oversight

Student Loans and Foreign Schools: Assessing Risks Could Help Education Reduce Program Vulnerability

Published by the Government Accountability Office on 2003-07-25.

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

             United States General Accounting Office

GAO          Report to Congressional Addressees




July 2003
             STUDENT LOANS
             AND FOREIGN
             SCHOOLS

             Assessing Risks Could
             Help Education
             Reduce Program
             Vulnerability




GAO-03-647
                                               July 2003


                                               STUDENT LOANS AND FOREIGN
                                               SCHOOLS

Highlights of GAO-03-647, a report to          Assessing Risks Could Help Education
Congressional Addressees
                                               Reduce Program Vulnerability



Recent events have increased                   Foreign schools offer unique educational opportunities for Americans and
concerns about the potential for               help ensure that U.S. students have a wide range of options in pursuing
fraud in Education’s student loan              postsecondary education. Almost 70 percent of all U.S. residents receiving
programs related to loans for U.S.             Federal Family Education Loan Program (FFELP) funds to attend foreign
residents attending foreign schools.           schools are in medical school and they account for three-quarters of the total
In 2002, GAO’s Office of Special
Investigations created a fictitious
                                               loan volume. While some foreign schools participating in the FFELP enroll
foreign school that Education                  large numbers of U.S. residents, others enroll only a few, as seen in the table
subsequently certified as eligible to          below, which also indicates the countries wherein FFELP loan volume is
participate in the student loan                highest.
program. GAO investigators
subsequently successfully obtained             Countries with Highest FFELP Loan Volume for Americans Attending Foreign Schools,
approval for student loans totaling            Academic Year 2000-01
$55,000 on behalf of three fictitious                                            Number of       Average number of
students. Over the past decade,                 Country                            schools      students per school      Loan volume
Education’s Inspector General has              Dominica                                  1                    1776       $35,235,509
investigated many instances of                 Grenada                                   1                    1528       $30,666,842
suspected student loan fraud                   Mexico                                   11                     138       $27,003,357
involving individuals applying for             England                                 182                       9       $25,405,722
loans for purported attendance at
                                               Dominican Republic                        6                     177       $20,653,159
foreign schools. The conference
                                               Source: GAO analysis of FSA data.
report accompanying the 2001
Labor, Health and Human Services,
and Education Appropriations Act               We found that FFELP is vulnerable to fraud, waste, and abuse in several
mandated that GAO examine and                  ways. For instance, many foreign schools do not submit required audited
report on fraud, waste, and abuse              financial statements and program compliance audit reports, which would
with respect to student loans for              allow Education to monitor for and detect significant fraud or other illegal
Americans attending foreign                    acts. For fiscal year 2001, about 57 percent of foreign schools failed to
schools.
                                               submit audited financial statements, while the vast majority of foreign
                                               schools failed to submit program compliance audit reports. Education has
                                               taken limited steps to address instances of vulnerabilities to fraud, waste,
GAO recommends that Education                  and abuse. For example, Education has issued a reference guide and
•   develop on-line training                   conducted training for foreign school officials. However, a number of foreign
    resources specifically designed            school officials reported that they had not received training prior to
    for foreign school officials and           administering FFELP funds. In addition, we found that some foreign school
•   undertake a risk assessment to             officials are not properly determining and documenting student eligibility for
    determine how best to ensure
                                               loans; as a result FFELP funds may be provided to students who should not
    accountability while
    considering costs, burden to               be receiving them. We also found that the on-line training to which
    schools and students, and                  Education refers foreign school officials presents information in some cases
    access to foreign schools.                 that is contrary to how foreign schools are to administer FFELP. Education
Education agreed with our                      could take additional action to reduce the potential for fraud, waste, and
recommendations.                               abuse, but will have to address the trade-offs that arise from its actions that
                                               may affect student access and burden for various program participants. A
                                               comprehensive risk assessment is one method that Education could employ
www.gao.gov/cgi-bin/getrpt?GAO-03-647.
                                               to determine how to balance an appropriate level of oversight with the
To view the full report, including the scope   desire to provide American students access to foreign educational
and methodology, click on the link above.      opportunities.
For more information, contact Cornelia M.
Ashby at (202) 512-8403 or
ashbyc@gao.gov.
Contents


Letter                                                                                     1
              Results in Brief                                                             3
              Background                                                                   5
              FFELP is Vulnerable to Fraud, Waste, and Abuse in Several Ways
                with Respect to U.S. Residents Attending Foreign Schools                 12
              Education Has Taken Limited Steps to Reduce the Vulnerability of
                FFELP to Fraud, Waste, and Abuse but FFELP Remains
                Vulnerable                                                               18
              Additional Actions to Reduce Program Vulnerability Will Require
                Balancing Competing Goals                                                23
              Conclusions                                                                27
              Recommendations for Executive Action                                       28
              Agency Comments                                                            28

Appendix I    Characteristics of Foreign Schools Participating in
              FFELP, by Country                                                          30



Appendix II   Comments from the Department of Education                                  32



Tables
              Table 1: Education Oversight Components for Foreign Schools                10
              Table 2: Status of Foreign Schools’ Submission of Audited
                       Financial Statements for Fiscal Year 2001                         16
              Table 3: Status of Foreign Schools’ Submission of Program
                       Compliance Audit Reports for Fiscal Year 2001                     17
              Table 4: Information in COACH Not Applicable to Foreign Schools            21


Figure
              Figure 1: Countries with Schools Eligible to Participate in FFELP
                       and Top 10 Foreign Schools by Loan Volume for
                       Academic Year 2000-01                                               8




              Page i                            GAO-03-647 Student Loans and Foreign Schools
Abbreviations
CPS         Central Processing System
COACH       Computer-Based Orientation and How-tos
FAFSA       Free Application for Federal Student Aid
FFELP       Federal Family Education Loan Program
FSA         Federal Student Aid
GAAP        Generally Accepted Accounting Principles
HEA         Higher Education Act of 1965
ISIR        Institutional Student Information Report
MPN         Master Promissory Note
NSLDS       National Student Loan Database System
OIG         Office of Inspector General
PEPS        Postsecondary Education Participants System
PPA         Program Participation Agreement
SAIG        Student Aid Internet Gateway
SAR         Student Aid Report
SSCR        Student Status Confirmation Report




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Page ii                                   GAO-03-647 Student Loans and Foreign Schools
United States General Accounting Office
Washington, DC 20548




                                   July 25, 2003

                                   Congressional Addressees

                                   Recent events have increased concerns about the potential for fraud in the
                                   Department of Education’s student loan programs, especially as it relates
                                   to U.S. citizens and permanent residents (hereafter referred to as U.S.
                                   residents) attending foreign schools.1 The Federal Family Education Loan
                                   Program (FFELP), which provided about $23 billion in loans to students in
                                   fiscal year 2000, is the only federal student financial aid program in which
                                   foreign schools participate; about $226 million in FFELP loans were
                                   disbursed to U.S. residents attending 407 foreign schools in the 2000-01
                                   academic year. Many of these foreign schools enroll only a small number
                                   of U.S. residents who receive FFELP funds, but a few schools enroll large
                                   numbers.

                                   The conference report accompanying the 2001 Labor, Health and Human
                                   Services, and Education Appropriations Act directed that we examine and
                                   report on the problem of fraud, waste, and abuse related to loans for U.S.
                                   residents attending foreign schools. Accordingly, our specific objectives
                                   were to determine (1) ways in which FFELP is vulnerable to fraud, waste,
                                   and abuse with respect to loans for U.S. residents attending foreign
                                   schools; (2) what Education has done to reduce FFELP’s vulnerability; and
                                   (3) additional actions that might reduce program vulnerability to fraud,
                                   waste, and abuse.

                                   To address our objectives, we discussed the vulnerability of FFELP and
                                   actions that Education has taken or could take to address such


                                   1
                                    A foreign school is a school that is located outside of the United States of America, its
                                   territories, the Commonwealth of Puerto Rico, the Freely Associated States of Micronesia,
                                   the Republic of the Marshall Islands, and the Republic of Palau. Students attending foreign
                                   schools are eligible for loans only under the Federal Family Education Loan Program. The
                                   program consists of subsidized and unsubsidized Stafford Loans, Federal PLUS loans, and
                                   Federal Consolidation loans. Subsidized Stafford Loans are provided to students who have
                                   demonstrated financial need and the federal government pays the interest costs on the loan
                                   while the student is in school. Unsubsidized Stafford Loans are provided to students
                                   regardless of financial need, but the federal government does not pay the interest costs on
                                   the loans while the student is in school. Students are therefore responsible for all interest
                                   costs. PLUS loans are loans made to parents of dependent undergraduate students;
                                   borrowers are responsible for paying all interest on the loan. Consolidation loans allow
                                   borrowers to combine one or more of their U.S. education loans into one new loan.



                                   Page 1                                     GAO-03-647 Student Loans and Foreign Schools
vulnerability with officials from Education’s Office of Federal Student Aid
(FSA) and Office of Inspector General (OIG), school administrators and
representatives of lenders and guaranty agencies that help to administer
FFELP and guarantee payment to lenders if students fail to repay loans.
We also reviewed relevant documents published by Education, such as
The Student Guide, The Student Financial Aid Handbook for Foreign
Schools 2001-2002, and FSA’s on-line training tutorial. We also reviewed
the Higher Education Act (HEA) and related Education regulations. To
further address the first objective, we reviewed GAO and OIG reports on
fraud investigations. 2 In addition, to assess selected foreign schools’ ability
to manage FFELP and their roles in reducing program vulnerability, we
conducted site visits to the administrative offices of four schools,
conducted telephone interviews with the administrators of an additional
eight schools, and reviewed student files at eight schools.3 We selected
these schools to reflect a variety of foreign schools in terms of degree
programs offered, school type (private for-profit, private nonprofit, and
public), U.S. resident student enrollment, and whether they had electronic
access to Education’s information systems. In reviewing student files at
those schools with fewer than 25 students receiving FFELP funds, we
reviewed the files of all such students to determine whether school
officials had ensured students’ eligibility for loans. In reviewing student
files at those schools with more than 25 students receiving FFELP funds,
we reviewed the files for those students for whom Education informed
schools, following its initial review of eligibility for student aid, that
additional information was needed to determine that students qualified for
loans. We also obtained information from Education’s Postsecondary
Education Participants System (PEPS) to determine whether schools were
meeting the requirements for participation in FFELP. To further address
the second and third objectives, we interviewed others involved in the
FFELP process, such as school administrators and lending and guaranty
agency officials, and reviewed relevant documents provided by those
officials.

We conducted our work between July 2002 and May 2003 in accordance
with generally accepted government auditing standards.




2
 See U.S. General Accounting Office, Department of Education: Guaranteed Loan
Program Vulnerabilities, GAO-03-268R (Washington, D.C.: Nov. 21, 2002).
3
 In addition to reviewing the files at the four schools we visited, we also reviewed the files
of four additional foreign schools; administrators mailed the relevant materials to us.




Page 2                                      GAO-03-647 Student Loans and Foreign Schools
                   FFELP is vulnerable to fraud, waste, and abuse with respect to loans for
Results in Brief   U.S. residents attending foreign schools in several ways. Some school
                   officials are improperly determining and documenting student eligibility
                   for loans and are unaware of the proper procedures for doing so. Also,
                   because of budget constraints, Education has not conducted on-site
                   program reviews at a foreign school since November 2000, even though its
                   earlier on-site reviews of foreign schools revealed that some schools were
                   inappropriately approving loans. In addition, certain features of the
                   program increase the potential for fraud, waste, and abuse. Unlike
                   students attending domestic schools, U.S. residents attending foreign
                   schools may choose to receive loan proceeds directly from the lender
                   rather than through their schools and may receive one lump sum for the
                   entire academic year rather than multiple disbursements for each
                   semester or other academic year division, thereby exacerbating the U.S.
                   government’s exposure to potential loss due to fraud, waste, and abuse.
                   Further, many foreign schools do not submit to Education required
                   audited financial statements and program compliance audit reports, which
                   can provide important information that could allow Education to, among
                   other things, identify vulnerability to fraud, waste, and abuse and detect
                   actual instances of such activities. For fiscal year 2001, about 57 percent of
                   foreign schools failed to submit audited financial statements, while the
                   vast majority of foreign schools failed to submit program compliance audit
                   reports. Finally, an investigation completed by our Office of Special
                   Investigations revealed vulnerability in Education’s process for
                   determining the eligibility of foreign schools to participate in FFELP.
                   Education approved a fictitious foreign school that our undercover
                   investigators created—a step that allowed our investigators to obtain
                   approval for FFELP loans for fictitious students.

                   Education has taken limited steps—since the beginning of 2002 and
                   throughout the course of our audit work—to reduce FFELP vulnerability
                   to fraud, waste, and abuse but FFELP remains vulnerable. For example, in
                   January 2002, Education issued a reference guide for foreign schools
                   designed to explain their legal requirements as participants in FFELP and
                   conducted training sessions for foreign schools officials to supplement the
                   reference guide in several countries. However, interviews with officials at
                   foreign schools suggest that some officials remain unfamiliar with
                   program procedures, such as how to properly determine and document
                   students’ eligibility for FFELP loans. As a result, FFELP funds may be
                   provided to students who should not be receiving them. A number of
                   school officials also reported that they had not received training prior to
                   administering FFELP funds. Education’s on-line training tutorial for
                   FFELP administrators, to which Education refers foreign school officials


                   Page 3                              GAO-03-647 Student Loans and Foreign Schools
for training, does not include information specific to foreign schools and
even presents information that is contrary to how foreign schools are to
administer FFELP. In addition, although in December 2002 Education
requested that all foreign schools submit overdue audited financial
statements and that schools that have certified $500,000 or more in FFELP
loans submit program compliance audit reports, it has not decided on the
consequences for schools that do not comply with the request. Further, in
response to our prior investigation during which Education granted
approval to a fictitious foreign school that our undercover investigators
created, Education has retrained its staff to verify school existence with
in-country officials, required documentation of the verification, and
performed verification of the existence of all currently participating
schools. However, Education’s process does not include conducting on-
site visits to verify the existence of foreign schools nor has it reached a
final decision on how it will verify the existence of new foreign schools.
As a result, no new foreign schools have been approved for participation
in FFELP since the summer of 2002, even though applications have been
received from 19 schools.

Education could take additional action to reduce the vulnerability of
FFELP to fraud, waste, and abuse with respect to loans for U.S. residents
attending foreign schools, such as more strictly enforcing audit
requirements or providing electronic access to information systems to
help school officials more easily determine students’ eligibility for FFELP
loans. However, any steps that Education takes will likely involve trade-
offs that may affect access, accountability, and burden for various
participants in FFELP. For example, Education could aggressively enforce
foreign schools’ audit reporting requirements for annual audited financial
statements and program compliance audit reports, but doing so may lead
to unintended consequences, such as foreign schools withdrawing from
FFELP, potentially limiting students’ access to such institutions. Several
foreign school officials told us that the audit reporting requirements
provide a disincentive to participate in FFELP because of the
administrative and financial burdens associated with the requirements,
especially when few U.S. residents attend their schools. Changing loan
disbursement procedures may also minimize the potential for fraud, waste,
and abuse of FFELP funds, but these changes might entail some burden on
the part of schools and students. Some schools, in fact, are unaccustomed
to handling student financial aid because such systems do not exist in
their own countries for their own students. While providing foreign
schools electronic access to Education’s databases would assist foreign
school administrators in fulfilling their responsibilities, doing so may
increase information security risk. To help agencies balance how best to


Page 4                             GAO-03-647 Student Loans and Foreign Schools
             achieve important program goals while safeguarding assets from fraud,
             waste, and abuse, we have issued standards for internal controls that
             provide a framework for identifying areas at greatest risk. In addition, we
             have issued various reports that are useful tools to assist agencies in
             evaluating internal controls and addressing improper payments resulting
             from fraud, waste, and abuse. Among other things, these reports highlight
             the importance of conducting risk assessments—comprehensive reviews
             and analyses of program operations to determine the nature and extent of
             program risks—and identifying cost-effective control activities to address
             identified risks.

             In this report, we make recommendations to the Secretary of Education to
             develop on-line training resources specifically designed for foreign school
             officials and conduct a risk assessment to determine how best to ensure
             program integrity while helping to provide U.S. residents with access to
             foreign schools.

             We provided Education with a copy of our draft report for review and
             comment. In written comments on our draft report, Education agreed with
             our reported findings and recommendations. Education’s written
             comments appear in appendix II. Education also provided technical
             clarification, which we incorporated where appropriate.

             Foreign schools can offer unique educational opportunities for U.S.
Background   residents, such as improved language proficiency and knowledge of other
             cultures, and help ensure that U.S. residents have a wide range of options
             in pursuing postsecondary education. The number of loans certified for
             U.S. residents attending foreign schools has risen from just under 4,600 in
             the 1993-94 academic year to over 13,000 in the 2000-01 academic year.
             Over 500 schools in 44 foreign countries are currently eligible to
             participate. About 9,000 of these students attend foreign medical schools
             and account for about three-quarters of the total loan volume.4 By country,
             the highest volume of FFELP loans—over $35 million—are for students
             attending school in Dominica; its sole eligible institution is a private, for-
             profit medical school. England, ranked fourth in loan volume, and Canada,
             seventh, have the largest number of institutions eligible to participate in
             the FFELP—182 and 108, respectively. Those countries participating in the



             4
               From fiscal years 1999-2002, 51 percent of loans to students attending foreign schools
             were subsidized Stafford Loans, 47 percent were unsubsidized Stafford Loans, and less
             than 2 percent were PLUS loans.




             Page 5                                     GAO-03-647 Student Loans and Foreign Schools
FFELP and the top 10 foreign schools in loan volume for the 2000-01
academic year are indicated in figure 1. While a few foreign schools enroll
large numbers of U.S. residents who receive FFELP funds, the majority of
foreign schools enroll only a small number. For example, Queen’s College
at the University of Oxford had just 3 students receiving FFELP funds in
2001. For more information on the ranges for numbers of U.S. residents
receiving FFELP funds for attendance at schools in different countries, see
appendix I.




Page 6                            GAO-03-647 Student Loans and Foreign Schools
Page 7   GAO-03-647 Student Loans and Foreign Schools
Figure 1: Countries with Schools Eligible to Participate in FFELP and Top 10 Foreign Schools by Loan Volume for Academic
Year 2000-01




                                                                                       McGill U.
                                                                                       Canada


                                                                                         U. Iberoamericana
                                                                                         Dominican Republic

                                                                                         U. Central del Este
                                                                                         Dominican Republic
                                                                                         American U. of the
                                                                                         Caribbean School
                                                                                         of Medicine
                                                                                         St. Maarten
                                                                                         Ross U. School of
                                                                                         Veterinary Medicine
                                                                                         St. Kitts
                                                                                         Ross U. School of
                                                                                         Medicine
                                                U. Autonoma de                           Dominica
                                                Guadalajara
                                                Mexico                                   St. George's U.
                                                                                         School of Medicine
                                                                                         Grenada




                      Participating countries




Source: GAO analysis of FSA data.




                                                       Page 8                 GAO-03-647 Student Loans and Foreign Schools
U. of London-
London School of
Economics and
Political Science
England




                               Tel Aviv U.-
                               Sackler School of
                               Medicine
                               Israel




                    In order to participate in FFELP, foreign schools must submit a variety of
                    documents, such as an application and a copy of the most recent course



                    Page 9                             GAO-03-647 Student Loans and Foreign Schools
catalog. Once Education initially certifies the school for participation, the
school enters into a Program Participation Agreement (PPA) with
Education that requires it to comply with the laws, regulations, and
policies governing FFELP. PPAs vary, but some may be valid for up to
6 years. To maintain its ability to participate, the foreign school must
demonstrate that it is administratively capable of providing the education
promised and of properly managing the program, and that it is financially
responsible. Schools must submit program compliance audits and audited
financial statement reports to Education on an annual basis. Program
compliance audit reports are intended to demonstrate schools’ ability to
administer FFELP in compliance with HEA and related Education
regulations, while audited financial statements serve as evidence of
schools’ financial responsibility. Schools must submit recertification
materials to Education for continued participation in FFELP before the
expiration of their current PPA.

Education evaluates the application and accompanying documentation to
determine whether a school is eligible to participate. Education’s Foreign
Schools Team, consisting of eight staff members and one director, is
responsible for assisting and overseeing foreign schools. Some of the ways
in which the team oversees foreign schools, which are similar to the way
Education oversees domestic schools, are presented in table 1. Education
also has responsibility for maintaining information systems involved in the
loan process, which is discussed more fully below.

Table 1: Education Oversight Components for Foreign Schools

 Oversight component          Purpose
 Audited financial statements Provides Education with information to evaluate a school’s
                              financial condition.
 Program compliance audit     Provides information about schools’ compliance with HEA
 reports                      and related Education regulations.
 On-site program reviews      Assesses schools’ ability to administer FFELP.
 Initial certification and    After Education certifies a school as eligible to participate
 recertification process      in FFELP, the school and Education enter into a program
                              participation agreement that requires a school to adhere
                              to all applicable laws and program regulations.
Source: Education.


While Education and the foreign schools each have specific
responsibilities, other parties are involved in the student loan process,
including students, lenders, and guaranty agencies. Students are
responsible for filing certain loan application materials, while lenders



Page 10                                  GAO-03-647 Student Loans and Foreign Schools
make loans, and guaranty agencies repay lenders the loan funds if the
borrower defaults.

Regardless of whether a student plans to attend a foreign or domestic
school, a student applying for a FFELP loan is required to first submit a
Free Application for Federal Student Aid (FAFSA). The student must also
sign the Master Promissory Note (MPN), which outlines the students’
responsibilities for repaying the loan. The information provided by the
student on the FAFSA is checked by Education against various
information systems, including Social Security Administration databases
and the National Student Loan Database System (NSLDS), to test the
accuracy of information and to assess the student’s loan history.

The administrators of the school the student plans to attend must certify
the student’s eligibility for loans and the loan amount based on the output
from the FAFSA.5 This output will indicate whether there are any issues
with the student’s eligibility based on the information provided by the
student and the edit checks against the various databases. For example,
the output would indicate if the check against SSA’s databases revealed
that the social security number provided did not match the name provided
by the student, or if the check against Education’s NSLDS revealed that
the student was in default on previous loans. In addition, the output
includes the Expected Family Contribution, which is the amount the
student and his family are expected to contribute to educational expenses.
The administrators determine the student’s financial need based on this
information, the cost of attendance, and the amount of financial aid other
than FFELP funds that the student is expected to receive.

Once the school has certified the student’s eligibility and loan amount and
the student has signed the MPN, the lender can disburse the loan.
Although lenders disburse loans for students attending domestic schools
to the school, a chief difference for students attending foreign schools is
that lenders may disburse loans either directly to students or to the foreign
school the student is attending. The guaranty agency then sends to the
student’s school a student status confirmation report (SSCR), which lists
all students for whom loans were guaranteed for attendance at the school.




5
  Alternatively, according to Education, it allows guaranty agencies to perform this function
on behalf of foreign school administrators; Education notes that, in particular, the guaranty
agencies for Massachusetts and Nebraska engage in this practice.




Page 11                                    GAO-03-647 Student Loans and Foreign Schools
                             School officials must indicate the enrollment status of these students and
                             return the form to the guaranty agency.


                             FFELP is vulnerable to fraud, waste, and abuse in several ways. Some
FFELP is Vulnerable          school officials who do not have electronic access to Education’s
to Fraud, Waste, and         information systems are improperly documenting and determining student
                             eligibility for loans and are unaware of the proper procedures to do so,
Abuse in Several Ways        which could result in ineligible students receiving federal funds. In
with Respect to U.S.         addition, Education has not conducted any on-site reviews to assess
                             schools’ ability to administer FFELP since November 2000. Moreover,
Residents Attending          exposure to fraud, waste, and abuse is increased because students
Foreign Schools              attending foreign schools, unlike students attending domestic schools, can
                             choose to receive loans directly and in one lump sum for the entire
                             academic year. Further, foreign schools do not submit required audited
                             financial statements and program compliance audit reports, which
                             compromises Education’s ability to monitor for and detect significant
                             fraud or other illegal acts. Also, an investigation by our Office of Special
                             Investigations revealed vulnerability in Education’s process for
                             determining the eligibility of foreign schools to participate in FFELP.


Some Foreign School          Interviews with foreign school officials and our review of school files
Officials Are Not Properly   revealed that some officials are not properly determining and documenting
Determining and              students’ eligibility for FFELP loans. As a result, FFELP funds may be
                             provided to students who should not be receiving them. In particular, we
Documenting Student          found that several schools were using incorrect versions of documents
Eligibility for Loans        Education generated to alert school officials to information that might
                             indicate a student is ineligible for FFELP loans. We identified this problem
                             among those schools that did not have electronic access to Education’s
                             information systems that contain data needed to determine students’
                             eligibility for loans. Of the over 500 foreign schools participating in FFELP,
                             only 32 can electronically access these information systems. However,
                             these 32 schools certified about 70 percent of the total foreign school
                             FFELP loan volume for fiscal year 2001.

                             Electronic access to Education’s information systems can help ensure that
                             schools use the correct information to determine whether students should
                             be receiving FFELP loans. In accessing Education’s information systems,
                             schools can obtain Institutional Student Information Reports (ISIR), which
                             Education generates to help schools determine whether students are
                             eligible for loans. ISIRs contain summary information provided on
                             students’ FAFSAs as well as the results of various computer matches that


                             Page 12                             GAO-03-647 Student Loans and Foreign Schools
Education conducts. ISIRs indicate, among other things, whether an
applicant’s social security number reported on the FAFSA is valid,
whether a loan applicant has ever defaulted on a student loan, and how
much an applicant has previously borrowed. Electronic access to
Education’s information systems under its existing procedures will not be
granted unless a foreign school has among its staff a person who
possesses a U.S. social security number. Few foreign schools meet this
requirement. In the absence of obtaining ISIRs, foreign school officials
must rely on and obtain from students a special eight-page version of the
Student Aid Report (SAR), which is also generated by Education and
contains information similar to that found in the ISIR. Education typically
provides students with only an abbreviated two-page SAR, which
summarizes information students submit on the FAFSA, but does not
contain all of the information foreign school officials need to determine
whether a student is eligible for a loan. Students must specifically request
the special eight-page version from Education. Rather than documenting
and determining student eligibility based on the eight-page SAR, we found
that certain foreign school officials were improperly basing their student
eligibility determinations on the two-page SAR.

In reviewing files to determine if schools were properly determining and
documenting students’ eligibility for FFELP loans, we found that the
2 schools with electronic access to Education’s information systems had
copies of ISIRs for every student file we reviewed. Each of these schools
had certified in excess of $30 million in FFELP loans and together certified
about 30 percent of the total FFELP loan volume for fiscal year 2001.
However, 5 of the 6 schools without access to Education’s information
systems, which collectively certified over $3 million in FFELP loans for
fiscal year 2001, did not have copies of ISIRs or eight-page SARs on file
indicating that schools may have approved loans without obtaining the
information necessary for determining student eligibility. Some school
officials, in fact, told us that they verified students’ eligibility for loans
based of the two-page SAR and were unaware that without the eight-page
SAR or ISIR, students’ eligibility for loans could not be properly verified
and documented.

The inability of foreign school officials to electronically access
Education’s information systems also creates the potential for delays in
schools confirming and reporting student enrollment. Schools must
confirm the enrollment of students who have borrowed FFELP funds
through the use of a SSCR. Without timely and accurate reporting of
student enrollment, detecting an individual who receives an FFELP loan
but never enrolls in a foreign school is made more difficult. Schools that


Page 13                             GAO-03-647 Student Loans and Foreign Schools
                          have electronic access to Education’s information systems can enter these
                          data directly into Education’s information systems. Guaranty agencies can
                          then retrieve data through these information systems and monitor whether
                          students whose loans the agency has guaranteed are in fact enrolled in the
                          foreign school. Schools that do not have electronic access to Education’s
                          information systems, however, rely on guaranty agencies to send them
                          SSCRs, which they then must return to guaranty agencies via postal mail.
                          Several school officials told us that the inefficiency and lack of
                          dependability of postal mail interfered with their timely submission of
                          SSCRs.

Education Has Not         Education has not conducted an on-site program review—which is
Recently Conducted On-    intended to assess, promote, and improve schools’ compliance with laws
Site Program Reviews,     and regulations and help ensure program integrity—at a foreign school
                          since November 2000. Program reviews can supplement the information
Which Could Help Ensure   provided to Education through the required annual audit reports and also
Program Integrity         help Education to monitor for fraud. Between March 1999 and November
                          2000, Education conducted six such program reviews at foreign schools
                          (or the U.S. administrative office of the foreign school). As a result of
                          these reviews, Education identified problems with how schools were
                          administering FFELP. For example, the reviews revealed that some
                          foreign school administrators had certified FFELP loans for students in
                          excess of allowable loan limits and certified loans without verifying
                          students’ eligibility for FFELP loans. However, a senior FSA official stated
                          that because of budget constraints, on-site visits at foreign schools may
                          not be a feasible use of Education’s funds at this time.

Loan Disbursement         Exposure to potential loss through instances of fraud, waste, and abuse is
Processes for Foreign     exacerbated by the fact that students attending foreign schools, unlike
Schools May Exacerbate    those attending domestic schools, may choose to receive loans directly
                          from the lender rather than through their schools and may receive all loan
Potential Loss of FFELP   proceeds in one lump sum for the entire academic year rather than receive
Funds                     the proceeds in multiple disbursements during the academic year. For
                          example, Education’s OIG investigated a case in which a single individual
                          submitted about 50 fraudulent loan applications for over $900,000 by
                          falsely claiming enrollment at foreign medical schools. About 26 of the
                          loans, totaling about $400,000 in FFELP funds, were disbursed to the
                          individual before the fraud was detected. Such cases of fraud underscore
                          the importance of foreign schools confirming and reporting student
                          enrollment information to guaranty agencies. Over the past decade,
                          Education’s OIG has investigated 90 cases of suspected FFELP fraud,
                          many of which involved individuals requesting to receive loan proceeds
                          directly and posing as foreign school students. During this same time


                          Page 14                            GAO-03-647 Student Loans and Foreign Schools
                            period, according to an Inspector General official, the OIG recouped about
                            $2.75 million in restitution from the successful prosecution of cases and
                            prevented an additional $1.2 million from being disbursed.

Many Foreign Schools Fail   Many foreign schools have not submitted required annual audited financial
to Submit Required Annual   statement and program compliance audit reports, which enable Education
Audit Reports That Could    to monitor whether schools are using correct procedures to award,
                            disburse, and account for the use of federal funds as well as help
Help Education Monitor      Education monitor for and detect significant fraud or other illegal acts.
for and Detect Fraud,       According to Education’s OIG Foreign School Audit Guide, the annual
Waste, and Abuse            audit reports are the primary tools used by Education program managers
                            to meet their stewardship responsibilities in overseeing FFELP. For fiscal
                            year 2001, about 57 percent of foreign schools failed to submit audited
                            financial statements.6 Collectively, these schools certified about
                            $38 million in FFELP loans, about 17 percent of the total foreign school
                            loan volume during the period. Further, Education regulations require
                            foreign schools that certify $500,000 or more in FFELP loans during a
                            fiscal year to have audited financial statements presented in U.S. Generally
                            Accepted Accounting Principles (GAAP). For fiscal year 2001, nearly one-
                            third of the foreign schools that certified $500,000 or more in FFELP loans
                            failed to submit audited financial statements. Moreover, of those schools
                            that certified $500,000 or more in FFELP loans and submitted audited
                            financial statements for the period, over half did not submit statements
                            presented into U.S. GAAP as required. (See table 2.)




                            6
                             While we verified submission of audited financial statements for schools receiving over
                            $500,000 in FFELP funds, we relied on spreadsheets summarizing data from PEPS
                            regarding the submission of audited financial statements from schools receiving less than
                            $500,000.




                            Page 15                                   GAO-03-647 Student Loans and Foreign Schools
Table 2: Status of Foreign Schools’ Submission of Audited Financial Statements for
Fiscal Year 2001

                                                                                      Number of
                                                Number of Volume of FFELP                schools
                                              schools that loans certified by         submitting
                                            did not submit       schools not              audited
                                    Number          audited       submitting            financial
 FFELP loan                              of       financial audited financial      statements in
 volume                             schools    statements         statements          U.S. GAAP
 $0-249,999                             419            257        $11.9 million    Not applicable
 $250,000-499,999                        39             19           6.2 million   Not applicable
 $500,000 +                              52             16         20.1 million               16
 Total                                  510            292       $38.2 million
Source: GAO analysis of FSA data.


In addition to submitting audited financial statements, all foreign schools
are required to submit program compliance audit reports on an annual
basis. These reports address schools’ compliance with the laws and
regulations that are applicable to FFELP. In fiscal year 2001, however,
only 7 percent of all foreign schools submitted such reports. Of schools
that certified $500,000 or more in FFELP loans, over 40 percent failed to
submit program compliance audit reports. The vast majority of those
schools that certified less than $500,000 in FFELP loans also failed to
submit such reports. While those schools that submitted program
compliance audit reports collectively certified about 75 percent of the
total FFELP loan volume for fiscal year 2001, the remaining schools
certified about $59 million in FFELP loans. (See table 3.)




Page 16                                             GAO-03-647 Student Loans and Foreign Schools
                          Table 3: Status of Foreign Schools’ Submission of Program Compliance Audit
                          Reports for Fiscal Year 2001

                           Dollars in millions
                                                                          Number of schools
                                                                          that did not submit    Volume of FFELP loans
                                                                                     program     certified by schools not
                           FFELP loan                         Number of     compliance audit         submitting program
                           volume                               schools               reports   compliance audit reports
                           $0-249,999                               419                  419                       $21.6
                           $250,000-499,999                          39                   34                         11.8
                           $500,000 +                                52                   23                         25.9
                           Total                                   510                   476                       $59.3
                          Source: GAO analysis of FSA data.



Some Foreign Schools Do   Interviews with foreign school officials and our review of school files
Not Provide Loan          revealed that some foreign schools do not provide loan counseling.
Counseling for Student    Despite that default rates for foreign schools as a whole are relatively low,
                          loan counseling is important because new students often have little or no
Borrowers                 experience with repaying and managing debt. Such counseling can help
                          borrowers avoid defaulting on their loans, which can, in turn, help prevent
                          waste from occurring in FFELP. Two of the schools we visited, which are
                          also the schools with electronic access to Education’s information
                          systems, had staff available to provide loan counseling and school officials
                          reported doing so both prior to students’ arrival on campus and after
                          students’ registration on campus. Other school officials, who had certified
                          loan volumes ranging from $100,000 to about $1 million, stated that loan
                          counseling was not provided as required by regulations.


No On-Site Visits         Education’s current eligibility certification process does not include
Conducted to Verify       conducting on-site visits to verify the existence of foreign schools. As we
Existence of Foreign      reported in November 2002, due in part to this weakness, Education
                          granted approval to a fictitious foreign school that our undercover
Schools                   investigators created and which enabled our investigators to obtain
                          approval for FFELP loans for fictitious students. To obtain approval to
                          participate in FFELP, our investigators created various false documents
                          required to be submitted with its PPA, including a course catalog, audited
                          financial statements, and a letter purporting to be from United Kingdom
                          government authorities acknowledging the school as a nonprofit, degree-
                          granting institution. Education did not verify the existence of the school
                          with foreign government officials or other parties or sources before
                          certifying the school as eligible to participate in FFELP. After receiving



                          Page 17                                            GAO-03-647 Student Loans and Foreign Schools
                       approval of their fictitious school, our investigators also requested and
                       obtained information necessary for the school to certify student eligibility
                       for loans. Our investigators then sought FFELP loans by filing FAFSAs
                       using three different fictitious student identities and applying for loans
                       from three different lenders. Our investigators created false school
                       certifications of these students’ eligibility for loans and also created false
                       student enrollment reports. Two of the three lenders to whom our
                       investigators submitted applications approved loans totaling, in the
                       aggregate, $55,000, at which point we completed the investigation. Based
                       on the results of our investigation, we recommended that Education
                       implement a process, including conducting on-site visits, to ensure that a
                       foreign school applying to participate in FFELP actually exists.


                       Education has taken limited steps—since the beginning of 2002 and
Education Has Taken    throughout the course of our audit work—to reduce the vulnerability of
Limited Steps to       FFELP to fraud, waste, and abuse; however, its actions in some cases have
                       been limited or have achieved limited results. In an effort to share more
Reduce the             information with foreign school officials to help them comply with HEA
Vulnerability of       and Education requirements, Education has increased the technical
                       assistance it provides to foreign schools by publishing a reference guide
FFELP to Fraud,        and holding a series of training sessions. In addition, to assist foreign
Waste, and Abuse but   schools in complying with audit requirements, Education’s OIG issued a
FFELP Remains          Foreign School Audit Guide in September 2002. However, interviews with
                       foreign school officials and review of school files revealed that these
Vulnerable             efforts may not be sufficient to ensure that FFELP is being properly
                       administered by the schools. Our review also found that the on-line
                       training tutorial made available to foreign school officials on Education’s
                       Web site does not contain information specific to foreign schools and even
                       has information contrary to how foreign schools are to administer FFELP.
                       Moreover, while Education requested that all foreign schools with overdue
                       audited financial statements and certain schools with overdue program
                       compliance audit reports submit them, it has not decided on the
                       consequences for schools that do not comply with the request. Finally, in
                       response to our fraud investigation, Education established new
                       procedures for staff to use in certifying schools’ eligibility to participate in
                       FFELP and provided its staff training on the new procedures yet no new
                       foreign schools have been approved for participation in FFELP since the
                       summer of 2002.




                       Page 18                              GAO-03-647 Student Loans and Foreign Schools
Reference Handbook and      Education has provided a reference handbook and training to foreign
Training Provided to        school officials; however, our interviews with several school officials and
Foreign School Officials,   our review of schools’ files revealed that they remain unaware of how to
                            properly administer FFELP, which may increase the risk of fraud, waste,
Yet Some Officials Remain   and abuse occurring. In January 2002, Education issued the Student
Unaware of How to           Financial Aid Handbook for Foreign Schools: 2001-2002. The Handbook
Properly Administer         was designed to help participating foreign schools achieve manageable,
FFELP                       student-friendly administration of FFELP and to ensure that schools are
                            aware of the legal requirements of participating in FFELP. According to
                            FSA, the Handbook was mailed to all foreign schools participating in
                            FFELP and it is currently posted to Education’s Web site. Education also
                            held a series of training sessions for foreign school officials during 2002 in
                            several locations, including Canada, Australia, England, Scotland, and
                            Puerto Rico. Also, in September 2002, Education’s OIG issued a Foreign
                            School Audit Guide, which assists foreign school officials in complying
                            with the audited financial statement and program compliance audit
                            requirements. To supplement this information, Education offers an on-line
                            training tutorial, FSA COACH,7 for school officials’ use, although it was
                            not specifically designed for foreign school officials.

                            However, Education’s efforts to improve FFELP administration through
                            training may have fallen short because knowledge of the training materials
                            available was not widespread among the school officials we spoke to
                            during our review. For instance, two foreign school administrators
                            indicated that they had not received the Handbook from Education. In
                            addition, as previously discussed, some foreign school officials were
                            unaware of how to properly document and determine student eligibility
                            for FFELP loans. Furthermore, although HEA regulations require training
                            for officials at schools newly certified to participate in FFELP, Education
                            officials did not provide information about training requirements or
                            opportunities to our undercover investigators when we created the
                            fictitious foreign school. An FSA official said that Education does not
                            require foreign school officials to travel to the United States to attend
                            available training before certifying a schools’ eligibility to participate in
                            FFELP because of concerns about the financial burden on foreign schools.
                            Instead, FSA provides training materials, along with information about
                            how to use FSA COACH, to school officials. However, some
                            administrators remain unaware of any on-line information, and when we
                            interviewed foreign school officials at schools that have been participating


                            7
                             Computer-Based Orientation to Aid Concepts and How-tos.




                            Page 19                                GAO-03-647 Student Loans and Foreign Schools
in FFELP for a number of years, several indicated that they had not
received training prior to administering FFELP.

Even when training materials did reach FFELP administrators, these
materials may have been insufficient to assist school officials. While some
officials told us that they found the information and training useful, other
officials told us that they did not. For example, several foreign school
officials we spoke with indicated that the training sessions were very
useful and indicated that holding such trainings more frequently would be
valuable. One school official, however, commented that his peers found
the regulatory and legislative information contained in the Handbook
beyond their grasp, and that some of the information was confusing,
especially for those school officials in countries where student financial
aid is administered in an entirely different fashion than in the United
States. Many other school officials commented on the need for better on-
line information. Some found Education’s Web page difficult to navigate
and some reported being unable to find needed information. Finally, while
reviewing COACH, we found that much of the information contained
within it was not applicable to foreign schools and, in some instances, it
presents information that is contrary to how foreign schools operate. (See
table 4.)




Page 20                            GAO-03-647 Student Loans and Foreign Schools
Table 4: Information in COACH Not Applicable to Foreign Schools

 Type of information                               COACH statement                               Reason not applicable to foreign schools
 FAFSA verification process                        A major financial aid office responsibility   Education regulations exempt foreign schools from
                                                   is the verification of application data for   verifying information that students report on the
                                                   students whose applications have been         FAFSA.
                                                   selected by Education’s Central
                                                   Processing System (CPS).
 Electronic systems                                Schools must enroll in the Student Aid        To enroll in SAIG the school must have at least one
                                                   Internet Gateway (SAIG), which is             staff member with a U.S. social security number,
                                                   Education’s electronic vehicle for            which most foreign schools do not have. Therefore,
                                                   transmitting application data to and from     most foreign schools are not enrolled in SAIG, and
                                                   schools. Schools must receive ISIRs           they do not receive the ISIRs.
                                                   through SAIG for every student to whom
                                                   they award Title IV funds.
                                                   The CPS transmits ISIRs to schools            NSLDS is accessed through SAIG.
                                                   electronically. ISIRs are designed to
                                                   provide all the data that a school needs to
                                                   determine a student’s eligibility for federal
                                                   student aid. Corrections to ISIR
                                                   information can be made by schools
                                                   electronically.
                                                   All schools are required to have on-line
                                                   access to the NSLDS Internet Web site
                                                   for financial aid professionals.
 Loan disbursement procedures                      The school is also responsible for            Students attending foreign schools may opt to receive
                                                   receiving FFELP funds disbursed by the        loan disbursements directly from lenders. In addition,
                                                   lender (or the guaranty agency on the         single rather than multiple disbursements are allowed
                                                   lender’s behalf) and delivering these         for students attending foreign schools. These
                                                   funds to the student.                         alternatives are not explained in Coach.
 SSCR information received on-                     Schools must complete and return              Most foreign schools do not have access to NSLDS
 line                                              SSCRs to Education’s NSLDS.                   (to obtain access they must be enrolled in SAIG).
                                                                                                 Guaranty agencies are responsible for sending such
                                                                                                 schools a paper copy of the SSCR. Schools indicate
                                                                                                 enrollment information on the SSCR and return it to
                                                                                                 the guaranty agency, which then uses the information
                                                                                                 to update NSLDS.
Source: FSA University Web site; COACH tutorial.


                                                           While COACH was not designed specifically for foreign schools,
                                                           Education directs foreign school officials to COACH for training materials
                                                           upon certification, and the COACH tutorial states that it is a
                                                           comprehensive introductory course on school requirements for
                                                           administering FFELP and other student financial aid programs.




                                                           Page 21                                     GAO-03-647 Student Loans and Foreign Schools
Education Has Requested      In December 2002, during the course of our review, Education sent letters
Foreign Schools to Submit    to all foreign schools requesting that they submit overdue audited financial
Overdue Audited Financial    statement reports. They also requested schools that certify $500,000 or
                             more in FFELP loans to submit program compliance audit reports for the
Statement and Program        4 most recent fiscal years. Education told the schools that failure to
Compliance Audit Reports     submit the requested documents within 45 days would result in
but Has Not Decided on       consequences. Education is now considering revoking or denying schools’
Consequences for Schools     certification to participate in FFELP if it did not receive overdue audited
That Fail to Do So           financial statement and program compliance audit reports.



In Response to Our           According to Education officials, FSA revised internal procedures for
Investigation, Education     verifying schools’ legitimacy, and its foreign schools’ team was retrained.
Has Taken Steps to           The retraining covered school eligibility requirements with an emphasis on
                             the importance of validating with the appropriate foreign education office
Address Deficiencies         that a school is legitimate. To help staff verify that a school is legitimate,
Identified in Creating a     Education modified an internal checklist to include space for documenting
Fictitious Foreign School,   the source and date of validation in the school’s file. Since learning of our
but Some Changes Have        investigation, Education verified the existence of all schools that are
Not Yet Been Implemented     participating in FFELP, by either checking that the school is approved on
                             an official Web site, or by corresponding or speaking with country
                             education offices and ministries. Additionally, with respect to new
                             applications from schools that have not previously participated in FFELP,
                             Education no longer accepts a post office box address as the official
                             location of a school or a third party servicer that administers FFELP for
                             the school.

                             Education has not yet implemented some planned changes in its
                             procedures for determining FFELP eligibility of new foreign school
                             applicants. Consequently, no new foreign schools have been certified to
                             participate in FFELP since Education became aware of the school we
                             created in May 2002, even though applications have been received from
                             19 schools. Education is currently considering implementing a process
                             similar to that used when a domestic school applies for participation. This
                             process would entail circulating the name of the school and its owners
                             among a number of officials in FSA and other Education offices to
                             determine whether staff have any information or knowledge that would
                             affect a decision to certify the school’s eligibility to participate in FFELP.
                             Education’s International Affairs staff, who coordinate the agency’s
                             various international programs, would be among those to whom such
                             information would circulate. If any staff were to raise concerns about the



                             Page 22                             GAO-03-647 Student Loans and Foreign Schools
                          school or its owners, Education would consider conducting an on-site
                          program review.

                          Education could take additional action to address the goal of reducing the
Additional Actions to     vulnerability of FFELP to fraud, waste, and abuse, such as more strictly
Reduce Program            enforcing school audit requirements or providing electronic access to
                          information systems to help school officials more easily determine
Vulnerability Will        students’ eligibility for FFELP loans. However, any steps that Education
Require Balancing         takes will likely involve trade-offs that may affect access, accountability,
                          and burden for various participants in FFELP. For example, Education
Competing Goals           could aggressively enforce foreign schools’ audit reporting requirements,
                          but this may lead to unintended consequences, including limiting students’
                          access to such institutions if foreign schools withdraw from FFELP as a
                          result. Other potential steps include changing disbursement procedures to
                          help limit the federal government’s exposure to loss, but doing so may
                          increase burdens for schools and students. In addition, providing foreign
                          school officials with electronic access to information may help them
                          properly determine student eligibility for FFELP loans, but may increase
                          security risks. Additionally, we have developed tools that could help
                          Education determine how to balance the objectives of providing U.S.
                          residents with access to foreign schools while protecting the taxpayers’
                          investment that is intended to help provide that access.


Stricter Enforcement of   Education could more strictly enforce school audit report requirements,
School Audit              but doing so may limit U.S. residents’ access to foreign schools. FSA
Requirements Would        officials have stated that while Education is committed to maintaining the
                          integrity of the FFELP program, it is also committed to providing access to
Provide Education More    international education opportunities for U.S. resident students and does
Data to Assess            not want to create barriers to those opportunities. As previously
Vulnerability, but May    discussed, a large number of foreign schools have failed to submit
Reduce Student Access     required audited financial statement and compliance audit reports to
                          Education in a timely manner. FSA officials told us that balancing
                          enforcement of these statutory and regulatory provisions with providing
                          students access to foreign schools is challenging. In their opinion, the
                          current compliance audit requirements may place an undue burden and
                          result in excessive costs for foreign schools that enroll few U.S. residents.
                          Several foreign school officials we spoke to also told us that they found
                          such audits to be costly, considering that students receiving FFELP loans
                          constituted very small proportions of their student bodies. According to
                          these officials, these audit requirements provide a disincentive to
                          participate in FFELP in order to avoid what they perceive as an
                          administrative and financial burden. Education officials are now


                          Page 23                            GAO-03-647 Student Loans and Foreign Schools
considering whether to issue letters to foreign schools that certify less
than $500,000 annually in FFELP loans requesting program compliance
audit reports and whether an alternative approach to overseeing these
schools should be taken.

In addition to requiring foreign schools to submit audited financial
statements and compliance reports, another potential step Education is
considering relates to the requirement that certain schools submit audited
financial statements under U.S. GAAP. Several school administrators and
government officials in the United Kingdom told us that they found the
requirement for schools to submit audited financial statements presented
in U.S. GAAP to be burdensome, in light of the audit requirements of their
home country. They stated that they believed that the United Kingdom’s
accounting standards are sufficiently comparable to U.S. GAAP that
Education should accept their statements for purposes of meeting FFELP
statutory and regulatory requirements. Doing so, according to these
officials, would reduce the administrative and financial burden associated
with the requirement. Further, because Education’s regulation requiring
that audited financial statements be presented under U.S. GAAP applies
only to foreign schools that certify $500,000 or more in FFELP loans, these
officials told us that foreign schools have an incentive to limit enrollment
of students receiving FFELP loans so that they do not exceed this
threshold.

Education is currently considering whether to allow exemptions for
foreign schools located in Canada and the United Kingdom—which
collectively accounted for 314, or about 62 percent of the total foreign
schools participating in the FFELP during academic year 2000-01—to its
regulations requiring audited financial statements be presented into U.S.
GAAP. According to an FSA official, the justification for such an
exemption is based on the results of a comparison of several foreign
countries’ auditing standards contained in Education’s policies and
procedures manual, developed in consultation with a private accounting
firm. While the purpose of the manual is to provide a methodology for FSA
staff to use in assessing the financial health of foreign schools certifying
less than $500,000 in FFELP loans, the manual does contain a limited
analysis comparing the selected foreign countries’ accounting standards
with U.S. GAAP and the potential effects of Education relying on foreign
standards on the results of its analyses.




Page 24                            GAO-03-647 Student Loans and Foreign Schools
Changing Loan              Education could seek statutory, and consider regulatory, changes to loan
Disbursement Procedures    disbursement procedures to address the potential for fraud, waste, and
Would Reduce Exposure to   abuse; however, such changes could have a significant impact on schools
                           and students. In our discussions with FFELP lenders and school officials,
Fraud, Waste, and Abuse,   we found that disbursement methods and preferences vary among both
but Decrease Lender,       lenders and schools. For example, representatives of one large FFELP
School, and Student        lender told us that it is their standard operating procedure to disburse
Flexibility                student loan proceeds directly to student borrowers by sending them
                           checks. In contrast, a representative of another large FFELP lender, which
                           specializes in making FFELP loans to students attending foreign medical
                           schools, told us that it only (1) issues checks that are payable to both the
                           student borrower and the foreign school and (2) sends these checks, or
                           electronically transfers loan proceeds, to foreign schools, requiring
                           student borrowers to obtain their funds through the schools. Some foreign
                           school officials encourage students to receive their loan proceeds in this
                           manner, as it helps the school maintain control of the funds. According to
                           a guaranty agency official, a school official, and an FSA official some
                           schools do not have financial aid offices or routinely carry out such
                           functions at their institutions and therefore do not have the resources to
                           be an intermediary between lenders and students. Other school officials
                           told us that they are prohibited by local regulations from taking out
                           student fees from loan checks and remitting the difference to students.

                           In addition to receiving loan proceeds directly from lenders, students
                           attending foreign schools may also receive loan proceeds in one lump sum
                           rather than in multiple disbursements. According to many of the lenders
                           and foreign school officials we spoke to, students frequently elect to
                           receive their loan proceeds in this way, particularly students who are
                           enrolled in 1-year graduate programs. Yet, several school officials told us
                           that they prefer multiple disbursements for their students as the school is
                           on a semester or trimester calendar and multiple disbursements provide
                           them more assurance that expenses will be paid. One lending official,
                           however, told us of an instance in which a student had trouble entering a
                           country because she did not have sufficient proof that she had enough
                           funds for the academic year. Thus, allowing students to receive loan
                           proceeds in one lump sum might help students in such situations.

                           Education is considering taking additional steps with respect to current
                           disbursement procedures. As previously discussed and as documented by
                           prior OIG investigations, the disbursement procedures used to provide
                           loan proceeds to U.S. residents attending foreign schools exposes the
                           federal government to increased risk for potential losses. Education is
                           considering encouraging or requiring lenders to take steps prior to


                           Page 25                            GAO-03-647 Student Loans and Foreign Schools
                           disbursing loan funds to students attending foreign schools. These steps
                           could include (1) confirming that schools are eligible to participate in
                           FFELP, (2) verifying that students are accepted for enrollment at foreign
                           schools prior to disbursing funds, and (3) continuing to notify foreign
                           schools when loan disbursements are made to student borrowers.


Providing Schools          Providing electronic access to Education’s information systems needed to
Electronic Access to       determine student eligibility may help improve schools’ administrative
Education Data Could       capacity but may also increase information security risk. The lack of
                           electronic access decreases schools’ administrative capacity, as foreign
Improve Eligibility        school officials have difficulty obtaining the documentation necessary to
Determinations but         determine student eligibility and impedes the exchange of SSCRs with
Increases Information      guaranty agencies. Education is currently working to address these issues
Security Risks             and is considering providing foreign school officials with an alternative to
                           requiring that someone on their staff possess a U.S. social security number
                           to access its information systems. However, poor information security is a
                           high-risk area across the federal government with potentially devastating
                           consequences.8 Threats to the security of any data system may include
                           attempts to access private information by unauthorized users, user error,
                           as well as pranks and malicious acts. Potential damage arising from such
                           threats could include, among other things, the disclosure of sensitive
                           information, disruption of critical services, the interruption of services and
                           benefits, and the corruption of federal data and reports. Therefore,
                           Education needs to carefully weigh the benefits and risks of providing
                           such access to foreign school administrators.


Risk Assessments Can       We have found that conducting a risk assessment is one of several critical
Help Agencies Balance      steps that agencies need to undertake to identify and address major
Competing Goals Inherent   performance challenges and areas that are at risk for fraud, waste, and
                           abuse. We have also developed tools to assist agencies in undertaking
in Addressing Program      such assessments. These tools provide a framework for identifying areas
Vulnerability              at greatest risk as well as various reports which can assist agencies in
                           evaluating internal controls and addressing improper payments resulting




                           8
                           U.S. General Accounting Office, Major Management Challenges and Program Risks: A
                           Governmentwide Perspective, GAO-03-95 (Washington, D.C.: Jan. 2003).




                           Page 26                               GAO-03-647 Student Loans and Foreign Schools
              from fraud, waste, and abuse.9 These tools could be useful to Education in
              weighing the advantages and disadvantages of various ways of overseeing
              and assisting foreign schools. Among other things, these tools highlight the
              importance of conducting risk assessments—comprehensive reviews and
              analyses of program operations to determine the nature and extent of
              program risks—and identifying cost-effective control activities to address
              identified risks.


              Foreign schools’ ability to participate in FFELP supports wide-ranging
Conclusions   educational opportunities for U.S. residents and ensures that these
              students have a variety of options in pursuing postsecondary education. In
              light of recent events highlighting the vulnerability of FFELP with respect
              to U.S. residents attending foreign schools, Education has taken some
              important steps, and could take additional steps, both immediate and
              longer term, to decrease the vulnerability of the program. Ensuring that
              foreign school officials know how to properly administer the program,
              especially what steps they need to take to ensure that students are eligible
              to receive federal funds, is critical to reducing the program’s vulnerability
              to fraud, waste, and abuse. Education has taken steps to provide school
              officials with additional information concerning their responsibilities yet
              as we have shown, foreign school officials may need more information.
              Training that is convenient and specifically designed for foreign school
              officials could help bridge this information gap. Education is also
              considering what regulatory flexibilities it might extend to some foreign
              schools while also considering stricter enforcement of current statutory
              and regulatory provisions. The use of a risk assessment could help ensure
              that Education appropriately identifies the risks involved in the program
              and how best to balance the objectives of providing U.S. residents with
              access to foreign schools while protecting the taxpayers’ investment
              intended to help provide that access. In taking such actions, Education
              might identify alternative regulatory and oversight methods that would
              strike such a balance.




              9
                U.S. General Accounting Office, Standards for Internal Control in the Federal
              Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov.1999), Strategies to Manage
              Improper Payments: Learning from Public and Private Sector Organizations,
              GAO-02-69G (Washington, D.C.: Oct. 2001); and Internal Control Management and
              Evaluation Tool, GAO-01-1008G (Washington, D.C.: Aug. 2001).




              Page 27                                GAO-03-647 Student Loans and Foreign Schools
                      To help ensure that foreign school officials have the knowledge necessary
Recommendations for   to properly administer FFELP, we recommend that the Secretary of
Executive Action      Education develop on-line training resources specifically designed for
                      foreign school officials.

                      To better ensure that Education is adequately overseeing foreign schools
                      participating in FFELP, we recommend that the Secretary of Education
                      undertake a risk assessment to determine how best to ensure
                      accountability while considering costs, burden to schools and students,
                      and the desire to maintain student access to a variety of postsecondary
                      educational opportunities. Further, after completing the risk assessment, if
                      Education determines that legislative and/or regulatory changes are
                      justified, we recommend that the Secretary seek any necessary legislative
                      authority and/or implement any necessary regulatory changes.

                      In written comments on our draft report, Education agreed with our
Agency Comments       reported findings and recommendations and, among other things, said that
                      it has begun to reengineer its process for determining the eligibility of
                      foreign schools to participate in FFELP. Education also provided technical
                      clarification, which we incorporated where appropriate. Education’s
                      written comments appear in appendix II.

                      We are sending copies of this report to the Secretary of Education,
                      appropriate congressional committees, and other interested parties. In
                      addition, the report will also be available at no charge on GAO’s Web site
                      at http://www.gao.gov.

                      If you or your staffs have any questions about his report, please contact
                      me on (202) 512-8403 or Jeff Appel on (202) 512-9915. Gillian Martin and
                      Cara Jackson made significant contributions to this report.




                      Cornelia M. Ashby
                      Director, Education, Workforce
                       and Income Security Issues




                      Page 28                            GAO-03-647 Student Loans and Foreign Schools
List of Congressional Addressees

The Honorable Judd Gregg, Chairman
The Honorable Edward M. Kennedy, Ranking Minority Member
Committee on Health, Education, Labor and Pensions
United States Senate

The Honorable Arlen Specter, Chairman
The Honorable Tom Harkin, Ranking Minority Member
Subcommittee on Labor, Health and Human Services,
 and Education
Committee on Appropriations
United States Senate

The Honorable Ralph Regula, Chairman
The Honorable David Obey, Ranking Minority Member
Subcommittee on Labor, Health and Human Services,
 and Education, and Related Agencies
Committee on Appropriations
House of Representatives

The Honorable John Boehner, Chairman
The Honorable George Miller, Ranking Minority Member
Committee on Education and the Workforce
House of Representatives

The Honorable Jeff Sessions
United States Senate




Page 29                         GAO-03-647 Student Loans and Foreign Schools
                      Appendix I: Characteristics of Foreign
Appendix I: Characteristics of Foreign
                      Schools Participating in FFELP, by Country



Schools Participating in FFELP, by Country


                                              FFELP loan volume         Number of students participating in
                                                                                                           a
Country          Number of schools         academic year 2000-01                   FFELP across schools
Australia                        35                     $5,021,718                                   0 to 49
Austria                           2                       $122,872                                   0 to 12
Belgium                           3                       $243,650                                   0 to 18
Bulgaria                          1                                $0                                     0
Canada                          108                    $15,825,894                                  0 to 356
Chile                             1                                $0                                     0
China                             1                                $0                                     0
Colombia                          1                                $0                                     0
Costa Rica                        3                       $541,437                                   0 to 34
Czech Republic                    6                       $424,969                                   0 to 12
Denmark                           4                         $65,000                                   0 to 6
Dom. Republic                     6                    $20,653,159                                  1 to 469
Dominica                          1                    $35,235,509                                     1776
Egypt                             1                       $450,133                                       33
England                         182                    $25,405,722                                  0 to 191
Finland                           3                       $110,000                                    0 to 5
France                           13                     $1,234,416                                   0 to 82
Grenada                           1                    $30,666,842                                     1528
Hungary                           5                     $3,035,655                                   3 to 92
India                             2                       $354,125                                   1 to 21
Ireland                           9                     $5,868,032                                  0 to 105
Israel                           12                     $7,176,498                                  0 to 214
Italy                             5                       $820,092                                   1 to 23
Japan                             3                         $67,598                                   0 to 3
Korea                             1                        $29,000                                        1
Lebanon                           1                        $37,000                                        2
Liechtenstein                     1                        $16,500                                        2
Mexico                           11                    $27,003,357                                 0 to 1214
Netherlands                      12                     $1,249,679                                   0 to 46
N. Zealand                        6                       $279,130                                    0 to 8
Nicaragua                         1                                $0                                     0
N. Ireland                        2                       $222,165                                   7 to 10
Norway                            5                         $56,125                                   0 to 2
Philippines                       4                       $311,666                                   0 to 13
Poland                            8                     $5,429,140                                  0 to 106
Scotland                         14                     $4,183,953                                   0 to 90




                      Page 30                                  GAO-03-647 Student Loans and Foreign Schools
                                         Appendix I: Characteristics of Foreign
                                         Schools Participating in FFELP, by Country




                                                                     FFELP loan volume             Number of students participating in
                                                                                                                                      a
 Country                            Number of schools             academic year 2000-01                       FFELP across schools
 S. Africa                                             2                            $76,000                                             0 to 5
 Spain                                                 6                           $483,308                                           0 to 17
 St. Kitts                                             2                       $14,086,736                                         91 to 609
 St. Maarten                                           1                       $16,500,071                                                774
 Sweden                                                5                           $152,800                                             0 to 7
 Switzerland                                           6                           $701,103                                           1 to 39
 Vatican                                               3                           $202,646                                           3 to 10
 Wales                                                 8                           $654,187                                           0 to 18
Source: GAO analysis of FSA data.
                                         a
                                         Foreign schools may be eligible to participate in FFELP but not enroll U.S. residents in a given year
                                         and thus report zero enrollments.




                                         Page 31                                        GAO-03-647 Student Loans and Foreign Schools
             Appendix II: Comments from the Department
Appendix II: Comments from the Department
             of Education



of Education




             Page 32                                GAO-03-647 Student Loans and Foreign Schools
           Appendix II: Comments from the Department
           of Education




(130149)
           Page 33                                GAO-03-647 Student Loans and Foreign Schools
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