Statement of Inspector General Kathleen Tighe on OIG work involving proprietary postsecondary institutions before the Committee on Health, Education, Labor, and Pensions, United States Senate, June 24, 2010. PDF (270K)

Published by the Department of Education, Office of Inspector General on 2010-06-24.

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

                              Statement of Kathleen S. Tighe 

                                     Inspector General 

                               U.S. Department of Education 

                                         Before the 

                  Committee on Health, Education, Labor, and Pensions 

                                    United States Senate 

                                       June 24, 2010 

Chairman Harkin, Ranking Member Enzi and Members of the Committee:

Thank you for inviting me here today to discuss the U.S. Department of Education

(Department) Office of Inspector General's work involving for-profit postsecondary

institutions, referred to herein as proprietary institutions. This is my first opportunity to

testify before this Committee since it approved my nomination as the Inspector General

earlier this year. It is an honor to have received your support to lead this organization,

and I look forward to working with you to improve Federal education programs and

operations so they meet the needs of America's students and families.

Before I begin my testimony, I would like to take this opportunity to recognize the

Department for the release of its Notice of Proposed Rulemaking last week. I would also

like to acknowledge the higher education community, whose discussions with the

Department throughout the 2009-2010 negotiated rulemaking sessions contributed to the

development of the Department's proposed rules-a number of which address program

integrity issues related to proprietary institutions that I will talk about today. We will
comment on the proposed rules and monitor the implementation of the final rules, and do

what we can to ensure that they assist in protecting our nation's students, parents and


I would also like to take a moment to address the significant change coming to the

Federal student aid programs on July 1, 2010. The Health Care and Education

Reconciliation Act 0/2010, Public Law 111-152, mandated there will be no new Federal

Family Education Loan (FFEL) originations as of July 1, 2010. As a result, in a very

short period of time, the Department must assist schools in transitioning to process all

new loans under the William D. Ford Direct Loan program (Direct Loan), oversee the

wind down of the FFEL program and its billions in Federal assets and improve its

oversight of additional contractors, while managing the risks presented by postsecondary

institutions and the vulnerabilities that exist with distance education. Ensuring that the

Department's infrastructure, processes, oversight, and monitoring are effectively

operating in order to guarantee that every eligible American student receives the aid to

which he or she is entitled is of vital concern to this Committee as well'as to my office

and will continue to be a major focus of our efforts.

Background on the OIG and Federal Student Aid Programs

As members of this Committee know, the Federal student aid programs have long been a

major focus of our audit, inspection, and investigative work, as they have been

considered highly susceptible to fraud and abuse. The programs are large, complex, and

inherently risky due to their design, reliance on numerous entities, and the nature of the

student population. The Department provided $129 billion in aid to students and parents

during fiscal year (FY) 2009 and has an outstanding student loan portfolio of more than

$600 billion.

OIG has produced volumes of significant work involving the Federal student aid

programs, leading to statutory changes to the Higher Education Act of 1965, as amended

(REA), as well as regulatory and Departmental changes. This includes extensive work

involving proprietary institutions. According to the Department, Federal student aid

funding for proprietary institutions has grown by 109.4 percent from 2004-2005 to 2008-

2009, while funding for public and non-profit institutions grew by approximately 40

percent for the same time period.

The HEA provides eligibility criteria that an institution must meet in order to participate

in the Federal student aid programs. State educational agencies, accrediting agencies,

and the Department all have responsibility for program integrity to ensure that institutions

meet, and continue to meet, requirements for participation in the Federal student aid

programs. For example:

       •	   States provide licensing or other authorization necessary for an institution of

            higher education to operate within a state;

       •   Accrediting agencies, recognized by the Secretary of Education (Secretary) as

           reliable authorities on the quality of education or training offered, must

           establish, consistently apply, and enforce standards for eligibility; and

       •   The Department assesses and certifies that an institution meets the HEA's

           eligibility criteria for administrative and financial responsibility. It must also

           conduct program reviews, on a systemic basis, designed to include all

           institutions of higher education participating in the Federal student aid


Institutional eligibility, certification, and oversight requirements in the HEA are the same

for all types of postsecondary institutions except for two requirements. One of these

requirements applies only to proprietary institutions, and the second applies to both

proprietary and postsecondary vocational institutions.

       Statutory Revenue Provision for the Proprietary Sector

       The HEA provides a criterion that is unique to proprietary institutions of higher

       education. Known as the "90/10 Rule'" the provision requires a proprietary

       institution to have at least 10 percent of the institution's revenues from sources

       that are not derived from funds provided under the student financial assistance

       programs, as determined in accordance with regulations prescribed by the

       Secretary. Compliance with the 90/10 Rule must be calculated annually, based on

       the institution's fiscal year. The Higher Education Opportunity Act 0/2008

       changed the 90/10 Rule from an institution eligibility criterion to a condition of

       program participation, and provided additional resources to be included as

       institutional revenue. These amendments were a significant change that made it

       easier for institutions to meet the 90/10 Rule, and institutions that fail to comply

       with the Rule are now allowed to continue participation in the Federal student

       programs for two years while they attempt to meet the Rule. The institution must

       report the calculation as a footnote to the institution's annual audited financial

       statements. The institution's independent certified public accountant is expected

       to test the accuracy of the institution's assertion as part of the audit of the

       fmancial statements.

       Statutory Provision for Training Programs

       The HEA provides an eligibility criterion that is unique to proprietary institutions

       and postsecondary vocational institutions regarding programs of training. These

       institutions must provide an eligible program of training to prepare students for

       gainful employment in a recognized occupation. This requirement does not apply

       to nonprofit and public sector institutions' associate, bachelors, or postgraduate

       degree-granting programs.

Role of the OIG in Program Oversight

In 2005, OIG testified before Congress on the topic of waste, fraud, and abuse in the

proprietary sector. At that time, we reported that, historically, the majority of our

postsecondary institutional audits and investigations involved proprietary schools. More

than five years later, this continues to be the case.

OIG generally opens an investigation as a result of credible evidence developed from

complaints and other sources that may indicate fraud. Audits or inspections are generally

initiated to assess specific areas of compliance but may also be initiated as the result of a

complaint. Since our 2005 testimony, OIG has issued 37 reports on postsecondary

institutions, 21 of which involved proprietary schools. In 2005, we reported that looking

at the previous 6 years of data, 74 percent of our postsecondary institutional

investigations involved proprietary institutions. Today, that number is very similar-70

percent of our current investigations involving postsecondary institutions are proprietary

school related.

Fraud and Abuse in the ProprietaIy Sector

Proprietary institutions have been eligible to participate in the Federal student aid

programs since 1972. This sector has evolved from being predominately vocational trade

institutions and now includes degree-granting institutions. Proprietary institutions have

also evolved into two classes of institutions: some are privately held and others are parts

of much larger publicly traded corporations. Both are driven by profit and can also be

driven by the need for growth. The volume of Federal student aid dollars going to the

publicly traded sector has seen tremendous growth in recent years. Over the years, we

have come to identify a relationship between rapid growth and failure to maintain

administrative capability. The following are several examples of the types of fraud and

abuse our work has identified involving proprietary institutions.

       Falsification of Eligibility

       Our audits and investigations have identified proprietary schools that falsify

       student enrollment, attendance, high-school diplomas, General Educational

       Development certificates, ability-to-benefit exam results, and satisfactory

       academic progress in order to qualify the students to obtain or continue to

       maintain Federal student aid. Schools also improperly received Federal student

       aid funds because they failed to perform or falsified the verification required

       under the Department's regulations for students. We have found schools that

       enrolled students in programs that do not meet the minimum program eligibility

       requirement and institutional locations that do not meet basic eligibility


       Refund Violations

       Refund violations have been a longstanding problem in proprietary institutions.

       We continue to identify this problem in our audits and investigations. Refunds,

       which are referred to as "Return of Title IV Funds" under the HEA, are triggered

       when a student ceases to attend an institution. The institution must determine if a

       refund is owed, calculate the amount of the unearned Federal student aid, and then

       return those funds to the Department, the FFEL loan holder, 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

institutions fail to pay refunds at all. Failure to pay refunds is a criminal offense

under the HEA. We have found all three types of refund violations in our audits,

and these violations are the frequent subject of our investigations.

90/10 Rule

Defined previously in this testimony, proprietary institutions must meet the 90/10

Rule every fiscal year to continue participation in Federal student aid programs.

We have identified proprietary institutions that miscalculate or devise other

creative accounting schemes (e.g., fake institutional scholarships and loans) to

make it appear they met this rule. When this occurs, ineligible institutions have

continued to participate in the Federal student aid programs.

Incentive Compensation

We receive and review complaints of aggressive recruiting and violations of the

HEA's ban on incentive compensation by proprietary institutions. We have

reviewed compensation plans that are clearly providing direct financial incentives

for recruiters to increase enrollment. However, due to the safe harbors included

in the Department's curr ent regulations, in many cases, schools are shielded from

administrative, civil, and criminal liability. Proprietary institutions are making

full use of the safe harbors in the Department's regulations to provide financial

incentives to drive enrollment. In 2002, when the Department originally

promulgated the safe harbor rules, we advised the Department that provisions of

those regulations were contrary to the requirements of the HEA and reported our

disagreement to Congress. In its Notice of Proposed Rulemaking issued last

week, the Department proposes to eliminate all safe harbors and return to the clear

ban on incentive compensation stated in the HEA. This is a significant step to

eliminate aggressive recruiting practices.

Distance Education

Distance education-both at proprietary and non-profit institutions-is an area

that is placing increased demands on our investigative and audit resources and

highlights the need for greater oversight and statutory or regulatory change. The

issue is determining whether students in distance education are "regular students"

as defined by the HEA, and actually in attendance for Federal student aid

purposes. Institutions are obligated to return any Federal student aid received if a

student does not begin attendance during the period for which aid was awarded.

Institutions must be able to document attendance in at least one class during a

payment period. Determining what constitutes a class and class attendance in the

on-line environment is a challenge in the absence of defined class times or

delivery of instruction by instructors. On-line instruction typically consists of

posted reading materials and assignments, chat-room and email exchanges, and

posting of completed student work. The point at which a student progresses from

on-line registration to actual on-line academic engagement or class attendance is

often not defined by institutions and is not defined by Federal statute or

regulations. Without such definition, or adequate controls at the institutions

       themselves, we believe Federal student aid funds are at significant risk of being

       disbursed to ineligible students in on-line programs, and that inadequate refunds

       will be made for students who cease attendance in these programs.

Evolving Oversight Challenges

As we noted earlier, the Federal student aid programs are complex and inherently present

risk. Following are several examples of what we consider evolving oversight challenges

that impact both proprietary and non-profit institutions.

       Accrediting Agencies Lack Meaningful Standards for Program Length

       In 2009 and 2010, we evaluated regional accrediting agency standards for

       program length and the definition of a credit hour. We examined three of the

       seven regional accrediting agencies to determine what guidance regarding

       program length and credit hours they provided to institutions and peer reviewers,

       and the documentation they maintained to demonstrate how they evaluated

       institutions' program length and credit hours. The three accrediting agencies

       reviewed represent one-third of the institutions participating in Federal student aid

       programs: 2,222 postsecondary institutions with more than $60 billion in Federal

       student aid funding. We found that none of the accrediting agencies defined a

       credit hour and none of the accrediting agencies provided guidance on the

       minimum requirements for the assignment of credit hours. At two of the

       accrediting agencies, we were told that student learning outcomes were more

       important than the assignment of credit hours; however, these two accrediting

agencies provided no guidance to institutions or peer reviewers on acceptable

minimum student learning outcomes at the postsecondary level.

While conducting our inspection at one of the agencies, we identified a serious

issue that we brought to the Department's attention through an Alert

Memorandum: the Higher Learning Commission of the North Central Association

of Colleges and Schools (HLC) evaluated American InterContinental University

(AIU)-a proprietary institution owned by Career Education Corporation

(CEC)-for initial accreditation and identified issues related to the school's

assignment of credit hours to certain undergraduate and graduate programs. HLC

found the school to have an "egregious" credit policy that was not in the best

interest of students, but nonetheless accredited AIU. HLC's accreditation of AIU

calls into question whether it is a reliable authority regarding the quality of

education or training provided by the institution. Since HLC detennined that the

practices at AIU meet its standards for quality, without limitation, the Department

should be concerned about the quality of education or training at other institutions

accredited by HLC. Based on this fmding, our Alert Memorandum recommended

that the Department detennine whether HLC is in compliance with the regulatory

requirements for accrediting agencies and, if not, take appropriate action under

the regulations to limit, suspend, or terminate HLC's recognition by the Secretary.

The Department initiated a review of HLC and detennined that the issue

identified was not an isolated incident. As a result, the Department gave HLC

two options for coming into compliance:     (1) to accept a set of corrective actions

detennined by the Department; or (2) the Department would initiate a limitation,

suspension, or termination action. In May 2010, HLC accepted the Department's

corrective action plan.

In addition, in its Notice of Proposed Rulemaking issued last week, the

Department proposed a defInition of a credit hour and procedures for accrediting

agencies to determine whether an institution's assignment of a credit hour is


Borrower Defaults

Considering the economic downturn over the last several years, combined with

escalating student loan debts, a significant concern is the potential for increased

loan defaults as we have seen the national cohort default rate increase recently.

As an example, last year, the Department announced that the FY 2007 national

student loan cohort default rate increased to 6.7 percent, up from the

FY 2006 rate of 5.2 percent. The 2007 cohort default rate for schools

participating in the FFEL Program was 7.2 percent, a 36 percent increase over the

2006 rate ofS.3 percent. The 2007 cohort default rate for schools participating in

the Direct Loan Program was 4.8 percent, a 2 percent increase over the 2006 rate

of 4. 7 percent. The FFEL portfolio has a larger percentage of proprietary schools,

which have higher default rates, and a lower percentage of public and private 4-

year schools, which have lower default rates. FY 2007 national cohort default

rate was 6.7 percent, while the proprietary school default rate was 11 percent.

In a 2003 audit report we concluded that cohort default rates do not appear to

provide decision makers with sufficient information about the rate of default in

the student assistance programs. Currently, to identify defaults, cohort default

rates track the cohort of borrowers entering repayment in a fiscal year, through the

following fiscal year. After the second fiscal year, subsequent defaults by the

borrowers in the base-year cohort are not included in cohort default rate

calculations. While the Higher Education Opportunity Act of2008 changed this

calculation to track borrowers over three years, this change will still not

adequately reflect all defaults.

Not addressed by this change were two issues noted in our earlier report. In that

report, we identified that cohort default rates were not a true representation, as

they were reduced by: (1) a statutory change to the HEA's definition of default

from 180 days of delinquency to 270 days of delinquency; this 90-day delay

excludes a significant number of defaulters from the cohort default rate

calculation; and (2) an increase in the use of deferments and forbearances.

Deferment entitles a borrower to have periodic installment payments of principal

deferred during authorized periods; forbearance permits the temporary cessation

of payments. We found that deferments and forbearances had more than doubled

in the period we examined. Borrowers in deferment or forbearance do not make

payments on their loans, so they are not counted as defaulters, but they continue

to be counted with other students in the cohort, thus reducing the cohort rate.

While we recognize that the Congress has provided additional repayment

flexibilities, when borrowers reach the limits on deferments and begin repayment

they may still lack the income and eventually default and are not accounted for in

the cohort default rate.

Estimating future loan defaults is a very difficult process. As part of the

requirements related to the Federal Credit Reform Act of 1990, as amended,

the Department must annually estimate loan volumes and the attendant costs, and

in doing so, factor in economic conditions. Our financial statement auditor has

raised concerns about the Department's estimation process, including its failure to

take into account recessionary conditions, and has made a number of

recommendations for improvements. The Department's credit reform estimates

continue to be reported in our audit of the financial statements as a significant

internal control deficiency.

Direct Loan Program

Guaranty agencies have always had a responsibility to enforce the requirements

for school participation in the FFEL program and have served as an important

source of possible waste, fraud, or abuse referrals for our office. As guaranty

agencies move away from guaranteeing and performing oversight of loans for

currently enrolled students, they will no longer serve as a source of oversight and

information on school participation in the loan programs.

       In the transition to the Direct Loan program, the Department will have to itself

       perform the school loan oversight function previously performed by guaranty

       agencies. Loan origination and servicing functions previously performed by

       lenders and guaranty agencies in the FFEL program are now the responsibility of

       the Department. The Department relies on contractors to perform these functions

       in the Direct Loan program. The Department had to modify its loan origination

       system, assure all institutions are capable of using the system, and contract with

       four new loan servicers last year to service the loans it purchased from lenders

       and handle the increased volume in the Direct Loan program.

       Because the Direct Loan program will become the largest lending program within

       the Federal government, we are examining the applicability of Federal banking

       statutes to determine if similar statutory provisions for enhanced program

       integrity should be recommended for the Department, as they have been for other

       Federal lending programs.

DIG Recommendations for Strengthening Laws/Regulations

In your invitation for me to testify today, you asked me provide an assessment of whether

current laws are sufficient to protect students and taxpayers. Congress could address two

areas that would increase accountability in postsecondary education and the Federal

student aid programs, as well as provide additional oversight tools and assist in reducing

fraud and abuse in the programs: amending the Internal Revenue Code to permit an

Internal Revenue Service (IRS) income match for student loan applicants and reconsider

the cost of attendance for individuals engaged in on-line education courses.

IRS Match

Since 1997, we have recommended implementation of an IRS income data match,

which would allow the Department to match the information provided on

student's application for Federal student aid with the income data that is

maintained by the IRS. While the HEA has been amended to permit this match, a

corresponding amendment to the Internal Revenue Code has not been enacted.

This action would go a very long way to identifying income inconsistencies and

eliminating an area of fraud and abuse within the student fmancial assistance


While the Department began a pilot project this January to allow applicants the

choice to have the Department obtain income data directly from the IRS, we do

not believe it likely that those individuals intent on defrauding the program by

providing false income information would select the IRS option. Leaving this

area unaddressed creates additional burdens for institutions to verify an

applicant's income and victimizes unsuspecting students and parents who are

advised by unscrupulous financial aid consultants to commit this type of fraud.

Our investigations have found that some officials at proprietary institutions have

encouraged students to falsify their income and dependents to qualify for Federal

student aid.

Cost of Attendance Calculations for Distance Education Programs

Since 2001, OIG has recommended that the HEA be amended to address cost of

attendance (COA) calculations for on-line learners. Currently, students in on-line

programs and residential programs can be eligible for the same amount of Federal

student aid based on the same COA. The COA as defined by the HEA primarily


   •   Tuition and fees normally assessed a student, including the costs for rental

       or purchase of any equipment, materials, or supplies;

   •   An allowance for books, supplies, transportation, and reasonable

       miscellaneous personal expenses, including a reasonable allowance for the

       documented rental or purchase of a personal computer;

   •   An allowance for room and board costs incurred by the student which

       shall be an allowance for (a) students without dependents residing at home

       with parents, (b) students without dependents residing in institutionally

       owned or operated housing, and (c) for all other students an allowance

       based on the expense reasonably incurred for room and board; and

   •   An allowance for dependent care for students with dependents.

The HEA limits the COA for students engaged in correspondence courses to

tuition and fees, and, if required, books, supplies, and travel. There is no similar

       limitation for on-line students. With the explosion of on-line education in recent

       years and the number of full-time working individuals that take these courses, a

       COA budget that includes an allowance for room and board for on-line learners

       may not be in the best interest of American taxpayers and may allow students to

       borrow more than is needed. We also note that under the Post-9/11 01 Bill,

       Congress has already determined that active duty personnel and veterans enrolled

       exclusively in on-line programs should receive reimbursement only for tuition and

       fees and not receive a housing allowance. Congress should reconsider the COA

       calculation for distance education programs under the HEA, which could reduce

       loan borrowing, decrease loan debt, and reduce the amount of funds available

       above tuition and thus obtainable by individuals who seek to defraud the Federal

       student aid programs through on-line fraud schemes.

Closing Remarks

In closing, I would like to once again mention the Department's recently proposed

regulations governing the Federal student aid programs, many of which we have

previously identified and recommended to the Department through our audit, inspection,

and investigative work. The Department has proposed a definition of a credit hour and

changes to the rules governing incentive compensation by eliminating regulatory safe

harbors. Other changes proposed include improvements to the rules (1) protecting

students from misrepresentation, (2) governing ability-to-benefit testing and satisfactory

academic progress, and (3) establishing a process to check whether a high school diploma

is valid for student eligibility purposes. Again, we will comment on the proposed rules

and monitor the implementation of the final rules. We believe changes in all these areas

will improve protections for students and taxpayers. In the meantime, let me reiterate

that OIG is committed to promoting accountability, efficiency, and effectiveness in all

Federal education operations and programs. We will continue to assist the Department in

its efforts to identify and reduce fraud and abuse, to safeguard Federal student aid dollars,

and to help ensure that these funds reach the intended recipients.

On behalf of the OIG, I want to thank you for the support this Committee has given to

this office over the years. We look forward to continuing to work with Congress in

furthering our goals and achieving our mission.

This concludes my written statement. I am happy to answer any of your questions.