oversight

Direct Student Loans: Overpayments During the Department of Education's Conversion to a New Payment System

Published by the Government Accountability Office on 1999-02-17.

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

      United States

GAO   General Accounting
      Washington,
                           Office
                    D.C. 20548

      Health,   Education, and
      Human     Services Division




      B-281808
      February 17,1999
      The Honorable William Goodling
      Chairman, Committee on Education and
       the Workforce
      House of Representatives

      The Honorable Howard P. McKeon
      Chairman, Subcommittee on Postsecondary Education, Training
       and Life-Long Learning
      Committee on Education and the Workforce
      House of Representatives

      The Honorable Pete Hoekstra
      Chairman, Subcommittee on Oversight and- __.
       Investigations
      Committee on Education and the Workforce
      House of Representatives

      Subject:       Direct Student Loans: Overnavments During the Derxrtment of
                     Education’s Conversion to a New Pavment Svstem


      This letter responds to your request that we investigate reports of erroneous
      Department of Education payments to schools participating in the William D.
      Ford Federal Direct Loan Program (FDLP). These payments were reported to
      have been made during the Department’s conversion to a new computerized
      payment system. Specifically, you asked us to review the transition from the old
      payment system to the new payment system and to determine whether the
      Department erroneously disbursed as much as $400 million to schools
      participating in the direct loan program during the conversion.

      The Department provides funds to students to help finance their postsecondary
      education. Schools draw down these funds from the government to use as
      needed for students who have loans under FDLP. The Department estimates that
      during fiscal year 1998, $11 billion in direct loan funds were available for three
      million loans to students. Recognizing the need to update the computer system


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used to disburse and track these funds, the Department designed a new financial
management and payment system-the Education Central Automated Processing
System/Grant Administration and Payment System (EDCAPWGAPS), which
became fully operational in May 1998. Payments are now made to schools that
participate in FDLP through GAPS.

In summary, the transition to GAPS took longer than the Department anticipated.
It was originally planned for a 2-week period in February 1998 but was delayed
about 4 months to May 1998 because of difficulties the Department encountered
in incorporating its data files into the new computer system. Schools were
authorized to draw down within existing guidelines as many funds as they
expected to disburse during the transition period. The Department did not
erroneously disburse $400 million to schools. The $400 million was the
approximate amount that FDLP schools drew down to meet their needs during
the transition to GAPS. However, overpayments of about $6 million to $10 million
were made when the Department’s contractor inadvertently processed a payment
list that it had already processed for disbursement. Aware of these
overpayments, the Department contacted all schools that may have received an
overpayment and asked them to return it. The Department plans to identify and
recover any remaining overpayments during its end of program year
reconciliation process starting July 31,1999.
                                          --    a.



BACKGROUND

EDCAPS is a centralized financial management system designed to integrate the
Department’s separate financial processes, including financial management,
contracts and purchasing, grants administration, and payment management.
Before EDCAPS was implemented, the Department relied on several stand-alone
systems to perform these functions, including the Payment Management System
(PMS), which processed grants and other payments. The Department concluded
that integrating these systems would enable it to improve such tasks as more
quickly processing financial transactions with other program participants and
conducting annual program account reconciliations. It integrated these functions
into EDCAPS, a single system with four modules, one of which is GAPS.

GAPS is the module for controlling and processing grants and other payments to
program participants. Its functions include the obligation of award
authorizations, disbursement of funds, annual certification of expenditures, and
final grant closeouts. Schools can access GAPS on line to request and receive
funds and to report expenditures, retrieve award and payment histories, and
obtain immediate updates and notifications of changes in awards.

The Department categorizes schools by their loan origination status. That is, the
Department allows some schools to draw downFDLP funds on their own,
originating them directly, while it requires others-depending on their experience


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or compliance record in administering the federal student aid programs-to
request drawdowns through a loan origination center (LOC)! A school or the
LOC enters the drawdown request in GAPS. The Department processes the
request and disburses funds directly to the bank account that the school
designates. Schools reconcile their FDLP balances with the Department’s
records, generally on a monthly basis, and the Department performs an end of
program year reconciliation.

To complete our work, we (1) obtained and reviewed Department documents on
the transition to and implementation of GAPS; (2) met with officials from the
Department’s Office of Postsecondary Education (OPE), Office of Chief Financial
Officer, Office of Inspector General, and contract support staff; and (3) reviewed      .
FDLP drawdown activity from February through April 1998. We conducted our
work between July and December 1998 in accordance with generally accepted
government auditing standards.

THE TRANSITION TO GAPS TOOK LONGER THAN PLANNED

The Department first announced in January 1998 that it planned to switch from
PMS to GAPS for all grants and other payments. It estimated that this would
entail a 2-week shutdown of PMS in February, during which neither system would
be operational and no payments would be made to schools. Before the shutdown,
the Department authorized direct loan schools to draw down within its existing
guidelines as many funds as they reasonably expected to disburse to eligible
borrowers during this a-week period. It also.waived certain cash management
requirements that schools must follow in drawing down and disbursing loan and
grant funds until GAPS became operational. For example, the Department
waived the requirement that schools promptly return excess cash during this
period and also said that it would not assessliability payments (or interest) for
their failure to return excess cash.’

On March 2,1998, the Department announced that the transition to GAPS would
be postponed because of unforeseen technical problems. Although the
Department did not provide details about these technical problems at the time,

‘The LOC is operated by Electronic Data Systems, Inc. (EDS), a private contractor. At
the time of the system conversion, the Department had designated only one LOC.
*Excess cash balances occur when schools draw down more federal funds than
they are able to disburse to students within a given time period. Direct loan
schools are required to return program funds they will not need for disbursement
to students generally within 3 business days after receiving them in the school’s
account.



                      GAO/HEHS-99-44R       Conversion   to a New Payment     System
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officials told us that the problems included difficulties in converting PMS data
into the GAPS data layout and in promptly processing changes in schools’ loan
origination status.

On March 26,1998, the Department announced that it would attempt the
conversion again beginning on April 23 1998. As before, schools were allowed to
draw down as many funds as they anticipated needing and the same cash
management requirements were waived. In the fast half of May1998, GAPS
became fully operational and all direct loan payments are now made through
GAPS.

OVERPAYMENTS MADE TO SCHOOLS
ARE BEING RECOVERED

We found no evidence to support the claim that the Department erroneously
disbursed $400 million to FDLP schools. Officials in OPE have determined that
the Department made between $6 million and $10 million in overpayments to
schools for direct loans on one day in late February 1998, immediately before the
first scheduled shutdown of PMS. In fact, $400 million was approximately the
amount of funds schools drew down during the week before the February 1998
shutdown of PMS. This amount appears to be consistent with the Department’s
authorizing schools to draw ‘down funds to meet their needs during the planned
shutdown.

According to an official representing the LO+Electronic      Data Systems, Inc.
(EDS)-the $6 million to $10 million in overpayments resulted from EDS’s
inadvertently reprocessing a drawdown request list that it had already processed
for disbursement. As soon as EDS discovered the problem, it identified 176
schools that might have received duplicate payments. EDS staff telephoned each
school, informed it of the problem, and instructed it to determine whether it had
received any improper disbursements and to return any funds it would not
disburse within 3 days.

According to OPE officials, some of the overpayments were returned when
schools developed excess cash balances. Because the Departrnent believes that
the amount of money is not significant and will be recovered during the end of
program year reconciliation process, it does not plan to undertake a separate
review. The Department is planning to identify the schools and amounts involved
when the program year ends on July 31,1999. In addition, OPE officials told us
that monthly statements are sent out to each direct loan school’s chief financial
aid officer to reconcile any differences between the school’s records and the
Department’s program accounts. Whenever a school finds excess cash on hand,
it must return the excess amount along with any interest due to the Department.
Because of these processes and because this was an isolated instance, OPE


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B-281808


officials said that they do.not believe a separate investigation to identify any
unreturned overpayments is warranted. In our view, this is a reasonable decision.

In order to corroborate what we were told, we reviewed schools’ drawdown
activity to identify possible duplicate payments. For the period from rnid-
February through April 1998, we found instances in which schools made requests
for more than one payment for the same amount within a few days of each other.
Nearly all these payments were for less than $5,000. The total amount of these
payments was less than $1 million. OPE officials advised us that they had no
basis on which to suspect that these were duplicate payments because it is
common practice for schools to make drawdowns for the same amount within
several days. They added that this is a typical pattern consistent with requesting
funds after a student is approved for a loan. Further, GAPS has built-in
safeguards that do not allow a school to enter the system one day and draw down
the exact same amount of funds more than once in that day. OPE and Office of
Chief Financial Officer officials said that if this occurs, the school’s request is
immediately referred to a “holding file” for OPE staff review before granting the
second drawdown.

In addition to the $6 million to $10 million in overpayments to schools, we learned
of other problems the Department experienced during the conversion. For
example, the Department identified two database problems. First, some bank
account numbers and school identification numbers in PMS were not accurately
converted when the database was shifted to GAPS. When PMS data were
converted to GAPS data, some bank account numbers appeared as two different
account numbers because of technical problems in reading spaces, hyphens, or
similar characters in the PMS data. For example, a bank account number
“012345”in PMS appeared as “012345”as well as “012-345”in GAPS, causing GAPS
to read it as two account numbers rather than one. Consequently, multiple
payments were sent to these schools’ banks. Similar situations occurred in
converting school identification numbers. Officials from the Office of Chief
Financial Officer said that once this problem was discovered, the Department
corrected the data errors within a couple of days and expects to recover all
resulting overpayments.

Second, on several occasions, changes in schools’loan origination status were not
promptly recorded in GAPS. When PMS was originally implemented, a change in a
school’s loan origination status was generally made only once a year. Over time,
however, according to an OPE official, schools’ loan origination status started
changing more frequently. This may have caused some schools to receive duplicate
payments for direct loans. For example, the OPE official explained, a direct loan
school that was required to have the LOC request drawdowns might do so-on a
particular day. One or two days later, the same school could be assigned to the
origination status that allows it to draw down funds on its own. Ifit did then draw
down funds on its own and’the contractor was unaware of the change in the school’s


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status, the school could receive two payments. After GAPS was fully implemented,
the Department specified the dates when changes in schools’ origination status will
be effective and built a safeguard into its financial management system to capture
these changes at about the time when they occur.

AGENCY COMMENTS

In a meeting with our staff on January 27,1999, Department of Education officials
from the Office of the Chief Financial Officer and the Office of Postsecondary
Education provided comments on a draft of this letter. We incorporated their
comments, which were generally editorial and technical in nature, as appropriate.



As arranged with your offices, we will send copies to interested congressional
offices, the Secretary of Education, and the Director of the Office of Management
and Budget, and we will provide copies to others on request. If you have any
questions, please feel free to contact me or Joseph J. Eglin, Jr., assistant director,
at (202) 512-7014. Other major contributors to this letter include Carolyn Blocker,
Joel Marus, and Linda Stokes.




Carlotta C. Joyner
Director, Education and
  Employment Issues



(104958)




6                      GAOIHEHS-99-44R        Conversion   to a New Payment      System
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