oversight

OIG's Recommendations for the Reauthorization of the Higher Education Act

Published by the Department of Education, Office of Inspector General on 2018-03-01.

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

                          UNITED STATES DEPARTMENT OF EDUCATION
                                        OFFICE OF INSPECTOR GENERAL


                                                                                                   THE INSPECTOR GENERAL



March 1, 2018



The Honorable Lamar Alexander                             The Honorable Virginia Foxx
Chairman, Committee on Health,                            Chair, Committee on Education and
Education, Labor, and Pensions                            the Workforce
U.S. Senate                                               U.S. House of Representatives
Washington, DC 20510                                      Washington, DC 20515

The Honorable Patty Murray                                The Honorable Bobby Scott
Ranking Member, Committee on                              Ranking Member, Committee on
Health, Education, Labor, and Pensions                    Education and the Workforce
U.S. Senate                                               U.S. House of Representatives
Washington, DC 20510                                      Washington, DC 20515



Dear Chairman Alexander, Chairwoman Foxx, Ranking Member Murray, and Ranking Member
Scott:

The purpose of this letter is to transmit the Office of Inspector General's recommendations for
consideration to assist Congress as it proceeds with the critical task of reauthorizing the Higher
Education Act (HEA). This is in accordance with our mission to promote the efficient and
effective use of taxpayer dollars in support of education and to provide independent and
objective assistance to assure continuous improvement in program operations and prevent
fraud, waste, and abuse.

As we have reported in previous testimonies and continue to report through the results of our
audits, other reviews, and investigations, there are persistent and emerging problems in the
Federal student aid programs authorized by the HEA. The programs are large, complex, and rely
on numerous entities to provide critical aid to millions of students to pursue quality
postsecondary education and to secure successful and manageable repayment of student loan
debt. The programs continue to be vulnerable to fraud, waste, and abuse. The Direct Loan
program and the Pell Grant program are designated by the Office of Management and Budget
as two of the Federal Government's high-priority programs susceptible to significant improper
payments. In addition, as we recently reported, the cost to provide credit through the loan
programs has been increasing and nearing a point where more dollars borrowed from Treasury
are loaned than collected (positive subsidy). This would add to the Federal debt.




                               400 MARYLAND AVENUE, S.W., WASHINGTON, DC 20202-1510

               Promoting the efficiency, effectiveness, and integrity ofthe Department's programs and operations.
 Page 2 - Letter to Chairman Alexander, Chairwoman Foxx,
 Ranking Member Murray, and Ranking Member Scott

Innovations to modes of delivery of education through distance education, direct assessment,
and competency-based education that may improve access to and more-t imely completion of
postsecondary education each present a new challenge to comply with statutory requirements
while ensuring a cost-effective quality education to justify the Federal investment. Oversight of
the programs by the Department continues to be a significant management challenge reported
by my office, and reliance on accrediting agencies and states for oversight in their roles defined
by the HEA has not always been effective to protect students and taxpayers.

It is imperat ive for Congress to address long-standing and emerging challenges, amend
outdated HEA provisions to address awarding and disbursing aid in distance education and
other alternative educational environments, and continue to provide for accountability, all
while not stifling innovation. We appreciate the opportunity to share our recommendations
with you. We share your dedication to protect students, assure accountability by
postsecondary schools, and ensure the long-t erm stability of the programs. We welcome the
opportunity to discuss our concerns with risks to the programs and our recommendations.



Sincerely,



<"'    q...-U_._
Kathleen S. Tighe
Inspector General
                   C t . \ Iv--


Enclosure
cc: The Honorable Betsy DeVos, Secretary, U.S. Department of Education
             U.S. Department of Education Office of Inspector General
                           Recommendations for the
                   Reauthorization of the Higher Education Act
                                 March 1, 2018

The Federal student aid programs have long been a major focus of the U.S. Department of
Education (Department) Office of Inspector General (OIG). These programs are inherently risky
because of their complexity, the amount of funding involved, the number of program
participants, and the characteristics of student populations. The Federal student aid programs
are staples in our annual list of top management challenges facing the Department. Since our
inception in 1980, the OIG has produced volumes of significant work involving the Federal
student aid programs, leading to statutory changes to the Higher Education Act of 1968, as
amended (HEA), including the dramatic overhaul of the HEA in 1992, as well as regulatory and
Department operational changes. In fact, many of the existing program integrity provisions are
the result of the OIG identifying fraud, waste, and abuse. Although statutory improvements
have been accomplished over the years, deficiencies continue, and risks constantly emerge as
the educational environment and workforce educational needs evolve. The HEA has not kept
pace with these changes. The HEA, regulations, and Departmental operations must promote
innovation, access, outcomes, and affordability. These are goals that the Congress, the
Department, and the OIG support. The key is to achieve these goals, while maintaining
enforceable accountability provisions designed primarily to protect America’s taxpayers and
students.

The OIG has compiled the following recommendations for the Congress to consider when
reauthorizing the HEA. These recommendations are based on OIG audits, reviews, and
investigations related to the Federal student aid programs and program participants.
In compiling these recommendations, the OIG also reviewed and considered the “Promoting
Real Opportunity, Success, and Prosperity through Education Reform Act” (PROSPER Act) as
passed by the U.S. House of Representatives Committee on Education and the Workforce; the
recent Higher Education Accountability white paper (HEA White Paper) issued by the Chairman
of the U.S. Senate Committee on Health, Education, Labor, and Pensions; and the recent
“Senate Democratic Caucus Higher Education Act Reauthorization Principles (HEA Principles
Paper).” The OIG recommendations for the HEA reauthorization are presented by topic below.

School Accountability

The OIG’s first area of focus relates to the effort, as evidenced by both the PROSPER Act and the
HEA White Paper, to move away from a separate definition for proprietary schools. The HEA
has provided a separate definition for proprietary schools since they were first authorized to
participate in the HEA programs beginning in 1972 in order to offer programs that must lead to
gainful employment. As the OIG has testified before Congress on issues involving proprietary
schools over the years, the sector continues to present itself as a high-risk area for the
Department. This sector, unlike public and nonprofit schools, must produce profit for owners

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and stockholders, which can create an incentive to evade compliance with obligations to
students and taxpayers. OIG resources devoted to postsecondary school investigations
continue to be disproportionately devoted to fraud and abuse in this sector. Since fiscal year
(FY) 2016, we have reported investigative results in 24 cases that involved a school or its
employees committing postsecondary education fraud. Proprietary schools were responsible
for 19 investigations, or 79 percent of these cases. For the same period, our cases resulted in
$126.8 million in recoveries from proprietary schools; this amount represented 83 percent of
investigative recoveries for all postsecondary schools. According to the FY 2014 cohort default
rates, the proprietary school default rate was 15.5 percent, compared to the national rate of
11.5 percent. 1 Students who cannot afford to repay their loans face very serious challenges.
Based on our work, we believe proprietary schools need additional scrutiny.

We are also concerned with the PROSPER Act’s proposed elimination of other accountability
provisions that impact all postsecondary schools. Under the PROSPER Act:

    •    All schools would no longer be subject to a loss of Title IV eligibility due to excessive loan
         cohort default rates (Section 426), and proprietary schools would no longer be required
         to obtain at least 10 percent of their revenue from sources other than Title IV (Section
         491(l)).
    •    Proprietary schools and postsecondary vocational schools would no longer be required
         to prepare students for gainful employment in a recognized occupation. (Section 101).
    •    All loan repayment measures would be replaced with a programmatic loan repayment
         measure for all schools, and current accountability requirements would be replaced
         with a single metric (Section 482).
    •    All schools would no longer be expected to provide regular and substantive interaction
         with an instructor in distance education programs. (Section 103(b)).

We address our concerns with each of these provisions below.

Cohort Default Rates and 90/10

We share the position presented in the PROSPER Act and in the HEA White Paper that cohort
default rates and 90/10 revenue limits generally have not been effective. Schools over time are
able to evade the consequences of accountability measures that involve multiple years. For
example, as we reported in our December 2003 audit on cohort default rates 2 we found that
borrowers in deferment or forbearance status lowered schools’ cohort default rates even
though these borrowers were not making payments and could not default during the cohort
default rate period. In addition, based on FY 2014 cohort default rates, the most recent rates


1
  We note the HEA Principles Paper states that proprietary schools enroll 9 percent of all students but receive 17
percent of student aid dollars and account for 35 percent of all loan defaults.
2
  “Audit to Determine if Cohort Default Rates Provide Sufficient Information on Defaults in the Title IV Loan
Programs”

                                                         2
available, out of more than 6,100 schools participating in the programs, only 10 schools were
subject to the loss of eligibility because of high default rates.

Regarding 90/10, few schools fail. Our investigations have shown that schools may manipulate
both cohort default rates and the 90/10 limitation in order to evade the requirements and
maintain eligibility. However, despite reduced efficacy over time, the OIG does not recommend
eliminating the cohort default rates or the 90/10 rule. Rather, Congress should retain the
accountability measures, and we recommend that it consider strengthening the definition of
cohort default rates and 90/10. For example, default rates could be adjusted to account for
nonperforming loans (no payment amounts due under forbearances or Income Driven
Repayment (IDR)), and 90/10 could be simplified and adjusted to eliminate veterans’ benefits
from the schools’ calculation of the 10 percent of revenue derived from non-Title IV funds.

Gainful Employment

The HEA has long required eligible proprietary institutions and postsecondary vocational
institutions to prepare students for gainful employment. However, before the Department
published the final regulations in June 2011, there was no statutory or regulatory definition of
what constituted gainful employment. As a result, the Department did not have eligible
institution and eligible program rules that it could use to hold institutions accountable.

We continue to believe that a school receiving funding for programs designed to provide
training for a specific occupation need to be held accountable for the success in securing
employment for its students in that occupation. Otherwise, students can be harmed by not
being able to pay loan debt which results in default, leaving taxpayers to bear the financial
burden associated with increasing default rates.

Loan Repayment

The PROSPER Act looks to replace all loan repayment measures with a programmatic loan
repayment measure for all schools. The PROSPER Act would replace the various accountability
requirements (which address different accountability goals) with a single metric that places
extreme pressure to ensure that the metric is well designed to achieve desired accountability
goals. The metric would make ineligible any program at an institution that for three consecutive
years has a loan repayment rate below 45 percent. 3 Since a program would lose eligibility only
after three consecutive failures, a school need only ensure compliance once in a three year
period to avoid loss of eligibility. Further, “positive repayment status” has a very limited
definition. For example, “positive repayment status” includes borrowers who are in repayment
status but not actually making payments on their loans. This can include some borrowers who
are in a deferment or forbearance status where no payments are due and some borrowers who
are enrolled in an IDR (Pay as You Earn, Revised Pay as You Earn) where the calculated monthly
payment amount is $0.

3
    Further, this provision would not track success of Pell-only students at lower cost institutions.

                                                             3
Implementation of a programmatic loan repayment measure would require a massive data
collection and reporting effort by schools and would require the Department to track millions of
student borrowers enrolling in all programs at over 6,100 schools. Although the measure is
well-intended, the OIG is concerned that the proposed massive data collection necessary for
the Department to track and administer a single accountability measure could result in a metric
nearly impossible to successfully implement and it would be rendered ineffective. We are also
concerned the measure could be subject to manipulation in much the same manner as cohort
default rates. In addition, data quality would be the linchpin of such an endeavor, and the OIG
has identified data quality assurance as a significant management challenge for the Department
for many years.

Regular and Substantive Interaction

Under the HEA, the distinction between correspondence and distance education is an
important one. To address fraudulent and abusive actions by schools offering correspondence
courses, Congress placed limitations on schools offering correspondence education and
students enrolled in such courses. Prior to these limitations, our investigations and audits had
focused on fraud and abuse that included awarding aid to students not in attendance and
schools not making refunds. There are no similar limitations placed on distance education.
According to Section 102(a)(3) of the HEA, if a school offers more than 50 percent of its courses
by correspondence or 50 percent or more of its students are enrolled in correspondence
courses, the school loses eligibility to participate in the Title IV programs. Under Section 484(k)
of the HEA, students enrolled in correspondence courses that lead to a certificate (not an
associate degree or higher) are not eligible for Title IV funds. In addition, for a student enrolled
in a correspondence program, Section 472 of the HEA generally limits the student’s cost of
attendance to tuition and fees. “Distance education” as defined by section 103(7) of the HEA,
qualifies for full funding and maximum borrowing by students, provided the programs “support
regular and substantive interaction between the students and the instructor.” In contrast,
correspondence education does not require regular and substantive interaction between the
students and the instructor.

The PROSPER Act amends Section 103(7) to remove the definition of “distance education” and
replace it with “correspondence education.” The former “distance education” requirement of
regular and substantive interaction between students and instructors is eliminated. The
definition of “correspondence education” is further amended to add “interaction between the
institution and the student is limited and the academic instruction by the faulty is not regular
and substantive.” A significant difference from the former definition of distance education is
that “instructor” is replaced with “faculty.” Faculty could include mentors or counselors that
lack subject matter expertise in the courses a student is taking. Removing the definition of
distance education and replacing “instructor” with “faculty” in correspondence education
would allow a school to qualify for full participation in the Federal student aid programs based
on e-mail contact between students and faculty on matters unrelated to the subject matter of a
program. There will be no assurance that programs provide the level of interaction Congress

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previously expected with instructors for full funding of distance education. Distance education
funding would only be restricted in the unlikely event the programs qualify as correspondence
education.

In our September 2017 audit at Western Governors University4 we identified that the school
offered distance education not designed to provide regular and substantive interaction
between the students and instructors. For example, little or no contact with a subject matter
expert was required; instead, students generally had some type of regular contact with a
faculty member such as a student mentor who was not a subject matter expert in the courses a
student was taking. As a result, we found the school was offering correspondence programs
and not eligible to participate in the Federal student aid programs because it failed to comply
with the 50 percent limits placed on correspondence education. In a March 2012 audit of Saint
Mary of the Woods College, 5 we also found it offered correspondence education exceeding the
50 percent limit.

The amendment in the PROSPER Act as proposed would allow schools that provide routine e-
mail contact with any member of the “faculty” without subject matter expertise to avoid the
limits placed on correspondence schools. We believe Congress should retain the definition of
distance education and not replace instructor with faculty. The requirement should remain that
a school that offers education programs, which will not qualify as correspondence education,
should provide education by an instructor with subject-matter expertise.

In addition, eliminating the definition of distance education may also present difficulties for
schools in the awarding, disbursing and refunding Federal student aid funds. In 2014, we issued
a summary audit report on issues unique to this distance education environment (2014
Distance Education audit). 6 We recommended additional safeguards to mitigate the risks of
fraud, waste and abuse. The absence of a separate definition of distance education may create
difficulties in putting in place through regulations much needed additional safeguards.

Definition of a Credit Hour

A credit hour is the unit of measure that gives value to the level of instruction, academic rigor,
and time requirements for a course taken at an educational institution. Since July 1, 2011, a
credit hour has been defined in 34 CFR 600.2 as:

        . . . an amount of work represented in intended learning outcomes and verified by
        evidence of student achievement that is an institutionally established equivalency that
        reasonably approximates not less than . . . [o]ne hour of classroom or direct faculty
        instruction and a minimum of two hours of out of class student work each week for

4
  “Western Governors University Was Not Eligible to Participate in the Title IV Programs”
5
  “Saint Mary-of-the-Woods College’s Administration of the Title IV Programs”
6
  “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”

                                                        5
       approximately fifteen weeks for one semester or trimester hour of credit, or ten to
       twelve weeks for one quarter hour of credit, or the equivalent amount of work over a
       different amount of time; or . . . [a]t least an equivalent amount of work . . . for other
       academic activities as established by the institution including laboratory work,
       internships, practica, studio work, and other academic work leading to the award of
       credit hours.

As such, schools have had the flexibility to determine the “amount of work represented in
intended learning outcomes,” whether measured by classroom instruction and out of class
work or by other “equivalent amount of work . . . as established by the institution.” The rule
does not mandate “seat time” or time in classroom instruction required for Title IV eligible
programs.

Credit hours (and their equivalent) form the foundation for proper administration of awarding,
disbursing, and equitably distributing the funds under the Federal student aid programs. In
2011, Inspector General Kathleen S. Tighe testified before Congress on the need for a credit
hour definition, and in 2013, the OIG provided comments to Congress on a proposal to repeal
and prohibit enforcement of the credit hour definition. Our comments, captured in an OIG
document titled, “Office of Inspector General Review of H.R. 2637, "Supporting Academic
Freedom through Regulatory Relief Act,” noted:

       Defining a credit hour protects students and taxpayers from inflated credit hours,
       improper designation of full time student status, the over-awarding of Title IV funds and
       excessive borrowing by students. Having a definition of a credit hour . . . provides
       increased assurance that a credit hour has the necessary educational content to support
       the amounts of Federal funds that are awarded . . . and that students at different
       institutions are treated equitably in the awarding of those funds.

Section 104(a)(1)(A) of the PROSPER Act would repeal the current regulatory definition of a
credit hour, and Section 104(b)(2) would prohibit promulgating any replacement rule or
enforcing any rule related to the definition of a credit hour. Eliminating a credit hour definition
would create difficulties for the Department in overseeing the Federal student aid programs,
including difficulties in awarding, disbursing, and returning student aid. Schools would no
longer be held to any standard for the quantity and quality of education to justify the debt
incurred by students and the Federal investment. We recommend that Congress not eliminate
the credit hour or prohibit the Secretary from retaining the regulatory definition established
through negotiated rulemaking.

Cost of Attendance

The OIG has long recommended that Congress and the Department reconsider the appropriate
cost of attendance for distance education programs. Distance education students and students
attending classes on campus often have different costs of attendance. For example, students
enrolled in distance education programs, like students enrolled in correspondence programs,
                                                 6
do not need to change residences, do not incur transportation costs, and are not physically
present in traditional classrooms. Yet, distance education students have been allowed to
borrow more than is necessary to cover educational expenses, creating loan debt on costs not
necessarily academically related.

In conducting our 2014 Distance Education audit, we reviewed a sample of schools from all
sectors (2- and 4-year public, nonprofit, and proprietary schools) offering distance education
programs. We learned that on average, tuition, fees, and books at the eight schools that we
reviewed accounted for 42 percent of each full-time student’s total cost of attendance. The
remaining 58 percent of the students’ cost of attendance consisted of allowances for
transportation, room and board, and miscellaneous personal expenses.

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. Including unnecessary costs can lead to excessive borrowing. We recommend that
Congress review components of cost of attendance budgets and ensure that the components
included fit the student’s educational needs. Further, the OIG supports changes proposed in the
PROSPER Act that would eliminate the prohibition on schools differentiating the cost of
attendance for distance education programs (Section 471(1)) and would authorize schools to
adjust aid eligibility if the school determines the mode or method of delivery results in
substantially reduced costs (Section 473).

Multiple Disbursements

In 2011, the OIG issued an investigative program advisory report alerting the Department to a
significant fraud vulnerability in distance education programs: distance education “fraud rings.”
Our work revealed that large, loosely affiliated groups of criminals seek to exploit distance
education programs in order to fraudulently obtain Federal student aid. These groups typically
have one or more ring leaders and associates who work to recruit friends, relatives, and other
acquaintances to participate in the fraud, or steal the identities of unwitting victims that they
use to enroll them into distance education programs for the sole purpose of improperly
obtaining Federal student aid funds. By targeting distance education programs, the participants
avoid setting foot on campus and can exploit institutions outside their geographic area.

Fraud rings mainly target lower-cost institutions because the Federal student aid awards will
satisfy institutional charges (such as tuition) and then result in a large disbursement of the
balance of Pell grants and loan awards to the student for other educational expenses (such as
books, room and board, and commuting expenses). Our investigative program advisory report
recommended changes to the disbursement rules to combat fraud by individuals and fraud
rings to eliminate upfront disbursements to students for living and other educational
expenses. In addition, our 2014 Distance Education audit demonstrated how schools offering
distance education programs struggled with awarding and disbursing Federal student aid. The
schools did not consistently apply the Department’s regulations and guidance regarding
academic attendance when determining student eligibility and disbursing aid.
                                                7
We recommend that Congress require schools to better verify academic attendance, make
more frequent, smaller disbursements, and align disbursements with timing of institutional
charges. This would eliminate unnecessary large credit balances paid to students at the start of
a payment period and would reduce the risk of fraud and abuse. Section 401(a) and Section
462’s addition of Section 465(a)(1) of the PROSPER Act appear to mandate weekly or monthly
disbursement of Pell grants and Direct loans. However, the PROSPER Act also contains language
that permits schools to make unequal installments to adjust for unequal costs (including tuition
and fees) that could obviate any benefit from multiple disbursements.

Refunds/Return of Title IV

OIG audits and investigations have found refund violations to be a longstanding problem.
Refunds, which are referred to as "Return of Title IV Funds" under the HEA, are triggered when
a student ceases to attend school. The school must determine whether a refund is owed,
calculate the amount of the unearned Federal student aid, and then return those funds to the
Department or to another applicable participant in Federal student aid programs within a
specified number of days. Violations of this requirement occur when refunds are not timely
paid, when incorrect calculations result in returning insufficient funds, and when schools fail to
pay refunds. In our 2014 Distance Education audit, we found that none of the eight schools
offering distance education programs retained adequate evidence of a student’s academic
attendance to support the student’s withdrawal date. As a result, each school experienced
problems with calculating and returning correct refund amounts.

Currently, schools earn 100 percent of Title IV funds if a student withdraws after 60 percent of a
payment period, creating a significant incentive for schools to avoid withdrawing a student
before the 60 percent point. The PROSPER Act would require a 100 percent refund up to 24
percent of a payment period, limit a refund to 75 percent from 25 percent to 49 percent of a
payment period, limit a refund to 50 percent from 50 percent to 74 percent of a payment
period, and require a 25 percent refund after 75 percent of a payment period. We support
these provisions of the PROSPER Act. We also recommend that schools be held accountable for
tracking academic attendance in a manner that addresses the concerns we raise in our 2014
Distance Education audit for these changes to be effective.

Financial Responsibility

The Department annually evaluates the financial responsibility of schools by reviewing audited
financial statements. The Department uses information in the audited financial statements of
private nonprofit and proprietary schools to calculate a composite score for each school based
on three financial ratios. A school with a failing composite score is deemed not financially
responsible and must provide the Department with either a letter of credit or an equal amount
of funds to continue participating in the Title IV programs.



                                                 8
In the Borrower Defense regulations published on November 1, 2016, the Department included
provisions that would allow the Department to act and obtain financial protection based on
adverse financial events that occur outside the annual audit submission cycle. In our February
2017 audit (At-Risk Title IV Schools), 7 which reviewed the collapse of Corinthian Colleges, we
highlighted the benefits these regulations could provide for the Department’s ability to identify
and mitigate the risk of unexpected or abrupt school closure. If the regulations were enforced,
the Department would receive broader and more current information than the information
schools provide in their audited financial statements. This would help the Department to more
timely identify schools that may not be financially responsible and at risk of closure. The
Department would also be able to obtain financial protection from schools based on that
information, which would provide assurance that funds would be available to make required
refunds to students, provide teach-out facilities, or meet institutional obligations to the
Department if schools closed.

We also highlighted the benefits of more transparent school financial data in our July 2013
audit (Proprietary Schools Financial Data). 8 We concluded that the financial information
reported by schools is generally not useful to the Department for purposes of identifying how
schools spent their funds or making meaningful comparisons of financial information across
schools participating in the Title IV programs. We recommended that the Department work
with Congress to obtain statutory authority to establish uniform account classification rules and
procedures for all postsecondary schools, including proprietary schools. Specifically, we
recommended that, after obtaining statutory authority, the Department create a standard
chart of accounts for use by schools that includes expense classifications that clearly define the
types of costs to be recorded under each expense account.

Earlier this year, when the Department proposed the delay of the Borrower Defense
regulations, we recommended that the Department leave in place the financial responsibility
improvements that were not related to borrower defense. The Department delayed the entire
borrower defense regulations and we reported our disagreement with that decision. The
Department is now in the process of negotiated rulemaking to revise the borrower defense
regulations. Although it has identified the issue for negotiation, it has yet to propose any
alternative regulations to address schools at the risk of precipitous closure. We have
recommended that the Department do so.

The PROSPER Act would by statute prescribe and restrict the procedures by which the
Department determines financial responsibility—procedures that have previously been
determined by regulation or the Department’s internal operating processes. The PROSPER Act
includes provisions that would appear to permit the Department to obtain a letter of credit
when it determines a school is at risk of precipitous closure or of not meeting all of its financial

7
  “Federal Student Aid’s Processes for Identifying At-Risk Title IV Schools and Mitigating Potential Harm to Students
and Taxpayers”
8
  “Transparency of Proprietary Schools’ Financial Statement Data for Federal Student Aid Programmatic
Decisionmaking”

                                                         9
obligations. However, the PROSPER Act would significantly restrict the ability of the
Department to require the posting of letters of credit as part of annual determinations of
financial responsibility based on reviews of audited financial statements and application of
financial ratios. We recommend Congress tighten financial responsibility and give the
Department authority to obtain letters of credit and other sanctions during and outside of the
annual determinations of financial responsibility to protect students and taxpayers.

Information Security

As we have noted in our annual Management Challenges reports, information security,
including the security of the personal information of the millions of students participating in the
Federal student aid programs, remains a challenge for the Department. Investigations
conducted by our Technology Crimes Division have revealed that Title IV schools we have
investigated do not protect the Department’s data at the same level of security that the
Department itself employs. For example, one school failed to segregate its financial aid data
from other parts of its network and a student was able to compromise the financial aid and
academic information of 650,000 people. In another case, the school left its public-facing web
page unsecured, and intruders were able to compromise and download the financial aid
information for every current, past, and past prospective student for which the school had
records. In a third case, the school was not using appropriate background checks for financial
aid employees and hired an individual who had previously been fired for stealing personal
information from another school's financial aid department.

To address the security of student and Department information, the Department has taken
steps to require schools to comply with the customer information safeguarding requirements of
the Financial Services Modernization Act of 1999 (commonly referred to as the Gramm-Leach-
Bliley Act) and with the requirements of user agreements providing access to FSA systems (Dear
Colleague Letter GEN-16-12, July 1, 2016, and Dear Colleague Letter GEN-15-18, July 29, 2015).
The Department has also encouraged schools to consider information security standards issued
by the National Institute of Standards and Technology and has stepped up efforts to ensure
schools report data breaches involving Title IV and student information to the Department. So
far for FY 2018, the Department has received more reports (of varying degrees of severity) than
for all of FY 2017.

The Gramm-Leach-Bliley Act—administered by the Federal Trade Commission—requires
entities to design, implement, and maintain a program of information security. Specific
safeguards, however, are not mandated. To ensure that student data are adequately protected,
we recommend that the HEA be amended to require institutions to comply with information
security requirements that the Secretary determines necessary for the unique circumstances of
the Title IV programs. The Secretary should be authorized to establish by notice in the Federal
Register the security requirements necessary to access and obtain information from
Department systems. As part of the program participation agreement required by Section
487(a) of the HEA, institutions should be required to agree that to access and


                                                10
receive information from information systems maintained by the Secretary, the institution will
comply with information security requirements determined by the Secretary.

Debt Relief Companies

Our work has identified third-party debt relief companies that have or are currently engaged in
fraudulent activities directed at borrowers and the Department. These companies misrepresent
possible debt relief available to borrowers, charge exorbitant fees for services or relief that is
already available for free from the Department, and improperly access Department systems to
carry out their fraudulent activities. To perform these acts, these companies obtain access to
online accounts created by the Department for borrowers to manage their own loans, or they
cause the Department to issue online accounts for borrowers and the companies then obtain
control of the accounts. In many instances, these companies change passwords, addresses, and
other contact information in Department systems, so that the integrity of the data in those
systems is impaired and the Department can no longer contact the actual borrowers. Effective
prosecution of these companies and persons working for them under existing Federal criminal
statutes (e.g., 18 U.S.C. 1030) has been challenging because the monetary value of the damages
sustained by Department systems is not always readily apparent as required by 18 U.S.C.
1030. We recommend expanding the criminal penalties in Section 490 of the HEA to explicitly
make unauthorized access to Department information technology systems and the misuse of
identification devices issued by the Department a criminal act. This statute would be used to
pursue prosecution of individuals and entities who use illegally obtained credentials to access
Department systems that contain sensitive personally identifiable information. The proposed
language will assist in obtaining the support and assistance of the U.S. Department of Justice in
prosecuting these cases. As such, we recommend that Section 490 be amended by inserting at
the end the following:

       “(e) Access to Department of Education Information Technology Systems for fraud,
       commercial advantage, or private financial gain. – Any person who –

               (1)(A) knowingly and willfully obtains an access device as defined in 18 USC
       1029(e)(1) that was issued by the Department of Education to another person for the
       purpose of applying for any funds provided under this subchapter or accessing financial
       aid or student loan information maintained by the Department; or

                 (B) by fraud or false statement causes the Department of Education to issue
       and assign such an access device and subsequently obtains that issued access device;
       and

               (2) uses the access device to access Department of Education information
       technology systems for purposes of obtaining commercial advantage or private financial
       gain or, in furtherance of any criminal or tortious act in violation of the Constitution or
       laws of the United States or of any State, shall be fined not more than $20,000 or
       imprisoned for not more than 5 years, or both.”
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Accrediting Agencies

Under the HEA, the Department is dependent on the accrediting agencies recognized by the
Secretary to ensure that institutions provide quality, content, and academic rigor at the
postsecondary level. The Higher Education Opportunity Act of 2008 included a provision that
prohibits the Department from developing minimum regulatory criteria for an accrediting
agency’s standards for accreditation. The Department of Education Organization Act of 1980
prohibits the Department from making determinations on curriculum and educational quality.
Thus, the Department is prohibited from determining the quality of education funded by
Federal education dollars. All it can do with regard to evaluating the quality of postsecondary
education is recognize accrediting agencies as reliable authorities for the quality of education
funded by Federal dollars.

We have reported extensively on some accrediting agencies’ deficient oversight of critical
issues such as credit hours, program length, and competency-based education. The results of
our reviews showed that accrediting agencies do not always have standards or procedures to
effectively oversee areas that are critical to effective Title IV oversight or administration and to
hold member schools accountable. For examples see our September 2015 audit on the Higher
Learning Commission 9 and our December 2009 audit on the Middle States Commission. 10

The PROSPER Act would eliminate most standards requirements for accrediting agencies,
instead requiring them only to have standards related to student achievement. Under
Section 496(2)(D), accrediting agencies would no longer be required to have standards for such
areas as curricula, faculty, program length, or consideration of compliance with Federal student
aid requirements. Given the statutory prohibitions on the Department from assessing
curriculum and quality and from regulating standards for accrediting agencies, eliminating
requirements for accrediting agencies to have standards for curriculum and quality of education
would mean that oversight in this area would be almost nonexistent. Oversight of quality would
be left to the States. Our experience has shown that some States limit their oversight to
providing business licenses to operate. This could create unnecessary and unacceptable risks to
students and taxpayers. The result could be Federal student aid funding programs inequitably
across schools and programs. The investment of taxpayers’ funds needs to have assurances that
student loan debt is not incurred for poor quality education.

As noted, our audits have found that accrediting agencies are not always reliable. However,
rather than eliminating requirements, we recommend retaining and strengthening expectations
for accrediting agencies to ensure the quality of education member schools provide.
Accrediting agencies should also ensure schools comply with Federal student aid rules and
requirements; they should also establish and enforce meaningful standards for student
achievement.

9
  “The Higher Learning Commission Could Improve Its Evaluation of Competency-Based Education Programs to
Help the Department Ensure the Programs Are Properly Classified for Title IV Purposes”
10
   “Review of the Middle States Commission on Higher Education's Standards for Program Length”

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Direct Loan Program

The PROSPER Act proposes to sunset the current Direct Loan program and establish a new
Federal ONE Loan program. It does not, however, provide sufficient information on the
operation of a new direct loan program for the OIG to evaluate its impact. We note that the
recent financial statement audits for the Department (and the Federal Student Aid office) have
identified significant internal control deficiencies over the credit reform modeling for the costs
of the Direct Loan program. The Department has developed a set of complex financial and
economic models that apply mathematical techniques and statistical methods to historical loan
level data to develop student loan program performance assumptions and estimate the value
and cost of its student loan programs. The financial statement audits determined that the
Department did not have a comprehensive framework for risk management or fully developed
critical modeling activities. The Department maintained limited documentation supporting the
initial design, evaluation, justification, and testing of the model for selecting a sample of
borrowers used for calculating program performance assumptions, estimating future incomes
for borrowers under income-driven plans, projecting future cash flows for borrowers under IDR
plans, and projecting overall program level cash flows. In our 2018 audit (Costs of Income-
Driven Repayment Plans), 11 we reported that the Department needs to be more transparent to
decision-makers in its reporting on costs to provide IDR and loan forgiveness programs. Costs to
provide credit are approaching positive subsidy and can add to the Federal debt. Any changes
to the loan programs need to consider the cost impact not only to students, but also to annual
appropriations and long-term stability of the loan programs.

Performance-Based Organization (PBO)

In a 1996 report, the OIG questioned the readiness of the Department to administer the Federal
Family Education Loan and Direct Loan programs. We noted that aspects of the PBO model
could help serve the Federal student aid programs, such as hiring a chief executive officer who
was not a political appointee and who had experience in managing large, computer-based
financial services operations. At the time, we reported that there would need to be a significant
amount of reengineering work done before establishing a PBO.

The 1998 amendments to the HEA mandated that the Department establish a PBO as a discrete
unit responsible for managing the operational functions supporting the Federal student aid
programs. The office of Federal Student Aid (FSA) was designated as the PBO. In 2008, we
conducted an audit to determine whether FSA was meeting its responsibilities as a PBO in three
key areas: planning and reporting, systems integration, and cost reduction. The audit found that
FSA was not completely fulfilling its responsibilities in those areas. First, FSA’s planning and
reporting processes were not always effective or efficient, as it did not issue its first 5-year
performance plan until 2004—6 years after it became a PBO, and none of the strategic
objectives included in the plan were measurable or quantifiable. Second, in reviewing FSA’s

11
  “The Department’s Communication Regarding the Costs of Income-Driven Repayment Plans and Loan
Forgiveness Programs”

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systems integration efforts, our audit revealed that FSA had not made significant progress in
completing activities designed to integrate its student financial assistance systems and
therefore was unable to realize the expected benefits of systems integration. Third, we found
that FSA’s progress towards the reduction of program administration costs was uncertain as it
had not yet established measurable strategic goals in the area of cost reduction and its
anticipated cost savings from three of four major system initiatives it had identified were not
expected to be realized until after FY 2008 and beyond.

Much has changed since our 2008 audit. For example, in 2010, there was a significant shift in
FSA’s operations with passage of legislation eliminating the origination of new Federal Family
Education Loans and requiring that all new Federal student loans be originated under the Direct
Loan program. Although we have not conducted an audit of FSA as a PBO post 2008, we have
since that time issued more than 90 audits, inspections, and other reports involving Federal
student aid programs and operations.

In November 2015, Inspector General Tighe testified before Congress on the operations of FSA
as a PBO. In that testimony, the Inspector General stated that OIG work since the 2008 audit
continues to identify problems in oversight of participants in the Federal student aid programs,
its efforts to identify and reduce improper payments, and its contract management to ensure
program integrity and better safeguard taxpayers’ interests. As such, we recommend that
Congress consider adding specific requirements to the HEA for oversight and contract
management to the purposes and functions of the PBO and require the PBO performance plan
to establish measurable goals and objectives in these areas. The PBO annual report should also
contain an evaluation of those goals and objectives.

Conclusion

The OIG supports the efforts of both the Senate and the House of Representatives to amend
the outdated HEA and to address long-standing and emerging challenges in the Federal student
aid programs. The OIG believes that changes are needed to address awarding and disbursing
aid in distance education and other alternative educational environments, while not stifling
innovation, and that improved oversight is needed by the Department, accrediting agencies,
and the States. The OIG is concerned, however, that eliminating various accountability
provisions without a proven substitute would increase the risks to students and taxpayers,
could result in higher costs to offer credit through loans due to excessive borrowing, could
increase defaults, and increase the use of IDR and loan discharges that could negatively impact
the long-term viability of the programs.




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