oversight

Title IV of the Higher Education Act Programs: Additional Safeguards Are Needed to Help Mitigate the Risks That Are Unique to the Distance Education Environment

Published by the Department of Education, Office of Inspector General on 2014-02-21.

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

          Title IV of the Higher Education Act Programs:
 Additional Safeguards Are Needed to Help Mitigate the Risks That
        Are Unique to the Distance Education Environment




                                 FINAL AUDIT REPORT




                                   ED-OIG/A07L0001
                                    February 2014




Our mission is to promote the                         U.S. Department of Education
efficiency, effectiveness, and                        Office of Inspector General
integrity of the Department’s
programs and operations
                                   NOTICE



    Statements that managerial practices need improvements, as well as other
  conclusions and recommendations in this report, represent the opinions of the
 Office of Inspector General. Determinations of corrective action to be taken will
          be made by the appropriate Department of Education officials.



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


                                                                                                                   AUDIT SERVICES




February 21, 2014


TO:                  Jamienne S. Studley
                     Acting Under Secretary

FROM:                Patrick J. Howard /s/
                     Assistant Inspector General for Audit Services

SUBJECT:             Final Audit Report
                     Title IV of the Higher Education Act Programs: Additional Safeguards Are
                     Needed to Help Mitigate the Risks That Are Unique to the Distance Education
                     Environment
                     Control Number ED-OIG/A07L0001

Attached is the subject final audit report that covers the results of our audit of the Department’s
management of risks to the Title IV Higher Education Act programs that are unique to the
distance education environment. We received your office’s comments agreeing in principle with
the findings and agreeing with all but one of the recommendations in our draft audit report. We
considered the comments and made changes where appropriate when preparing this final audit
report.

Corrective actions proposed (resolution phase) and implemented (closure phase) by the
Department will be monitored and tracked through the Department’s Audit Accountability and
Resolution Tracking System (AARTS). Department policy requires that you develop a final
corrective action plan (CAP) for our review in AARTS within 30 days of the issuance of this
final audit report. The CAP should set forth the specific action items, and targeted completion
dates, necessary to implement final corrective actions on the findings and recommendations
contained in this final audit report.

In accordance with the Inspector General Act of 1978, as amended, the Office of Inspector
General is required to report to Congress twice a year on the audits that remain unresolved after
6 months from the date of issuance.

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.

We appreciate the cooperation given us during this audit. If you have any questions, please call
me at (202) 245-6900 or Gary D. Whitman, Regional Inspector General for Audit, at
(312) 730-1620.

 The Department of Education's mission is to promote student achievement and preparation for global competitiveness by fostering educational
                                                   excellence and ensuring equal access.
                                              TABLE OF CONTENTS


RESULTS IN BRIEF.................................................................................................................... 1
WHY WE DID THIS AUDIT ...................................................................................................... 4
BACKGROUND ........................................................................................................................... 5
AUDIT RESULTS ...................................................................................................................... 13
                   Finding No. 1 – Regulations Related to Verifying Student Identity and Disbursing
                                   Title IV Funds Should Be Strengthened ............................................. 15
                   Finding No. 2 – Current Regulations Defining Attendance at an Academically
                                   Related Activity Should Also Apply to Student Eligibility and
                                   Disbursement Requirements................................................................ 19
                   Finding No. 3 – Cost of Attendance Components for Distance Education Students
                                   Should Be Revised................................................................................. 23
                   Finding No. 4 – FSA Could Improve Its Monitoring of Schools’ Compliance by
                                   Targeting Its Reviews on High-Risk Areas ........................................ 29
                   Finding No. 5 – More Useful Data on Distance Education Is Needed to Adequately
                                   Assess Risk and Direct Monitoring Efforts ........................................ 33
OTHER MATTERS ................................................................................................................... 37
OBJECTIVES, SCOPE, AND METHODOLOGY ................................................................. 39
Appendix A: OIG Issued Reports on Audits of Schools Offering Distance Education
            Programs .............................................................................................................. 45
Appendix B: Introduction of Information on Selected Schools .............................................. 46
Appendix C: The Pennsylvania State University ..................................................................... 48
Appendix D: Kent State University ........................................................................................... 52
Appendix E: Ivy Tech Community College of Indiana ........................................................... 57
Appendix F: Valencia College.................................................................................................... 61
Appendix G: Liberty University ................................................................................................ 64
Appendix H: Western Governors University ........................................................................... 67
Appendix I: ITT Technical Institute ......................................................................................... 70
Appendix J: University of Phoenix............................................................................................ 73
Appendix K: Department’s Comments on the Draft Audit Report ....................................... 78
           Acronyms, Abbreviations, and Short Forms Used in this Report

C.F.R.               Code of Federal Regulations

Department           U.S. Department of Education

FAFSA                Free Application for Federal Student Aid

FSA                  Federal Student Aid

GAO                  United States Government Accountability Office

HEA                  Higher Education Act of 1965, as amended

IPAR                 Investigative Program Advisory Report

IPEDS                Integrated Postsecondary Education Data System

ISIR                 Institutional Student Information Report

ITT Tech             ITT Technical Institute

Ivy Tech             Ivy Tech Community College

Kent State           Kent State University

NCES                 National Center for Education Statistics

OIG                  Office of Inspector General

OPE                  Office of Postsecondary Education

Pell                 Federal Pell Grant

Penn State           The Pennsylvania State University

Schools              An institution of higher education, a proprietary institution of higher
                     education, or a postsecondary vocational institution that participates in the
                     Title IV programs as defined in 34 C.F.R. §§ 600.4, 600.5, and 600.6

Title IV             Title IV of the Higher Education Act of 1965, as amended

Valencia             Valencia Community College
Final Audit Report
ED-OIG/A07L0001                                                                                         Page 1 of 83



                                           RESULTS IN BRIEF


The objectives of this audit were to determine whether (1) the U.S. Department of Education
(Department) adapted the program requirements and guidance for the Title IV of the Higher
Education Act of 1965, as amended (Title IV), programs to mitigate the unique risks inherent in
the distance education environment and (2) the Department, accrediting agencies, and
State agencies adequately monitored schools to provide assurance of their compliance with the
Title IV requirements unique to the distance education environment.

As part of this audit, we interviewed officials from and reviewed the records of the Department’s
Office of Postsecondary Education and Federal Student Aid (FSA), nine accrediting agencies,
and eight schools. We also asked for information from nine States and received information
from five. The records that we reviewed covered July 1, 2009, through June 30, 2011. 1

For the purpose of this report, a school means an entity that meets the statutory definition of an
institution of higher education, a proprietary institution of higher education, or a postsecondary
vocational institution and participates in the Title IV programs. Distance education means
education that uses certain technologies to deliver instruction to students who are separated from
the instructor and to support regular and substantive interaction between the student and the
instructor.

Distance education is the fastest growing segment of higher education and creates unique
oversight challenges and increases the risk of school noncompliance with the law and
regulations. Distance education also creates new opportunities for fraud, abuse, and waste in the
Title IV programs. Past Office of Inspector General audits, investigations, and special projects
have shown instances of problems related to verifying student identity, determining attendance,
and determining cost of attendance. These problems are increasing as schools deliver more
programs through distance education and more students enroll in programs offered entirely
through distance education.

Did the Department Adapt the Title IV Requirements and Guidance to Mitigate the
Unique Risks Inherent in the Distance Education Environment?

The Department issued regulations and provided guidance to accrediting agencies and schools to
address distance education issues associated with verification of student identity, attendance, and
fraud. However, the regulations and guidance as they relate to verifying the identity of distance
education students and the definition of attendance do not sufficiently mitigate the risks of fraud,
abuse, and noncompliance.

         •   Current regulations require schools to use some type of method, such as a secure
             login and passcode, to ensure that the student who registers in a distance education

1
 The information presented in this report should not be projected to the universe of all accrediting agencies, States,
and schools involved with the Title IV programs during the audit period because we did not use statistical sampling
methods to select entities included in this audit.
Final Audit Report
ED-OIG/A07L0001                                                                            Page 2 of 83

               course or program is the same person who participates in and completes the course or
               program and receives the academic credit. The reliability of logins and passcodes
               depends on the processes that schools use to verify identity before issuing the
               passcodes and on students’ care in safekeeping such credentials. A secure login and
               passcode ensure only that someone logging in to a course is using the same login and
               passcode assigned to the person who enrolled. A secure login and passcode do not
               ensure that the person is enrolling under a valid name and intends to obtain an
               education. The regulations should be clarified and strengthened so that schools are
               required to use current best practices in identity verification methods to better
               mitigate the risk of student identity fraud.

           •   Current regulations are not sufficient to mitigate the risk of Title IV funds being paid
               to students who fraudulently enroll and do not intend to complete a course or
               program. The Department could reduce the likelihood of fraud schemes being
               successful by revising the regulations and requiring schools to use smaller, more
               frequent disbursements.

           •   The definition of attendance currently is mentioned only in the regulatory provision
               regarding the treatment of Title IV funds for students who withdraw from school.
               However, the proper determination of attendance also affects a student’s entitlement
               to receive or retain initial disbursements, as well as to receive or retain subsequent
               disbursements of Title IV funds. The Department should develop a general
               regulatory definition of attendance that applies consistently to all attendance-based
               requirements for the Title IV programs. The regulations and any related guidance
               also should clearly distinguish between requirements applicable to distance education
               and requirements applicable to traditional, campus-based education.

In addition, the cost components included in students’ cost of attendance budgets might not
accurately reflect students’ actual costs of attendance. Cost of attendance budgets should reflect
the costs associated with each student’s actual educational needs and not include costs that are
unnecessary to complete his or her program of study. The Department should work with
Congress to review components of cost of attendance budgets and ensure that the components
included fit the student’s educational needs.

Did the Department, Accrediting Agencies, and State Agencies Adequately Oversee Schools
to Provide Assurances of Compliance With the Title IV Requirements?

Collectively, the oversight provided by the Department, accrediting agencies, and States has not
been adequate to mitigate the risk of schools not complying with the requirements that are
unique to the distance education environment. For the purposes of this audit, we identified the
following requirements that present unique compliance challenges for schools offering distance
education:

           •   verifying a student’s identity;
           •   determining student attendance at an academically related activity; 2 and
           •   maintaining sufficient evidence of a student’s academic attendance.
2
    Referred to throughout this report as “academic attendance.”
Final Audit Report
ED-OIG/A07L0001                                                                        Page 3 of 83

Accrediting agencies and States have minimal or nonexistent responsibility to monitor a school’s
compliance with the Title IV requirements. An accrediting agency’s role is to monitor a school’s
academic quality, while a State’s role is to authorize and license schools. Therefore, the
Department is the entity responsible for ensuring that schools comply with Title IV law and
regulations.

FSA’s monitoring of schools’ compliance with the Title IV requirements could be improved
through enhanced targeting of its monitoring reviews on the highest risk areas. Such
improvements would better position FSA to identify the issues that we found during our reviews
of schools and to identify other issues unique to the distance education environment.

In addition, although both Office of Postsecondary Education and FSA officials acknowledge
that high-risk areas exist in the distance education environment, the Department has not been
collecting data and other information that could help it identify additional risks unique to
distance education. Based on our analysis of the data that we received from the eight schools
that participated in this audit, schools disbursed a significant amount of Title IV funds to students
who did not earn any credits during a payment period. The 8 schools disbursed nearly
$222 million to more than 42,000 distance education students who did not earn any credits
during a payment period. Collecting and analyzing sufficient and appropriate data would help
the Department appropriately address risks, proactively adapt policies to address those risks, and
better target its school compliance monitoring.

We provided a draft of this report to the Department for comment. The Department agreed, in
principle, that additional safeguards and risk assessment strategies are needed to mitigate the
unique risks associated with distance education. In addition, the Department agreed with all but
one of our recommendations. The Department partially agreed with Recommendation 3.2,
stating that, while schools have the authority to use professional judgment to adjust the cost of
attendance, the law limits such discretion to be exercised on a case-by-case basis, rather than
across an entire category or class of students. We summarize the Department’s comments at the
end of each finding and include its written response as Appendix K.

Based on the Department’s comments, we revised Recommendation 3.2 to clarify that the
professional judgment must be exercised on a case-by-case basis in accordance with section
479A of the HEA. We also revised portions of this report for clarity.
Final Audit Report
ED-OIG/A07L0001                                                                       Page 4 of 83



                              WHY WE DID THIS AUDIT


Distance education is the fastest growing segment of higher education. The purpose of this
report is to raise awareness of the issues unique to the distance education environment and to
recommend actions needed to mitigate the risks associated with distance education.

The Department provides more than $150 billion dollars each year in the form of Federal grants,
loans, and work-study funds to more than 15 million students paying for college or career school.
More than 6,000 schools participate in the Title IV programs. Title IV programs are large,
complex, and inherently risky because of their design, reliance on numerous entities for
administration and oversight, the nature of the student population, and the changes in educational
delivery methods, such as distance education.

Since 2005, the Inspector General has testified before Congress five times on the susceptibility to
fraud and abuse of Title IV programs delivered to students enrolled in programs of study offered
through distance education. Key issues highlighted during those testimonies included the
verification of a student’s identity, determination of a student’s attendance at an academically
related activity (referred to throughout this report as “academic attendance”), and the calculation
of cost of attendance for students enrolled in distance education programs. Past Office of
Inspector General (OIG) audits, investigations, and special projects have shown that instances of
problems in these areas are increasing as schools deliver more programs through distance
education.
Final Audit Report
ED-OIG/A07L0001                                                                             Page 5 of 83



                                                 BACKGROUND


The purpose of the programs authorized by Title IV of the Higher Education Act of 1965, as
amended (HEA), is to provide loans, grants, and work-study financial assistance to students to
meet the costs of attending eligible postsecondary schools. To participate in the Title IV
programs, a school must qualify in whole or in part as an eligible school. Sections 102(a)
through 102(c) of the HEA established three types of eligible schools:

           •    An institution of higher education, which is a public or private nonprofit educational
                institution. This type of school provides an educational program that awards an
                associate, baccalaureate, graduate, or professional degree.

           •    A proprietary institution of higher education, which is an educational institution that
                is not a public or private nonprofit educational institution. This type of school
                (1) provides an eligible program of training to prepare students for gainful
                employment in a recognized occupation or (2) has provided a program leading to a
                baccalaureate degree in liberal arts continually since January 1, 2009. To establish
                eligibility based on providing a baccalaureate degree in liberal arts, the school must
                also be accredited by a recognized regional accrediting agency or association and
                have continuously held such accreditation since October 1, 2007, or earlier.

           •    A postsecondary vocational institution, which is a public or private nonprofit
                educational institution. This type of school provides an eligible program of training
                to prepare students for gainful employment in a recognized occupation.

Schools deliver instruction to students through a variety of methods. The two most common
delivery methods are campus-based instruction and distance education. Campus-based
instruction is delivered in an on-campus setting where students and the instructor are face to face.
In contrast, distance education uses certain technologies to deliver instruction to students who are
separated from the instructor but supported by regular and substantive interaction between the
student and the instructor. Permissible technologies may include the Internet; one-way and
two-way transmissions through open broadcast, closed circuit, cable, microwave, broadband
lines, fiber optics, satellite, or wireless communications devices; or audio conferencing. In
addition, video cassettes, DVDs, and CD-ROMS are permissible if they are used in combination
with any of the permissible types of technologies (34 Code of Federal Regulations (C.F.R.)
§ 600.2). 3

Congress authorized, as part of the 1998 amendments to the HEA, the Distance Education
Demonstration Program (Public Law 105–244 on October 7, 1998). The purpose of the Distance
Education Demonstration Program was to help the Department determine the regulatory changes
needed to provide greater access to distance education and the appropriate level of Title IV
assistance for students enrolled in distance education programs. In July 1999, the Department
approved participation for 15 schools offering distance education programs. As of

3
    All regulatory citations are to the July 1, 2010, version unless otherwise noted.
Final Audit Report
ED-OIG/A07L0001                                                                                    Page 6 of 83

February 2005, 24 schools were participating—9 proprietary schools, 7 private nonprofit
schools, 4 public schools, 3 consortia, and 1 public system. 4 Upon completion of the
Distance Education Demonstration Program, the Department concluded that providing students
with greater access to distance education programs did not result in problems.

Before July 1, 2006, section 102(a)(3) of the HEA provided that a school was not eligible to
participate in the Title IV programs if it (1) offered more than 50 percent of its courses by
correspondence or (2) enrolled 50 percent or more of its students in correspondence courses.
This was referred to as the “50-percent rule.” By regulation, “telecommunications courses” were
considered “correspondence courses” for purposes of this provision in certain circumstances.
The Higher Education Reconciliation Act of 2005 (Public Law 109–171), enacted on
February 8, 2006, among other things, amended section 102(a)(3) of the HEA to exclude
“courses offered by telecommunications” from “correspondence courses” that are subject to the
50-percent rule. As a result, for an otherwise eligible school, the 50-percent limitations on
correspondence courses and on the percentage of students enrolled in correspondence courses no
longer applied to telecommunications courses. Since this change, enrollment in distance
education programs has grown significantly.

According to a National Center for Education Statistics (NCES) report dated October 2011, from
2000 to 2008, the percentage of undergraduate students enrolled in at least one distance
education class rose from 8 percent to 20 percent. According to a January 2013 report on a
survey conducted by Babson Survey Research Group, online enrollment in degree-granting
postsecondary schools has continued to grow at rates far in excess of the growth for total
enrollment in higher education. 5 The survey results showed that more than 6.7 million students
(32 percent) were taking at least one online course during the fall 2011 term, an increase of more
than 570,000 students (9.3 percent) over the number reported the previous year. At the same
time, the overall higher education student population grew 2.6 percent over the previous year. In
academic year 2009–2010, nearly half of all schools offered distance education opportunities to
their students. Public 2- and 4-year schools were most likely to offer distance education,
followed closely by private, for-profit 4-year schools.

Who Is Responsible for Overseeing Schools and Ensuring School Compliance With the
Title IV Requirements?

Oversight of schools participating in the Title IV programs is handled by three primary entities:
(1) the Department, (2) accrediting agencies, and (3) States. The Department is responsible for
promulgating Title IV regulations, authorizing schools to participate in the Title IV programs,
and monitoring a school’s compliance with the Title IV requirements. Accrediting agencies are
primarily responsible for monitoring a school’s academic quality. States are responsible for
authorizing and licensing schools to operate.


4
  From 1999 through 2005, four schools voluntarily left the project, and one was removed.
5
  I. Elaine Allen, and Jeff Seaman, Co-Directors, Babson Survey Research Group, “Changing Course: Ten Years of
Tracking Online Education in the United States,” January 2013. Questions for this study were included in the
College Board’s annual survey of colleges, sent to 4,527 active, degree-granting schools in the United States. The
results of the survey were based on the responses from the chief academic officers at 2,820 schools, representing
about 83 percent of higher education enrollments. The survey was conducted with support from the Alfred P. Sloan
Foundation, the Sloan Consortium, and Pearson, and data collection was provided by the College Board.
Final Audit Report
ED-OIG/A07L0001                                                                       Page 7 of 83

Department
Within the Department, the Office of Postsecondary Education (OPE) and Federal Student Aid
(FSA) are responsible for administering and overseeing the Title IV programs. OPE develops
Federal postsecondary education policies and legislative proposals, administers and oversees the
Department’s accrediting agency recognition process, and provides guidance to schools to help
them comply with the Title IV requirements.

FSA authorizes schools to participate in the Title IV programs and works with eligible schools,
financial institutions, and other participants in the Title IV programs to deliver programs and
services that help students and families finance education beyond high school. FSA also
enforces compliance with the Title IV requirements by using a variety of tools, including reviews
of annual financial and compliance audit reports prepared by independent public accountants and
reviews of schools’ administration of the Title IV programs conducted by FSA employees.
Some of FSA’s reviews are full compliance assessments, and some are assessments focused on
specific topics.

Accrediting Agencies
The purpose of accreditation is to ensure that the education provided by schools participating in
the Title IV programs meets acceptable levels of quality. Sections 101(a)(5) and 102(b)(1)(D) of
the HEA require schools participating in the Title IV programs to be accredited by an agency that
is recognized by the Secretary. Accrediting agencies are private educational associations that
develop evaluation criteria and conduct evaluations to assess whether schools meet agency-
developed criteria. Schools and their programs that meet an agency’s criteria are then accredited
by that agency.

The two basic types of accreditation are institutional, which can be either national or regional in
scope, and specialized or programmatic. Institutional accreditation generally applies to an entire
school and is required for Title IV participation. Specialized or programmatic applies only to
programs, departments, or schools that are a part of a larger school. A national accrediting
agency operates throughout the United States. The accreditation granted by a national
accrediting agency is institutional. A regional accrediting agency operates primarily in a specific
geographical area and accredits a wide range of schools that offer associate, baccalaureate,
masters, and doctoral degrees. As of February 5, 2014, the Department had recognized
37 accrediting agencies for Title IV purposes.

According to section 101(c) of the HEA, the Secretary recognizes accrediting agencies to ensure
that these agencies are reliable authorities regarding the quality of education or training offered
by the schools or programs that they accredit. Under section 496(n)(3) of the HEA, if the
Secretary recognizes an accrediting agency, and the accrediting agency reviews schools offering
distance education, then the accrediting agency’s scope of recognition will include accreditation
of schools offering distance education provided it satisfies the requirements under section
496(n)of the HEA. The Secretary periodically publishes a list of recognized accrediting agencies
together with each accrediting agency’s scope of recognition. According to Dear Colleague
Letter GEN-06-17, “Institutional Accreditation for Distance Learning Programs,”
September 28, 2006, if a school offers a program that has more than 50 percent of its courses
offered through distance education, it must be accredited by an agency that the Department has
recognized to accredit schools offering distance education. As of February 5, 2014, the
Final Audit Report
ED-OIG/A07L0001                                                                       Page 8 of 83

Department had recognized 31 accrediting agencies for Title IV purposes and whose scope of
recognition included distance education.

The Higher Education Opportunity Act of 2008 (Public Law 110–315, enacted on
August 14, 2008) created new provisions applicable to accrediting agencies whose scope
includes distance education programs. The provisions at section 496(a)(4)(B) of the
HEA provide that each such accrediting agency must demonstrate to the Secretary that its
standards effectively address the quality of a school’s distance education. The
accrediting agency is not required to have separate standards for evaluating distance
education schools or programs. However, the accrediting agency’s standards must
require a school that offers distance education to have processes through which the
school establishes that the person who registers in a distance education course or program
is the same person who participates in and completes the program and receives the
academic credit.

The Department amended regulations to implement these and other new statutory provisions.
Effective July 1, 2010, an accrediting agency recognized by the Department to ensure the quality
of distance education programs must, among other things, do the following:

       •   apply and enforce standards that effectively address the quality of a school’s distance
           education (34 C.F.R. § 602.16(c)),

       •   require a school that offers distance education to have processes in place for verifying
           that the person who registers in a distance education course or program is the same
           person who participates in and completes the program and receives academic credit
           (34 C.F.R. § 602.17(g)),

       •   employ individuals who are trained in distance education to review a school or
           program (34 C.F.R. § 602.15(a)(2)), and

       •   report enrollment to the Department if certain accredited schools have experienced an
           increase in enrollment of 50 percent or more within 1 fiscal year (34 C.F.R.
           § 602.19(e)).

In addition, any accrediting agency that has notified the Secretary of a change in its scope in
accordance with 34 C.F.R. § 602.27(a)(5) must monitor the headcount enrollment of each school
it has accredited that offers distance education or correspondence education (34 C.F.R.
§ 602.19(e)).

States
Sections 101(a)(2), 102(a)(1), 102(b)(1)(B), and 102(c)(1)(B) of the HEA require a school to
obtain State authorization to participate in the Title IV programs. Effective July 1, 2011, in
general, the Department considers a school to be legally authorized by a State if
(1) the authorization is given to a school by name through a charter, license, approval, or other
State document or action specifically to offer programs beyond secondary education;
(2) the school complies with any applicable State approval or licensure requirements; and
(3) the State has a process to review and appropriately act on complaints concerning a school and
Final Audit Report
ED-OIG/A07L0001                                                                          Page 9 of 83

enforces applicable State laws. If not authorized by a State, a school may be authorized by the
Federal government or an Indian tribe, or it may be exempt from State authorization as a
religious school under State law (34 C.F.R. § 600.9(a) and (b)). A separate State authorization
provision, 34 C.F.R. § 600.9(c), was invalidated by a court on procedural grounds. That
provision would have required a school offering distance education to students in a State in
which the school is not physically located to comply with any authorization requirement
established by that State. States may have their own authorization standards that go beyond the
requirements established in Federal regulations.

Schools
Each school participating in the Title IV programs is responsible for complying with all
standards established by its accrediting agencies and the States in which it is authorized. In
addition, each school is responsible for ensuring that it complies with all applicable Title IV
requirements.

A school must do the following to comply with Title IV requirements that present unique
challenges for schools offering distance education:

       •   require selected applicants to verify their identity as part of the student aid
           verification process (Dear Colleague Letter GEN-12-11, July 17, 2012);

       •   establish a process, acceptable to its accrediting agency, to verify that the person who
           registers in a distance education course or program is the same person who
           participates in and completes the course or program and receives the academic credit
           (34 C.F.R. § 602.17(g));

       •   determine the withdrawal date for a student who withdraws from the school
           (34 C.F.R. § 668.22(b) and (c));

       •   ensure that, when determining a withdrawal date or whether a student has begun
           attendance, it adheres to the definition of academic attendance and attendance at an
           academically related activity (34 C.F.R. § 668.22(l)(7), effective July 1, 2011;
           34 C.F.R. § 668.21);

       •   resolve Institutional Student Information Record (ISIR) codes flagging students with
           unusual enrollment histories in accordance with Dear Colleague Letter GEN-13-09
           (March 8, 2013); and

       •   develop and follow procedures to evaluate the validity of a student’s high school
           completion if the school or the Secretary has reason to believe that the high school
           diploma is not valid or was not obtained from an entity that provides secondary
           education (34 C.F.R. § 668.16(p), effective July 1, 2011).

In addition, the Department specified by regulation that evidence of a student logging in to an
online class is not sufficient evidence by itself to demonstrate academic attendance by the
student (34 C.F.R. § 668.22(l)(7)(i)(B)(3), effective July 1, 2011; 75 Federal Register 66898-
66899, October 29, 2010). In promulgating this regulation, the Department rejected a comment
Final Audit Report
ED-OIG/A07L0001                                                                                      Page 10 of 83

that it was requiring documentation beyond that required in the past and indicated that the
regulation was consistent with guidance provided to schools about the requirements of existing
law.

Schools Reviewed As Part of This Audit
For this audit, we selected two schools from each of four categories: 4–year public, 2–year
public, private nonprofit, and proprietary. During our visit to each school, we reviewed records
and assessed the school’s compliance with selected Title IV requirements related to distance
education, including those described above that were in effect for the award year that we
reviewed, for students who were enrolled solely in distance education courses during award year
2010–2011 (July 1, 2010, through June 30, 2011).

Table 1 shows the growth of recipients enrolled solely in distance education during award years
2008–2009, 2009–2010, and 2010–2011 at the schools we visited. 6 Table 1 also shows the
amount of Title IV funds disbursed to all recipients for each of the 3 award years. 7 During
award year 2010–2011, these eight schools disbursed more than $7.6 billion in Title IV funds.

Table 1. Title IV Funding and Enrollment Data
                                                                             Percent                      Percent
                                                                             Change       Recipients      Change
                                                                              From         Enrolled        From
                                              Title IV       Number of        Prior        Solely in       Prior
                                           Disbursed for        All          Award         Distance       Award
          School         Award Year        All Recipients    Recipients       Year        Education        Year
    The Pennsylvania      2008–2009        $542,914,152       49,298           N/A          1,495           N/A
     State University     2009–2010        $627,645,897       52,934            7.4         2,147           43.6
       (Penn State)       2010–2011        $676,632,782       54,847            3.6         3,129           45.7

        Kent State        2008–2009        $204,593,360        23,416         N/A             268              N/A
        University        2009–2010        $282,079,305        28,372         21.2            542             102.2
       (Kent State)       2010–2011        $326,299,493        31,095          9.6            882              62.7

    Ivy Tech              2008–2009        $304,191,916        59,127         N/A           6,318             N/A
Community College         2009–2010        $514,206,929        84,312         42.6          8,853             40.1
   (Ivy Tech)             2010–2011        $629,837,409        93,741         11.2          9,393              6.1

    Valencia              2008–2009         $71,541,290        20,175         N/A           1,501             N/A
Community College         2009–2010        $136,003,145        29,728         47.4          2,574             71.5
   (Valencia)             2010–2011        $173,529,973        35,850         20.6          3,228             25.4

                          2008–2009        $211,838,525        23,643         N/A           15,469            N/A
                          2009–2010        $327,905,031        35,728         51.1          27,091            75.1
    Liberty University    2010–2011        $430,080,606        45,184         26.5          36,166            33.5

                          2008–2009        $111,152,209        12,939         N/A           12,939            N/A
Western Governors         2009–2010        $179,347,255        18,341         41.7          18,341            41.7
    University            2010–2011        $242,591,862        24,276         32.4          24,276            32.4

6
 The University of Phoenix had a decrease in enrollment between award years 2009–2010 and 2010–2011.
7
 The Department does not track the amount of Title IV funds disbursed to traditional as opposed to distance
education students.
Final Audit Report
ED-OIG/A07L0001                                                                                     Page 11 of 83


                                                                              Percent                      Percent
                                                                              Change       Recipients      Change
                                                                               From         Enrolled        From
                                              Title IV        Number of        Prior        Solely in       Prior
                                           Disbursed for         All          Award         Distance       Award
       School            Award Year        All Recipients     Recipients       Year        Education        Year

    ITT Technical          2008–2009        $875,040,850        101,199         N/A            5,731         N/A
       Institute           2009–2010       $1,382,663,890       124,617         23.1           9,878         72.4
     (ITT Tech)            2010–2011       $1,505,621,694       132,926          6.7          13,183         33.5

                         2008–2009       $3,023,539,562      309,717         N/A            242,506           N/A
   University of         2009–2010       $3,747,465,452      362,762         17.1           288,924           19.1
      Phoenix            2010–2011       $3,628,816,139      326,367        (10.0)          253,472          (12.3)
Source: Enrollment and disbursement data that we obtained from the eight schools.

Risks Inherent in the Distance Education Environment
Distance education is the fastest growing segment of higher education. It creates unique
oversight challenges and increases the risk of school noncompliance with the law and
regulations. Distance education also creates new opportunities for defrauding and abusing the
Title IV programs. It also has increased demand on the resources of the Department and the
OIG. Distance education programs have been a major focus of OIG audits and investigations
because of their high susceptibility to fraud, abuse, and noncompliance.

         •   On September 26, 2011, the OIG issued an Investigative Program Advisory Report
             (IPAR), “Distance Education Fraud Rings,” (ED-OIG/L42L0001) to OPE and FSA.
             The purpose of the IPAR was to alert Department officials to a serious vulnerability
             in distance education programs. Conclusions presented in the IPAR were based on
             past cases involving numerous individuals who conspired to defraud the Title IV
             programs through distance education.

             Among other actions, OIG recommended that the Department (1) change the
             regulations to require schools that enroll students exclusively in distance education
             programs to confirm student identity; (2) designate identity, high school graduation
             status, and statement of educational purpose as information required to be verified
             pursuant to the verification of student aid application information requirements;
             (3) revise the Department’s Central Processing System and the National Student Loan
             Data System to identify participants who repeatedly enroll and withdraw;
             (4) implement controls in the Department’s personal identification number delivery
             system to identify and prevent multiple numbers issued to the same email address
             without confirmation of identity; 8 and (5) issue a Dear Colleague Letter to alert
             schools about distance education fraud rings. The Department completed a corrective
             action plan, issued the recommended Dear Colleague Letter, and put in place a
             number of procedures to address these recommendations.


8
  The Department provides personal identification numbers to each applicant. A student uses his or her number to
electronically sign the Free Application for Federal Student Aid and loan promissory notes and to access his or her
loan account(s).
Final Audit Report
ED-OIG/A07L0001                                                                      Page 12 of 83

       •   Since 2007, the OIG has issued 10 audit reports specific to the distance education
           environment (see Appendix A). Our work identified instances of noncompliance by
           schools offering distance education programs. The noncompliance included
           ineligible students receiving Title IV funds, improper disbursements to students who
           never started classes, excessive credit balances held by schools, use of incorrect last
           dates of attendance, incorrect determination of student attendance, lack of
           documentation to show academic attendance, correspondence programs being
           considered distance education programs, and unreliable data.

       •   The U.S. Government Accountability Office (GAO) issued a report, “Higher
           Education: Use of New Data Could Help Improve Oversight of Distance Education,”
           November 2011, to Congress. GAO’s work focused on four areas: (1) the
           characteristics of distance education, (2) the characteristics of students participating
           in distance education, (3) how the quality of distance education is being assessed, and
           (4) how the Department monitors distance education in its stewardship of Federal
           student aid funds. GAO recommended that the Department develop a plan on how to
           use data being collected and to provide input on what data to collect. GAO reported
           that such information should help to improve the Department’s oversight and
           monitoring of Title IV funds.

       •   The Deputy Under Secretary asked FSA and the OIG to initiate a special project to
           identify schools that participate in the Title IV programs and had high risks of
           noncompliance with program requirements. FSA and OIG collaborated on the
           “FSA/OIG Risk Project for Schools Participating in the Title IV Programs” to
           (1) obtain a shared understanding of actual and potential abuses, (2) identify risk
           indicators that the Department might use to target schools with a high risk of
           noncompliance with requirements, and (3) produce a list of high-risk schools based
           on those risk indicators. FSA and OIG agreed to make distance education the focus
           of the project because the existing requirements did not clearly address distance
           education’s unique delivery method or the significant increase in the number of
           students enrolled in distance education. FSA and OIG identified 27 schools as having
           a high risk for noncompliance with the Title IV requirements. As a result of the
           project, FSA conducted program reviews of 25 schools and OIG conducted audits of
           2 schools. The two audits identified multiple instances of noncompliance with
           Title IV requirements specific to distance education.

OIG reports have shown that Title IV funds delivered to students enrolled in programs offered
through distance education are susceptible to fraud and abuse. OIG reports have also shown
school noncompliance with the Title IV requirements and waste in setting the amount of awards
to students. Key risk areas include the verification of a student’s identity, determination of a
student’s academic attendance, and the calculation of cost of attendance for students enrolled in
distance education programs.
Final Audit Report
ED-OIG/A07L0001                                                                      Page 13 of 83



                                     AUDIT RESULTS


 Did the Department Adapt Title IV Requirements and Guidance to Mitigate
     the Unique Risks Inherent in the Distance Education Environment?
The Department issued regulations and provided guidance to accrediting agencies and schools to
address some distance education issues associated with verification of a student’s identity,
attendance, and fraud. However, the Department could do more to address the risks of fraud,
abuse, and waste in the distance education environment without hurting the efficient and
effective delivery of Title IV funds to eligible students. Specifically, the Department should take
the following actions:

       1. Develop regulations that require schools to verify the identity of all distance
          education students at the time of enrollment.

       2. Amend the regulations to require more frequent disbursements of Title IV funds. The
          disbursements should coincide with the timing of institutional charges and other
          expenses, such as child or dependent care expenses and monthly Internet fees.

       3. Amend the regulations expressly to apply the definition of attendance in 34 C.F.R.
          § 668.22(l)(7) to the regulations for returning Title IV funds for students who do not
          begin attendance.

       4. Issue guidance that clearly explains what is considered acceptable evidence of a
          distance education student’s academic attendance.

       5. Work with Congress to revise the HEA so that schools are required to develop cost of
          attendance budgets applicable to the student’s actual educational needs and not
          include costs that are unnecessary to complete the student’s program of study.

By addressing these areas, the Department will have greater assurance that Title IV funds are
used for the intended purpose—education—and that the interests of taxpayers are protected.

Risk Mitigation Steps That the Department Has Already Taken
The Department has taken steps to mitigate the risks related to a school (1) inadequately
verifying a student’s identity, (2) improperly determining whether a student had academic
attendance, and (3) having fraud committed against its distance education programs. The
Department amended existing regulations or established new regulations, effective July 1, 2010,
that apply to accrediting agencies and the distance education environment (74 Federal Register
55426, October 27, 2009).
Final Audit Report
ED-OIG/A07L0001                                                                      Page 14 of 83

Effective July 1, 2010, accrediting agencies must

       •   ensure that the individuals conducting onsite evaluations are competent,
           knowledgeable, and trained by the agency on their responsibilities appropriate for
           their roles, including their responsibilities regarding distance education (34 C.F.R.
           § 602.15);

       •   evaluate the quality of education offered through distance education (34 C.F.R.
           § 602.16);

       •   ensure that schools have a process in place to verify that the student who registers in a
           distance education course or program is the same student who participates in and
           completes the course or program and receives the academic credit (34 C.F.R.
           § 602.17); and

       •   monitor the growth of programs at schools that experience significant growth in
           enrollment (34 C.F.R. § 602.19).

In addition, the Department

       •   revised the regulations at 34 C.F.R. § 668.22(l)(7)(i)(B)(3), effective July 1, 2011, to
           make explicit that, when determining the withdrawal date for a student, documenting
           that a student logged in to an online class is not sufficient by itself to demonstrate
           academic attendance by the student. In promulgating this regulation, the Department
           rejected a comment that it was requiring documentation beyond that required in the
           past and indicated that the regulation was consistent with guidance provided to
           schools about the requirements of existing law (75 Federal Register 66898-66899,
           October 29, 2010);

       •   revised regulations, effective July 1, 2011, to include a more detailed definition of
           academic attendance for purposes of determining a student’s withdrawal date from
           school (34 C.F.R. § 668.22(l)(7)); and

       •   provided in 34 C.F.R. § 668.16(p), effective July 1, 2011, that schools must develop
           and follow procedures to evaluate the validity of a student’s high school completion if
           the school or the Secretary has reason to believe that the high school diploma is not
           valid or was not obtained from an entity that provides secondary education.

The Department also revised its own processes for confirming a student’s identity and added
verification requirements for schools. The Department added a new Institutional Student
Information Report (ISIR) flag code that requires schools to verify a student’s enrollment
history. Plus, the Department added three new items for schools to verify when a student’s
Free Application for Federal Student Aid (FAFSA) is selected for verification: the student’s
high school completion, identity, and statement of educational purpose.
Final Audit Report
ED-OIG/A07L0001                                                                       Page 15 of 83

To communicate the new requirements to schools, the Department

       •   issued a Dear Colleague Letter, “Students with an Unusual Enrollment History
           Flag—‘C’ code on the ISIR,” which describes how schools must resolve students
           flagged with unusual enrollment histories (GEN–13–09, March 8, 2013);

       •   issued a Dear Colleague Letter, “2013–2014 Award Year: FAFSA Information to be
           Verified and Acceptable Documentation,” which required selected applicants to
           verify their high school completion status and identity and resubmit a statement of
           educational purpose (GEN–12–11, July 17, 2012); and

       •   issued a Dear Colleague Letter, “Fraud in Postsecondary Distance Education
           Programs—URGENT CALL TO ACTION,” which called on schools to do more to
           prevent, identify, and report suspected distance education fraud in the Title IV
           programs (GEN–11–17, October 20, 2011).

Finally, the Department announced its intention to conduct negotiated rulemaking to develop
proposed regulations designed to prevent fraud and ensure proper use of Title IV funds within
the context of distance education (77 Federal Register 25658, May 1, 2012).

Despite the Department’s efforts, further actions are needed to protect the integrity of the
Title IV programs.

Finding No. 1 – Regulations Related to Verifying Student Identity and Disbursing
                Title IV Funds Should Be Strengthened

Current requirements related to verifying the identities of and disbursing Title IV funds to
students enrolled in distance education programs are not sufficient to mitigate the risks of fraud
and abuse. As a result, fraud rings are targeting distance education programs to illegally obtain
Title IV funds. The fraud rings enroll straw students, which are students who do not intend to
complete a distance education course or program but who still receive Title IV funds. Both the
ringleader and the straw student receive a portion of any Title IV credit balance disbursed in the
straw student’s name.

Accrediting Agencies and Schools Need to Be Diligent in Verifying Student Identity
Because distance education students do not physically attend classes, the processes to ensure that
students are who they claim to be and the person enrolled in school is the one attending classes
are inherently more difficult and potentially less effective at schools offering distance education
than at schools offering traditional, campus-based education. School personnel do not interact in
person with distance education students. This lack of face-to-face interaction makes distance
education programs attractive to fraud rings, which see the programs as providing an opportunity
for an easy theft, requiring limited work with minimal risk of getting caught.

Accrediting agencies must require schools that offer distance education to have processes in
place through which the accredited school establishes that the student who registers in a
distance education course or program is the same person who participates in and completes the
course or program and receives the academic credit (section 496(a)(4)(B) of the HEA).
Final Audit Report
ED-OIG/A07L0001                                                                       Page 16 of 83

According to the Department’s current regulation (34 C.F.R. § 602.17(g)), schools can comply
with this requirement using methods such as secure logins and passcodes, proctored
examinations, and new or other technologies and practices that are effective in verifying student
identity. All nine of the accrediting agencies that we visited required their accredited schools to
establish processes to ensure that the student who registers in a distance education course or
program is the same person who participates in and completes the course or program and
receives the academic credit.

This requirement is not sufficient to protect Title IV funds. All eight schools that we reviewed
required distance education students to have secure logins and passcodes. However, none of the
eight schools had a specific process to verify student identity as part of the enrollment process.
By themselves, logins and passcodes do not confirm the student’s identity. The reliability of
logins and passcodes depends on the processes that schools use to verify identity before issuing
the logins and passcodes and on students’ care in safekeeping such credentials. As a result,
logins and passcodes cannot detect individuals logging on with multiple identities and straw
students involved with fraud rings. A login and passcode ensure only that someone logging in to
a course is using the same login and passcode assigned to the person who enrolled. Without
effective enrollment processes at a school, a login and passcode do not ensure that the person is
enrolling under a valid name and intending to obtain an education.

Additional requirements are needed to ensure that schools verify a student’s identity as part of
the enrollment process. Requiring the student to provide proof of name, high school diploma,
educational transcripts, or college admission test scores would help corroborate identity and
ensure the student intends to obtain an education.

Required Accrediting Agency Review of Schools’ Processes Is Too Infrequent to Be
Effective
According to 34 C.F.R. § 602.19(a) and (b), accrediting agencies must reevaluate, at regularly
established intervals, the schools or programs they have accredited or preaccredited. This
reevaluation includes confirming that schools have processes in place to ensure that the student
who registers in a distance education course or program is the same person who participates in
and completes the course or program and receives the academic credit. However, the primary
purpose of accrediting agencies is to ensure the quality of education or training offered by
accredited schools, not to evaluate identity verification processes or assess whether a school’s
system of internal control over administration of Title IV programs is operating as intended. In
addition, the accrediting agencies that we reviewed evaluated schools’ compliance with agency
standards and reaccredited schools on cycles that ranged from 3 to 10 years. As a result, a
school’s system of internal control as it relates to student identity verification could be
ineffective and not be timely detected by an accrediting agency’s review.

A better way of ensuring, on an ongoing basis, that a school has implemented effective processes
for verifying students’ identities would be to have the independent public accountant verify, as
part of the annual compliance audit, that the school has implemented student identity verification
procedures and those procedures are operating as intended. Schools participating in the Title IV
programs are required to have annual compliance audits conducted by an independent public
Final Audit Report
ED-OIG/A07L0001                                                                                 Page 17 of 83

accountant. 9 The purpose of the annual compliance audit is to provide the Department with
reasonable assurance that the school is complying with the Title IV requirements. Part of the
audit process is to ensure that the school is complying with Title IV requirements by testing the
school’s processes. Therefore, the independent public accountant already is required to verify
that the school has implemented Title IV-related processes and confirm that those procedures are
operating as intended.

Stronger Regulations Needed to Reduce Title IV Disbursements to Students Who Enroll
Without an Educational Purpose
Current Title IV regulations are not sufficient to mitigate the risk of Title IV funds being paid to
students who do not intend to complete a course or program. Students are eligible to receive
Title IV funds if they are regular students enrolled or accepted for enrollment in an eligible
program at an eligible school (34 C.F.R. § 668.32 (a)(1)(i)). According to 34 C.F.R. § 600.2, a
regular student is a student who is enrolled for the purpose of obtaining a degree, certificate, or
other recognized credential that the school offers.

Once a school deems a student eligible, the school awards Title IV funds to the student. The
Department transfers the awarded amount of funds to the school. Then, a school disburses the
funds to the student by crediting the student’s account or by paying the student directly. The
earliest that a school may disburse the funds is 10 days before the first day of classes (34 C.F.R.
§ 668.164(f)(1)). When a school disburses Title IV funds to a student by crediting a student’s
account, it may do so only for allowable charges. Allowable charges include tuition, institutional
fees, and room and board. Any amount remaining on the student’s account is called a “credit
balance” and may be given directly to the student or held by the school to pay future, allowable
charges during the school year. A school may hold the credit balance only with the student’s
permission (34 C.F.R. § 668.164(d) and (e) and 668.165(b)).

Assuming that a school appropriately applies Title IV disbursements and institutional charges to
a student’s account before the start of classes, the student could have a credit balance on his or
her account before classes even begin. If a credit balance exists and the student has not
authorized the school to hold it, the school is required to pay the credit balance to the student no
later than 14 days after the start of the first class (34 C.F.R. § 668.165(b)(1)(ii) and 34 C.F.R.
§ 668.164(e)(2)).

When completing a FAFSA, a student must certify that Title IV funds will be used only for the
cost of attending a school (that is, the student must file a statement of educational intent in
accordance with instructions of the Secretary; see 34 C.F.R. § 668.32(h)). A student is
defrauding the government if he or she enrolls in school to obtain Title IV funds for
noneducational purposes and then stops attending school after receiving Title IV funds. Such
students enroll in school, attend only as long as necessary to receive their excess Title IV funds
(credit balance), and then drop out. These students usually target schools with low tuition costs,
such as community colleges, because the credit balance paid directly to the student would be
larger than a school with higher tuition costs.


9
 An audit conducted in accordance with Office of Management and Budget Circular A-133, “Audits of States,
Local Governments, and Non-Profit Organizations,” or the audit guides developed by the Department’s Inspector
General, whichever is applicable.
Final Audit Report
ED-OIG/A07L0001                                                                      Page 18 of 83

Four of the eight schools that we reviewed as part of this audit had tuition charges that were high
enough to decrease their risk of being targeted by people intent on defrauding the Title IV
programs. In addition, one of the eight schools disbursed Title IV funds for distance education
students by module (subterm), not by payment period. When schools disburse Title IV funds by
module, a student would have to attend every module in which he or she was enrolled during the
payment period to receive the full award for the payment period and corresponding Title IV
credit balances. Such a disbursement procedure decreases the risk of unscrupulous people
targeting the school. Even though these five schools had a lower risk of being targeted by people
intent on defrauding the Title IV programs, OIG still identified a fraud ring at one of the schools.
The three other schools that we reviewed had tuition charges low enough to put them at a higher
risk of being targeted by fraud rings. OIG has identified fraud rings at two of the three schools.

The Department could reduce the likelihood of fraud schemes being successful by revising the
regulations and requiring schools to use smaller, more frequent disbursements. In addition,
payment periods and periods of enrollment could be better defined to coincide with actual
patterns of enrollment and billing. The smaller, more frequent disbursements could closely
match the timing of institutional charges and living expenses (for example, monthly child or
dependent care and Internet expenses) and would reduce the amount of a student’s credit balance
immediately available at the beginning of the payment period. Currently, the Department has
told schools only that they have the authority to implement such preventive measures
(Dear Colleague Letter GEN 11-17, “Fraud in Postsecondary Distance Education Programs—
URGENT CALL TO ACTION,” October 20, 2011). To be effective, such preventive measures
should be required, not recommended.

Schools currently have the authority to delay disbursement of Title IV funds until a student has
participated in the distance education program for a longer and more substantiated period (for
example, until an exam has been given, completed, and graded, or until a paper has been
submitted). Schools also may make more frequent disbursements of Title IV funds so that they
do not disburse the payment period’s entire award at the beginning of the payment period.
However, of the eight schools that we reviewed as part of this audit, only one made more
frequent disbursements. With today’s technology, schools could modify their disbursement
procedures to include multiple disbursements, eliminating unnecessarily large credit balances
paid to students at the start of the payment period.

Recommendations

We recommend that the Acting Assistant Secretary for Postsecondary Education, in
collaboration with the Chief Operating Officer for FSA—

1.1    Develop regulations in 34 C.F.R. Part 668 specifically requiring schools that offer
       distance education to establish processes to verify the student’s identity as part of the
       enrollment process. Acceptable student identity verification items might include a high
       school diploma, educational transcripts, or college admission test scores. Such
       verification should occur before a school issues a student a secure login and passcode.

1.2    Work with the OIG to implement audit requirements for the regulations promulgated
       under Recommendation 1.1 for independent public accountants, not accrediting agencies,
       to assess the effectiveness of schools’ processes for verifying a student’s identity.
Final Audit Report
ED-OIG/A07L0001                                                                              Page 19 of 83

1.3        Revise the regulations to require more frequent disbursements of Title IV funds. The
           disbursements should coincide with the timing of institutional charges and other
           educational expenses, such as monthly child or dependent care and Internet expenses.

Department Response
The Department agreed in principle with the finding and agreed with all three recommendations.
The Department stated that OPE will develop a decision memo for the Secretary’s Executive
Team. The decision memo will address whether or not to modify the appropriate regulations
related to confirmation of student identity and the timing of disbursements of Title IV funds.

Finding No. 2 – Current Regulations Defining Attendance at an Academically
                Related Activity Should Also Apply to Student Eligibility and
                Disbursement Requirements

Currently, the definition of attendance at an academically related activity (referred to throughout
this report as “academic attendance”) appears in the regulation regarding calculation of funds to
be returned to the Title IV programs for students who withdraw from school (see 34 C.F.R.
§ 668.22(l)(7)). When a student withdraws, the school must determine the amount of the
Title IV funds that the student earned as of the student’s withdrawal date.

The Department clarified the definition of academic attendance in 34 C.F.R. § 668.22(l)(7). 10
That regulation describes a nonexclusive list of activities that may be considered academic
attendance:

           •    physically attending a class;

           •    submitting an academic assignment;

           •    taking an exam, an interactive tutorial, or computer-assisted instruction;

           •    attending a study group that is assigned by the school;

           •    participating in an online discussion about academic matters; and

           •    initiating contact with faculty members to ask a question about the academic subject
                studied in the course.

That regulation also describes a nonexclusive list of activities that may not be considered
academic attendance:

           •    living in school housing,

           •    participating in a school meal plan,



10
     Effective July 1, 2011.
Final Audit Report
ED-OIG/A07L0001                                                                        Page 20 of 83

       •   logging in to an online class without active participation, and

       •   participating in academic counseling or advising.

However, determination of academic attendance affects eligibility to initially receive or retain
Title IV funds not only for students who withdraw from school but also for students who never
begin attendance. Although regulations at 34 C.F.R. § 668.21 require schools to return all
Title IV funds for students who do not begin attendance in a payment period or period of
enrollment, that regulation does not expressly cross-reference the definition of academic
attendance in 668.22(l).

Determination of Attendance Affects a Student’s Eligibility to Receive or Retain Initial and
Subsequent Disbursements of Title IV Funds
Proper determination of attendance affects a student’s initial eligibility for Title IV funds and
subsequent disbursements of Title IV funds. For example:

       •   If a school disburses Title IV funds to students on or after the first day of classes, the
           students are eligible to receive the Title IV disbursements only if they have begun
           attendance (“2011-2012 Federal Student Aid Handbook”, Volume 4, Chapter 1,
           page 4-29).

       •   If a school disburses Title IV funds to students who never attend during the payment
           period, the school must return to the Department or lenders all Title IV funds
           disbursed to those students (34 C.F.R. § 668.21(a)).

       •   If the projected enrollment status of a student changes based on the courses in which
           the student actually began attendance, schools must recalculate the student’s
           Federal Pell Grant (Pell) award (34 C.F.R. § 690.80(b)(2)(ii)).

Therefore, a proper determination of whether a student attended the courses in which he or she
enrolled is necessary to ensure that only proper payments of Title IV funds are made.

Schools Did Not Consistently Apply the Definition of Academic Attendance When
Determining Eligibility for Disbursements of Title IV Funds
Our review of student records at eight schools showed that schools have not consistently applied
the Department’s regulation and guidance regarding academic attendance when determining
initial student eligibility and making disbursements of Title IV funds. We found that all
eight schools considered activity that was not academic attendance to be evidence that
distance education students attended their courses.

We reviewed student records covering award year 2010–2011 using the July 1, 2010, attendance
requirement (34 C.F.R. § 668.22(c)(3)) that was applicable to students who withdraw from
school. Student records showed that schools used different methods for determining attendance
during award year 2010–2011. Three of the eight schools that we reviewed as part of this audit
allowed faculty members to define attendance on their own. However, faculty members were
not responsible for knowing Title IV regulations. Student records at two of these three schools
showed that faculty members accepted activity that was not academic attendance as evidence
Final Audit Report
ED-OIG/A07L0001                                                                      Page 21 of 83

that distance education students started attending the courses. Therefore, these schools did not
ensure that they complied with regulatory prohibitions against retaining Title IV funds for
students who did not begin attendance.

We found the following for the remaining five schools that we reviewed.

       •   Two schools considered a student logging in to the online learning management
           system to be support for academic attendance. One of the two schools revised its
           attendance policy in August 2011 so that logging in to the online learning
           management system is no longer considered an academically related activity.

       •   One school defined attendance as accessing a course through the school’s online
           learning management system.

       •   Two schools considered any submission to the online learning management system to
           be support for academic attendance, even though not all submissions were
           academically related. Both schools considered nonacademically related submissions,
           such as a student posting a brief personal introduction or completing a checklist, to
           the online learning management system to be evidence that distance education
           students attended during the payment period.

During our review, we looked for events, such as the examples listed in 34 C.F.R.
§ 668.22(c)(3)(ii)(2010), or any other evidence that might reasonably indicate that a student
attended an academic activity. We accepted as sufficient evidence a student (1) submitting
discussion postings related to the classwork; (2) completing exams, quizzes, or assignments; or
(3) initiating contact with a faculty member to ask a question about the academic subject. We
did not consider a student’s simply accessing the online learning management system as
sufficient evidence of attendance when the record of access did not indicate whether the student
attended an academic activity, such as replaying a video lecture, joining an online discussion, or
reviewing reading materials.

None of the eight schools that we reviewed retained adequate evidence of a student’s academic
attendance, as required in regulation that became effective July 1, 2010 (34 C.F.R.
§ 668.22(c)(3)), to support the student’s withdrawal date. To support the withdrawal date, the
July 1, 2010, regulation requires schools to document that the activity is academically related and
document that the student attended the activity. Generally, the schools that we reviewed retained
evidence of a student’s accessing the online learning management system to support the
student’s withdrawal date. However, by itself, evidence that the student accessed the online
learning system is not sufficient to support that the student attended an academically related
activity as required in 34 C.F.R. § 668.22(c)(3). In the situations described in this report and
appendices, the login record did not indicate any activity other than the login itself.

Without Expansion of the Regulations Defining Attendance and Issuance of Additional
Guidance, Schools Might Not Comply With All Attendance-Dependent Requirements
Because the definition of academic attendance in the return of Title IV aid regulations is not
expressly cross-referenced in other regulations, schools might not always (1) return all Title IV
funds for distance education students who never attended during a payment period, (2) adjust
Final Audit Report
ED-OIG/A07L0001                                                                      Page 22 of 83

Pell awards for distance education students whose enrollment statuses changed because they did
not attend all the courses in which they enrolled, and (3) confirm that distance education students
attended in the payment period before disbursing Title IV funds after the start of the payment
period.

We reviewed the records for 400 students who received about $1.8 million from the 8 schools
that we reviewed as part of this audit. We found that

       •   seven schools retained about $101,000 of Title IV funds for 39 distance education
           students who never attended a payment period,

       •   six schools retained about $37,000 more than they should have received because the
           schools did not adjust the Pell awards for 49 distance education students who had a
           change in enrollment status in the payment period, and

       •   seven schools disbursed Title IV funds after the start of the payment period to
           41 distance education students who had not yet attended classes during the payment
           period.

Appendices C through J provide the details for the numbers reported.

Recommendations

We recommend that the Acting Assistant Secretary for Postsecondary Education, in
collaboration with the Chief Operating Officer for FSA—

2.1    Amend the regulations for disbursing Title IV funds to cross-reference the definitions of
       “academic attendance” and “attendance at an academically related activity” in 34 C.F.R.
       § 668.22(l)(7).

2.2    Issue further guidance that clearly explains what is considered acceptable evidence to
       support a distance education student’s academic attendance and last date of attendance.

Department Response
The Department agreed in principle with the finding and agreed with both recommendations.
The Department stated that OPE will develop a decision memo for the Secretary’s Executive
Team. The decision memo will address whether or not to modify the appropriate regulations to
apply the definition of “academic attendance” and “attendance at an academically related
activity” to the regulations for determining student eligibility and disbursing Title IV. In
addition, OPE will issue guidance clarifying acceptable evidence supporting academic
attendance and last date of attendance for students enrolled in distance education programs.
Final Audit Report
ED-OIG/A07L0001                                                                       Page 23 of 83

Finding No. 3 – Cost of Attendance Components for Distance Education Students
                Should Be Revised

Distance education students and students attending classes on campus often have different costs
of attendance. Students enrolled in distance education programs, like students enrolled in
correspondence programs, are not physically present in traditional classrooms.

According to the HEA, cost of attendance includes tuition and fees; an allowance for books,
supplies, transportation, and other personal expenses; and room and board expenses. Subsequent
to the Distance Education Demonstration Program, Congress amended section 472 of the HEA to
state that no distinction shall be made with respect to the mode of instruction in determining the
student’s cost of attendance. Although section 472 states that no distinction is to be made
between on-campus or distance education programs when determining a student’s cost of
attendance, it limits cost of attendance for students enrolled in correspondence programs to only
tuition and fees and, if required, books, supplies, travel, and room and board costs incurred only
for periods of required residential training.

Not All Students Incur the Same Expenses to Attend School
On average, tuition, fees, and books at the eight schools that we reviewed as part of this audit
accounted for 42.3 percent of each full-time student’s total cost of attendance (see Table 2).
The remaining 57.7 percent of the student’s cost of attendance consisted of allowances for
transportation, room and board, and miscellaneous personal expenses.

Table 2. Cost of Attendance Components for Full-Time Students (Percentages)
                                                                    Room, Board, and
                             Tuition, Fees,                          Miscellaneous
          School              and Books        Transportation      Personal Expenses
        Penn State                50.3               0.0                  49.7
        Kent State                44.7               8.3                  47.0
         Ivy Tech                 21.0              10.1                  68.9
         Valencia                 21.1              16.3                  62.6
    Liberty University            40.1               6.7                  53.2
    Western Governors
        University                38.7               3.0                  58.3
         ITT Tech                 61.5               0.0                  38.5
  University of Phoenix           45.6               0.0                  54.4
         Average                  42.3               4.7                  53.0

However, Title IV funds to cover transportation, room and board, and miscellaneous personal
expenses might not always be needed by distance education students. For example, distance
education students do not need to change residences to attend school. Because of such
differences, distance education students are not likely to incur the same expenses to attend school
as students attending on-campus programs. Yet, distance education students have been allowed
to borrow more than is necessary to cover their educational expenses, creating loan debt on costs
that are not necessarily academically related.
Final Audit Report
ED-OIG/A07L0001                                                                                       Page 24 of 83

Cost of attendance is an estimate of a student’s educational expenses for the period of
enrollment. Only components that directly relate to a student’s educational expenses should be
included in cost of attendance budgets. These estimated costs should be reasonable and
necessary, and they most likely will vary depending on the student’s educational needs. Cost of
attendance budgets greatly impact the amount of Title IV funds a student is awarded.

Transportation cost is one component in cost of attendance budgets and an example of a cost that
might not be incurred by every student enrolled in a distance education program. Three of the
eight schools that we reviewed did not include any transportation costs in cost of attendance
budgets for distance education students. The other five schools included transportation costs.
We found that two of these five schools limited the transportation costs to the distance education
student’s anticipated need. However, the other three schools included the same transportation
cost allowance for distance education students as they did for students attending classes on
campus.

If students do not incur additional costs during their courses of study, they have no need for the
costs to be included as part of their cost of attendance budgets for Title IV purposes. Schools
need to apply cost of attendance budgets based on students’ characteristics. Applying cost of
attendance budgets based on students’ characteristics would (1) reduce the risk of certain groups
of students being awarded Title IV funds that they do not need to cover their costs of education
and (2) reduce the opportunities for students to borrow amounts not needed to cover the costs of
education.

Title IV Aid in Excess of Educational Need Increases the Risks of Fraud
Title IV funds delivered to students attending distance education programs are more vulnerable
to fraud and abuse than funds delivered to students in traditional programs. The IPAR that the
OIG issued on September 26, 2011, 11 reported on the increasing number of fraud rings obtaining
Title IV funds when schools provide credit balances to students. 12 Fraud rings usually target
community colleges and other distance education programs that charge lower tuition, because the
Title IV funds awarded are sufficient to satisfy institutional charges (for example, tuition and
fees) and result in a sizable payment of the balance of the award to the student for other expenses
(for example, room and board and miscellaneous personal expenses). The balance typically
consists of loan funds because Pell funds are applied to tuition and fees first.

Table 3, “Pell and Stafford Loan Amounts Potentially in Excess of the Costs for Tuition, Fees,
and Books (Annual),” shows the Title IV credit balance scenarios at each of the eight schools
that we reviewed as part of this audit.




11
   Investigative Program Advisory Report, “Distance Education Fraud Rings,” ED-OIG/L42L0001,
September 26, 2011.
12
   Finding No. 1 of this report discusses student identity fraud and recommends that schools verify the identity of a
student who enrolls and applies for Title IV funds.
Final Audit Report
ED-OIG/A07L0001                                                                                   Page 25 of 83

Table 3. Pell and Stafford Loan Amounts Potentially in Excess of the Costs for Tuition,
Fees, and Books (Annual)
                                                            Maximum
                                                            Amount of
                                                             Pell and       Percentage of
                                                             Stafford      Maximum Pell
                                                             Loans in       and Stafford
                                  Maximum       Cost of      Excess of         Loans in
                       Maximum Amount of Tuition,            Tuition,         Excess of
             School Amount of     Stafford      Books,      Books, and Tuition, Books,
  School      Type        Pell      Loans      and Fees        Fees            and Fees
Penn State 4–Year       $5,500     $12,500      $15,446       $ 2,554            14.2
Kent State 4–Year       $5,500     $12,500      $10,370       $ 7,630            42.4
 Ivy Tech 2–Year        $5,500     $10,500      $ 3,908       $12,092            75.6
 Valencia 2–Year        $5,500     $10,500      $ 3,530       $12,470            77.9
  Liberty
University 4–Year       $5,500     $12,500      $ 8,360       $ 9,640            53.6
  Western
Governors
University 4–Year       $5,500     $12,500      $ 7,710       $10,290            57.2
 ITT Tech 4–Year        $5,500     $12,500      $15,636       $ 2,364            13.1
University
of Phoenix 4–Year       $5,500     $12,500      $11,520       $ 6,480            36.0
For award year 2010–2011, the maximum Pell amount for a full-time, independent, undergraduate student was
$5,500. For award year 2010–2011, the maximum Stafford loan amount for a second year, full-time, independent,
undergraduate student was $10,500, and for a third year and beyond, full-time, independent, undergraduate student
the maximum amount was $12,500.

A student’s actual credit balance is based on the timing of a school’s charges and its
disbursements of Title IV funds. At four of the schools, the resulting credit balances could be
more than half the Title IV funds awarded to a student. Such high remaining balances are
attractive to those who are looking to defraud the Title IV programs. In fact, the OIG has
investigated and obtained indictments against members of fraud rings that targeted three of the
eight schools that we reviewed.

Specific Circumstances Should Dictate a Student’s Title IV Award
Although section 472 of the HEA states that no distinction is to be made between on-campus or
distance education programs when determining a student’s cost of attendance, it excludes certain
indirect costs in the calculation of the cost of attendance for a student enrolled in a course of
instruction composed of correspondence courses. Section 472 limits cost of attendance for
students enrolled in a correspondence program to only tuition and fees and, if required, books,
supplies, travel, and room and board costs incurred for periods of required residential training.
By limiting the cost of attendance for correspondence programs, the HEA recognizes the
differences in actual costs incurred based on the mode of instruction. The HEA also recognizes
that distance education might result in a substantially lower cost of attendance for some students.
Currently, section 484(l)(2) of the HEA permits a school’s financial aid officer to reduce a
student’s Title IV aid if the financial aid officer determines that distance education results in a
substantially reduced cost of attendance for the student. Section 479A of the HEA requires
Final Audit Report
ED-OIG/A07L0001                                                                       Page 26 of 83

financial aid officers to make such determinations on a case-by-case basis. In other words, a
financial aid officer may use professional judgment, based on supplementary information about
the financial status or personal circumstances of students, to alter the data used to calculate the
estimated family contribution. This alteration of data may include the student’s cost of
attendance.

With the sharp rise in the number of students attending classes through distance education and
their different educational expense needs compared with students attending on-campus
programs, it is time to reevaluate the true cost of attendance for the different modes of instruction
(on-campus, distance education, and correspondence). Tailoring the amounts allowed to be
included in cost of attendance budgets to fit students’ educational expenses could reduce the
amount of Title IV funds obtained to cover unnecessary expenses, thereby decreasing a student’s
loan debt. Tailoring the amounts also could lessen or eliminate the activities of fraud rings,
thereby protecting the integrity of the Title IV programs.

Recommendations

We recommend that the Acting Assistant Secretary for Postsecondary Education, in
collaboration with the Chief Operating Officer for FSA—

3.1    Work with Congress to amend section 472 of the HEA to specify that a school’s cost of
       attendance budget for a student include only those costs that reflect actual educational
       expenses.

3.2    Provide guidance to schools explaining (1) that a distance education student’s cost of
       attendance budget should not include expenses that he or she most likely will not incur,
       and (2) pursuant to section 484(l)(2) of the HEA, a school’s financial aid officer can
       exercise professional judgment on a case-by-case basis in accordance with section 479A
       of the HEA and reduce a student’s Title IV aid amount if the financial aid officer
       determines that distance education results in a substantially reduced cost of attendance for
       the student.

Department Response
The Department agreed in principle with the finding. The Department agreed with
Recommendation 3.1 but only partially agreed with Recommendation 3.2. Regarding
Recommendation 3.1, the Department currently is assessing recommended changes to the HEA
to improve access to, and the quality and affordability of, postsecondary education. This
assessment will include reviewing the statutory framework that governs the determination of
financial need among student aid recipients and the direct and indirect educational costs of
attendance incurred by students pursuing postsecondary education. The Department plans to
communicate the results and recommendations of the assessment to Congress before the
September 30, 2014, expiration of the authorization of the HEA.

Regarding Recommendation 3.2, the Department stated that OPE will issue guidance to remind
schools that they should develop and use different standard costs of attendance for different
categories of students. However, the Department will reaffirm that, while schools have the
authority to use professional judgment to adjust the cost of attendance, the law limits such
Final Audit Report
ED-OIG/A07L0001                                                                      Page 27 of 83

discretion to be exercised only on a case-by-case basis, rather than across an entire category or
class of students. In addition, any such adjustments must be documented in the student’s file.

OIG Response
We revised Recommendation 3.2 to clarify that the financial aid officer must exercise
professional judgment on a case-by-case basis in accordance with section 479A of the HEA.

        Did the Department, Accrediting Agencies, and State Agencies
       Adequately Oversee Schools to Provide Assurances of Compliance
                      With the Title IV Requirements?
Collectively, the oversight provided by the Department, accrediting agencies, and States has not
been adequate to mitigate the risk of schools’ not complying with Title IV requirements that are
unique to the distance education environment. For the purposes of this audit, we considered the
following to be Title IV requirements that are unique to distance education:

       •   verifying a student’s identity,

       •   determining student academic attendance, and

       •   maintaining sufficient evidence of a student’s academic attendance.

In addition, the Department has not been collecting data and other information that could help it
identify additional risks unique to distance education. Collecting and analyzing sufficient and
appropriate data would help the Department proactively adapt existing regulations and guidance
or develop new policies to address risks unique to distance education. Sufficient and appropriate
data also would help the Department better target its monitoring of schools offering distance
education.

Oversight of Distance Education Schools
As discussed in more detail in the Background section of this report, the Department, accrediting
agencies, and States provide oversight of schools. Accrediting agencies, in accordance with
Title IV requirements, oversee the quality of distance education programs, monitor enrollment
growth at certain distance education schools, and determine whether schools have processes for
verifying a student’s identity. Accrediting agencies are not required to monitor any other aspects
of schools’ compliance with the Title IV requirements unique to the distance education
environment. States are responsible for authorizing and licensing schools to operate in their
States. However, States are not required to monitor schools’ compliance with Title IV
requirements unique to the distance education environment. The Department, specifically FSA,
has primary responsibility for monitoring schools’ compliance with Title IV requirements,
including those unique to the distance education environment.
Final Audit Report
ED-OIG/A07L0001                                                                                 Page 28 of 83

Accrediting Agencies
The Department relies on accrediting agencies primarily to monitor the quality of a school’s
educational programs. Therefore, accrediting agencies’ reviews focus on the academic quality of
the school’s educational programs; their reviews are not designed to identify noncompliance with
the Title IV requirements.

We performed work at nine accrediting agencies: two national, two regional, and five
specialized. All nine accrediting agencies complied with the following Title IV regulations
affecting accrediting agency reviews of schools offering distance education that took effect on
July 1, 2010. 13 All nine accrediting agencies

        1. had standards, policies, and procedures that address the quality of distance education
           (34 C.F.R. § 602.16(c)); and

        2. established processes to ensure that their accredited schools have policies and
           procedures in place to ensure that the person who registers in a distance education
           course or program is the same person who participates in and completes the program
           and receives the academic credit (34 C.F.R. § 602.17(g)).

States
We contacted officials from nine States (Arizona, Arkansas, Florida, Indiana, Ohio,
Pennsylvania, South Dakota, Utah, and Virginia) and asked for information about each State’s
authorization and licensure processes. We received responses from five (Arizona, Pennsylvania,
South Dakota, Utah, and Virginia). In general, all five States indicated that their school
authorization processes focused on authorizing and licensing schools that are physically located
in the State and seek to offer postsecondary education in the State. Examples of the
authorization process included submitting an application that included information such as
accreditation status, financial statements, course offerings, and ownership. In addition, one State
required school officials to attend a new school orientation session and submit to a site visit by a
State official.

States are not required to monitor schools’ compliance with the Title IV requirements. Four of
the five States indicated that they do not monitor schools’ compliance with the Title IV
requirements. The fifth State did not provide sufficient information for us to determine whether
it performed such monitoring.

All five States informed us that they have implemented the State authorization regulation
(34 C.F.R. § 600.9) that became effective July 1, 2011, and have processes to

        1. authorize, license, approve, or certify postsecondary schools to offer programs in the
           respective State and

        2. review and act on complaints concerning a school and enforce applicable State laws.



13
  We did not assess whether the agencies employed reviewers who were competent and trained in the evaluation of
distance education as required by 34 C.F.R. § 602.15(a).
Final Audit Report
ED-OIG/A07L0001                                                                     Page 29 of 83

Only one State indicated that schools physically located in the State are required to provide
additional information if they offer distance education. Pennsylvania requires schools offering
distance education to identify available student access to academic and student services as well
as textbooks and research resources. Pennsylvania also requires schools to show how students
will interact with faculty, how the schools will ensure the integrity of student work, and how
coursework will be assessed.

Department
Within the Department, OPE develops policies, including the recognition of accrediting agencies
and the role of States in authorizing schools, that govern the Title IV programs. OPE does not
directly monitor schools’ compliance with the Title IV requirements. FSA is responsible for
implementing student financial aid policies and monitoring schools’ compliance with the
Title IV requirements. We discuss FSA’s monitoring in Finding No. 4.

Finding No. 4 – FSA Could Improve Its Monitoring of Schools’ Compliance by
                Targeting Its Reviews on High-Risk Areas

FSA could improve the effectiveness of its program reviews of schools’ compliance with the
Title IV requirements by targeting part of its monitoring reviews on the highest risk areas.
Focusing on higher risk areas would put FSA in a better position to identify the issues that we
identified during our school reviews and to identify other issues unique to the distance education
environment.

According to GAO’s “Standards for Internal Control in the Federal Government,”
November 1999, 14 the five standards of internal control are control environment, risk
assessment, control activities, information and communications, and monitoring. Monitoring
should assess the quality of performance over time and ensure that the findings of audits and
other reviews are promptly resolved. Sound monitoring processes should include evaluations
focused on the effectiveness of the controls. The scope and frequency of such evaluations will
depend on the assessment of risks and the effectiveness of ongoing monitoring procedures. The
responsibility for good internal control rests with all managers. Management sets the control
objectives, puts the control mechanisms and activities in place, and monitors and evaluates
the controls. However, all personnel in the organization play important roles in making sure
controls are effective and operating as intended.

FSA’s Identification and Analysis of Risk
Each year, FSA performs a risk assessment to identify and analyze risks associated with schools’
compliance with the Title IV requirements. For each risk identified, FSA calculates a risk score
based on the significance and likelihood of each particular risk. FSA also considers the potential
impact or effect of each type of risk. Then, FSA considers existing risk mitigation strategies and
develops future action steps to mitigate the impact of the risks on the Title IV programs.

FSA’s fiscal year 2010 and fiscal year 2011 risk assessments identified distance education as
one of the highest risk areas. FSA’s concerns were that (1) schools might be expanding distance
education programs rapidly without being able to provide adequate support to the increased


14
     Publication Number GAO/AIMD-00-21.3.1.
Final Audit Report
ED-OIG/A07L0001                                                                       Page 30 of 83

number of students, (2) distance education programs might not have appropriate content and
contact hours between instructors and students, and (3) schools offering distance education
courses might not be monitoring student attendance and student progress.

Both the 2010 and 2011 risk assessments also identified FSA’s program reviews as high-risk
areas. FSA was concerned that it might not be doing a sufficient number of program reviews to
ensure that the population of schools as a whole was in compliance with the Title IV
requirements. Both the 2010 and 2011 risk assessments also identified reliance on annual
compliance audits of schools as another risk area. FSA was concerned that the quality of the
audits was not sufficient for its purposes and that the audits were not identifying all significant
instances of noncompliance.

FSA’s Monitoring of School Compliance With Title IV Requirements
FSA is responsible for monitoring more than 6,000 schools. To fulfill its responsibility, FSA
uses the following four core monitoring tools:

       1. Determination of institutional and program eligibility. A school that seeks to
          establish eligibility to participate in any Title IV program must submit an application
          to the Department for a determination on whether the school qualifies as an eligible
          school. According to FSA’s program compliance director, a school obtains regular
          certification (initial or renewal) to participate in the Title IV programs once every 4 to
          6 years. If provisional certification is granted, a recertification is required after 1 to
          3 years. FSA generally performs an off-site review of information submitted by the
          school, rather than conduct an onsite review, to decide whether to recertify the school.

       2. Review of annual financial statements. A school that participates in the Title IV
          programs is required to have an independent public accountant annually audit the
          school’s general purpose financial statements. The school submits the audited
          financial statements to FSA. FSA uses the school’s audited financial statements to
          calculate financial ratios to determine whether the school is financially responsible.
          Depending on FSA’s determination about the school’s financial responsibility, it
          might require the school to provide a letter of credit or to make Title IV
          disbursements using institutional funds and request subsequent reimbursement from
          the Department.

       3. Review of annual compliance audits. A school that participates in the Title IV
          programs generally is required to have an independent public accountant annually
          conduct a compliance audit of the school’s administration of the Title IV programs.
          The school submits the compliance audit report to FSA for review, which evaluates
          the school’s compliance with the Title IV requirements and resolves findings of
          noncompliance reported by the independent public accountant.

       4. FSA program reviews. FSA conducts a program review to evaluate whether a school
          has complied with the HEA and Title IV regulations. In addition, program reviews
          are intended to identify liabilities owed to the Department for instances of
          noncompliance and to improve a school’s internal control over compliance with the
          Title IV requirements. From October 1, 2010, through September 30, 2011, FSA
Final Audit Report
ED-OIG/A07L0001                                                                      Page 31 of 83

           program review specialists conducted 316 program reviews (about 5 percent of all
           participating schools were reviewed).

When conducting reviews, FSA program review specialists follow a program review manual.
The 2008 version of the review manual was in use during our audit period. The manual provides
standardized procedures for conducting program reviews. The manual also outlines elements,
including some mandatory ones, the reviewer should test based on the scope of the review.

A scope that includes the review of student files must include a review of the following:

       •   student eligibility for Title IV disbursements,
       •   return of Title IV funds for students who withdrew from school,
       •   proper handling of student credit balances,
       •   student enrollment status and eligibility for Title IV programs,
       •   the school’s attendance policies and procedures,
       •   verification of information reported by students,
       •   cost of attendance, and
       •   calculation of awards and disbursement of Title IV funds.

Since the issuance of its 2008 program review manual, FSA has revised sections of the manual to
incorporate additional issues specific to distance education. In July 2010, FSA added procedures
for testing compliance with school eligibility requirements regarding distance education
programs. The procedures include tests for regular and substantive interaction between the
students and instructors, which 34 C.F.R. § 600.2 states is one of the key factors for determining
whether a course is considered distance education or correspondence. Program review
specialists complete these tests by reviewing program descriptions and syllabi and interviewing
school employees and students.

In May 2011, FSA again updated its review manual. The attendance section of the May 2011
version addresses distance education programs and the determination of student attendance. The
manual now states that attendance must be an academic assignment or substantive interaction
between the student and a faculty member. Attendance may not consist of logging in to a class
without participation. This revision is aligned with the preamble to 34 C.F.R. § 668.22, which
states that evidence of a student logging in to an online class is not sufficient by itself to
demonstrate academic attendance by the student (75 Federal Register 66898-66899,
October 29, 2010). This revision also is aligned with the revised regulation, effective
July 1, 2011, that defines academic attendance for purposes of determining a student’s
withdrawal date from school (34 C.F.R. § 668.22(k)(7)).

OIG Results of Eight Schools Reviewed
Our review of the eight schools selected as part of this audit identified instances of
noncompliance unique to the distance education environment. We concluded that none of the
eight schools properly determined and documented students’ academic attendance in accordance
with the requirements promulgated in 34 C.F.R. § 668.22(c)(3) as of July 1, 2010. In addition,
none of the eight schools used procedures that effectively verified students’ identities as part of
the enrollment process (see Finding No. 1 of this report).
Final Audit Report
ED-OIG/A07L0001                                                                      Page 32 of 83

FSA Monitoring Is Not Sufficiently Focused on Risk Areas Unique to Distance Education
To test a school’s attendance policies and procedures, program review specialists randomly
select samples from the general population of students who receive Title IV funds. Generally,
the sample includes 15 records selected from the universe that includes all Title IV funds
recipients at a school for an award year. FSA’s program reviews usually cover 2 award years,
resulting in a total of 30 students being selected for review. Because FSA selects its sample only
from the general population of students, students enrolled solely in distance education courses
might not be included or could be underrepresented in the samples despite the risks inherent in
the distance education environment.

In contrast, at the eight schools that we reviewed as part of this audit, we randomly selected
samples from a universe of distance education students who earned zero credits for the payment
period. Students who earn zero credit hours are a high-risk population because they might have
withdrawn from the school without notification, or they might never have begun attendance in
the payment period. If the school did not properly determine the student’s attendance, it could
improperly disburse Title IV funds to students or not return the appropriate amount of Title IV
funds to the Department. Sampling from the high-risk population instead of sampling only from
the general population increases the likelihood of identifying problems if they exist. Because it
selects samples only from the general population of students, FSA’s program reviews are not as
likely as an OIG audit to identify issues unique to the distance education environment.

Between February 2009 and December 2010, FSA reviewed four of the eight schools’
compliance with the Title IV requirements. None of the four program reviews identified the
attendance and student identity issues that we identified.

The importance of selecting samples from high-risk populations also was highlighted in the
results of the OIG audits and FSA program reviews conducted as part of the FSA/OIG risk
project. The risk project identified 27 high-risk schools that offered distance education
programs. FSA conducted program reviews of 25 schools, and OIG conducted audits of
2 schools. OIG’s audits of distance education programs at the two schools identified multiple
instances of significant noncompliance with the Title IV requirements. FSA’s reviews of the
25 schools identified far fewer and less significant compliance issues.

FSA officials stated that its reviews disclosed few instances of noncompliance specific to
distance education. According to the report summarizing the results of the 25 reviews that
FSA conducted as part of the FSA/OIG risk project, only 4 reviews identified instances of
noncompliance specific to distance education. Still all four instances were related to schools not
properly tracking attendance.

Both FSA’s fiscal year 2010 and fiscal year 2011 risk assessments raised concerns that schools
offering distance education courses might not be monitoring student attendance and student
progress. However, FSA’s program reviews still did not include samples selected from
universes of students enrolled solely in distance education courses. To address the risks
associated with schools offering distance education that FSA identified in its risk assessment, a
better approach would have been to target students with one or more specific attributes, such as
no credits earned for a payment period. Otherwise, with the limited amount of testing and time
allocated to perform a program review, FSA’s program reviews most likely will not identify
compliance issues unique to distance education.
Final Audit Report
ED-OIG/A07L0001                                                                     Page 33 of 83

Recommendations

We recommend that the Chief Operating Officer for FSA—

4.1    Ensure that the sampling methodology for program reviews includes testing of samples of
       students selected from specific high-risk areas, such as distance education, identified
       during its annual risk assessment.

4.2    Analyze the results of program reviews conducted using the 2011 version of the review
       guide to determine whether program reviews are consistently identifying academic
       attendance issues related to the distance education environment. If the program reviews
       are not identifying attendance issues, research why, and, if necessary, revise the guide
       and provide training to staff.

Department Response
The Department agreed in principle with the finding and agreed with both recommendations.

Finding No. 5 – More Useful Data on Distance Education Is Needed to Adequately
                Assess Risk and Direct Monitoring Efforts

The Department does not collect sufficient data specific to distance education. At the time we
conducted our audit, the Department did not have information on such things as (1) which
students attended distance education programs or courses, (2) the amount of Title IV funding that
was used by students for distance education programs or courses, and (3) the extent to which
individual schools offered distance education programs or courses. The Department cannot
adequately manage the Title IV programs in a distance education environment without the data
needed to identify and analyze the characteristics, trends, and risks.

According to GAO’s “Standards for Internal Control in the Federal Government,”
November 1999 (GAO/AIMD-00-21.3.1), one of the standards of internal control is risk
assessment, which is identifying and analyzing risks associated with achieving the objectives,
such as those defined in strategic and annual performance plans, and forming a basis for
determining how risks should be managed. Risk identification methods may include, but are not
limited to, qualitative and quantitative ranking activities, management conferences, forecasting
and strategic planning, and consideration of findings from audits and other assessments.

In addition, for an entity to run and control its operations, it must have relevant, reliable, and
timely communications. Information is needed throughout the agency to achieve all of its
objectives. Program managers need both operational and financial data to determine whether
they are meeting their agencies’ strategic and annual performance plans and meeting their goals
for accountability for effective and efficient use of resources. In addition to internal
communications, management should ensure there are adequate means of communicating with,
and obtaining information from, external stakeholders that might have a significant impact on the
agency achieving its goals. Moreover, effective information technology management is critical
to achieving useful, reliable, and continuous recording and communication of information.
Final Audit Report
ED-OIG/A07L0001                                                                      Page 34 of 83

Sufficient and Appropriate Data Are Needed to Properly Manage Risk
For Department policy makers and program managers to better understand distance education
and appropriately manage risk, they must recognize the complex characteristics of distance
education and the risks associated with it. Based on our analysis of the data that we received
from the eight schools that participated in this audit, the schools disbursed a significant amount
of Title IV funds to students who did not earn any credits during a payment period. The eight
schools disbursed nearly $222 million to more than 42,000 distance education students who did
not earn any credits during at least one payment period from July 1, 2010, through
June 30, 2011.

Students who do not earn any credits during a payment period are at a higher risk for improper
disbursements because they might not have attended school, and the school should have returned
all Title IV funds to the Department. In addition, students who do not earn any credits might not
have attended all the courses for which they registered during the payment period or stopped
attending school during the payment period, which could potentially affect the amount of
Title IV funds for which they are eligible.

Because the Department does not collect such data, Department policy makers and program
managers cannot fully identify and fully understand the characteristics and risks unique to
distance education.

Change in the Population of Postsecondary Education Students Requires Increased
Analysis
As described in the Background section of this report, the increase in the number of students
taking at least one distance education course is outpacing the growth for total enrollment in
higher education. Because distance education is growing, the Department should take steps now
to design a plan to collect the data necessary to identify trends in the distance education
environment. Doing so would help policy makers and program managers better understand
distance education and proactively identify needed statutory and regulatory changes to protect
students and taxpayers.

To better understand distance education, the Department could collect data that it could then
analyze and answer questions such as:

       •   To what extent is distance education offered at schools (for example, how many
           degree programs and courses are offered through distance education)?

       •   What is the level of a student’s participation in distance education (for example, is the
           student enrolled 100 percent in distance education courses, 100 percent in traditional
           education courses, or some combination of the two)?

       •   What amount of Title IV funds did students receive to attend distance education
           programs (for example, how much in Title IV funds did schools disburse to the
           students in each category in the preceding bullet)?

       •   What are the costs of attendance for a traditional student and a distance education
           student (for example, what is the total amount of tuition and fees charged to a
Final Audit Report
ED-OIG/A07L0001                                                                        Page 35 of 83

           distance education student and is it the same as the amount charged to a
           traditional student for the same program of study)?

Such information would help Department policy makers and program managers identify trends
and make informed policy and operational decisions with respect to overseeing and monitoring
distance education programs receiving Title IV funds. Plus, this type of information could help
FSA

       •   identify additional risks that have the potential to negatively affect the Title IV
           programs,

       •   formulate strategies to mitigate the risks identified, and

       •   focus its program review resources on high-risk areas.

A properly designed plan that outlines how data will be collected, the type of data to collect, and
the purpose of the data collected could provide Department decision makers and program
managers a much deeper insight into the distance education environment. Plus, establishing a
baseline that can be used for comparative purposes will give the Department the ability to
identify shifts in the distance education environment and proactively develop policies and
regulations to address future concerns. The issuance of new regulations or guidance, or
modifications to existing requirements, would likely be timelier, lessening the impact on the
Title IV programs.

Recommendations

We recommend that the Acting Assistant Secretary for Postsecondary Education, in
collaboration with the Chief Operating Officer for FSA—

5.1    Collect data that helps Department policy makers and program managers better
       understand the characteristics of the distance education environment; monitor growth in
       distance education as it relates to Title IV funds, programs, and student population; assess
       risks specific to the distance education environment; and formulate strategies to address
       the risks identified.

5.2    Incorporate the data into FSA’s risk assessment process.

Department Response
The Department agreed in principle with the finding and agreed with both recommendations.
The Department stated that FSA will review Integrated Postsecondary Education Data System
(IPEDS) data elements related to distance education and send comments and recommendations
to NCES for updating data elements in IPEDS, as needed. In addition, the Department stated
that FSA will use available IPEDS data on distance education to determine how to strengthen
Program Compliance’s school risk assessment process. However, the Department stated that the
distance education data collected from the schools cannot be tied to Title IV disbursements.
Final Audit Report
ED-OIG/A07L0001                                                                 Page 36 of 83

OIG Response
Distance education disbursement data could be collected through the National Student Loan Data
System, which collects student-level data. However, the National Student Loan Data System
would need to be modified to include fields for distance education-related data.
Final Audit Report
ED-OIG/A07L0001                                                                       Page 37 of 83



                                     OTHER MATTERS


During our audit, we identified an additional issue that was not specific to the distance education
environment. Of the eight schools that we reviewed, four used a form to obtain the student’s or
parent’s authorization to hold Title IV credit balances. Two of the four forms were not in
compliance with Title IV requirements. In addition, of the eight schools, four did not return
Title IV credit balances in a timely manner.

Credit Balance Authorization Forms Were Not in Compliance With Federal Regulations
ITT Tech and Liberty University were using authorization forms that did not comply with the
Title IV regulations.

       •   ITT Tech’s authorization form was not in compliance with the regulations because it
           (1) stated that the school could retain a Title IV credit balance for future charges and
           for prior academic years and (2) did not specify to whom the Title IV credit balance
           must be paid when it is liquidated. However, according to 34 C.F.R.
           § 668.165(b)(5)(iii), a school may not hold a credit balance to pay for future charges
           beyond the end of the award year or loan period, in the case of loans. In addition, a
           school may not use Title IV funds to satisfy more than $200 of prior award year
           charges (34 C.F.R. § 668.164(d)(2)).

       •   Liberty University’s authorization form stated that students who wanted to change
           their current authorization had to submit a written request before the end of the
           second week of the semester. However, according to 34 C.F.R. § 668.165(b)(2)(ii),
           the student or parent must be allowed to cancel or modify the authorization at any
           time.

Credit Balances Not Returned in a Timely Manner
ITT Tech, Ivy Tech, Penn State, and Western Governors University were holding Title IV credit
balances longer than 14 days without a student’s or parent’s authorization. Unless a school has
authorization from students or their parents to hold Title IV credit balances, it must pay a
Title IV credit balance no later than 14 days after the balance occurred, unless the credit balance
occurred on or before the start of the first class of the payment period. In that case, schools must
pay the credit balance no later than 14 days after the first day of class of the payment period
(34 C.F.R. § 668.164(e) and § 668.165(b)(1)(ii)).

Penn State, Western Governors University, and Ivy Tech did not have authorization forms
because their practices were to not hold Title IV credit balances. However, our testing showed
that Ivy Tech and Western Governors University did not always pay Title IV credit balances to
students within 14 days. Penn State paid Title IV credit balances to students unless the students
verbally requested that their credit balances be held on their accounts. This verbal request would
be noted in the student’s records. However, such a process does not comply with Federal
regulations, which require that the authorization be in writing (34 C.F.R. § 668.165(b)(1)).

FSA should review these five schools to verify that all credit balance issues have been corrected.
Final Audit Report
ED-OIG/A07L0001                                                                    Page 38 of 83

Department Response
The Department agreed to follow up with the two schools whose credit balance authorization
forms were not in compliance with Title IV requirements and the four schools that did not return
Title IV credit balances in a timely manner.
Final Audit Report
ED-OIG/A07L0001                                                                   Page 39 of 83



                 OBJECTIVES, SCOPE, AND METHODOLOGY


The objectives of this audit were to determine whether (1) the Department adapted the program
requirements and guidance for the Title IV programs to mitigate the unique risks inherent in the
distance education environment and (2) the Department, accrediting agencies, and State agencies
adequately monitored schools to provide assurance of their compliance with the Title IV
requirements unique to the distance education environment.

To achieve our objectives, we gained an understanding of selected provisions of the
Higher Education Act of 1965, as amended; the Higher Education Reconciliation Act of 2005;
and the Higher Education Opportunity Act of 2008. We also gained an understanding of the
Title IV regulations; June 2012 version of Office of Management and Budget Circular A-133
Compliance Supplement, Part 5, Section 3, “Clusters of Programs, Student Financial Assistance
Programs;” January 2000 version of the OIG audit guide, “Audits of Federal Student Financial
Assistance programs at participating Institutions and Institution Servicers;” and Departmental
guidance applicable to the audit objectives. We also obtained an understanding of the policies,
procedures, and practices relevant to distance education at four levels: the Department,
accrediting agencies, States, and schools. We reviewed records relevant to July 1, 2009, through
June 30, 2011.

Department
We interviewed officials and reviewed policies and procedures to obtain an understanding of
OPE’s processes for overseeing accrediting agencies and State authorizations of schools. We
also gained an understanding of the data that OPE and NCES collected on schools offering
distance education programs and OPE’s interaction with FSA to monitor schools that offer
distance education programs. In addition, we gained an understanding of OPE’s regulatory and
policy changes and guidance related to distance education programs and OPE’s process for
recognizing accrediting agencies to accredit schools offering distance education.

We also interviewed officials and reviewed policies and procedures to obtain an understanding
of FSA’s processes for monitoring schools that offer distance education programs. We gained an
understanding of the role that independent auditors, accrediting agencies, and States had in
FSA’s monitoring of schools. We also gained an understanding of the data that FSA collected
on schools offering distance education programs and FSA’s interaction with OPE as it related to
monitoring schools that offered distance education programs.

Finally, we interviewed personnel, reviewed written policies and procedures, and reviewed
five program review reports and the documentation supporting the program review to gain an
understanding of FSA’s process for conducting program reviews at schools that offer distance
education programs. We judgmentally selected five FSA program reviews: four reviews that
FSA conducted at three of the eight schools included in our audit and one additional FSA
program review of a school that we previously audited. We compared FSA’s findings with our
findings at the same schools.
Final Audit Report
ED-OIG/A07L0001                                                                     Page 40 of 83

Accrediting Agencies
The Department has approved 6 national, 8 regional, and 16 specialized accrediting agencies to
accredit distance education programs. We judgmentally selected two national, two regional, and
five specialized accrediting agencies for review. We selected the national and regional
accrediting agencies that accredited the most schools. We selected the specialized accrediting
agencies based on the number of schools and the types of programs that they accredited, as well
as whether the agencies shared a location, employees, and other resources (see Table 4). At each
of the nine accrediting agencies we

       •   interviewed officials and reviewed documentation to obtain an understanding of the
           accrediting agency and its processes for accrediting schools offering distance
           education;

       •   reviewed the process for applying for recognition with the Department and the steps
           the accrediting agency has taken to address new regulations that came into effect
           July 1, 2010, and July 1, 2011;

       •   reviewed policies and procedures for accrediting schools, including processes for
           (1) conducting site visits at traditional schools and schools offering distance
           education programs and (2) distinguishing between distance education and
           correspondence programs; and

       •   obtained an understanding of the accrediting agency’s interaction with the
           Department, States, independent public accountants, and other accrediting agencies.

The accrediting agency’s documentation that we reviewed included the files for judgmentally
selected samples of schools offering distance education. We selected the schools by considering
four, nonexclusive factors: (1) amount of Title IV funding the school received, (2) the type of
school, (3) geographic location, and (4) whether the school had previously been reviewed by
FSA or audited by the OIG.

Table 4. Accrediting Agencies Selected for Review
                                                                                     School
                                                                                      Files
                   Name                            Type            Location         Reviewed

Accrediting Council for Independent Colleges                      Washington,
                 and Schools                     National            D.C.              10
Accrediting Commission of Career Schools and                       Arlington,
                   Colleges                      National           Virginia           10
     The Higher Learning Commission A
 Commission of the North Central Association
           of Colleges and Schools               Regional       Chicago, Illinois      18
Southern Association of Colleges and Schools
           Commission on Colleges                Regional      Decatur, Georgia        13
   Joint Review Committee on Education in
            Radiologic Technology               Specialized     Chicago, Illinois      17

  National Association of Schools of Music*     Specialized     Reston, Virginia        2
Final Audit Report
ED-OIG/A07L0001                                                                                    Page 41 of 83

                                                                                                   School
                                                                                                    Files
                    Name                                    Type                Location          Reviewed
  National Association of Schools of Art and
                   Design*                               Specialized        Reston, Virginia            2
  National Association of Schools of Theatre*            Specialized        Reston, Virginia            0
  National Association of Schools of Dance*              Specialized        Reston, Virginia            0
* Located in the same office space.

States
We judgmentally selected nine States and asked for information about their oversight of distance
education programs. For this audit, we reviewed eight schools that offered distance education
programs. We judgmentally selected the seven States (Arizona, Florida, Indiana, Ohio,
Pennsylvania, Utah, and Virginia) in which the eight schools were located. In addition, using the
Council for Higher Education Accreditation’s descriptions of the various levels of State
oversight of schools, 15 as well as information that we solicited from the schools we reviewed as
part of this audit, we judgmentally selected one State (Arkansas) that had a strong level of
oversight over schools and one State (South Dakota) that had a minimal level of oversight over
schools. We concluded that Arkansas had a strong level of oversight because it required
out-of-state and proprietary schools to be certified by the Arkansas Higher Education
Coordinating Board in order to offer degrees and college-credit courses. We concluded that
South Dakota had a minimal level of oversight because no State agency or commission has
approval and licensing authority over proprietary schools. These schools are required only to file
articles of incorporation with the Secretary of State.

From each of the nine States, we requested information related to the

        •    role that the State played in monitoring schools, the type of monitoring performed,
             and whether that role and type of monitoring were different for schools offering
             distance education;

        •    requirements for reporting to the Department fraud or violations of the Title IV
             requirements;

        •    changes imposed that affected the State authorization requirements;

        •    current State laws, regulations, and requirements for schools and schools offering
             distance education;

        •    measures taken, if any, to ensure that schools and schools offering distance education
             programs complied with State authorization; and

        •    process for authorizing schools to provide postsecondary education.



15
  The Council for Higher Education Accreditation is a nonprofit association of 3,000 degree-granting schools that
recognizes 60 institutional and programmatic accrediting organizations.
Final Audit Report
ED-OIG/A07L0001                                                                                   Page 42 of 83

We received responses and reviewed information from five States: Arizona, Pennsylvania, South
Dakota, Utah, and Virginia.

Schools
For this audit, we selected eight schools that offered distance education (see Table 5) from the
universe of schools that received Pell funds during award year 2009–2010. If a school received
only loan funds, we did not include it in our universe. We judgmentally selected two schools
from each of four categories: 4-year public, 2-year public, private nonprofit, and proprietary.
The total amount of funding received by the schools in the universes for each category was as
follows: 16

        •    4-year public: 78 schools that each received more than $130 million in total Title IV
             funding for award year 2009–2010.

        •    2-year public: 81 schools that each received more than $35 million in total Title IV
             funding for award year 2009–2010.

        •    Private nonprofit: 74 schools that each received more than $70 million in Title IV
             funding for award year 2009–2010.

        •    Proprietary: 70 schools that each received more than $50 million in Title IV funding
             for award year 2009–2010.

In making our judgmental selections, we considered the amount of Title IV funds that the school
received; recent growth in the amount of Title IV funds that each school received; each school’s
primary accrediting agency, student retention rates, and default rates; our knowledge of the
schools; recent OIG investigations; and recent FSA program reviews.

Table 5. Classification of Schools Reviewed
          School                Type of School                              Location of School
        Penn State               4-Year Public                         University Park, Pennsylvania
        Kent State               4-Year Public                                  Kent, Ohio
         Ivy Tech                2-Year Public                             Indianapolis, Indiana
         Valencia                2-Year Public                               Orlando, Florida
    Liberty University         Private Nonprofit                           Lynchburg, Virginia
   Western Governors
        University             Private Nonprofit                            Salt Lake City, Utah
        ITT Tech                   Proprietary                              Indianapolis, Indiana
  University of Phoenix            Proprietary                                Phoenix, Arizona




16
  Total Title IV funding limited to Pell, Federal Family Education Loans, and William D. Ford Federal Direct
Loans.
Final Audit Report
ED-OIG/A07L0001                                                                        Page 43 of 83

At each school, we interviewed officials and reviewed handbooks, manuals, and written policies
and procedures to gain an understanding of each school’s system of internal control over
administration of the Title IV programs as they relate to distance education in the following
areas:

       •     determining student eligibility,
       •     identifying and documenting attendance,
       •     calculating Title IV award,
       •     disbursing Title IV funds,
       •     returning Title IV aid,
       •     retaining and disbursing credit balances,
       •     identifying straw students,
       •     verifying students’ identities,
       •     obtaining State authorization to offer distance education programs, and
       •     retaining records.

We also determined whether the characteristics of each school’s distance education courses were
consistent with the definition of distance education or the definition of a correspondence course
at 34 C.F.R. § 600.2. In addition, we obtained cost of attendance budgets and data used to
support the cost categories to determine whether the school (1) used different cost of attendance
budgets for different modes of delivery (such as residential programs, 100-percent distance
education programs, correspondence programs, or a hybrid program) and (2) included costs in
their cost of attendance budgets that were potentially unnecessary or unreasonable for distance
education.

At each school, we randomly selected 50 students from the universe of students who were
enrolled solely in distance education courses, received Title IV aid, and did not earn any credits
during a payment period that began and ended during the period from July 1, 2010, through
June 30, 2011 (see Table 6). We reviewed academic and financial records to (1) determine
whether the school complied with selected regulations governing Pell award recalculations,
disbursements, return of Title IV aid, and credit balances; (2) determine whether students were
potentially straw students; and (3) evaluate whether the school properly determined and
adequately documented students’ attendance at academically related activities.

Table 6. Number of Students in Universe and Sample
                                                                                         Amount
                  Number of       Students in                           Number of      Disbursed to
                   Students        Universe     Amount Disbursed to      Students      Students in
   School         (estimated)       (actual)    Students in Universe    in Sample        Sample
 Penn State        96,500 (1)          460           $ 2,101,068            50          $ 221,118
 Kent State        24,000 (2)          297           $ 1,528,824            50          $ 233,804
  Ivy Tech        200,000 (3)        4,388           $ 19,770,570           50          $ 229,864
 Valencia          65,000 (4)          367           $ 1,272,783            50          $ 162,020
  Liberty
 University        70,000 (2)        5,259           $ 27,945,355           50          $ 286,224
Final Audit Report
ED-OIG/A07L0001                                                                    Page 44 of 83

                                                                                     Amount
                  Number of      Students in                          Number of    Disbursed to
                   Students       Universe     Amount Disbursed to     Students    Students in
  School          (estimated)      (actual)    Students in Universe   in Sample      Sample
  Western
 Governors
 University         25,000 (5)      1,541         $ 10,303,580            50        $ 317,020

 ITT Tech           70,000 (6)      4,140         $ 7,793,451             50        $ 105,895
University of
  Phoenix         400,000 (7)      25,724         $151,192,683            50        $ 269,699
      Total          950,500       42,176         $221,908,314           400        $1,825,644
1.   As of fall 2011
2.   As of 2011
3.   Serves annually
4.   Award year 2010–2011
5.   As of October 2011
6.   As of May 2012
7.   As of May 2011

When we finished reviewing the records of 50 students at each school, we provided the school
with our results and asked for comments and any additional documentation that might not have
been available at the time of our review. If the school provided additional documentation with
its comments, we revised our results if the additional documentation was sufficient to
demonstrate compliance with the regulatory requirement. The final results of our review of each
school and each school’s comments on our results are included as Appendices C through J.

Data Reliability
To achieve our objectives, we relied on computer-processed data that each school provided. For
each school, the data included students who were enrolled solely in distance education courses,
received Title IV aid, and did not earn any credits during a payment period that began and ended
during the period July 1, 2010, through June 30, 2011, as well as the amount of Title IV aid
disbursed to each student. To test the reliability of the data, we performed tests to look for
missing data, the relationship of one data element to another, values outside of a designated
range, and dates outside of a designated range. Based on our tests, we determined the data that
the schools provided were sufficiently reliable for the purposes of our audit.

We conducted our audit from January 2011 through September 2012. We discussed the results
of our work with Department officials on May 3, 2012, and August 27, 2013. We provided a
draft of this report to the Department for comment on September 9, 2013. The Department
provided comments to the draft report on November 18, 2013.

We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
based on our audit objectives. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objectives.
Final Audit Report
ED-OIG/A07L0001                                                                    Page 45 of 83

         Appendix A: OIG Issued Reports on Audits of Schools Offering
                       Distance Education Programs
The following reports provide the results of recent OIG audits covering the distance education
environment.

       1. “Colorado Technical University’s Administration of Title IV, Higher Education Act
          Student Financial Assistance Programs,” September 2012 (A09K0008)
          http://www2.ed.gov/about/offices/list/oig/auditreports/fy2012/a09k0008.pdf

       2. “Metropolitan Community College’s Administration of the Title IV Programs,”
          May 2012 (A07K0003)
          http://www2.ed.gov/about/offices/list/oig/auditreports/fy2012/a07k0003.pdf

       3. “Saint Mary-of-the-Woods College’s Administration of the Title IV Programs,”
          March 2012 (A05K0012)
          http://www2.ed.gov/about/offices/list/oig/auditreports/fy2012/a05k0012.pdf

       4. “Ashford University’s Administration of the Title IV, Higher Education Act
          Programs,” January 2011 (A05I0014)
          http://www2.ed.gov/about/offices/list/oig/auditreports/fy2011/a05i0014.pdf

       5. “Baker College’s Compliance with Selected Provisions of the Higher Education Act
          of 1965 and Corresponding Regulations,” August 2010 (A05I0012)
          http://www2.ed.gov/about/offices/list/oig/auditreports/fy2010/a05i0012.pdf

       6. “TUI University’s Administration of Higher Education Act, Title IV Student
          Financial Assistance Programs,” August 2009 (A09I0009)
          http://www2.ed.gov/about/offices/list/oig/auditreports/fy2009/a09i0009.pdf

       7. “Walden University’s Compliance with Selected Regulations and U.S. Department of
          Education Guidance,” January 2009 (A05H0018)
          http://www2.ed.gov/about/offices/list/oig/auditreports/fy2009/a05h0018.pdf

       8. “Capella University’s Compliance with Selected Provisions of the Higher Education
          Act of 1965 and Corresponding Regulations,” March 2008 (A05G0017)
          http://www2.ed.gov/about/offices/list/oig/auditreports/fy2008/a05g0017.pdf

       9. “Herzing College-Madison’s Compliance with Selected Provisions of the Higher
          Education Act of 1965 and Corresponding Regulations,” January 2008 (A05H0015)
          http://www2.ed.gov/about/offices/list/oig/auditreports/fy2008/a05h0015.pdf

       10. “Bellevue University’s Compliance with Selected Regulations and U.S. Department
           of Education Guidance,” October 2007 (A07H0009)
           http://www2.ed.gov/about/offices/list/oig/auditreports/fy2008/a07h0009.pdf
Final Audit Report
ED-OIG/A07L0001                                                                      Page 46 of 83

          Appendix B: Introduction of Information on Selected Schools
As part of this audit, we selected eight schools that offered distance education (see Table 5,
“Classification of Schools Reviewed”). We judgmentally selected two schools from each of the
following four categories: 4-year public, 2-year public, private nonprofit, and proprietary. The
information that we are providing in Appendix B is applicable to each of the eight schools
discussed in Appendices C through J.

Appendices C through J include general background information on each of the eight schools
that we reviewed as part of this audit. In addition, the appendices include information regarding
each school’s cost of attendance budgets, billing and disbursement policies, and attendance and
withdrawal policies. Finally, the appendices describe instances of noncompliance relevant to the
Title IV requirements that we identified during our review, comments that we received from
each school regarding the instances of noncompliance, and our analysis of each school’s
comments on the issues.

Universes of Students and Sample Selections
Each of the eight schools provided us with a universe of students who (1) received Title IV
funds, (2) attempted but did not earn any credits, and (3) were enrolled only in distance
education courses for payment periods that began and ended during the period July 1, 2010,
through June 30, 2011. From each universe, we randomly selected 50 students (see Table 6,
“Number of Students in Universe and Sample”).

Methodology for Reviewing Student Records
For each sample of 50 students, we obtained data from each school’s online learning
management system. We reviewed the data for evidence of attendance consistent with the
requirements in 34 C.F.R. § 668.22(c)(3) and in effect during our audit period or any other
evidence that might reasonably indicate that a student attended an academically related activity.
We accepted as sufficient evidence of academic attendance a student (1) submitting discussion
postings related to the classwork; (2) completing exams, quizzes, or assignments; or (3) initiating
contact with a faculty member to ask a question about the academic subject. We did not accept
as sufficient evidence of academic attendance a student’s simply logging in to a course when the
record of access did not indicate whether the student attended an academically related activity,
such as replaying a video lecture, joining an online discussion, or reviewing reading materials.
In the situations described in Appendices C through J, the login record generally did not indicate
any activity other than the login itself. We also did not accept discussion postings that were not
academically related to be sufficient evidence of academic attendance.

Four of the eight schools whose records we reviewed maintained records outside the online
learning management system that could have contained evidence of academic attendance. For
those four schools, we first reviewed the records maintained in the online learning management
system. If the records in the online learning management system did not provide sufficient
evidence of academic attendance, we asked the school for records of academic attendance
maintained outside the online learning management system.
Final Audit Report
ED-OIG/A07L0001                                                                       Page 47 of 83

Criteria Relevant to Issues Identified
If a school does not properly determine whether a student attended or remained in attendance and
does not retain evidence of such attendance in accordance with Federal regulations, it (1) cannot
identify students who withdrew without notification or properly calculate the amount of Title IV
funds the student earned before withdrawing, (2) cannot properly identify and return Title IV
funds disbursed to students who do not attend during the payment period, (3) cannot determine
student eligibility to receive Title IV funds during a payment period, and (4) cannot recalculate
Pell awards as required. The following criteria address each of the four areas.

Treatment of Title IV Funds When a Student Withdraws
When a student receives Title IV funds and withdraws from a school during a payment period in
which the student began attendance, the school must determine the amount of Title IV funds the
student earned as of the student’s withdrawal date (34 C.F.R. § 668.22(a)(1)). For schools that
are required to take attendance, the student’s withdrawal date is the last date of academic
attendance (34 C.F.R. § 668.22(b)(1)). If a school is not required to take attendance and a
student withdraws from the school without notification, the school generally may use one of
two dates as the student’s withdrawal date: the midpoint of the payment period or period of
enrollment, or, with proper documentation, the student’s last date of academic attendance. If the
school chooses to consider the withdrawal date as the student’s last date of academic attendance,
the school must maintain evidence that the (1) activity is academically related and (2) student
attended the academically related activity (34 C.F.R. §§ 668.22(c)(1)(iii) and 668.22(c)(3)).

Treatment of Title IV Funds When a Student Does Not Begin Attendance
According to 34 C.F.R. § 668.21(a), if a student does not begin attendance in a payment period
or period of enrollment, the school must return all Title IV funds that were credited to the
student’s account or disbursed directly to the student for the payment period or period of
enrollment.

Confirmation of Eligibility at Time of Disbursements
According to Department guidance, if a Title IV disbursement occurs on or after the first day of
classes, the school must determine whether the student began attending his or her classes before
disbursing Title IV funds to the student. If the student did not begin attending classes, the
student is not eligible to receive the Title IV disbursements (“2010–2011 Federal Student Aid
Handbook,” Volume 4, Chapter 1, page 4-21).

Recalculation of Pell Award
A student’s Pell award is based, in part, on the student’s enrollment status (34 C.F.R.
§§ 690.63(b), 690.63(c), and 690.63(d)). If a student’s projected enrollment status changes
before the student begins attending all of his or her classes for that payment period, the school
must recalculate the student’s enrollment status to reflect only those classes for which the student
actually began attending classes (34 C.F.R. § 690.80(b)(2)(ii)).
Final Audit Report
ED-OIG/A07L0001                                                                      Page 48 of 83

                   Appendix C: The Pennsylvania State University
                                       4-year public school

Penn State was established in 1855, and its main campus is located in University Park,
Pennsylvania. The school is accredited by the Middle States Commission on Higher Education.
Penn State offers about 70 degree programs and 740 individual courses through distance
education. During award year 2010–2011, Penn State disbursed more than $676 million in
Title IV funds to about 55,000 students, including about 3,200 students who were enrolled solely
in distance education courses.

Cost of Attendance
Penn State’s cost of attendance budget included tuition and fees and allowances for room and
board, books, transportation, and miscellaneous expenses. Penn State created a separate cost of
attendance budget that did not include an allowance for transportation costs for distance
education students.

Billings and Disbursements
Penn State is a term-based school operating on a semester system and charging tuition and fees
by the semester. Penn State established the semester as its payment period for Title IV purposes.
Each semester was 15 weeks, and Penn State began a new semester each fall, spring, and
summer.

Penn State disbursed loan funds 10 days before the start of each semester. It generally disbursed
Pell funds during the first week of each semester. Penn State programmed its higher education
software to automatically disburse Title IV funds if the student met all disbursement
requirements, such as enrollment in at least 6 credit hours for loans and enrollment as a full-time
student for a full-time Pell award. If a student was in default on a loan, the higher education
software would not automatically disburse the Title IV funds.

Attendance and Withdrawal Policies
Penn State used the same attendance policy for all students, regardless of whether they were
enrolled in traditional courses, distance education courses, or both. That policy did not establish
what activities could or could not be considered evidence of academic attendance. Instead,
faculty members were responsible for determining what activity would be considered evidence
of academic attendance. Evidence of academic attendance was maintained in either the online
learning management system or outside the online learning management system.

Faculty members also were responsible for determining whether a student (1) began attending a
course, (2) stopped attending a course, or (3) completed a course. If assigning a grade of F, the
faculty member was required to indicate the reason for the F (partially participated, participated
the entire semester, or never participated). If a student stopped attending, the faculty member
was given the option to enter the last date of attendance into the online learning management
system but was not required to do so. Penn State’s financial aid office would review the records
of students who received all F grades in a payment period to determine whether the students
unofficially withdrew from the school and needed a return of Title IV aid calculation performed.
Final Audit Report
ED-OIG/A07L0001                                                                                     Page 49 of 83

Penn State was not required to take attendance. However, if a faculty member provided a last
date of attendance for a student who unofficially withdrew, then Penn State used the last date of
attendance as the student’s withdrawal date for the return of Title IV aid calculation. Otherwise,
Penn State used the midpoint of the payment period as the student’s withdrawal date.

Determination of Attendance Affects Compliance With the Title IV Requirements
We identified attendance issues that affected Penn State’s compliance with the Title IV
requirements in four areas: (1) treatment of Title IV funds when a student withdraws,
(2) treatment of Title IV funds when a student does not begin attendance, (3) confirmation of
eligibility at the time of disbursement, and (4) recalculation of the Pell award.

Penn State considered a student’s entering an online class via a secure login to be sufficient
evidence of academic attendance and aligned with the regulation in effect during the audit
period. Penn State stated that the OIG, in making its determination of attendance (see
“Methodology for Reviewing Student Records” in Appendix B), applied regulations that were
not in effect during the audit period. Specifically, Penn State stated that the OIG applied the
definition of attendance in 34 C.F.R. § 668.22(l)(7)(i), which did not become effective until
July 1, 2011.

We disagree with Penn State’s position that a student’s entering an online class via a secure login
was sufficient evidence of academic attendance during our audit period. Even before
July 1, 2011, the regulations required activity supporting attendance to be academically related.
Absent any other evidence of activity, a student’s logging in to an online course is not sufficient
to satisfy the regulatory requirement.

Treatment of Title IV Funds When a Student Withdraws
Of the 50 students in our sample, 35 withdrew during a payment period. Penn State did not treat
Title IV funds properly for 25 of the 35 students who withdrew. For 14 of the 25 students,
Penn State used a last date of attendance that was not supported by evidence of the student’s
academic attendance. 17 It did not perform return of Title IV aid calculations for 11 students.

Using information recorded in Penn State’s online learning management system and other
records, we determined that Penn State did not properly handle Title IV funds for 18 of the
25 students. As a result, Penn State returned $12,814 less than it should have for 8 students and
$17,882 more than it should have for 10 students.

Penn State agreed that it improperly handled Title IV funds for 1 student but disagreed with our
conclusion for the other 17 students. Penn State provided the following explanations:

           •   Ten of the 18 students officially withdrew from school. Penn State performed return
               of Title IV aid calculations based on the “date of action” recorded in its higher
               education software. Penn State explained that the “date of action” recorded in the
               higher education software was the date that the students officially withdrew from


17
     One student is counted twice because the student withdrew from two separate payment periods.
Final Audit Report
ED-OIG/A07L0001                                                                         Page 50 of 83

           school. Penn State believed that it correctly calculated the return of Title IV aid for
           these 10 students.

       •   Five of the 18 students possibly had academically related contacts with faculty
           members that were not logged in to the online learning management system.
           However, time did not permit Penn State to contact all the faculty members to gather
           documentation that supported the reported last dates of attendance for each of these
           five students.

       •   Two of the 18 students officially and unofficially withdrew from a combination of
           courses. Penn State performed the return of Title IV aid calculations based on the
           dates of the last recorded student course activity for these two students. Penn State
           believed it used the correct dates for both students.

We disagree with Penn State’s position that it used the appropriate withdrawal date for the
10 students who officially withdrew. For those 10 students, the “date of action” recorded in the
higher education software as the date the student officially withdrew could not be corroborated
with other evidence. The student emails and letters that Penn State provided us and activity
reports from the higher education software indicated other dates of withdrawal.

For the remaining seven students, we disagree with Penn State’s position that it used the
appropriate withdrawal date. Using information from Penn State’s online learning management
system or other records, we concluded that all seven students unofficially withdrew. However,
the withdrawal dates that Penn State used for the students were not supported. During our
review of students’ records, if we were unable to find support for the withdrawal dates that
Penn State used, we asked Penn State to provide evidence to support the dates that it used. In
response, Penn State did not provide evidence that supported the withdrawal dates for these
seven students.

Treatment of Title IV Funds When a Student Does Not Begin Attending Classes
Of the 50 students in our sample, Penn State did not return $27,980 in Title IV funds that it
credited to the accounts of or disbursed directly to seven students without evidence of the
students’ attendance in academically related activities during the payment period.

Penn State did not provide any evidence to show that the seven students were engaged in
academically related activities as required by 34 C.F.R. § 668.22(c)(3).

Confirmation of Eligibility at the Time of Disbursement
The records for 21 of the 50 students in our sample indicated that the students received Title IV
disbursements after the start of the payment period. Penn State disbursed $55,550 to 8 of the
21 students without evidence of the students’ academic attendance before the disbursements.

Penn State explained that, for students receiving disbursements on or after the first day of
classes, nightly automated processes performed all eligibility checks before the release of
Title IV funds. The eligibility check verified the student was in a “registered” status. A student
is placed in a registered status after registering for classes and taking deliberate action within the
Final Audit Report
ED-OIG/A07L0001                                                                      Page 51 of 83

Web-based student portal to either pay the tuition bill or confirm that all his or her charges will
be covered by financial aid. Penn State considered the registered status to be the initial proof of
student attendance for Title IV disbursement purposes. Penn State stated that the eight students
who received Title IV disbursements after the start of the payment period all had their eligibility
status checked, as described; therefore, Penn State concluded that the students were eligible for
the disbursements.

We disagree with Penn State’s position. According to guidance from the Department, if a
Title IV disbursement occurs on or after the first day of classes, the school must determine
whether the student began attending his or her classes before disbursing Title IV funds. If the
student did not begin attending classes, the student is not eligible to receive the Title IV
disbursement (“2010–2011 Federal Student Aid Handbook,” Volume 4, Chapter 1, page 4-21).
The actions required by a student to be placed in a registered status did not include any
academically related activities. Therefore, if the disbursement was made after the first day of
classes, Penn State could not use a student’s registered status as the sole evidence of the
student’s eligibility for a Title IV disbursement. For disbursements made after the first day of
classes, Penn State would need evidence that the student attended an academically related
activity before making the disbursement. Penn State’s online learning management system or
other records did not show evidence that any of the eight students attended an academically
related activity as required by 34 C.F.R. § 668.22(c)(3) during the payment period.

Recalculation of Pell Awards
Of the 50 students in our sample, Penn State’s online learning management system records or
other records for 8 students indicated a change in enrollment status based on the students’ lack of
academic attendance in 1 or more of their classes. The enrollment status changes for all
eight students had an effect on the students’ Pell eligibility. As a result, Penn State awarded
$4,825 more than it should have awarded to six students and awarded $1,387 less than it should
have awarded to two students.

Penn State stated that human error caused the incorrect Pell award calculation for one student.
Penn State informed us that it recently implemented refresher training on how to calculate
Title IV awards and how to verify that Title IV award calculations performed manually are
correct. For the remaining seven students, Penn State discussed the use of the semester midpoint
to perform the recalculations or explained how it performed return of Title IV aid calculations, or
both. Penn State did not address the lack of evidence to support the students’ attendance at
academically related activities.
Final Audit Report
ED-OIG/A07L0001                                                                    Page 52 of 83

                          Appendix D: Kent State University
                                      4-year public school

Kent State was established in 1910, and its main campus is located in Kent, Ohio. The school is
accredited by The Higher Learning Commission. Kent State offers 12 degree programs and
9 certificate programs entirely through distance education. Kent State also offers 5 degree
programs and 4 certificate programs that are a combination of distance education and traditional
courses. During award year 2010–2011, Kent State disbursed more than $326 million in Title IV
funds to about 31,000 students, including about 900 students who were enrolled solely in
distance education courses.

Cost of Attendance
Kent State’s cost of attendance budget included tuition and fees and allowances for room and
board, transportation, books and supplies, and miscellaneous and personal expenses. Kent State
did not create a separate cost of attendance budget for distance education students.

Billings and Disbursements
Kent State is a term-based school, operating on a semester system and charging tuition and fees
by the semester. Kent State established the semester as its payment period for Title IV purposes.
Each semester was 15 weeks, and Kent State started a new semester each fall, spring, and
summer. Although Kent State offered alternative academic periods of 5, 7, or 7.5 weeks, it
considered the alternative periods part of the semester because they occurred during the 15-week
semester.

Kent State disbursed Title IV funds 10 days before the start of each semester, programming its
higher education software to automatically disburse Title IV funds if the student met all
disbursement requirements, such as the student completing loan entrance counseling and signing
a master promissory note. If a student had defaulted on a loan, exceeded the annual loan limits,
or had a social security number that did not match the student’s record in the National Student
Loan Data System, the higher education software would not automatically disburse the Title IV
funds.

Attendance and Withdrawal Policies
Kent State used the same attendance policy for traditional and distance education students. That
policy did not establish what activities could or could not be considered evidence of academic
attendance. Instead, faculty members were responsible for managing student attendance. The
faculty member’s attendance policy for each course was to be written in the course syllabus.
Each faculty member determined what activity would be considered evidence of academic
attendance and how he or she would monitor a student’s attendance. Evidence of academic
attendance was maintained in either the online learning management system or outside the online
learning management system.

Faculty members were also responsible for determining whether a student (1) began attending a
course, (2) stopped attending a course, or (3) completed a course. Kent State’s guidelines
suggested that faculty members give a grade of “NF” (never attended, counts as an F grade) to
those students who never attended a course and a grade of “SF” (stopped attending, counts as an
Final Audit Report
ED-OIG/A07L0001                                                                             Page 53 of 83

F grade) to those students who unofficially withdrew from a course. The SF grade was not to be
used after the course withdrawal deadline. After that time, grades were to be based on student
performance in completing the course requirements. However, Kent State only encouraged, not
required, faculty members to follow the guidelines related to the grades.

Kent State was not required to take attendance. However, if a faculty member provided a last
date of attendance for a student who unofficially withdrew, then Kent State used the last date of
attendance as the student’s withdrawal date for the return of Title IV aid calculation. Otherwise,
Kent State used the midpoint of the payment period as the student’s withdrawal date.

Records Retention
Kent State’s higher education software was the repository for official student records. The
higher education software contained all students’ official financial aid and academic records,
including grades, registration information, and financial aid awards and disbursements.
According to the senior associate provost, Kent State’s policy was to rely on the information that
faculty members entered in the higher education software as evidence of a student’s activity or
performance in a course. The senior associate provost informed us that communication between
a faculty member and a student could take many forms. Therefore, the OIG’s reliance on
Kent State’s online learning management system records as the sole evidence of faculty member
and student communication was erroneous.

We reviewed data from both Kent State’s higher education software and its online learning
management system. Data in Kent State’s online learning management system included activity
logs that recorded students’ activities in their distance education courses. Therefore, we
expected data related to academic attendance recorded in the online learning management system
or other records to confirm that the data that faculty members entered in the higher education
software were accurate and complete for students enrolled in distance education courses.
However, the records did not always confirm the information in the higher education software.
For example, of the 50 students whose records we reviewed, 8 students received F grades even
though the online learning management system or other records did not contain any evidence of
academic attendance. According to Kent State’s policy, those students should have received a
grade of NF. We also identified two students who were given SF grades even though the online
learning management system or other records did not contain evidence of the students’ academic
attendance. Those students also should have received grades of NF. Kent State did not have
records to support the grade designations that faculty members entered in its higher education
software for any of the nine students. 18

We concluded that the data from the higher education software were not sufficiently reliable for
our purposes. Our conclusion was based on Kent State not having records to support the data
that faculty members entered in the higher education software. Therefore, instead of relying on
faculty-entered data in the higher education software, we used data from the online learning
management system to determine whether students attended courses, never attended courses,
stopped attending courses, or withdrew from courses, as well as to determine the last date of
attendance for students who unofficially withdrew from courses. If we could not find sufficient

18
     One student erroneously received an F grade and an SF grade in two separate courses.
Final Audit Report
ED-OIG/A07L0001                                                                       Page 54 of 83

evidence of academic attendance in the online learning management system, we asked Kent State
for any records maintained outside of the online learning system that might be evidence of
academic attendance. Kent State did not provide us any such records.

Kent State stated that its policy is to rely on the information that faculty members enter in the
higher education software. Thus, administration of Title IV is based on the information entered
by faculty members. Kent State informed us that it understands our comment that information
entered into the higher education software was not supported, and it is working to develop and
refine delivery methodologies for its online instruction. Kent State expected the final
refinements to be concluded during the fall 2013 semester.

Determination of Attendance Affects Compliance With the Title IV Requirements
We identified attendance issues that affected Kent State’s compliance with the Title IV
requirements in four areas: (1) treatment of Title IV funds when a student withdraws,
(2) treatment of Title IV funds when a student does not begin attendance, (3) confirmation of
eligibility at the time of disbursement, and (4) recalculation of the Pell award.

Treatment of Title IV Funds When a Student Withdraws
Of the 50 students in our sample, 26 withdrew during a payment period. Kent State used a last
date of attendance that was not supported by evidence of academically related activity for 1 of
the 26 students. In addition, Kent State did not perform return of Title IV aid calculations for
12 of the 26 students. As a result, Kent State returned $9,731 less than it should have returned
for 6 of the 13 students.

Kent State’s higher education software showed that 5 of the 12 students received F grades in
their courses. However, we reviewed each student’s academically related activity as recorded in
the online learning management system and concluded that the five students unofficially
withdrew from their courses and did not earn their F grades. Using information recorded in the
online learning management system, we concluded that the remaining seven students attended
enough of the payment period before withdrawing from Kent State to earn 100 percent of the
Title IV funds disbursed for the payment period.

Kent State disagreed that it used a last date of attendance that was not supported by evidence of
academically related activity for one of the students in the sample. Kent State stated that it used
the student’s official withdrawal date as recorded in its higher education software. Kent State
further stated that all five students with F grades recorded in the higher education software
received a grade in at least one of their courses. Therefore, in accordance with the “2010–2011
Federal Student Aid Handbook,” Volume 5, Chapter 2, page 5–77, Kent State presumed that the
student completed the course and thus completed the payment period. In Kent State’s opinion,
no returns of Title IV aid calculations were required for any of these five students.

We disagree with Kent State’s position. The one student who officially withdrew was enrolled
in three courses. The online learning management system showed that the student had
academically related activity in only one of the three courses. The student first officially
withdrew from one course in which the student had academically related activity. The student
then officially withdrew from the remaining two courses but did not have any academically
Final Audit Report
ED-OIG/A07L0001                                                                             Page 55 of 83

related activity in either course. Kent State should have used the student’s first official
withdrawal date when determining the amount to return to the Title IV programs. Instead,
Kent State used the later date, the one that was not supported by any academically related
activity.

We also disagree that Kent State could presume that a student completed a course just because
the student received an F grade. Kent State’s online learning management system showed that
all five students either withdrew from school or did not have any academically related activity in
their courses. The “2010–2011 Federal Student Aid Handbook,” Volume 5, Chapter 2,
page 5–77, states

       If a student earns a passing grade in one or more of his or her classes offered over an
       entire period, for that class, an institution may presume that the student completed the
       course and thus completed the period. If a student who began attendance and has not
       officially withdrawn fails to earn a passing grade in at least one course offered over an
       entire period, the institution must assume, for Title IV purposes, that the student has
       unofficially withdrawn, unless the institution can document that the student completed
       the period.

Kent State should not have presumed that students who received F grades had completed those
courses. It should have assumed the student had unofficially withdrawn.

Treatment of Title IV Funds When a Student Does Not Begin Attending Classes
Of the 50 students in our sample, Kent State did not return $45,922 in Title IV funds that it
credited to the accounts of or disbursed directly to 12 students without evidence of the students’
attendance in academically related activities during the payment period.

Kent State stated that the financial aid awards recorded in its higher education software for all
12 students were consistent with the number of credit hours in which the students were enrolled
at the time of the disbursements. Kent State believed that it made any required adjustments to
the students’ Title IV aid after the Title IV disbursements were made.

We disagree with Kent State’s position. We reviewed Kent State’s online learning management
system for evidence of academically related activity for all 12 students. We did not identify any
academically related activities during the payment period for those 12 students, and Kent State
did not provide any other records showing that the 12 students engaged in academically related
activity as required by 34 C.F.R. § 668.22(c)(3).

Confirmation of Eligibility at the Time of Disbursement
The records for 14 of the 50 students in our sample indicated that the students received Title IV
disbursements after the start of the payment period. Kent State disbursed $30,045 to 5 of the
14 students without evidence of the students’ attendance in academically related activities before
the disbursement.

Kent State stated that, based on information recorded in its higher education software, the
disbursements for each of the students were consistent with their enrolled status at the
time of the disbursements.
Final Audit Report
ED-OIG/A07L0001                                                                      Page 56 of 83

We disagree with Kent State’s position. Kent State may use a student’s enrollment status to
determine a student’s eligibility for Title IV funds that it disburses before the start of the
payment period. However, for Title IV funds that it disburses during the payment period,
Kent State is required to confirm that the student engaged in academically related activity in the
payment period before it makes the disbursement. Kent State’s online learning management
system did not contain evidence that any of the five students engaged in academically related
activity as required by 34 C.F.R. § 668.22(c)(3) before the disbursements.

Recalculation of Pell Awards
Of the 50 students in our sample, Kent State’s online learning management system records for
23 students indicated a change in enrollment status based on the students’ lack of academically
related activity in 1 or more of their classes. The enrollment status changes for 16 of the
23 students had an effect on their Pell eligibility. However, Kent State did not recalculate the
Pell awards for those 16 students. As a result, Kent State awarded $11,405 more than it should
have awarded to 14 students. The other two students’ Pell awards were not affected by their
changes in enrollment statuses.

Kent State informed us that it determined a student’s enrollment status for the semester at the end
of the 100 percent tuition refund period (also known as the census date). For the fall and
spring semesters, the census date occurred after the first week of the semester. Kent State
calculated students’ Pell awards based on a student’s enrollment status as of the census date.
The initial Pell awards for 10 of the 14 students were consistent with the students’ credit hours as
of the census date. Therefore, no Pell recalculations were required. For 1 of the 14 students,
Kent State stated that the student was registered for 10 credit hours as of the census date, but the
student later received an NF grade in one course and dropped a second course before starting it.
Kent State stated that it recalculated the Pell award based on the student’s enrollment in 6 credit
hours and reduced the student’s Pell award to reflect half-time enrollment. The remaining
three students dropped courses before they started them or received NF grades in courses, but the
students’ enrollment statuses were not affected. Therefore, a Pell award recalculation was not
required.

We disagree with Kent State’s position. We reviewed Kent State’s online learning management
system for evidence of academically related activity for the 14 students. The online learning
management system showed that the students did not engage in academically related activity in
one or more classes during the payment period. Though Kent State provided a written
explanation of its position regarding the 14 students’ Pell awards, it did not provide any other
evidence to support that the students’ Pell awards were based on their enrollment statuses in
courses for which they had attendance in academically related activities as required by 34 C.F.R.
§ 668.22(c)(3).
Final Audit Report
ED-OIG/A07L0001                                                                     Page 57 of 83

               Appendix E: Ivy Tech Community College of Indiana
                                      2-year public school

Ivy Tech was established in 1963 and is headquartered in Indianapolis, Indiana. The school is
accredited by The Higher Learning Commission. Ivy Tech offers 12 degree programs and about
350 individual courses entirely through distance education. During award year 2010–2011,
Ivy Tech disbursed more than $629 million to about 94,000 students, including about
9,400 students who were enrolled solely in distance education courses.

Cost of Attendance
Ivy Tech’s cost of attendance budget includes tuition and fees and allowances for room and
board, books, transportation, and personal expenses. Ivy Tech did not create a separate cost of
attendance budget for distance education students.

Billings and Disbursements
Ivy Tech is a term-based school, operating on a semester system and charging tuition and fees by
semester. Ivy Tech started a new semester each fall, spring, and summer. The fall and spring
semesters were 16 weeks. A summer semester could be either 8 or 10 weeks. Ivy Tech also
offered “part of term” courses (modules) that were 6 or 8 weeks. Ivy Tech established the
payment period as the start date and end date of the students’ courses within the semester.
Therefore, if a student was enrolled only in a 6-week module during a 16-week semester, the
student’s payment period would be 6 weeks, not 16.

Ivy Tech disbursed Title IV funds 4 weeks after the start of the semester, programming its
higher education software to disburse Title IV funds only if the student met all disbursement
requirements, such as making satisfactory academic progress and being enrolled in an eligible
program of study.

Attendance and Withdrawal Policies
Ivy Tech determined a student’s enrollment status at the end of the second week of the semester
(referred to as census date, no-show date, and 100-percent-refund date). For distance education
students, Ivy Tech’s attendance policy was that faculty members were required to identify the
students who never attended a course by the end of the census date. Faculty members were to
administratively withdraw such students with the code of “NW,” indicating that the students did
not attend their courses before the census date.

For the purpose of documenting eligibility for Title IV funds, Ivy Tech required students in
distance education courses to make at least one academically related contact with the faculty
member before the census date. Otherwise, the student would be removed from the course.
Ivy Tech defined an academically related contact as submitting an assignment, responding to a
discussion question, or otherwise performing some kind of activity that could be documented and
demonstrated active involvement in the course.

Ivy Tech did not have policies or procedures that established what activities could or could not
be considered evidence of academically related activity for distance education students after the
census date. After the census date, faculty members were responsible for maintaining attendance
Final Audit Report
ED-OIG/A07L0001                                                                      Page 58 of 83

records. Each faculty member was responsible for determining what types of activities would be
considered evidence of attendance. Faculty members were responsible for determining whether
a student (1) began attending a course, (2) stopped attending a course, or (3) completed a course.
Ivy Tech’s policy was that faculty members were to assign a grade of “FW” to students who
failed to achieve a course objective because they stopped attending classes and did not officially
withdraw.

Though Ivy Tech was not required to take attendance, before spring 2012, Ivy Tech used the last
date of attendance as the withdrawal date for return of Title IV aid calculations if a student
completed more than 50 percent of the payment period. Otherwise, Ivy Tech used the midpoint
of the payment period as the withdrawal date. Effective spring 2012, Ivy Tech began to use the
midpoint of the payment period for all return of Title IV aid calculations.

Determination of Attendance Affects Compliance With the Title IV Requirements
We identified attendance issues that affected Ivy Tech’s compliance with the Title IV
requirements in four areas: (1) treatment of Title IV funds when a student withdraws,
(2) treatment of Title IV funds when a student does not begin attendance, (3) confirmation of
eligibility at the time of disbursement, and (4) recalculation of the Pell award.

Treatment of Title IV Funds When a Student Withdraws
Of the 50 students in our sample, 40 withdrew during a payment period. Ivy Tech used an
unsupported last date of attendance or did not perform return of Title IV aid calculations for
21 students, resulting in Ivy Tech returning $7,538 less than it should have for 10 students.

Ivy Tech used a last date of attendance that was not supported by evidence of academically
related activity for 6 of the 21 students. In addition, Ivy Tech did not perform return of Title IV
aid calculations for 15 of the 21 students. After reviewing information recorded in Ivy Tech’s
online learning management system, we concluded that 6 of the 21 students attended enough of
the payment period before withdrawing from school to earn 100 percent of the Title IV funds
disbursed for the payment period. We did not identify a financial impact for five of the students.

Ivy Tech disagreed that it returned less than it should have for the 10 students. According to
Ivy Tech, eight students completed the term and did not require a return of Title IV aid
calculation. Although these students received F grades in their courses, the F grades were
earned. Ivy Tech explained that it had a unique grade designation, FW, for students who failed
the course because they ceased attending (unofficial withdrawal). The F grade for these
eight students indicated that they continued attending their courses and failed because they did
not comprehend the material or pass the academic requirements for the course. Ivy Tech stated
that the other two students attended beyond the 60 percent point in the payment period, and
supporting documentation of the students’ participation in academically related activities was
maintained. In Ivy Tech’s opinion, schools were not required to perform return of Title IV aid
calculations if a student attended beyond the 60 percent point of the payment period.

We disagree with Ivy Tech’s position. For the eight students who Ivy Tech claimed earned their
F grades, the online learning management system did not contain evidence of academically
related activity showing that the students attended their courses long enough to earn the F grades.
Final Audit Report
ED-OIG/A07L0001                                                                      Page 59 of 83

Therefore, we used the last date of academically related activity in the payment period to
perform return of Title IV aid calculations. Using last dates of attendance supported by
academically related activity in the online learning management system, we determined that the
other two students did not attend more than 60 percent of the payment period and a return of
Title IV aid calculation was required.

Treatment of Title IV Funds When a Student Does Not Begin Attending Classes
Of the 50 students in our sample, Ivy Tech did not return $3,766 in Title IV funds that it credited
to the accounts of or disbursed directly to 2 students without evidence of the students’ attendance
in academically related activities during the payment period.

Ivy Tech stated that both students received an FW grade, indicating that the students started the
term, but stopped attending their courses at some point. Ivy Tech stated it is the school’s policy
that faculty members notify the registrar’s office when a student does not attend a class session
or show participation in an academically related activity during the first 2 weeks of the semester.
When that occurred, the faculty members had to administratively withdraw the student from the
course using the code NW. Neither of these students’ records contained the NW code, indicating
that the students attended during the term.

We disagree with Ivy Tech’s position that the two students started attending their courses during
the payment period. We reviewed Ivy Tech’s online learning management system for evidence
of academically related activity for the two students. We did not identify any academically
related activity for those two students during the payment period, and Ivy Tech did not provide
any other evidence showing that the two students engaged in academically related activity as
required by 34 C.F.R. § 668.22(c)(3).

Ivy Tech informed us that it implemented a new process starting with the spring 2012 term.
Starting with that term, faculty members receive an automated notification for all students who
drop from their courses. The automated email requires faculty members to attest to the students’
attendance or lack of attendance. Ivy Tech stated that this new process should help strengthen its
internal control and provide an additional layer of compliance in relation to this issue.

Confirmation of Eligibility at the Time of Disbursement
The records for 1 of the 50 students in our sample indicated that Ivy Tech disbursed Title IV
funds after the start of the payment period without evidence of the student’s attendance in an
academically related activity before the disbursement.

Ivy Tech stated that the student received an FW grade, which indicated the student attended
during the term. If the student would have received an NW grade, it would mean that the student
did not attend during the term.

We disagree with Ivy Tech’s position that the student began attending courses during the
payment period. Ivy Tech’s online learning management system did not contain evidence
showing that the student engaged in academically related activity as required by 34 C.F.R.
§ 668.22(c)(3) before or after the disbursement.
Final Audit Report
ED-OIG/A07L0001                                                                     Page 60 of 83

Recalculation of Pell Awards
Of the 50 students in our sample, the online learning management system records for 7 students
indicated a change in enrollment status based on the students’ lack of academically related
activity in one or more of their courses. The enrollment status changes for five of the
seven students had an effect on their Pell eligibility. However, Ivy Tech did not properly
recalculate the Pell award for those five students. As a result, Ivy Tech awarded $2,803 more
than it should have awarded to the five students.

Ivy Tech stated that the evidence contained in its higher education software supported that, when
necessary, Pell awards were adjusted based on changes in student enrollment statuses in
conjunction with the school’s census date and no-show policies. For two of the five students,
Ivy Tech stated that it properly adjusted the Pell awards to reflect courses that were dropped. For
three of the five students, Ivy Tech stated that the Pell awards did not require adjustments
because the students attended each course beyond the school’s census date. Ivy Tech provided
information from its higher education software to support that it properly adjusted the
Pell awards when required.

We disagree with Ivy Tech’s position. We compared the students’ attendance records from the
higher education software with information from Ivy Tech’s online learning management
system. The online learning management system showed that the five students did not have
academically related activity in one or more of their courses.
Final Audit Report
ED-OIG/A07L0001                                                                       Page 61 of 83

                               Appendix F: Valencia College
                                       2-year public school

Valencia was founded in 1967 as Valencia Junior College and is headquartered in Orlando,
Florida. The school is accredited by the Commission on Colleges of the Southern Association of
Colleges and Schools. Valencia offers associate and bachelor degree programs, including about
200 individual courses through distance education. During award year 2010–2011, it disbursed
more than $173 million in Title IV funds to about 36,000 students, including about
3,200 students who were enrolled solely in distance education courses.

Cost of Attendance
Valencia’s cost of attendance budget includes tuition and fees, and allowances for room and
board, books and supplies, transportation, and miscellaneous expenses. Valencia did not create a
separate cost of attendance budget for distance education students.

Billings and Disbursements
Valencia is a term-based school, operating on a semester system and charging tuition and fees by
the semester. Valencia established the semester as its payment period. Each semester was
16 weeks, and each course was either 8, 10, or 16 weeks. Valencia started a new semester each
fall, spring, and summer.

Valencia usually disbursed Title IV funds during the fourth week of each semester. However, if
a student was enrolled in courses that did not all start on the same date, Valencia disbursed
Pell funds based on the start date of the latest starting course. Before disbursing Title IV funds,
Valencia’s financial aid services office reviewed each student’s records for compliance with
Title IV eligibility requirements, such as the student making satisfactory academic progress and
not being in default on prior loans.

Attendance and Withdrawal Policies
Although Valencia was not required to take attendance, it required its faculty members to
monitor their students’ attendance. Valencia’s attendance policy allowed faculty members to set
their own attendance policies but required the policies to be documented in the course syllabus.
The policy suggested methods for gauging student attendance in the online environment. For
award year 2010-2011, suggested methods included the faculty member requiring evidence of
the student (1) logging in to the course, (2) emailing a faculty member, (3) taking an orientation
quiz, (4) posting to a discussion board, or (5) completing any assignment that enabled the faculty
member to verify the student’s attendance and intention to continue in the course. However,
each faculty member ultimately determined what activity would be considered attendance.
Evidence of academic attendance was maintained in either the online learning management
system or outside the online learning management system.

Faculty members were required to maintain attendance records for 3 years. Valencia also
required faculty members to report students who did not begin attending their courses by the end
of the first week of the course. If a student violated the faculty member’s attendance policy, the
faculty member could withdraw the student from a course up to the beginning of the final exam
period. Faculty members also were required to report each student’s last date of attendance in a
course. For students who unofficially withdrew, Valencia used the last date of attendance as the
withdrawal date for return of Title IV aid calculations.
Final Audit Report
ED-OIG/A07L0001                                                                         Page 62 of 83

Beginning in August 2011, Valencia established a policy that no longer considered logging in to
an online course to count as activity supporting attendance during the first week of the course.
This policy was developed in response to the new regulatory definition of attendance at an
academically related activity (34 C.F.R. § 668.22(l)(7)), effective July 1, 2011. Valencia stated
that the audit period was before the time for which enhanced requirements for documenting
online class attendance was required.

Determination of Attendance Affects Compliance With the Title IV Requirements
We identified attendance issues that affected Valencia’s compliance with the Title IV
requirements in four areas: (1) treatment of Title IV funds when a student withdraws,
(2) treatment of Title IV funds when a student does not begin attendance, (3) confirmation of
eligibility at the time of disbursement, and (4) recalculation of the Pell award.

Treatment of Title IV Funds When a Student Withdraws
Of the 50 students in our sample, 14 withdrew during a payment period. Valencia performed
return of Title IV aid calculations for all 14 students. Valencia used an unsupported last date of
attendance in the return of Title IV aid calculations for three students, resulting in it returning
$514 less than it should have for two students. We concluded that the third student attended
enough of the payment period to earn 100 percent of the Title IV funds disbursed for the
payment period.

Valencia stated that it considered a student’s last date of attendance to be the date the registrar or
faculty member initiated the withdrawal or the date the student officially withdrew. For a
registrar-or faculty-member-initiated withdrawal during award year 2010–2011, Valencia agreed
that it did not always use the student’s last date of attendance at an academically related activity
as the student’s last date of attendance. Valencia stated that, during the audit period, logging in
to an online course was acceptable as an activity supporting attendance during the first week of
the course; however, it since has implemented new procedures. The new procedures were
effective July 1, 2011, and Valencia stated that the procedures reflected the new regulatory
definition of attendance at an academically related activity (34 C.F.R. § 668.22 (l)(7),
effective July 1, 2011).

We disagree with Valencia’s position that a student’s logging in to an online course was
sufficient evidence of academic attendance during our audit period. Even before July 1, 2011,
the regulations required that the activity supporting attendance be academically related. We also
reviewed Valencia’s new procedures. As currently written, the new procedures are applicable
only for the first week of the course when faculty members must determine whether the students
began attending their courses.

Treatment of Title IV Funds When a Student Does Not Begin Attending Classes
Of the 50 students in our sample, Valencia did not return $10,303 in Title IV funds that it
credited to the accounts of or disbursed directly to 7 students without evidence of the students’
attendance in academically related activities during the payment period.

Valencia stated that its procedures were that Title IV funds would be disbursed during the fourth
week of each semester, and faculty members were required to report students who did not attend
within the first week of the course as “no shows.” Valencia would not disburse Title IV funds
until it verified student attendance. However, Valencia acknowledged that, during the audit
Final Audit Report
ED-OIG/A07L0001                                                                       Page 63 of 83

period, it did not define attendance as participation only at an academically related activity. As
stated above, during the audit period, Valencia’s definition of attendance for an online course
was any activity recorded in the online learning management system. Valencia stated that,
effective August 2011, it implemented new procedures that reflect the regulatory definition of
attendance at an academically related activity.

Confirmation of Eligibility at the Time of Disbursement
The records for 19 of the 50 students in our sample indicated that the students received Title IV
disbursements after the start of the payment period without evidence of the students’ attendance
in an academically related activity before the disbursements.

Valencia stated that 16 of the 19 students participated in an academically related activity or had
logged in to their courses. For two students, Valencia said the students did not have attendance
and for one student, Valencia did not have information from the faculty member on the student’s
attendance.

We disagree with Valencia’s position. For Title IV funds disbursed during the payment period,
Valencia is required to confirm that each student engaged in academically related activity before
the disbursement. Simply logging in to a course is not an academically related activity, and
Valencia’s online learning management system did not show evidence that any of the 19 students
attended academically related activities as required by 34 C.F.R. § 668.22(c)(3) before the
disbursements.

Recalculation of Pell Awards
Of the 50 students in our sample, Valencia’s online learning management system or other
records for 13 students indicated a change in enrollment status based on the students’ lack of
attendance at academically related activities in one or more of their courses. The enrollment
status changes for 10 of the 13 students had an effect on their Pell eligibility. However, Valencia
did not properly recalculate the Pell awards for those 10 students. As a result, Valencia awarded
$6,264 more than it should have awarded to the 10 students.

Valencia obtained comments from faculty members for 9 of the 10 students. However, those
comments did not cause us to change our position. After we reviewed the comments, we
concluded that the faculty members did not always use academically related activity as evidence
of attendance. For example, one faculty member used a student’s logging in to the course as
evidence of attendance. Another faculty member used the date the faculty member informed the
student that the student would be dropped from the course as evidence of attendance.
Final Audit Report
ED-OIG/A07L0001                                                                       Page 64 of 83

                             Appendix G: Liberty University
                                      Private nonprofit school

Liberty University was founded in 1971 and is located in Lynchburg, Virginia. Liberty
University is accredited by the Commission on Colleges of the Southern Association of Colleges
and Schools. Liberty University offers more than 230 programs of study, including more than
45 degree programs through distance education. During award year 2010-2011, Liberty
University disbursed more than $430 million in Title IV funds to about 45,000 students,
including about 36,000 students who were enrolled solely in distance education courses.

Cost of attendance
Liberty University’s cost of attendance budget includes tuition and fees and allowances for room
and board, books and supplies, transportation, personal computer, dependent care, and loan
expenses. For distance education students, Liberty University created a separate cost of
attendance budget that included the same cost categories as the cost of attendance budget for
traditional students; however, some of the amounts varied.

Billings and Disbursements
Liberty University is a term-based school, operating on a semester system. It established the
semester as its payment period for Title IV purposes. Liberty University offered a fall and spring
semester that were 17 weeks and a summer semester that was 14 weeks. The semesters were
divided into 8-week sessions. The fall and spring semesters had three sessions and the
summer semester had two sessions. Each session had a different start and end date.
Liberty University charged tuition and fees by session.

Liberty University also disbursed Title IV funds by session. It disbursed Pell funds the first day
of the session and loan funds 17 days after the start of the session in which the student reached
half-time status. The Title IV disbursements were prorated throughout the payment period by
session. For example, if a student enrolled in 3 credit hours in the first session and 3 credit hours
in the second session, he or she would receive half of the Pell award for the semester in the first
session and the remaining Pell award for the semester in the second session. The student would
receive the loan funds 17 days after the start of the session in which the student reached half-time
status of 6 credit hours. Liberty University’s higher education software ran eligibility checks on
distance education students before Title IV funds were disbursed.

Attendance and Withdrawal Policies
Liberty University defined academic attendance for distance education students as any
submission to its online learning management system within the enrollment dates of the course
or any student-initiated communication with his or her faculty member regarding an academic
subject or course materials. Examples of activities that Liberty University accepted as evidence
of attendance included the course requirements checklist, introductory discussion board postings,
student group activities, and academic advising and counseling. Evidence of academic
attendance was maintained in either the online learning management system or outside the online
learning management system.

Liberty University also required distance education students to establish attendance during the
first week of class. Students who failed to submit an assignment, such as Liberty University’s
course requirements checklist, an examination, written paper, discussion board post, or other
Final Audit Report
ED-OIG/A07L0001                                                                      Page 65 of 83

academic event, during the first week were removed from the class roster. If a distance
education student attended the first week of a course but then had 21 consecutive days without
attendance, the student would receive a grade of FN, which indicated failure for not attending.
Faculty members were responsible for identifying students who had 21 consecutive days without
attendance and recording an FN grade.

Liberty University was not required to take attendance. However, for students who unofficially
withdrew, Liberty University used the last date of attendance as the withdrawal date for return of
Title IV aid calculations.

Determination of Attendance Affects Compliance With the Title IV Requirements
We identified attendance issues that affected Liberty University’s compliance with the Title IV
requirements in three areas: (1) treatment of Title IV funds when a student does not begin
attendance, (2) confirmation of eligibility at the time of disbursement, and (3) recalculation of
the Pell award.

Liberty University disagreed with the OIG’s interpretation of what activities could be used as
evidence of academic attendance (see “Methodology for Reviewing Student Records” in
Appendix B). Liberty University stated that the OIG’s insertion of its own legally unsupported
opinion as to what activities should be treated as evidence of academically related activity raised
concerns that the OIG was asserting its influence over the school’s curriculum. Such influence is
in violation of the prohibition against Federal control of education.

We disagree with Liberty University’s position. We based our conclusions on the regulations in
effect during the audit period. Those regulations required activity supporting attendance to be
academically related. We also disagree that our interpretation of the regulation interferes with
Liberty University’s curriculum decisions. Our interpretation is not an attempt to control
curriculum. We limited our work to applying the regulations in effect during the audit period
and concluding whether the school maintained sufficient evidence of academic attendance.

Treatment of Title IV Funds When a Student Does Not Begin Attending Classes
Of the 50 students in our sample, Liberty University did not return $4,358 in Title IV funds that
it credited to the accounts of or disbursed directly to three students without evidence of the
students’ attendance in academically related activities during the payment period. The three
students’ only activity in the payment period was completing Liberty University’s course
requirements checklist. Completion of the course requirements checklist showed only that the
student had (1) read the syllabus; (2) read the student expectation documents explaining the
meaning and policies regarding plagiarism, attendance, FN grade (nonattendance) policy, and
honor code; and (3) submitted a quiz demonstrating his or her completion of items (1) and (2).
We did not consider Liberty University’s course requirements checklist to be evidence that the
student attended an academically related activity in the course.

Liberty University disagreed and stated that it considered submission of the course requirements
checklist or the submission of discussion posts to introduce oneself to classmates to meet the
regulatory definition of an academically related activity that was in effect during the audit
period. Liberty University believed that the OIG applied regulations governing the
determination of attendance that were not in effect during the audit period. Specifically,
Final Audit Report
ED-OIG/A07L0001                                                                      Page 66 of 83

Liberty University believed that the OIG applied the definition of attendance in 34 C.F.R.
§ 668.22(l)(7)(i), which did not become effective until July 1, 2011.

We disagree with Liberty University’s position. We did not consider the course requirements
checklist or the submission of discussion posts to introduce oneself to classmates to be an
academically related activity because the activities covered by the checklist or the discussion
posts are not related to the subject matter of the course. Even before July 1, 2011, the
regulations required the activity to be academically related, not administratively related. We
considered the activities used by Liberty to justify disbursements and retention of Title IV funds
to be administratively related.

Confirmation of Eligibility at Time of Disbursement
The records for 1 of the 50 students in our sample indicated that the student received a Title IV
disbursement after the start of the payment period without evidence of the student’s attendance in
academically related activities. Liberty University disbursed $268 of Title IV funds to the
student. The student’s only activity in the payment period was completing the course
requirements checklist.

Liberty’s position and our disagreement are the same as noted in the “Treatment of Title IV
Funds When a Student Does Not Begin Attending Classes” issue.

Recalculation of Pell Awards
Of the 50 students in our sample, Liberty University’s online learning management system or
other records for 10 students indicated a change in enrollment status based on the students’ lack
of academic attendance in 1 or more of their classes. The enrollment status changes for 7 of the
10 students had an effect in their Pell eligibility. However, Liberty University did not properly
recalculate the Pell awards for those seven students. As a result, Liberty University awarded
$6,069 more than it should have to seven students.

Liberty University disagreed that it improperly calculated the Pell awards. Liberty University
stated that academically related activity for the seven students was confirmed and that it properly
determined the students’ enrollment levels and correctly calculated and disbursed the students’
Pell awards. Liberty University provided us with information for the seven students so that we
could confirm its position. Liberty University informed us that the information included course
activity from the online learning management system and a list of academic advising and
counseling or other academically related assistance applicable to the first week of the students’
courses.

We reviewed the information provided and concluded it was not sufficient evidence that the
students attended an academically related activity during the payment period. As stated
previously, we did not consider the course requirements checklist or the submission of discussion
posts to introduce oneself to classmates to be an academically related activity because the
activities covered by the checklist or the discussion posts are not related to the subject matter of
the course. We did not consider technical assistance for navigating the course requirements
checklist, accessing a course, and viewing a course video as academically related activities.
Such activities are administratively, not academically, related. For the students that Liberty
University asserted received academic counseling on certain dates, the evidence submitted with
the response did not corroborate the assertion.
Final Audit Report
ED-OIG/A07L0001                                                                    Page 67 of 83

                      Appendix H: Western Governors University
                                     Private nonprofit school

Western Governors University was incorporated in 1997 and is headquartered in Salt Lake City,
Utah. The school is nationally accredited by the Distance Education and Training Council and
regionally accredited by the Northwest Commission on Colleges and Universities. Western
Governors University offers all its programs and courses entirely through distance education.
During award year 2010–2011, Western Governors University disbursed more than $243 million
in Title IV funds to about 24,000 students.

Cost of Attendance
Western Governors University’s cost of attendance budget included tuition and fees, and
allowances for room and board, books and supplies, technology, travel, and personnel expenses.

Billings and Disbursements
Western Governors University is a term-based school, operating on 6-month terms and charging
tuition and fees by the term. Western Governors University established the 6-month term as its
payment period for Title IV purposes. A student’s term may begin on the first day of any month.

For new students, Western Governors University disbursed Title IV funds 30 days after the start
of the term. For continuing students, Western Governors University disbursed Title IV funds
15 days after the start of the term. Students had to meet satisfactory academic progress
requirements to be eligible for disbursements for the next 6-month term.

Attendance and Withdrawal Policies
Western Governors University used a process called academic activity verification to determine
when a student began attending his or her courses. Early in the payment period, a student mentor
would call the student to discuss the learning resources available to the student and to schedule
assessment completion dates for the payment period. The student mentor did not provide
educational instruction to the student, but Western Governors University considered the student
mentor to be a faculty member.

During 2010–2011, Western Governors University determined a student’s last date of attendance
by reviewing its online learning management system for evidence of one of the following:

       1.   academically related email initiated by the student;
       2.   documented phone call with a mentor;
       3.   attendance in a conference call, study group, or online chat;
       4.   referral for an assessment;
       5.   login to the portal;
       6.   enrollment in a learning resource;
       7.   submission of an assignment in a learning resource course;
       8.   post to a message board in a learning community; or
       9.   submission of a task.
Final Audit Report
ED-OIG/A07L0001                                                                    Page 68 of 83

According to the interim provost, beginning July 1, 2011, Western Governors University no
longer considered a student simply logging in to its online learning management system to be
evidence of academic attendance.

Western Governors University was not required to take attendance. For students who
unofficially withdrew, Western Governors University used the later of the last date of attendance
as defined above or the midpoint of the payment period as the withdrawal date for the return of
Title IV aid calculation.

Determination of Attendance Affects Compliance With the Title IV Requirements
We identified attendance issues that affected Western Governors University’s compliance with
the Title IV requirements for the treatment of Title IV funds when a student withdraws.

Western Governors University stated that the OIG, in making its determination of attendance
(see “Methodology for Reviewing Student Records” in Appendix B), applied regulations that
were not in effect during the audit period. Specifically, Western Governors University believed
that the OIG applied the definition of attendance in 34 C.F.R. § 668.22(l)(7)(i), which did not
become effective until July 1, 2011.

We disagree with Western Governors University’s position. Even before July 1, 2011, the
regulations required activity supporting attendance to be academically related. Our
determination of what activities were academically related was based on the regulations in effect
during the audit period.

Treatment of Title IV Funds When a Student Withdraws
Of the 50 students in our sample, 17 withdrew during a payment period. Western Governors
University used an unsupported last date of attendance or did not perform return of Title IV aid
calculations for seven students, resulting in Western Governors University returning $4,414 less
than it should have returned for five students.

Western Governors University used a last date of attendance that was not supported by evidence
of academically related activity for five of the seven students. In addition, Western Governors
University did not perform return of Title IV aid calculations for two students. Using
information recorded in Western Governors University’s online learning management system,
we determined that there was a financial impact for five students and no financial impact for
two of the seven students.

Western Governors University partially agreed and provided the following explanations:

       •   For one of the five students, Western Governors University agreed that it used an
           unsupported last date of attendance in the return of Title IV aid calculation.

       •   For three of the five students, Western Governors University disagreed that it used an
           incorrect last date of attendance in the return of Title IV aid calculations. Western
           Governors University stated that it based the withdrawal dates for the three students
           on (a) one student’s last login to the online learning management system, (b) an
Final Audit Report
ED-OIG/A07L0001                                                                    Page 69 of 83

           academically initiated email by one student to a student mentor, and (c) one student’s
           last phone call with a student mentor.

       •   For one of the five students, Western Governors University did not agree that the
           student withdrew during the payment period. Western Governors University believed
           that the student was in continuous attendance during the term. Western Governors
           University stated that the student stayed in contact with his or her student mentor
           during the term and was constantly working on a teacher certification exam that the
           student was required to pass before he or she could do demonstration teaching.

We disagree with Western Governors University’s position that it used the appropriate
withdrawal date for the three students. We do not agree that the activity provided as evidence of
the last dates of attendance was academically related. The records for the first student showed
only that the student had logged in to the online learning management system and did not
indicate academic attendance. The records of the second student showed an email exchange
between the student and a student mentor to schedule a phone call. The records had no evidence
of a subsequent phone call. The records of the third student did not include evidence of a
phone call from the student to the student mentor. Instead, on the same date, we found evidence
of an email from the student mentor to the student. We did not consider these activities to be
evidence that the three students attended an academically related activity on the dates
Western Governors University used as the last dates of attendance.

We also disagree with Western Governors University’s position that one student did not
withdraw. During the term in question, the student worked on a teacher certification exam that
was not part of an assignment for any of the courses in which the student was enrolled.
Final Audit Report
ED-OIG/A07L0001                                                                     Page 70 of 83

                          Appendix I: ITT Technical Institute
                                        Proprietary school

ITT Tech opened in 1956 and is headquartered in Carmel, Indiana. The school is accredited by
the Accrediting Council for Independent Colleges and Schools. ITT Tech offered its distance
education programs through its Indianapolis, Indiana location. It offers 40 degree programs that
can be completed entirely through distance education. During award year 2010–2011, ITT Tech
disbursed more than $1.5 billion in Title IV funds to about 133,000 students, including about
13,000 students who were enrolled solely in distance education courses.

Cost of Attendance
ITT Tech’s cost of attendance budget included tuition and fees and allowances for room and
board, transportation, and miscellaneous expenses. For distance education students, ITT Tech
created a separate cost of attendance budget that did not include an allowance for transportation
costs.

Billings and Disbursements
ITT Tech is a term-based school, operating on a quarter system and charging tuition and fees by
course. ITT Tech established the quarter as its payment period for Title IV purposes. ITT Tech
began a new quarter each September, December, March, and June. Every quarter was 12 weeks
and courses were either 6 or 12 weeks. Because students were charged tuition and fees by
course, if a student took a 6-week course during the last 6 weeks of the quarter, the student
would not be charged tuition and fees until the middle of the quarter.

ITT Tech disbursed loan funds 10 days before the start of the payment period and disbursed
Pell funds during the first week of the payment period. Although ITT Tech charged tuition and
fees as each course began, it disbursed Title IV funds for the entire payment period,
programming its financial aid system to automatically disburse the funds at the start of the
payment period.

Attendance and Withdrawal Policies
For students enrolled in distance education courses, ITT Tech’s attendance policy stated that
attendance was recorded weekly. ITT Tech tracked attendance automatically through its online
learning management system. Distance education students had to log in to the online learning
management system and then access a specific course within the system to be considered
attending the course. The online learning management system also tracked when a student
submitted work for a learning activity within a course, but the submission date was not used to
determine attendance in the course. A student’s last date of attendance was the last date that the
student accessed the course in the online learning management system. The online learning
management system identified distance education students as unofficial withdrawals if they had
stopped attending for 11 consecutive days during a 6-week class or 22 consecutive days during a
12-week class.

ITT Tech was not required to take attendance but chose to do so. For a distance education
student who unofficially withdrew from the school, ITT Tech used the last date of attendance as
Final Audit Report
ED-OIG/A07L0001                                                                      Page 71 of 83

recorded in its online learning management system as the student’s withdrawal date for the return
of Title IV aid calculation.

Determination of Attendance Affects Compliance With the Title IV Requirements
We identified attendance issues that affected ITT Tech’s compliance with the Title IV
requirements in four areas: (1) treatment of Title IV funds when a student withdraws,
(2) treatment of Title IV funds when a student does not begin attendance, (3) confirmation of
eligibility at the time of disbursement, and (4) recalculation of the Pell award.

Treatment of Title IV Funds When a Student Withdraws
Of the 50 students in our sample, 28 withdrew during a payment period. Using an unsupported
last date of attendance resulted in ITT Tech returning $1,987 less than it should have for
three students and $3,780 more than it should have for four students. The last dates of
attendance for the seven students were not supported by evidence of academically related
activity.

ITT Tech disagreed and believed it correctly performed the return of Title IV aid calculations.
ITT Tech stated that regulations in effect during award year 2010–2011 allowed schools to
consider a student accessing the online learning management system and reviewing course-
related material to be considered academically related activity. ITT Tech stated that its
determination of attendance reflected the industry’s common understanding of the Department’s
regulation related to documenting attendance at an academically related activity and in effect
during award year 2010–2011. In addition, ITT Tech stated that the OIG retroactively applied
standards and criteria for determining attendance during the audit period. The standards and
criteria did not become effective until July 1, 2011, so they cannot be applied to award year
2010–2011. Finally, ITT Tech stated that the OIG’s insertion of its own legally unsupported
opinion as to what activities should be treated as academic in nature raised concerns that the OIG
was asserting its influence over the school’s curriculum. Such influence is in violation of the
prohibition against Federal control of education.

We disagree with ITT Tech’s position that a student’s accessing a course in the online learning
management system could be considered evidence of academic attendance during the audit
period. ITT Tech’s login records indicated only whether a student completed logging into the
online learning management system. Therefore, ITT Tech did not maintain evidence that the
student attended an academically related activity as required by 34 C.F.R. § 668.22(c)(3).

We also disagree with the statement that our interpretation of the regulation interferes with
ITT Tech’s curriculum decisions. Our interpretation is not an attempt to control the school’s
curriculum. We limited our work to applying the regulations in effect during the audit period
and concluding whether the school maintained sufficient evidence of academic attendance.

Treatment of Title IV Funds When a Student Does Not Begin Attending Classes
Of the 50 students in our sample, ITT Tech did not return $8,165 in Title IV funds that it credited
to the accounts of or disbursed directly to 6 students without evidence of the students’ attendance
in academically related activities during the payment period.
Final Audit Report
ED-OIG/A07L0001                                                                      Page 72 of 83

ITT Tech disagreed that it did not return the Title IV funds for students who did not begin
attendance during a payment period. ITT Tech’s position and our disagreement are the same as
noted in the “Treatment of Title IV Funds When a Student Withdraws” issue.

Confirmation of Eligibility at Time of Disbursement
The records for 4 of the 50 students in our sample indicated that the students received Title IV
disbursements after the start of the payment period without evidence of the students’ attendance
in academically related activities before the disbursements.

ITT Tech disagreed that it did not confirm eligibility before making disbursements after the start
of the payment period. ITT Tech’s position and our disagreement are the same as noted in the
“Treatment of Title IV Funds When a Student Withdraws” issue.

Recalculation of Pell Award
Of the 50 students in our sample, ITT Tech’s online learning management system records for
8 students indicated a change in enrollment status based on the students’ lack of academically
related activity in 1 or more of their classes. The enrollment status changes for seven of the
eight students had an effect on their Pell eligibility. However, ITT Tech did not properly
recalculate the Pell awards for those seven students. As a result, ITT Tech awarded $5,549 more
than it should have awarded to the seven students.

ITT Tech disagreed that a change in enrollment status had occurred based on its policy for
determining attendance discussed above. Therefore, a recalculation of Pell funds was not
required. ITT Tech’s position and our disagreement are the same as noted in the “Treatment of
Title IV Funds When a Student Withdraws” issue.
Final Audit Report
ED-OIG/A07L0001                                                                                    Page 73 of 83

                                Appendix J: University of Phoenix
                                               Proprietary school

University of Phoenix was founded in 1976 and is headquartered in Phoenix, Arizona. It is a
subsidiary of Apollo Group, Inc. The school is accredited by The Higher Learning
Commission.19 University of Phoenix offers 160 programs that can be completed entirely
through distance education. During award year 2010–2011, University of Phoenix disbursed
more than $3.6 billion in Title IV funds to about 326,000, including about 253,000 students who
were enrolled solely in distance education courses.

Cost of Attendance
University of Phoenix’s cost of attendance budget included tuition and fees and allowances for
room and board, transportation, books and supplies, miscellaneous, and loan expenses.
University of Phoenix created a separate cost of attendance budget that did not include an
allowance for transportation costs for distance education students.

Billings and Disbursements
University of Phoenix is a non-term-based school. It defined the payment period for each
student as 12 successfully completed credit hours. Associate degree courses were 9 weeks,
bachelor degree courses were 5 weeks, and graduate degree courses were 6 weeks, with new
courses beginning each week. Bachelor and graduate degree-seeking distance education students
attended one course at a time, and associate degree-seeking distance education students attended
two courses concurrently. University of Phoenix charged tuition and fees by course, not by
payment period. Distance education students usually earned 3 credit hours per course and would
have to receive passing grades on 12 credit hours’ worth of courses to complete a payment
period.

If a distance education student failed or withdrew from courses during a payment period, he or
she would take longer to receive passing grades worth 12 credit hours and complete the payment
period. Also, University of Phoenix allowed distance education students to take breaks between
courses. Before July 1, 2011, distance education students could take a break for a maximum of
29 days between courses without being withdrawn from the school. Starting July 1, 2011,
distance education students could take a break for a maximum of 14 days between courses
without being withdrawn from the school. If a distance education student chose to take a break
between courses instead of taking one course immediately after another, he or she would take
longer to complete the payment periods. A distance education student would not receive a
second Title IV disbursement until after he or she had successfully completed the credit hours for
the first payment period.

University of Phoenix usually disbursed Title IV funds to distance education students 10 days
after the start of the payment period. Although tuition and fees were charged one course at a
time, Title IV funds were disbursed for the entire payment period. Three days before a Title IV

19
 University of Phoenix informed us that, effective June 27, 2013, it was placed on notice by The Higher Learning
Commission. The notice was a sanction indicating that the school was pursuing a course of action that, if continued,
could lead it to be out of compliance with one or more criteria for accreditation. A school placed on notice by the
accrediting agency retains its accreditation.
Final Audit Report
ED-OIG/A07L0001                                                                      Page 74 of 83

disbursement, University of Phoenix’s automated financial aid system ran eligibility checks to
determine whether students were eligible for their disbursements. These checks included
determining whether the student had attendance in the payment period. If a distance education
student was not eligible at the time the system ran the checks, the automated financial aid system
would put a hold on the disbursement until the student met all applicable requirements. Once the
student cleared all eligibility checks, the automated financial aid system released the student’s
disbursement.

Attendance and Withdrawal Policies
University of Phoenix required distance education students to establish attendance on 2 separate
days during a week (a predefined 7-day period established for each course) to be considered in
attendance for the entire week. University of Phoenix considered any submission to the
interactive classroom section of its online learning management system as evidence that the
student met the attendance requirement. For example, a student could post a message to a course
forum on 2 separate days during the week and be considered in attendance for the week.
Students who failed to meet the attendance requirements for a certain number of weeks
(depending on the length of the course) would be dropped from the course. If the student failed
the attendance requirement for the first week of a 4-week course, the first 2 consecutive weeks
for a 5- or 6-week course, or the first 3 consecutive weeks for a 9-week course, University of
Phoenix would drop the student from the distance education course and treat the student as if he
or she had never attended the course.

University of Phoenix was not required to take attendance but chose to do so. For a distance
education student who unofficially withdrew from the school, the University of Phoenix used the
last date of attendance as recorded in its online learning management system as the student’s
withdrawal date for the return of Title IV aid calculation. University of Phoenix calculated the
percentage of the payment period the student completed by calculating the student’s rate of
progress in successfully completing the credit hours for the payment period before withdrawing.
For example, if a student received passing grades on 3 of the 12 credit hours in the payment
period before withdrawing, the student would have completed 25 percent of the payment period.

Determination of Attendance Affects a School’s Compliance With the Title IV
Requirements
We identified attendance issues that affected University of Phoenix’s compliance with the
Title IV requirements in three areas: (1) treatment of Title IV funds when a student withdraws,
(2) treatment of Title IV funds when a student does not begin attendance, and (3) confirmation of
eligibility at the time of disbursement.

Treatment of Title IV Funds When a Student Withdraws
Of the 50 students in our sample, 45 did not successfully complete their credit hours for the
payment period. University of Phoenix used an unsupported last date of attendance or
incorrectly calculated the number of days in the payment period, resulting in University of
Phoenix returning $11,031 less than it should have for 26 students and disbursing $976 more
than it should have for 2 students.

University of Phoenix used a last date of attendance that was not supported by evidence of
academically related activity for 25 of the 45 students. For 17 of the 25 students, University of
Phoenix correctly calculated the percentage of Title IV funds that the students earned before
Final Audit Report
ED-OIG/A07L0001                                                                       Page 75 of 83

withdrawal. However, for the other eight students, University of Phoenix did not correctly
calculate the number of days in the payment period based on the students’ rates of progress or
properly account for breaks between courses.

University of Phoenix disagreed that it improperly calculated the return of Title IV aid, stating
that we misapplied its attendance policy. According to University of Phoenix, we used last dates
of attendance that were not based on the school’s established attendance policies. Specifically,
University of Phoenix stated that we failed to use the last day of the week in which the student
had submissions on at least 2 days as the student’s last date of attendance. In addition,
University of Phoenix believed that we arbitrarily credited some instances of student attendance
while ignoring others and incorrectly discounting 1 or more weeks of attendance. University of
Phoenix also believed that our misapplication of its attendance policy was an attempt by us to
control the school’s curriculum, which is in violation of the prohibition against Federal control of
education.

University of Phoenix stated that, during the audit period, the applicable regulation indicated that
schools that were not required to take attendance could establish the withdrawal date as the
midpoint of the payment period. However, a school also could use the last date of attendance at
an academically related activity as the student’s withdrawal date. University of Phoenix believed
that the regulation clearly indicated that the school had the option of performing the return of
Title IV aid calculation based on the midpoint of the student’s payment period. Therefore, it
stated that the questioned dollars overstated the much lesser amounts that University of Phoenix
could have chosen to return under the midpoint methodology. According to University of
Phoenix, a new regulation stating that a school having its own requirement to take attendance
could not use the midpoint of the payment period as the withdrawal date was not effective until
July 1, 2011. University of Phoenix stated that we sought to apply this new regulation
retroactively by denying the school the option to calculate the return of Title IV aid using the
midpoint of the payment period as the withdrawal date.

University of Phoenix also disagreed that it did not correctly calculate the number of days in the
payment period. University of Phoenix believed that the information that the OIG provided it
related to this issue was not sufficient for the school to provide specific comments related to its
calculations of the number of days in the payment period.

We disagree with University of Phoenix’s position. University of Phoenix’s policy of using the
last day of the week as the last date of attendance for return of Title IV aid purposes is contrary
to 34 C.F.R. § 668.22. The student’s last date of attendance must be the last date of an
academically related activity, not the last day of the week in which the student had academically
related activity. When conducting our review of student records, we considered an academically
related activity to include things such as a discussion posting related to the coursework, a
completed quiz, and homework submissions. We did not consider a student logging in to a
course to be sufficient evidence of academic attendance because the login record did not indicate
attendance at an academically related activity. We also did not consider every discussion post to
be an academically related post. For example, we did not consider a student’s post stating that
he or she was “Ready to go” or “Checking in” as evidence of an academically related activity.

We also disagree with the statement that our interpretation of the regulation interferes with
University of Phoenix’s curriculum decisions. Our interpretation is not an attempt to control the
Final Audit Report
ED-OIG/A07L0001                                                                       Page 76 of 83

school’s curriculum. We limited our work to applying the regulations in effect during the audit
period and concluding whether the school maintained sufficient evidence of academic
attendance.

In addition, we disagree that we overstated the amount of Title IV funds that University of
Phoenix should have returned for students who did not successfully complete their credit hours
for the payment period. During the audit period, University of Phoenix could have chosen to use
the midpoint of the payment period or the last date of academic attendance as the student’s
withdrawal date. University of Phoenix chose to use the last date of academic attendance.
Therefore, it was appropriate to use the last date of academic attendance, not the midpoint of the
payment period, to determine whether University of Phoenix properly calculated the amount of
Title IV aid it should have returned.

We consider University of Phoenix’s practice of not deducting the days in which a student is on
a break to be contrary to guidance in the Department’s FSA Handbook. According to the FSA
Handbook, when a student in a nonterm, credit hour program takes an unscheduled break in
attendance, deviating from the student’s original attendance plan, the school must either (1) treat
the student as a withdrawal or (2) place the student on an approved leave of absence. The gap in
attendance may not be treated as part of the student's attendance in the payment period and
should be excluded from the return of Title IV aid calculation (“2010–2011 Federal Student Aid
Handbook,” Volume 5, page 5-85). When we asked for University of Phoenix to comment, we
provided it with a list of students for whom we concluded that University of Phoenix did not
properly determine the number of days in the payment period when calculating the amount of
Title IV aid to return. For those students, we also provided an explanation of how we concluded
that the payment period was not properly determined. Finally, we indicated whether University
of Phoenix deducted breaks in attendance from the number of days the students attended during
the payment period. The information demonstrated precisely how we concluded that University
of Phoenix improperly calculated the number of days in the payment period.

Treatment of Title IV Funds When a Student Does Not Begin Attending Classes
Of the 50 students in our sample, University of Phoenix did not return $662 in Title IV funds that
it credited to the accounts of or disbursed directly to 2 students without evidence of the student’s
attendance in an academically related activity during a payment period.

University of Phoenix disagreed that the students did not begin attendance during the payment
period. University of Phoenix stated that the students in question were in attendance during the
first week of their respective courses.

We disagree with University of Phoenix’s position. We made our determination based on our
review of academically related activities recorded in the online learning management system. If
discussion posts were clearly not related to the subject matter of the course (for example, a post
in which the student simply introduced himself or herself to classmates), we did not consider the
post to be academically related. When conducting our review, we followed University of
Phoenix’s policy that a student would be dropped from a course if he or she did not adhere to the
school’s attendance requirements. If a student did not meet the attendance requirements for the
first week of a 4-week course, the first 2 weeks of a 5- or 6-week course, or the first 3 weeks of a
9-week course, we considered the student to have never attended the course even if the students
had an academically related activity later in the course. These two students had activity in their
Final Audit Report
ED-OIG/A07L0001                                                                     Page 77 of 83

courses but they did not have academically related activity on 2 separate days in a week during
the course, as required per University of Phoenix’s attendance requirements.

Confirmation of Eligibility at the Time of Disbursement
The records for 3 of the 50 students in our sample indicated that the students received Title IV
disbursements after the start of the payment period without evidence of the students’ attendance
in an academically related activity before the disbursements.

University of Phoenix disagreed that the students were not eligible at the time of the
disbursements. University of Phoenix stated that the students in question were in attendance
during the first week of their respective courses and that all disbursements occurred subsequent
to the students’ documented postings of attendance.

We disagree with University of Phoenix’s position. University of Phoenix’s online learning
management system did not contain evidence that any of the three students attended
academically related activities as required by 34 C.F.R. § 668.22(c)(3) before the disbursements.
Final Audit Report
ED-OIG/A07L0001                                                                     Page 78 of 83

        Appendix K: Department’s Comments on the Draft Audit Report

MEMORANDUM


DATE:          November 13, 2013

TO:            Gary D. Whitman
               Regional Inspector General for Audit Services
               Office of Inspector General

               Pat Howard
               Assistant Inspector General for Audit Services
               Office of Inspector General

FROM:          Martha J. Kanter /s/
               Under Secretary

SUBJECT:       Draft Audit Report
               Title IV of the Higher Education Act Programs: Additional Safeguards Are
               Needed to Help Mitigate the Risks That Are Unique to the Distance Education
               Environment
               Control No. ED-OIG/A07L0001


Thank you for the opportunity to comment on the Office of Inspector General’s (OIG) draft audit
report, Title IV of the Higher Education Act Programs: Additional Safeguards Are Needed to
Help Mitigate the Risks That Are Unique to the Distance Education Environment, dated
September 6, 2013. The objectives of the audit were to determine whether (1) the U.S.
Department of Education adapted the program requirements and guidance for Title IV of the
Higher Education Act of 1965, as amended (Title IV), programs to mitigate the unique risks
inherent in the distance education environment, and (2) the Department, accrediting agencies,
and State agencies adequately monitored schools to provide assurance of their compliance with
the Title IV requirements unique to the distance education environment.

This Memorandum provides the Department’s comments and responses to the five (5) findings
and recommendations and other matters in OIG’s draft audit report. Federal Student Aid, the
Office of Postsecondary Education, and the Office of the Under Secretary collaborated to
provide the comments in this Memorandum.

The draft audit report acknowledges that the Department has taken steps to mitigate the risks in
the distance learning environment, but recommends further actions to protect the integrity of the
Title IV programs. Although the Department agrees in principle that additional safeguards and
risk assessment strategies are needed to mitigate the unique risks associated with distance
education, the Department does not concur entirely with all of OIG’s recommendations. The
Department’s response provides information to support any recommendation(s) for which the
Final Audit Report
ED-OIG/A07L0001                                                                       Page 79 of 83

Department does not concur, as well as clarifying information as may be warranted for
recommendations that are being accepted.

In addition, with respect to the issue concerning the calculation of cost of attendance for distance
education programs, we believe the draft audit report implies—or may lead a reader to infer—
that Congress was unaware of the limitations on the calculation of cost of attendance for
correspondence programs when it amended the law to specifically state that no distinction is to
be made between on-campus or distance education programs when determining a student’s cost
of attendance. A more thorough discussion of the legislative history, however, would show that
Congress made this change subsequent to a distance education demonstration program it
authorized several years prior. In addition, section 484(l)(1)(A) further demonstrates that
Congress sought to distinguish distance education from correspondence courses. We believe
such information would better place in context the statement in the draft audit report that “…the
HEA recognizes the differences in actual costs incurred based on the mode of instruction.” In
particular, we believe it would be more accurate to clarify that the Higher Education Act
excludes certain indirect education costs of attendance in the calculation of the cost of attendance
for a student enrolled in a course of instruction comprised of correspondence courses that are not
excluded with respect a student enrolled in an instruction program comprised of distance
education courses.

Regarding Finding No. 5, “More Useful Data on Distance Education Is Needed to Adequately
Assess Risk and Direct Monitoring Efforts,” the National Center for Education Statistics (NCES)
required institutions to report in the Integrated Postsecondary Education Data System (IPEDS)
on programs that are available entirely by distance education beginning in 2012-13. The degree
or certificate programs must be identified by the Classification of Instructional Program (CIP)
code. In addition, institutions are required to report enrollment data at the institutional level for
the fall cohort. The data to be reported include the number of students (undergraduate/graduate)
enrolled in none/some/all distance education courses. Furthermore, of the students that are
enrolled 100 percent in distance education, the institution is to report where they are located—in
the state where the institution is located, in the U.S., or outside of the U.S. This enrollment data
is based on the most recent address the institution has on record. For some institutions, particular
sections of a course are online, while others are not, and the institution may not have that
indicated in its data systems. NCES provided as much notice as possible to institutions that this
requirement was forthcoming so the institutions could take whatever steps were necessary to
obtain the information, but for some institutions this was definitely a challenge.

Although the level of reporting required for distance education data has increased, NCES has
advised the Department that the data from the institutions cannot be tied to Title IV
disbursements. Institutions typically keep three different data systems that impact Title IV
disbursements (financial aid records, enrollment records, and course records), all of which have
different crystallization times that will not support effective data reporting to NCES data
systems.

We would also like to offer one technical correction. In the background section of the draft audit
report, OIG states “monitor the headcount enrollment of each accredited school that offers
distance education (34 C.F.R. § 602.19(e)).” The referenced code states:
Final Audit Report
ED-OIG/A07L0001                                                                       Page 80 of 83

       (e) Any agency that has notified the Secretary of a change in its scope in
       accordance with 602.27(a)(5) must monitor the headcount enrollment of each
       institution it has accredited that offers distance education or correspondence
       education. If any such institution has experienced an increase in headcount
       enrollment of 50 percent or more within one institutional fiscal year, the agency
       must report that information to the Secretary within 30 days of acquiring such
       data.

OIG apparently interprets that to mean that all accrediting agencies that have distance education
in their scope are required to report information to the Secretary when an institution experiences
an increase in headcount of 50 percent or more within one institutional fiscal year. However, that
is not the case. This regulation applies only to those institutions that notified the Secretary of an
increase in scope to include distance education (see 602.27(a)(5)) rather than apply to the
Secretary for an expansion of scope. A handful of agencies expanded their scope by notification
to the Department after the statue was amended to allow that. However, the Department conducts
a full review of an agency based on its scope when it comes up for renewal of recognition. Once
those agencies have had their scope formally reviewed/approved, they are no longer subject to
this requirement.

FINDING NO. 1 – Regulations Related to Verifying Student Identify and
Disbursing Title IV Funds Should Be Strengthened
RECOMMENDATION 1.1 -- Revise the student identity verification regulations to require
schools offering distance education to have a process in place to verify the student’s name
and educational credentials. Acceptable student identity verification items might include
high school diploma, educational transcripts, or college admission test scores. Such
verification should occur as part of the enrollment process.

RECOMMENDATION 1.2 -- Revise the regulations to require schools to have their
independent public accountants, not accrediting agencies, assess the effectiveness of their
processes for verifying a student’s identity.

RECOMMENDATION 1.3 -- Revise the regulations to require more frequent
disbursements of Title IV funds. The disbursements should coincide with the timing of
institutional charges and other educational expenses, such as monthly child or dependent
care and Internet expenses.

We agree with these three recommendations. The Office of Postsecondary Education will
develop a decision memo for the Secretary’s Executive Team. The decision memo will address
whether or not to include revising the recommendations to modify the appropriate student
financial assistance regulations related to confirmation of student identity on the Department’s
negotiated rulemaking schedule. The issues addressed in the decision memo will include:
(1) acceptable student identity verification items and when verification should occur, (2) having
independent public accountants, not accrediting agencies, assess the effectiveness of the
processes for verifying a student’s identity, and (3) the timing of institutional disbursements and
other educational expenses, such as monthly child or dependent care and Internet expenses.
Final Audit Report
ED-OIG/A07L0001                                                                      Page 81 of 83

FINDING NO. 2 – Attendance at an Academically Related Activity Should Be
a Student Eligibility and Disbursement Requirement, Not a Requirement
Limited to Return of Title IV Aid Calculations
RECOMMENDATION 2.1 -- Amend the regulations to apply the definitions of “academic
attendance” and “attendance at an academically related activity” in 34 C.F.R. §
668.22(l)(7) to the regulations for determining student eligibility and disbursing Title IV
funds.

We agree with the recommendation. The Office of Postsecondary Education will develop a
decision memo for the Secretary’s Executive Team. The decision memo will address whether or
not to include revising the recommendations to modify the appropriate student financial
assistance regulations related to confirmation of student identity on the Department’s negotiated
rulemaking schedule. The issues addressed in the decision memo will include applying the
definitions of “academic attendance” and “attendance at an academically related activity” in
34 C.F.R. § 668.22(l)(7) to the regulations for determining student eligibility and disbursing Title
IV funds.

RECOMMENDATION 2.2 -- Issue further guidance that clearly explains what is
considered acceptable evidence to support a distance education student’s academic
attendance and last date of attendance.

We agree with the recommendation. The Office of Postsecondary Education will issue guidance
clarifying acceptable evidence supporting academic attendance and last date of attendance for
students enrolled in distance education programs through a Dear Colleague letter, the Federal
Student Aid Handbook, or other appropriate communication.

FINDING NO. 3 – Cost of Attendance Components for Distance Education
Students Should Be Revised

RECOMMENDATION 3.1 -- Work with Congress to amend section 472 of the HEA to
specify that a school’s cost of attendance budget for a student include only those costs that
reflect actual educational expenses.

We agree with the recommendation. The Department is currently assessing needed changes to
the Higher Education Act to improve access to, and the quality and affordability of,
postsecondary education as well as to improve outcomes for both students and taxpayers and
strengthen program integrity. This assessment will include reviewing the statutory framework
that governs the determination of financial need among student aid recipients and the direct and
indirect educational costs of attendance incurred by students pursuing postsecondary education.
We plan to communicate the results and recommendations of our assessment to Congress prior to
the September 30, 2014 expiration of the authorization of the Higher Education Act.
Final Audit Report
ED-OIG/A07L0001                                                                      Page 82 of 83

RECOMMENDATION 3.2 -- Provide guidance to schools explaining (1) that a distance
education student’s cost of attendance budget should not include expenses that they most
likely will not incur, and (2) pursuant to section 484(l)(2) of the HEA, a school’s financial
aid officer can exercise professional judgment and reduce a student’s Title IV aid amount if
the financial aid officer determines that distance education results in a substantially
reduced cost of attendance for the student.

We partially agree with the recommendation. The Office of Postsecondary Education will issue
guidance through a Dear Colleague letter, the Federal Student Aid Handbook, or other
appropriate communication to remind institutions of higher education that they should develop
and use different standard costs of attendance for different categories of students, such as a cost
of attendance for students enrolled exclusively in distance education programs that do not
include expenses that other categories of students might otherwise incur. The guidance will draw
upon the examples cited in the draft audit report that appropriately illustrate how institutions
develop different costs of attendance that exclude, for example, an allowance for transportation
costs when such costs are not included for an entire category or class of students.

However, we will also reaffirm that, while institutions have the authority to use professional
judgment to adjust the cost of attendance, the law limits such discretion to be exercised only on a
case-by-case basis to allow for special circumstances, rather than circumstances that exist across
an entire category or class of students. In addition, any such adjustments must be documented in
the student’s file.

FINDING NO. 4 – FSA Could Improve Its Monitoring of Schools’
Compliance by Targeting Its Reviews on High-Risk Areas
RECOMMENDATION 4.1 -- Ensure that the sampling methodology for program reviews
includes testing of samples of students selected from specific high-risk areas, such as
distance education, identified during its annual risk assessment.

We agree with the recommendation. Federal Student Aid will revise the sampling methodology
for program reviews to include testing of samples of students in distance education.

RECOMMENDATION 4.2 -- Analyze the results of program reviews conducted using the
2011 version of the review guide to determine whether program reviews are consistently
identifying academic attendance issues related to the distance education environment. If
the program reviews are not identifying attendance issues, research why, and, if necessary,
revise the guide and provide training to staff.

We agree with the recommendation. Federal Student Aid will analyze the results of program
reviews conducted since July 2011 to determine the frequency of academic attendance issues
related to distance education.
Final Audit Report
ED-OIG/A07L0001                                                                      Page 83 of 83

FINDING NO. 5 – More Useful Data on Distance Education Is Needed to Adequately
Assess Risk and Direct Monitoring Efforts

RECOMMENDATION 5.1 -- Collect data that helps Department policy makers and
program managers better understand the characteristics of the distance education
environment; monitor growth in distance education as it relates to Title IV funds,
programs, and student population; assess risks specific to the distance education
environment; and formulate strategies to address the risks identified.

We agree with the recommendation. Federal Student Aid will review IPEDS data elements
related to distance education and send comments and recommendations to NCES/IPEDS for
updating data elements, as needed.

RECOMMENDATION 5.2 – Incorporate the data into FSA’s risk assessment process.

We agree with the recommendation. Federal Student Aid will utilize available IPEDS data on
distance education to determine how to strengthen Program Compliance’s school risk assessment
process.

OTHER MATTERS

The audit identified an additional issue that was not specific to the distance education
environment that the Department will address with the respective institutions. The Department
will follow up with two institutions, ITT Tech and Liberty University, concerning credit balance
authorization forms that were not in compliance with Title IV requirements to obtain the
student’s or parent’s authorization to hold Title IV credit balances. In addition, the Department
will follow up with the four institutions, ITT Tech, Ivy Tech, Penn State, and Western Governors
University, that did not return Title IV credit balances in a timely manner.

Again, thank you for the opportunity to comment on the draft audit report. If you have further
questions, please feel free to contact Jon O’Bergh, the OUS liaison for the collective response in
this Memorandum, at (202) 260-8568 or by email at jon.obergh@ed.gov.