oversight

University of Phoenix's Management of Student Financial Assistance Programs.

Published by the Department of Education, Office of Inspector General on 2000-03-30.

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

             University of Phoenix’s Management of
             Student Financial Assistance Programs



                              FINAL AUDIT REPORT




                      Audit Control Number ED-OIG/A09-70022
                                     March 2000




Our mission is to promote the efficient            U.S. Department of Education
and effective use of taxpayer dollars              Office of Inspector General
in support of American education.                  Sacramento, California
                                     NOTICE
Statements that management practices need improvement, as well as other conclusions
and recommendations in this report, represent the opinions of the Office of Inspector
General. Determination of corrective action to be taken will be made by the
appropriate Department of Education officials.

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

                                                                    Page


Executive Summary ………………………………..…….…….…..                             1

Audit Results ……………………...………………………….……..                              3

    Finding 1 - The University’s Academic Year for Its
                Undergraduate Programs Did Not Provide the
                Required Instructional Hours …………………….…….             3

    Finding 2 - The University Overawarded Title IV Funds to
                Students Enrolled in Correspondence Courses ………….    17

Other Matters ………………………………….……………….….. 21

Background ……………………………………….……….…….… 23

Purpose, Scope & Methodology …………...….…..………..….….. 25

Statement on Management Controls ……………...….…..…….... 28

Attachment – University’s Comments on the Report ….......…… 29
                                 Executive Summary


The University of Phoenix (University) is a private, for-profit educational institution that offers
graduate degree, undergraduate degree and certificate programs for working adult students. In
addition to providing classroom instruction, the University offers educational programs through its
Center for Distance Education (CDE). The University measures its educational programs in credit
hours, but does not use a semester, trimester or quarter system. During the two-year period from
October 1995 through September 1997, the University disbursed $339 million in Federal Family
Educational Loan (FFEL) funds and $8.8 million in Federal Pell Grant (Pell Grant) funds.

Our review found that:

   • The University’s definition of an academic year for its undergraduate programs did not
       provide the number of instructional hours required to meet the statutory definition of an
       academic year contained in the Higher Education Act (HEA) of 1965, as amended. The
       statutory definition is set forth in Title 34 Code of Federal Regulations (CFR) Section
       668.2(b). The regulations in this section that apply to institutions not using semester,
       trimester or quarter systems are commonly known as the 12-Hour Rule. The 12-Hour Rule
       requires the equivalent of at least 360 instructional hours per academic year. Because the
       University did not meet the conditions specified by Student Financial Assistance (SFA) for
       including study group meetings as instructional hours, the University’s academic year only
       provided 180 instructional hours. As a result, the University disbursed Title IV funds to
       students who were not eligible for all or part of the funds. We estimated that the University
       disbursed at least $50.6 million in FFEL and $4 million in Pell Grant funds to its students in
       excess of the amounts that students were entitled to receive.

   • The University overawarded Title IV funds to students enrolled in correspondence courses
       provided through CDE. The HEA does not allow institutions to include cost of living
       expenses when determining financial need for students enrolled in correspondence courses.
       Also, we estimated that the University improperly disbursed about $96,000 in Pell Grant
       funds to CDE students because the University did not adhere to the regulatory requirement
       that students in correspondence courses cannot be considered as more than half-time students.

We recommend that the Chief Operating Officer for SFA require the University to immediately
establish an academic year for its undergraduate programs that satisfies the requirements of the
12-Hour Rule. Also, we recommend that the Chief Operating Officer require the University to cease
including living expenses when determining the financial need for CDE students under Title IV
programs and limit Pell Grant awards made to CDE students to the amount authorized for half-time




ED-OIG                             ED-OIG/A09-70022                                        Page 1
students. The University should be required to return $50.6 million in FFEL funds improperly
disbursed to its students. In addition, the University should be required to return $4 million in Pell
Grant funds that were improperly disbursed. SFA also needs to determine the amount of Title IV
funds improperly disbursed for periods not covered by our estimate.1

SFA’s policy is to use an “estimated actual loss” formula to determine the amount of FFEL funds to
be returned, when it determines that use of the formula is appropriate. The formula takes into
consideration the institution’s cohort default rate and the amount of interest subsidies and special
allowance paid on ineligible loan amounts. SFA has advised us that it commonly uses the “estimated
actual loss” formula for this type of finding in the audit resolution process and that use of the formula
would significantly reduce the amount of FFEL funds to be recovered.2 The “estimated actual loss”
formula does not apply to Pell Grant funds.

In its comments to the draft report, the University did not agree with our conclusions and
recommendations. The University's comments did not change our conclusions or recommendations.
A summary of the University’s comments and our response are presented in the Audit Results section
of the report. The University’s entire comments are included as an attachment to the report.




1
 Institutions were required to comply with the 12-Hour Rule as of July 1, 1995. Our estimate did
not include loans and grants with a start date between July 1 and September 30, 1995; grants with
a start date of October 1, 1997 or later; and loans with a start date of October 1, 1998 or later. In
addition, the estimate did not include certain loans or disbursements on loans that had start dates
between October 1, 1995 and September 30, 1998. The Purpose, Scope and Methodology section
of this report provides more details on the loans and grants included in our estimate.

2
  SFA advised us that its preliminary figure of FFEL funds to be recovered using the “estimated
actual loss” formula would likely be about $7 million for the loans included in our estimate.


ED-OIG                               ED-OIG/A09-70022                                         Page 2
                                        Audit Results

We concluded that the University needs to improve its management of the Title IV programs.
Specifically, we found that the University’s definition of its academic year for undergraduate
programs did not provide the 360 instructional hours required to meet the HEA’s statutory definition
of an academic year. Also, the University overawarded Title IV funds to students enrolled in
correspondence courses.

During our audit work, we also identified issues regarding program eligibility and a “schedule
change” policy. The “schedule change” policy contributed to the University’s failure to make refunds
within required time frames. Since SFA has already initiated action to address these issues, we did
not include the areas as findings in the report. The Other Matters section of the report contains
additional information on the two issues.



Finding No. 1 – The University’s Academic Year for Its Undergraduate
               Programs Did Not Provide the Required Instructional Hours


The University defines its academic year as the period of time in which an enrolled student completes
at least 24 credit hours in at least 45 weeks of instructional time. The University’s undergraduate
programs consist of a series of five-week courses for which a student generally receives three credit
hours per completed course. An institution’s academic year and the credit hours that a student is
enrolled in are used to determine the amount of funds a student is eligible to receive from the Title IV
programs. The University’s academic year for its undergraduate programs did not provide the
minimum amount of instructional time required by the HEA. As a result, the University overawarded
Title IV funds to its students. We estimate that the University improperly disbursed at least
$54.6 million in FFEL and Pell Grant program funds.

Non-Term Institutions Must Provide a
Minimum of 360 Hours of
Instructional Time in an Academic Year

The HEA, Section 481(a)(2) specifies that an “academic year” for Title IV, HEA programs:

       . . . shall require a minimum of 30 weeks of instruction time, and, with respect to an
       undergraduate course of study, shall require that during such minimum period of
       instructional time a full-time student is expected to complete at least 24 semester or
       trimester hours or 36 quarter hours at an institution that measures program length
       in credit hours . . . .

The HEA definition of an academic year is restated in 34 CFR Section 668.2(b).


ED-OIG                              ED-OIG/A09-70022                                         Page 3
The University measured its educational programs in credit hours, but did not use a semester,
trimester or quarter system. For such institutions, a “week of instructional time” is defined under
34 CFR Section 668.2(b) Academic year (2)(ii)(B) as at least 12 hours of regularly scheduled
instruction, examinations, or preparation for examinations that occurs within a consecutive seven-day
period. These regulations, commonly known as the 12-Hour Rule, require the equivalent of
360 instructional hours per academic year (30 weeks times 12 hours per week). Institutions were
required to comply with the 12-Hour Rule as of July 1, 1995.

In the preamble section of the Federal Register dated November 29, 1994, which contains the above
cited final regulations, the Secretary explained that an institution with a program that meets less
frequently than 12 hours per week would have to meet for a sufficient number of weeks to meet the
required instructional hours. For example, if an institution decided to establish an academic year for
a program with classes that meet for ten hours a week, the classes would need to be held for
36 weeks.

When the 12-Hour Rule regulations were finalized in November 1994, the Secretary stated in the
preamble to the regulations that he was:

       . . . correcting an abuse of the definition of an academic year whereby an institution
       that has programs that are measured in credit hours without standard terms could
       claim that it meets the requirements for the minimum amount of work to be
       performed by a full-time student over an academic year by giving a full-time student
       a minimal amount of instruction over a 30-week (or more) period . . . .

The preamble further stated that:

       The Secretary believes that 12 hours per week is a reasonable measure, since
       full-time students are expected to carry a minimum of 12 semester or quarter hours
       per academic term in an educational program using a semester, trimester, or quarter
       system. Thus, full-time students enrolled in such programs are generally assumed
       to be in class attendance at least 12 hours per week . . . .

SFA Allowed the University to
Consider Scheduled Study Group Meetings
As Instructional Time Provided That the
University Met Certain Conditions

In a letter dated March 9, 1995, the University sought guidance from SFA on the 12-Hour Rule to
determine whether its academic year was in compliance with the regulations. The University explained
that the academic year for its programs consisted of 45 weeks in which students have four hours of
class time instruction and four hours of “scheduled cohort group study” for a total of eight hours each
week.




ED-OIG                              ED-OIG/A09-70022                                        Page 4
SFA’s Policy Development Division responded to the University in a letter dated May 30, 1995, with
the following conclusion:

       You [the University] asked if the Department would continue to consider the
       ‘scheduled cohort group study’ as acceptable hours of instruction under the new
       12 hour rule. We would as long as the study group concept is still operating as you
       described last year. That is, it is required of all students in the program and that it
       is held at a site under the control of the institution.3

       You also asked if the approved four hours of study group added to the regular four
       hours of class time would count as eight of the twelve hours required under the rule.
       The answer is yes.

       You also asked if, therefore, the eight hours out of twelve meant that the minimum
       academic year for reasons of annual loan limit could be 45 weeks. Once again, the
       answer is yes since the statutory minimum of 30 weeks times the regulatory
       requirement of 12 hours means that the program must consist of 360 hours, and 360
       hours divided by 8 hours per week equals 45 weeks.

Thus, the University could award Title IV funds to its undergraduate students using a 45-week
academic year provided that the conditions specified in the May 30, 1995 letter were met. The
University provided us with no evidence that it made any further inquiry of SFA concerning this issue.

The University Did Not Meet the
SFA Conditions for Including
Study Group Meetings As Instructional
Time Under the 12-Hour Rule

The University did not meet the required conditions specified by SFA for the study group meetings
to be included as hours of instruction for purposes of the 12-Hour Rule. SFA had conditioned its
acceptance of the University’s scheduled cohort group study hours as instructional time under the
12-Hour Rule on the continuation of representations made by the University that study group
meetings take place at sites controlled by the University.

Our review found that the University did not require its students to meet at locations that were leased,
owned or in any other way controlled by the University. Nor did we find that the University
otherwise controlled study group meetings. The Faculty Handbook and materials provided to
students did not specify that study group meetings must be held at a location under the control of the
University. University officials informed us that study groups met on their own and that the location




3
 The Policy Development Division staff informed us that “a site under the control of the institution”
meant a location that was either leased or owned by the University.


ED-OIG                              ED-OIG/A09-70022                                         Page 5
was up to the students. Our observations at campuses located in the Phoenix area confirmed that,
in general, study groups were not meeting at the University’s facilities.4

Further, our review found that the University did not have adequate documentation to show that
students generally spent 180 hours in study group meetings over the 45-week period regardless of
location. In addition, the University did not take steps to ensure that all students actually participated
in study group meetings.

     • Instructors or other University representatives were not required to attend study group
        meetings.

     • The University had an extensive system for tracking and monitoring scheduled class
        attendance, but had not established such a system for study group meetings. According to
        University officials, its faculty was provided with a form that students could use to record
        their study group meetings, including the hours spent in the meetings. However, the
        University did not require faculty to use or retain the form.

     • The University’s catalog described its class attendance policy but had no such policy for
        attendance at study group meetings.

     • Student handbooks and other documents provided to the University’s students did not
        mention that four hours of study group meetings per week were required for each course.
        Also, the “Faculty Handbook” used during our audit period did not mention the required
        four hours per week.

Under these circumstances, the cohort study groups did not qualify as “regularly scheduled
instruction” for purposes of the 12-Hour Rule.

If the University was unclear about the meaning of “a site under the control of the institution” in the
Policy Development Division letter, it should have requested further interpretation from SFA. We
were provided with no evidence to show that the University had requested any further guidance.




4
  We estimated that the main Phoenix location would require 513 study group meetings per week.
During the four days that we observed the classrooms at the main Phoenix location, we found only
seven groups that appeared to be holding study group meetings. Except for one room, all other
rooms were being utilized for scheduled classes on Monday through Thursday evenings. We were
told that, unless a class was scheduled, the main Phoenix facility was locked on Friday evenings,
Saturdays and Sundays. Our weekend observations at four other locations in the Phoenix area
confirmed our conclusion that, in general, study groups were not meeting at the University’s facilities.
According to the Director of Financial Aid, the five sites were typical of other locations in the
University of Phoenix system.

ED-OIG                               ED-OIG/A09-70022                                          Page 6
The Cohort Study Groups Did Not
Otherwise Qualify for Inclusion in
the 12-Hour Rule Calculation

In its annual filings with the Securities and Exchange Commission, the Apollo Group, Inc. (parent
corporation of the University of Phoenix) described the purpose of study group meetings
as: “ . . . study group meetings are used for review, work on assigned group projects and preparation
for in-class presentations.” The facts described in the previous section and the Apollo Group, Inc.’s
own description of study group meetings show that the study group meetings do not represent the
time spent in regularly scheduled instruction, examinations, or preparation for examinations required
by the 12-Hour Rule.

The regulations refer to three activities that are allowed to be included as instructional time for the
12-Hour Rule calculation: regularly scheduled instruction, examinations, or preparation for
examinations. The Policy Development Division May 30, 1995 letter expressly addressed the
University’s question regarding cohort study groups in terms of hours of instruction.

If the University had intended for study groups to be considered as regularly scheduled preparation
for examinations, it should have expressly stated this in its request to the Policy Development
Division. The Policy Development Division advised us that, based on the negotiation of the 12-Hour
Rule, preparation for examinations referred to the period set aside to prepare for final examinations
after the last day of class in an academic term or other period.

Allowing time spent in study groups working on assignments outside of the classroom to count
toward the required hours of regularly scheduled instruction, examinations, or preparation for
examinations, would render the 12-Hour Rule meaningless.

The Consequence of Failing to Comply
With the 12-Hour Rule Is That
the University Overawarded at Least
$54.6 Million of Title IV Funds to Its
Undergraduate Students

Since the University did not comply with each of the conditions set forth in SFA’s letter and the study
groups did not otherwise qualify for inclusion in the 12-Hour Rule calculation, study group meetings
cannot be counted as providing four hours of instructional time. Consequently, the University-defined
academic year of 45 weeks only provided 180 hours of the required minimum of 360 hours of
instructional time (four hours of instruction per week times 45 weeks equals 180 hours). In order
to meet the 360-hour requirement, the University’s academic year would need to be 90 weeks in
length. By using an academic year of 45 weeks rather than 90 weeks for awarding Title IV funds,
the University disbursed amounts to students that exceeded the maximum amounts for an academic
year allowed under the FFEL and Pell Grant programs. Also, the University disbursed FFEL funds
to ineligible students who were enrolled less than half-time. We estimated that the University
disbursed at least $54.6 million of Title IV funds to students who were not eligible for all or part of




ED-OIG                              ED-OIG/A09-70022                                         Page 7
the funds.5 The students included in the estimate had FFELs and Pell Grants with loan/grant periods
that started between October 1995 and September 1997.

    • FFEL Loan Limits - Title 34 CFR 682.603(f)(2) stipulates that the total amount a student may
       borrow for any one academic year may not exceed the maximum annual loan limits. The
       maximum annual loan amounts are specified in 34 CFR 682.204. Our estimate includes $50.4
       million in FFEL disbursements that exceeded the annual loan limits.

    • Pell Grant Maximum - For the Pell Grant program, 34 CFR 690.62(a) specifies that the
       amount of a student’s grant for an academic year is based upon schedules published by the
       Secretary for each award year. The Payment Schedule lists the maximum amount a student
       could receive during a full academic year. Our estimate includes $4 million in Pell Grant
       disbursements that exceeded the maximum amount allowed.

    • Less Than Half-Time Status – Title 34 CFR 682.201(a) requires that a student must be at
       least a half-time student to be eligible for FFEL funds. Our estimate includes $185,000 in
       FFEL disbursements for students who were enrolled less than half-time, and thus not eligible
       for FFEL.

Institutions were required to comply with the 12-Hour Rule as of July 1, 1995. Because the
University’s 45-week academic year did not meet the 12-Hour Rule, the University has improperly
disbursed Title IV funds for its undergraduate students on FFEL and Pell Grants awarded since
July 1, 1995.

Recommendations

We recommend that the Chief Operating Officer for SFA require that:

    1. As a condition for continued participation in Title IV programs, the University immediately
       develop an academic year for its undergraduate programs that satisfies the requirements of
       the 12-Hour Rule.

    2. Require that the University return to lenders the FFEL funds disbursed by the University that
       exceeded the FFEL loan limits for an academic year. The amount returned should include
       improperly disbursed funds for loans awarded on and after July 1, 1995. We estimate that the
       amount was at least $50.4 million ($22.7 million for subsidized loans and $27.7 million for
       unsubsidized loans) for students who had loans with begin dates between October 1995
       through September 1997. Also, the University should repay the interest and special
       allowances incurred on Federally subsidized loans.




5
 This amount does not include amounts of Title IV funds disbursed for students enrolled at the
Puerto Rico campus (a term school), the Center for Distance Education, or the Online Program.

ED-OIG                             ED-OIG/A09-70022                                       Page 8
    3. Require that the University return the Pell Grant funds disbursed to students that exceed the
       allowable award for an academic year. The amount returned should include improperly
       disbursed funds for grants awarded on and after July 1, 1995. We estimate that the amount
       was about $4 million for students who had Pell Grants with grant period dates beginning
       between October 1995 and September 1997.

    4. Require that the University return to lenders the FFEL funds disbursed by the University to
       students who were enrolled less than half-time and, thus, not eligible for the loans. The
       amount returned should include improperly disbursed funds for loans awarded on and after
       July 1, 1995. We estimate that the amount was at least $185,000 ($83,000 for subsidized
       loans and $102,000 for unsubsidized loans) for students who had loans with begin dates
       between October 1995 through September 1997. Also, the University should repay the
       interest and special allowances incurred on Federally subsidized loans.

    5. Require that the University determine the amounts of FFEL and Pell Grant funds improperly
       disbursed for periods not covered by our estimate.6

SFA’s policy is to use an “estimated actual loss” formula to determine the amount of FFEL funds to
be returned, when it determines that use of the formula is appropriate. The formula takes into
consideration the institution’s cohort default rate and the amount of interest subsidies and special
allowance paid on ineligible loan amounts. SFA has advised us that it commonly uses the “estimated
actual loss” formula for this type of finding in the audit resolution process and that use of the formula
would significantly reduce the amount of FFEL funds to be recovered.7 The “estimated actual loss”
formula does not apply to Pell Grant funds.




6
 Institutions were required to comply with the 12-Hour Rule as of July 1, 1995. Our estimate did
not include loans and grants with a start date between July 1 and September 30, 1995; grants with
a start date of October 1, 1997 or later; and loans with a start date of October 1, 1998 or later. In
addition, the estimate did not include certain loans or disbursements on loans that had start dates
between October 1, 1995 and September 30, 1998. The Purpose, Scope and Methodology section
of this report provides more details on the loans and grants included in our estimate.
7
  SFA advised us that its preliminary figure of FFEL funds to be recovered using the “estimated
actual loss” formula would likely be about $7 million for the loans included in our estimate.

ED-OIG                               ED-OIG/A09-70022                                         Page 9
meeting at the University’s facilities in Phoenix. The University provided no information to support
its statement. The policy, procedural and documentation weaknesses noted in the report show that
the University did not maintain “strict control” over study group activities.

Students engaged in additional qualifying hours of scheduled instruction. The University stated
that study groups often met more frequently than required and that students engaged in substantial
quantities of scheduled instruction above and beyond their class and study group meetings. The
University stated that each student engaged in a substantial amount of scheduled preparation in the
form of reading assignments, writing assignments, and preparation for examinations and
presentations. The University claimed that scheduled preparation time, and cooperative educational
activities at the student’s place of work, should be included in the academic year. According to the
University’s provost, students spend, on average, an additional eight hours in these activities between
class sessions. The University stated that if these additional hours were included, its 45-week
academic year is too long, rather than too short.

OIG Response - When developing the clock hour/credit hour regulations, the Secretary stated that
he “did not include outside preparation hours as part of the formula because of the difficulty of
independently determining whether the number of outside hours an institution might claim was
accurate….” However, in the preamble to the Interim Final Rule issued on April 29, 1994 (which
preceded the Final Rule containing the 12-Hour Rule), the Secretary did emphasize the importance
of comparable student workloads between institutions. In this preamble the Secretary stated:

       … it is important to ensure that full-time students are performing comparable
       workloads regardless of the type of institution they are attending, and that such work
       should be ratably allocated throughout the period of instruction.

In the preamble to the Final Rule, issued November 29, 1994, the Secretary explained why 12 hours
per week of instruction was chosen for an educational program using credit hours but not using a
semester, trimester, or quarter system. The Secretary stated:

       …12 hours per week is a reasonable measure, since full-time students are expected
       to carry a minimum of 12 semester or quarter hours per academic term in an
       educational program using a semester, trimester, or quarter system. Thus, full-time
       students enrolled in such programs are generally assumed to be in class attendance
       at least 12 hours per week.

Even if the OIG had used a “workload” measure, as suggested by the University’s comments and
accepted the accuracy of the University’s time estimates, the workload of the University’s full-time
students was not comparable to the workload of students at standard-term institutions.

Under the standard unit of measuring credit in higher education (referred to as the Carnegie Unit of
Credit), one credit hour generally consists of one hour of classroom work and two hours of outside
preparation over the course of its academic term. Using the Carnegie Unit of Credit, a full-time
student in an educational program using a semester, trimester or quarter system would have a
workload of 36 hours per week through the academic term (12 hours of classroom work and




ED-OIG                              ED-OIG/A09-70022                                        Page 11
University Comments and OIG Response

The University did not agree with our conclusions and recommendations. In its comments to the
report, the University stated: “…study groups have been, and continue to be, an essential and integral
component of the University’s regularly scheduled instructional activity.” The University’s position
is that hours spent in study group activities qualified for inclusion in the 12-Hour Rule calculation.
The University made the following assertions:

   •   The University had controls over study group meetings.
   •   Students engaged in additional qualifying hours of scheduled instruction.
   •   The U.S. Department of Education (Department) was aware of the University’s controls over
       study groups.
   •   The condition held at "a site under the control of the institution” is contrary to governing
       regulations and guidance.
   •   Study group activities are regularly scheduled instruction.
   •   The Department failed to give the University proper notice of the policy interpretation.
   •   The General Education Provisions Act (GEPA) requires that the Department uniformly apply
       its rules and regulations.
   •   The GEPA also prohibits the Department from interfering with the University’s curriculum.

The University also disputed the estimated liability. The following is a summary of the University’s
comments and our response to the comments.

The University had controls over study group meetings. The University stated that it maintained
strict control over the “scheduled cohort group study” model and activities. Group assignments were
specified in the curriculum modules. Faculty reviewed student assignments completed during the
particular group study meeting and awarded group grades for oral and written projects completed
within the study groups. Faculty reviewed the study group log forms. The University also stated
that many study groups met at its facilities in available space, such as study group rooms and vacant
classrooms. The University claimed that the report did not refute or deny the foregoing indicia of
control, but instead focused solely upon one factor—the prospect that some study groups choose to
meet off-campus.

OIG Response - Our review did focus on the site of study group meetings since “a site under the
control of the institution” was one of the conditions specified by SFA when it allowed the University
to include scheduled study group meetings as instructional time for the 12-Hour Rule. However, the
University is incorrect in its statement that we focused solely on this control factor. We also assessed
the adequacy of the University’s policies and procedures for documenting and monitoring the hours
students spent in study group meetings. The weaknesses that we noted in the University’s policies,
procedures and documentation are disclosed in the report.

Several of the University's statements regarding controls are contrary to the facts disclosed by our
review. The University did not require its faculty to use or retain study group log forms. The
University’s statement that many study groups use the University’s facilities is contrary to our
observations at campuses. Our observations confirmed that, in general, study groups were not




ED-OIG                              ED-OIG/A09-70022                                         Page 10
24 hours of outside preparation per week). The University informed us that a student at the
University has four hours of classroom work each week with five hours of study group8 and eight
hours of outside preparation between classes for a workload of about 72 hours for each 5-week three
credit course. A student at the University in a 45-week academic year would earn 27 credits and have
a workload of 648 hours compared to a workload of 1080 hours for a student in a 30-week academic
year using a semester, trimester, or quarter system earning 24 credit hours. The workload in an
academic year of a student at the University is 60 percent of the workload in an academic year of a
student at an institution using a semester, trimester, or quarter system.

The Department was aware of the University’s controls over study groups. The University stated
that, during August, September and December 1994, it had discussions with Department officials
regarding the proposed regulations that resulted in the 12-Hour Rule. The University claimed that
during those discussions, it responded to extensive questioning and described in detail the structure
of study groups and the methods by which the University exercised control over them. In addition,
it informed the Department officials that study groups may meet off campus as a matter of
convenience.

OIG Response - The fact that the University had meetings with the Department and requested
guidance from the Policy Development Division shows that the University was concerned about its
compliance with the 12-Hour Rule. The only record of the meetings is the Policy Development
Division letter, which contained a general reference to the University’s description of the study group
concept. Neither the letter from the University requesting the policy determination nor the Policy
Development Division letter contains a description of the asserted controls in place at the University.
Regardless of whether the Department was fully aware of the University’s controls, the Department,
in its approval, did emphasis the key representations on which it relied, that is that study group
meetings are required of all students and that the meetings are held at a site under the control of the
institution.

The condition held at “a site under the control of the institution” is contrary to governing
regulations and guidance. The University stated that neither the report nor the Policy Development
Division letter identified any statute, regulations or published guidance requiring institutional control
over the site at which instructional time takes place. The University claimed that, instead of requiring
such a control, issued regulations and guidance confirm that instructional time may include external
course work and other off-site educational activity.

The University stated that the regulatory definition of an “academic year” did not impose a control
requirement and acknowledged that instruction included off-site instruction. The definition states
that time spent in “preparation for examinations” is included within the 12-Hour Rule calculation. The
University emphasized that “preparation for examinations” was an off-site activity. The “academic
year” definition also states that instructional time for this purpose excludes “activity not related to
class preparation or examination.” The University concluded that this statement implied that activity
related to class preparation is included regardless of whether or not the activities occur on site. The
University claimed that study group meetings are related to class preparation and examination.

The University also stated that the preamble to the issued final regulations for the 12-Hour Rule did
not set forth a control requirement and included statements that confirmed instruction may include

8 During our audit, the University provided us with estimates of the time student spent in study group
meetings. The estimates varied from four to five hours. For purposes of the analysis, we used five
hours.

ED-OIG                               ED-OIG/A09-70022                                         Page 12
off-campus educational activity and external course work. The University cited the Secretary’s
reference to the emergence of “many external degree and adult learning programs [that] are trying
to reduce the number of days spent in the classroom” as a basis for his determination that
“cooperative education programs, independent study, and other forms of regularly scheduled
instruction can be considered as part of an institution’s academic year.”

The University claimed that the regulatory definition of a “full-time student” states that the student’s
workload may include any combination of courses, work, research or special studies that the
institution considered sufficient to classify the student as a full-time student. The University
emphasized that the “full-time student” definition bears heavily on the interpretation of the 12-Hour
Rule because the Secretary explicitly stated that the definition of academic year was based, in part,
on the workload of a full-time student. The regulation also confirmed that it was an institution’s
discretion to determine whether the educational activity was sufficient to constitute a portion of the
student’s workload.

The University also claimed that the reference to independent study in the regulatory definition of an
“educational program” supported its position that instruction may include off-site educational activity.

OIG Response - We agree that the condition that instruction is held at "a site under the control of
the institution” is not contained in statute or Departmental regulations. The Policy Development
Division letter reflects that the controls previously represented to the Department by the University
were to remain in existence for the study groups to qualify as instructional time under the 12-Hour
Rule. If the University knew that the conditions specified in the May 1995 letter did not exist or
believed that the letter was contrary to existing statute, regulations or the information it had provided
to the Department, it should have notified the Department at that time.

We agree that a student’s “preparation for examinations,” which is referred to in the regulatory
definition of an academic year, may occur off-site. However, the Policy Development Division
confirmed to us that “preparation for examinations” referred to the period set aside to prepare for
final examination after the last day of class in an academic term or other period. Therefore, study
group meetings should not be considered “preparation for examinations.”

We also agree that the “cooperative education programs” and “independent study” may take place
off-site. However, in the March 9, 1995 letter requesting the policy interpretation from the Policy
Development Division, the University did not characterize the group study meetings as “cooperative
education programs,” or “independent study.” Neither did the University mention time spent by its
students in such programs. The University described its courses as consisting of four hours of class
per week and one evening of “scheduled cohort group study, also of at least four hours.”

While the definition of a full-time student does state that the workload of a full-time student is
determined by the institution under a standard applicable to all students enrolled in a particular
educational program, it also establishes a minimum standard for undergraduate students. That
minimum standard is as follows: “Twenty-four semester hours or 36 quarter hours per academic year
for an educational program using credit hours but not using a semester, trimester, or quarter
system....”

As previously stated, the Secretary emphasized the importance of comparable student workload
between institutions in the preamble to the Interim Final Rule, on the definition of a full-time student,
issued on April 29, 1994. In this preamble, the Secretary also stated:



ED-OIG                               ED-OIG/A09-70022                                         Page 13
       Rather than changing the proposed definition of full-time student to require
       measurement of student workloads, a modification is being made to require a
       minimum number of days of instruction per week for institutions that offer credit
       hour programs without terms.

The preamble was referring to the definition of an academic year when the five-day rule was created.
The five-day rule was replaced with the 12-Hour Rule on November 29, 1994. The regulations
established a minimum standard for an undergraduate academic year, which for the University of
Phoenix is the 12-Hour Rule.

Study group activities are regularly scheduled instruction. The University stated that the meeting
site of a particular study group session was irrelevant to whether the session constitutes regularly
scheduled instruction. The University claimed that the study group meetings relate to “class
preparation and examinations,” and, therefore, did constitute instructional activity. The University
stated that the study group activities were “regularly scheduled” because: (a) the specific tasks to be
performed and completed by the study group in a given week were specified in the curriculum
modules for the course; (b) all students enrolled in the course must participate; (c) each designated
group study session was slated to occur between specified class meetings; (d) students must complete
the rigorous assignments, or submit the specified projects that were to be performed during the
sessions in order to progress in their program; and (e) faculty maintained control over the sessions
by reviewing the designated group study assignments and projects.

OIG Response - Based on the policy interpretation provided in the Policy Development Division
letter, the study group activities described by the University would be considered acceptable hours
of instruction under the 12-Hour Rule, but only to the extent they were in fact conducted as
represented to the Department, including the representation that the activities took place at a site
controlled by the University. The study groups were not generally meeting at the University's
facilities, nor did the University otherwise exhibit control over the study groups.

The Policy Development Division letter is not binding or enforceable. The University stated that
an individual request for policy guidance was not binding on the requestor. Also, the University
asserted that the condition “held at a site under the control of the institution” had no binding effect
since the condition had not been subjected to the notice and comment procedures specified under the
Administrative Procedure Act. The University stated that the Policy Development Division letter was
not a definitive statement of agency policy as no evidence suggests that the Department previously
has taken the position outlined in the letter. In addition, the Policy Development Division director
authored the letter rather than the Secretary or some other high-level official. The University cited
two court cases in support of its position.

OIG Response - The University addressed the request for the policy interpretation to the Policy
Development Division director who then responded to the University. The requirement that the study
group meetings are held at a "site under the control” of the institution was a condition specified in
the policy interpretation allowing the University to include study group meeting hours as instructional
hours for the 12-Hour Rule calculation. The interpretation did not impose a rule of general
applicability on the University, but rather expressed the Department’s agreement that the University’s
particular practices, as represented to the Department, would conform with existing regulations.
Therefore, the University’s various Administrative Procedures Act arguments are not relevant.




ED-OIG                              ED-OIG/A09-70022                                        Page 14
The Department failed to give the University proper notice of the policy interpretation. The
University stated that imposition of a multi-million dollar liability under the policy interpretation
violated due process and did not provide the University with “fair warning of the conduct it prohibits
or requires.” The University stated that it could not have known, before receiving the Policy
Development Division letter that study groups must meet at “a site under the control of the
institution.” More importantly, it had no reason to assume that the Policy Development Division
defined this phrase to mean a site “owned or leased” by the institution since the letter made no such
statement. The University claimed that the Department has yet to determine or announce any final
or authoritative policy determination on this matter.

OIG Response – As previously stated, the Policy Development Division letter did not impose a new
condition on the University, but stated SFA’s agreement that study group time could be considered
scheduled instruction if conducted as represented to the Department. The liability assessed against
the institution does not include Title IV funds that the University received for periods prior to the
issuance of the Policy Development Division letter. If the University was uncertain of the meaning
of “a site under the control of the institution” or the Department’s understanding of its
representations, the University should have sought clarification from the Department. As mentioned
earlier, our assessment of the University’s policies and procedures for documenting and monitoring
the hours students spent in study group meetings disclosed significant weaknesses. Therefore, even
if there was a misunderstanding over the meaning of the phrase, the University had not implemented
sufficient policies and procedures to provide the required control of the study groups, regardless of
where they were located.

The GEPA requires that the Department uniformly apply its rules and regulations. The
University referred to the emergence of non-traditional modes of instruction throughout
postsecondary education which frequently incorporate off-campus components. The University
stated that, to its knowledge, neither OIG nor the Department previously has applied the “site”
criteria or any 12-Hour Rule criteria to other educational institutions. The University believed that
the report violated the GEPA provision, which states that regulations shall be uniformly applied and
enforced throughout the 50 states.

OIG Response - The University’s assertion that the Department’s initial enforcement action of the
12-Hour Rule is a violation of the GEPA is unfounded. The requirement “held at a site under the
control of the institution” was a key representation relied upon by the Policy Development Division
when it provided the interpretation requested by the University. GEPA does not bar the Department
from responding to requests for guidance on how the regulations should be applied in specific
situations.




ED-OIG                              ED-OIG/A09-70022                                        Page 15
The GEPA prohibits the Department from interfering with the University’s curriculum. The
University stated that the GEPA precluded the Department from adopting a definition of an academic
year that unduly intruded upon the University’s right to make curriculum decisions. The University
stated that requiring study group meetings to take place at sites “leased or owned by the institution”
exceeded the scope of the Department’s authority.

OIG Response - We agree that curriculum decisions are matters left to the institutions and their
accrediting agencies. At the request of the University, SFA provided the interpretation in order for
the University to comply with the instructional time requirement of the 12-Hour Rule. The
Department utilizes the 12-Hour Rule to ensure that the appropriate amount of the Title IV, HEA
program funds is disbursed to students in an academic year.

The OIG engaged in activities expressly reserved for the Department. The University stated that
the OIG’s use of the Policy Development Division letter in the audit report resulted in unauthorized
policy making in an area over which the Department clearly had “program operating responsibility.”
The University stated that the Inspector General Act of 1978 states that an agency may not delegate
“program operating responsibilities” to an OIG. The University cited a court case to support its
position.

OIG Response - The OIG did not engage in program operating responsibilities. The audit sought
to determine whether the University’s practices met the requirements of the 12-Hour Rule. Since the
Policy Development Division letter appeared to approve the University’s practices, we evaluated
whether the University complied with its representations to the Department, that is, the study group
meetings were required of all students and were held at a site under the control of the institution.


The University disputes the estimated assessment of liability. The University stated that the OIG
improperly included in its estimate loan disbursements made after the audited period. The University
reserved the right to further respond to the estimated liability upon receipt of detailed information
concerning the data, basis and methodology utilized by OIG in arriving at its estimates and the
calculation of liability under the “estimated actual loss formula.” The University also objected to the
extension of liability to periods beyond the audit period.

OIG Response - The OIG’s audit working papers were available for the University’s review during
the period provided for the University’s comments. As of the date of this report, the OIG has not
received a request to review the working papers. Our working papers will continue to be available
to address questions that the University may have regarding the OIG’s methodology and estimated
liability during the Department’s audit resolution process.




ED-OIG                              ED-OIG/A09-70022                                        Page 16
Finding No. 2 — The University Overawarded Title IV Funds to
                Students Enrolled in Correspondence Courses


Through its Center for Distance Education (CDE), the University offered undergraduate degree and
graduate degree programs to students using a “directed study” delivery system.9 This delivery system
allowed CDE students to complete all course work and degree requirements from their home, work
or on the road. The students completed weekly assignments and either mailed, faxed or e-mailed the
work to the instructor for grading. The University did not require the CDE students to combine
classroom instruction or residential training with the “home study” program.

The University overawarded Title IV funds to students enrolled in correspondence courses provided
through CDE. HEA does not allow institution to include cost of living expenses when determining
financial need for students enrolled in correspondence courses. Also, we estimate that the University
improperly disbursed about $96,000 in Pell Grant funds to CDE students because the University did
not adhere to the regulatory requirement that students in correspondence courses can not be
considered as more than half-time students.

CDE Courses Meet Federal Definition
of Correspondence Courses

Title 34 CFR Section 600.2 defines a correspondence course as: A “home-study” course provided
by an institution under which the institution provides instructional materials, including examinations
on the materials, to students who are not physically attending classes at the institution. When
students complete a portion of the instructional materials, the students take the examinations that
relate to that portion of the materials, and return the examinations to the institution for grading. The
University’s educational courses offered through CDE meet the regulatory definition of
correspondence courses. CDE students do not physically attend classes at the institution and they
send completed assignments to the institution for grading.

The president of Apollo Group, Inc. asserted that CDE programs could not be correctly classified as
correspondence. He claimed that courses delivered through “directed study” are virtually identical
in structure, course content and academic rigor to the University’s resident programs. However, the
regulatory definition of a correspondence course focuses on the method of delivery, not the structure,
content and academic requirements of the course. The CDE method of delivery parallels the
description provided in the regulatory definition of a correspondence course.



9
  The University began using its “directed study” delivery system in 1989 under the name of
ACCESS. In an Institutional Eligibility Notice dated December 7, 1990, the Department approved
courses provided through ACCESS for Title IV programs. The University changed ACCESS to
CDE in 1995. The University reduced the length of individual courses from ten weeks to five weeks
for undergraduate students and six weeks for graduate students.


ED-OIG                              ED-OIG/A09-70022                                         Page 17
The University’s accrediting agency has also recognized that CDE’s directed study are comparable
to correspondence courses. In July 1990, North Central Association of Colleges and Schools
conducted a review at the University. In its report, the accrediting agency concluded that the
University’s “directed study” delivery system “ . . . is probably very similar to correspondence courses
or independent study courses at the other universities.”

We considered whether courses offered through CDE were telecommunications courses. Title 34
CFR Section 600.2 defines a telecommunications course as: “A course offered in an award year
principally through the use of television, audio, or computer transmission, including open broadcast,
closed circuit, cable, microwave, or satellite, audio conferencing, computer conferencing, or video
cassettes or discs.” In our opinion, the CDE courses do not meet the requirement that
telecommunications courses be “principally” offered through computer transmission.

Title IV Funds Are Limited for
Correspondence Courses

Cost of attendance and enrollment status are factors used to determine the amount of Title IV funds
that a student is eligible to receive. The HEA does not allow institutions to include cost of living
expenses in the cost of attendance for students enrolled in correspondence courses. Specifically,
Section 472 of the HEA specifies that for a student engaged in a program of study by
correspondence, the cost of attendance is “ . . . only tuition and fees and, if required, books and
supplies, travel, and room and board costs incurred specifically in fulfilling a required period of
residential training. . . .” As for enrollment status, 34 CFR Section 690.2 (c) states that “ . . . no
student enrolled solely in correspondence study is considered more than a half-time student.”

The University disbursed $10.8 million in FFEL and $193,000 in Pell Grant funds to over 1,200 CDE
students with loan and/or grant periods beginning between October 1995 through September 1997.
 We estimate that the students were ineligible for about $96,000 of Pell Grant funds disbursed,
because the University did not adhere to the requirement that students in correspondence courses
cannot be considered more than half-time students. In addition to cost of living expenses, the
University’s calculation of the cost of attendance includes tuition, allowances for books and loan
application fee, and may include child/dependent care expense. Because we did not obtain the
information needed to determine the child/dependent care expense used in the calculations, we were
unable to identify the portion of FFEL funds disbursed to CDE students to cover living expenses.

Recommendations

We recommend that the Chief Operating Officer for SFA require the University to:

   1. Cease including living expenses when determining the financial need for CDE students under
      Title IV programs.

   2. Limit Pell Grant awards made to CDE students to the amount authorized for half-time
      students.




ED-OIG                              ED-OIG/A09-70022                                         Page 18
   3. Determine the portion of FFEL funds disbursed to CDE students to cover living expenses and
      return those funds to lenders.

   4. Return the portion of Pell Grant funds that were improperly distributed to CDE students. We
      estimate that the amount was about $96,000 for CDE students with grant periods beginning
      between October 1995 through September 1997.

University Comments

The University did not agree with our conclusions and recommendations. In its comments to the
report, the University stated that the CDE offered independent (directed) study rather than
correspondence courses. The University stated that, based on the regulatory definition,
correspondence is a home study course that is administered without any direct faculty supervision,
where student accountability is achieved by having the student take tests at home and send the tests
back to the institution for grading. The University claimed that, in contrast, CDE utilized the same
faculty and same admissions standards, curricula, grading systems and graduation requirements as the
University’s resident programs. Also, the University stated that a mandatory weekly student-
instructor contact ensured that students were subjected to meaningful and direct ongoing faculty
instruction.

The University stated that the definition of “independent study” adopted in regulation by the
Department of Veterans Affairs (VA) was instructive since the Department of Education regulations
did not explain what constitutes independent study. The University also cited the VA’s regulatory
definition of a “home study” course. In contrasting the two VA definitions, the University concluded
that VA’s definition of independent study placed special emphasis upon collegiate-level instruction,
degree-granting authority, and interaction between the student and the instructor. The University
stated that the VA regulations do not determine a course as correspondence rather than independent
study solely based on the institution’s use of the mails or other means of corresponding with the
student. The University stated that the definitions and distinctions promulgated by the VA paralleled
the distinctions that the University had drawn between CDE’s independent study courses and
correspondence courses.

The University stated that the report did not explain the basis for the opinion that CDE courses did
not meet the requirement that telecommunications courses be principally offered through computer
transmission. Also, the University expressed concern that the audit did not consider the frequent use
of facsimile transmittals, in combination with the emails, when determining whether CDE’s courses
qualified as telecommunication courses.

OIG Response

The Department’s regulatory definition of a correspondence course, which is quoted in the finding,
does not include a reference to “without any direct faculty supervision.” The procedures that the
University described are not in conflict with the definition of a correspondence course.




ED-OIG                             ED-OIG/A09-70022                                        Page 19
The Department does distinguish between correspondence programs leading to certificates and those
leading to degrees. The HEA provides that correspondence programs that do not lead to a degree
are not eligible for Title IV funds. With regard to the Title IV programs, the University is bound by
the Department of Education’s regulations, not the Department of Veterans Affairs’ regulations.

The Department’s regulatory definition of a telecommunications course, which mirrors the HEA
provision and is quoted in the finding, lists the mediums comprising telecommunications. Facsimile
is not included in the list. The students’ use of facsimile to submit assignments and examinations was
one of the factors that led us to the conclusion that CDE courses were correspondence courses.




ED-OIG                              ED-OIG/A09-70022                                        Page 20
                                      Other Matters


Eligibility of Educational Programs

As a result of our work, SFA has notified the University that two of its educational programs are not
eligible programs as defined by 34 CFR Section 668.8. Paragraph (d)(iii) of the section states that
an eligible program provided by a proprietary institution of higher education must provide
undergraduate training that prepares a student for gainful employment in a recognized occupation.
The two programs which did not prepare students for gainful employment in a recognized occupation
are the University’s Associate of Arts Degree in General Studies and the Associate of Arts - Credit
              10
Recognition.

Our review found that students enrolled in these two programs received Title IV funds. From
University records reviewed during our audit, we identified 19 students who were enrolled in the
Associate of Arts Degree in General Studies or Associate of Arts - Credit Recognition programs.
These 19 students received $137,663 in Title IV loans and grants that had loan/grant periods that
started between October 1995 and September 1997.

Refund and Other Problems Identified
by IPOS Program Review

Prior to the start of our review, SFA’s Institutional Participation and Oversight Service (IPOS)
completed a program review that identified significant refund problems at the University. Since the
period covered by IPOS’ review included our audit period, we limited our review of the University’s
refund procedures to identifying causes that contributed to the University’s failure to make refunds
or to make the refunds within required time frames.

The systemic issues identified by the IPOS review were presented in a report to the Apollo Group,
Inc. entitled “Corporate Summary Program Review Report,” dated April 21, 1998. The report
covered systemic issues identified during on-site reviews conducted at six University locations during
the period of April 7, 1997 through May 2, 1997. IPOS concluded that the Apollo Group, Inc. did
not comply with various Title IV regulations for the Pell Grant and FFEL programs. In its report,
IPOS disclosed that the University (1) had unpaid or late refunds and credit balances; (2) made
untimely determinations that a student has withdrawn; (3) had failed to provide records; (4) had not
enforced its satisfactory academic progress policy; (5) had financial aid policies and procedures that


10
   The Associate of Arts degree through credit recognition is designed for active duty, retired, and
separated U.S. military personnel. The University acts as a “credit bank” where service members may
transfer credit from other education sources, thus, allows applicants to fulfill their degree
requirements.


ED-OIG                              ED-OIG/A09-70022                                       Page 21
were incomplete or conflicted with Federal regulations; and (6) had incomplete or deficient audit trails
for confirming compliance with Federal regulations. IPOS concluded that these findings indicated
that Apollo Group, Inc had an impaired capability for administering Title IV programs. The report
outlined the actions that Apollo Group, Inc. was required to take to address the findings.

One required action was that Apollo Group, Inc. complete a file review of refund calculations and
timeliness of refunds for the 1994-95, 1995-96 and 1996-97 award years. In January 1999, the
University notified IPOS of the results of the review. The University's contractor had identified
3,302 “out-of-attendance” students that had unpaid refunds/credit balances of about $2.9 million at
the time of the contractor’s review. (The contractor stated in its December 21, 1998 report that the
University has now paid these unpaid refunds to the applicable lender and/or Pell fund account.) The
contractor also identified 4,760 “out-of-attendance” students that had refunds/credit balances of
about $6.9 million that were not paid on a timely basis. In addition, the contractor identified
3,774 students that had been “out-of-attendance,” but subsequently re-entered and continued in their
program of study.

Apollo Group, Inc. has acknowledged that its mechanisms for monitoring individual students’
enrollment status may in some cases have been insufficient. In a letter to IPOS dated November 2,
1998, the Apollo Group stated it had contracted for a file review of all students that withdrew during
the 1997-98 fiscal year. The University reported to IPOS that the review identified $2.8 million in
unpaid refunds for these students and that it subsequently paid the refunds. In addition, the review
identified $8.5 million of refunds that had not been paid on a timely basis.

Our review found that, in addition to the findings disclosed in the IPOS report, the University had
implemented a “schedule change” policy that allowed students up to the equivalent of two leaves of
absence beyond what the regulations allow. The policy also allowed school officials to approve
breaks in a student’s attendance without the student’s request for the approval. In a letter to Apollo
Group, Inc. dated November 19, 1998, IPOS informed the University that it may grant a student an
official leave of absence for a period of up to 60 days to bridge the gap between courses, but this
approach may only be used once in a 12-month period.

SFA reviewed Apollo, Inc.’s response to the program review and conducted a follow-up site visit to
the Apollo Group’s corporate office and the University’s main student financial assistance offices. In
its Final Program Review Determination Letter dated July 28, 1999, IPOS concluded that the
University had completed a satisfactory response to all findings in the program review report.




ED-OIG                              ED-OIG/A09-70022                                         Page 22
                                         Background


The University of Phoenix (University) is a private, for-profit higher education institution that
provides educational programs for working adult students. The University was founded in Phoenix,
Arizona in 1976, and is a subsidiary of Apollo Group, Inc. It is accredited by the Commission on
Institutions of Higher Education of the North Central Association of Colleges and Schools. The
University ranks as one of the institutions that annually disburses the highest total amount of Title IV
funds.

As of August 31, 1998, the University reported a total of 70 main campuses and learning centers11
located in 13 states, and the Commonwealth of Puerto Rico. The Online Campus is located in
San Francisco, California. The University describes its Online Campus as a computer-based
educational delivery system. The Center for Distance Education (CDE) is located in Phoenix,
Arizona. The University describes CDE as directed study. On-site classes are provided at the other
68 campuses and learning center locations. The University also provides education courses that do
not participate in Title IV Programs: CPEInternet (continuing professional education via the
Internet) and FlexNet (courses for executives who need to earn an accredited graduate degree).

The University offers certificate programs, and graduate and undergraduate degree programs.
Certificate programs are available in several fields such as negotiation, conflict resolution and total
quality management. Bachelor of Science and Associate of Arts Degree programs offered by the
University include general studies, business and management, health care professions, counselor
education, and technology programs. The University also offers an Associate of Arts Degree through
Credit Recognition. In 1998, the University received approval from its accrediting agency to offer
a Doctor of Management degree.

                                                          1996              1997             1998

 Tuition Revenues                                     $165 million      $221 million     $305 million

 Student Enrollment                                      33,096            42,134           53,249

 Percentage of Revenue From Tuition and                51 percent        56 percent       58 percent
 Other Institutional Charges That Was Received
 from Title IV Programs



11
   In its 10K report to the Security and Exchange Commission, Apollo Group, Inc. described
campuses as classroom and administrative facilitates with full student and administrative services.
Learning centers were described as primarily classroom facilitates with limited on-site administrative
staff.

ED-OIG                              ED-OIG/A09-70022                                         Page 23
The University information was derived from figures reported in the Apollo Group, Inc.’s 10-K
reports filed with the Securities and Exchange Commission. The tuition revenue amounts are for the
year ended August 31. The student enrollment numbers and revenue percentages are as of
August 31.

The University participates in the Federal Family Education Loan Program and the Federal Pell Grant
Program.

                                             October 1, 1995      October 1, 1996    Total for Two Year
     Title IV Disbursed to Students             through              through            Period Ended
                                           September 31, 1996   September 31, 1997   September 31, 1997

 Federal Family Education Loan Program
     Subsidized Loans                            $ 63,894,633         $ 95,691,627         $159,586,260
     Unsubsidized Loans                            79,935,702           99,218,644          179,154,346
     PLUS Loans                                       198,464              424,739              623,203
        Total                                    $144,028,799         $195,335,010         $339,363,809

 Federal Pell Grant Program                      $ 3,870,234          $ 4,974,156          $ 8,844,390

 Total Title IV Funds Received                   $147,899,033         $200,309,166         $348,208,199

The U.S. Department of Education reported a FFEL cohort default rate of 5.8 percent for fiscal
year 1996.




ED-OIG                                   ED-OIG/A09-70022                                      Page 24
                       Purpose, Scope and Methodology


The objective of the audit was to evaluate the University’s management of Title IV programs. After
conducting a survey of the University’s control environment, electronic data systems, and policies and
procedures, we focused our review on the following areas: (1) Required hours of instruction in an
academic year under the 12-Hour Rule, (2) Institutional and program eligibility for Title IV funds,
and (3) Causes that contributed to the University’s failure to make refunds or to make the refunds
within required time frames.

To accomplish our objectives, we reviewed the University’s financial aid policies and procedures. We
also reviewed the most recent Title IV audit reports prepared by the University’s Certified Public
Accountants and the program review report prepared by SFA’s Institutional Participation and
Oversight Service. We interviewed University officials, faculty and staff.

We relied extensively on computer-processed data extracted by the University from its databases and
our extract of data from National Student Loan Data System (NSLDS). To ensure that the
University provided us with records for all students, we compared students’ social security numbers
on the NSLDS and the University’s extract. We gained an understanding of the various data elements
contained on the University’s extract. We also held discussions with University staff to gain an
understanding of the automated process used for determining the number of credit hours that the
student is expected to complete for the loan period. We did not perform other tests to establish the
reliability of data contained on the University and NSLDS extracts. Nothing came to our attention
during our review that would cause us to doubt the acceptability of the extracted data used in our
analyses.

The audit covered loan and grant periods with start dates between October 1, 1995 and
September 30, 1997. We performed fieldwork on-site at the University from October 1997 to
March 1998. We continued to collect and analyze data in our offices through April 1999. Our audit
was performed in accordance with government auditing standards appropriate to the scope of the
review described above.




ED-OIG                              ED-OIG/A09-70022                                       Page 25
Methodology Used to Estimate
the Title IV Funds Improperly
Disbursed By the University

The University provided electronic files containing information on students who received
disbursements for FFEL and/or Pell Grants with loan/grant periods started between October 1, 1995
and September 30, 1997. We used the information contained on these files and additional information
extracted from the NSLDS to estimate the improperly disbursed funds.

                                    Estimates for Finding No. 1

The University’s academic year would need to be 90 weeks in length in order for it to meet the
360-hour requirement for an academic year. Therefore, the University could not (1) disburse Title IV
funds to students during a 90-week academic period that exceeded the maximum annual amounts for
an academic year allowed under the FFEL and Pell Grant programs and (2) disburse FFEL funds to
students who were enrolled less than half-time during a 90-week academic period.

For the FFEL estimates, we analyzed disbursements for two separate groups of undergraduate
students identified from the University-provided files.

     • The first group consisted of students who received disbursements for loans with loan start
        dates in the period October 1, 1995 through September 30, 1996 AND disbursements for
        loans with loan start dates in the period October 1, 1996 through September 30, 1997.

     • The second group (which excludes students included in the first group) consisted of students
        who received disbursements for loans with loan start dates in the period October 1, 1996
        through September 30, 1997 AND disbursements for loans with loan start dates in the
        period October 1, 1997 through September 30, 1998.12

For students in each group, we analyzed loan period start dates, credit hours and other information
to identify the maximum number of credit hours certified and the loan disbursements covering a
90-week academic period.

Students Who Were Enrolled Less Than Half-Time. Students who had less than 27 credit hours
certified during the period and who were not at the end of their educational programs were not




12
   The University-provided files did not contain information for the entire period of October 1, 1997
through September 30, 1998. Therefore, we used the NSLDS to obtain the loan information needed
for our analysis of loans with loan start dates after September 30, 1997 and loan disbursements after
that date.


ED-OIG                             ED-OIG/A09-70022                                        Page 26
enrolled at least half-time.13 Therefore, these students were not eligible for FFEL. We identified
$185,000 in FFEL disbursements made to students who were not enrolled at least half-time.

Students Who Received FFEL Disbursements In Excess of Annual Limits. For the remaining
students, we compared the disbursements to the applicable annual loan limit. Students were not
eligible to receive the amounts that exceeded the limit. For the two groups, we identified
$50.4 million of disbursements that exceeded the annual limits

Students Who Received Pell Grant Disbursements In Excess of Annual Limits. We identified the
funds awarded for Pell Grants started between October 1, 1995 and September 30, 1996 and the
funds awarded for Pell Grants started between October 1, 1996 and September 30, 1997. To
determine the amount of Pell Grant funds that a student may receive in a payment period, institutions
without standard terms multiply the maximum amount shown on schedules published by the Secretary
by a specified fraction. The numerator of the fraction is the number of credit hours in a payment
period and the denominator is the number of credit hours in an academic year. Since the University
used the credit hours for a 45-week academic year rather than a 90-week academic year as the
denominator, the Pell Grant award was overstated by one-half, or 50 percent. We identified $4 million
in Pell Grant disbursements that exceeded the maximum amount allowed.

                                    Estimates for Finding No. 2

No student enrolled in a correspondence course is considered to be more than a half-time student.
To determine the Pell Grant fund improperly disbursed for CDE students, we identified from the
University-provided files the CDE students who received Pell Grant funds for grants that started
between October 1, 1995 and September 30, 1997. For this group of students, we identified the total
amount of the Pell Grant disbursements.

As mentioned in the previous section, institutions without standard terms multiply the applicable
maximum Pell grant by a specified fraction to determine the Pell funds that a student may receive in
a payment period. The numerator of the fraction is the number of credit hours in a payment period
and the denominator is the number of credit hours in an academic year. Because CDE students could
only be considered half-time students, the student could only receive Pell grant funds for up to one-
half of the credits hours in the institution’s academic year. Since the University did not consider CDE
students as half-time student, the credit hours used in the numerator of the fraction were overstated
by 50 percent. Therefore, we estimated that the CDE students were ineligible to receive 50 percent,
or $96,000 of the Pell Grant disbursements made during each period.



13
  We used 27 credit hours to conclude that students were at least half-time students. The
University’s undergraduate courses are five-weeks in length during which a student receives four
hours of class time instruction per week. A student generally earns three credit hours for each
completed course. Therefore, a full-time student would need to complete 18 courses (54 credit
hours) in a 90-week academic year to receive 360 hours of instruction. A half-time student would
need to complete at least nine courses (27 credit hours) in a 90-week academic year to receive
180 hours of instruction.


ED-OIG                              ED-OIG/A09-70022                                        Page 27
                     Statement on Management Controls


As part of the review, we gained an understanding of the University’s management control structure,
as well as its policies, procedures, and practices applicable to the scope of the audit. Our purpose was
to assess the level of control risk for determining the nature, extent, and timing of our substantive
tests. We assessed the significant management controls in the following categories:

   •   Cash Management
   •   Student Attendance
   •   Refunds and Cancellations
   •   Institutional and Program Eligibility

Because of inherent limitations, a study and evaluation made for the limited purpose described above
would not necessarily disclose all material weaknesses in the control structure. However, our review
identified weaknesses related to controls over hours spent by students in study group meetings and
program eligibility. These weaknesses are discussed in the Audit Results and Other Matters sections
of this report.




ED-OIG                              ED-OIG/A09-70022                                         Page 28
                    Attachment


         University’s Comments on the Report




ED-OIG           ED-OIG/A09-70022              Page 29
                              Report Distribution List
                       Audit Control No. ED-OIG/A09-70022


                                                                                No. of
Auditee                                                                         Copies
   Mr. Todd S. Nelson, President
   Apollo Group, Inc.
   4615 East Elwood Street
   Phoenix, AZ 85040                                                              1

Primary Action Official
    Mr. Greg Woods                                                                4
    Chief Operating Officer
    Student Financial Assistance
    U.S. Department of Education
    400 Maryland Ave., SW
    Regional Office Building 3, Room 4004
    Washington, DC 20202

Other ED Offices
   General Manager for Schools Channel, Student Financial Assistance              1
   Director, Default Management, Student Financial Assistance                     1
   Chief Financial Officer, Student Financial Assistance                          1
   Area Case Director, San Francisco Team, Student Financial Assistance           1
   General Counsel, Office of General Counsel                                     1
   Assistant Secretary, Office of Postsecondary Education                         1

Other
   Director, Arizona State Board for Private Postsecondary Education              1
   Director, Commission on Institutions of Higher Education of the
      North Central Association of Colleges and Schools                           1

Office of Inspector General                                               (Electronic Copy)
    Inspector General                                                              1
    Deputy Inspector General                                                       1
    Counsel to Inspector General                                                   1
    Acting Assistant Inspector General for Investigation                           1
    Assistant Inspector General for Audit                                         1
    Deputy Assistant Inspector General for Audit                                  1
    Director, Student Financial Assistance Advisory and Assistance Team            1
    Regional Offices                                                               1 each