipends as
a reduction to the numerator or denominator.