oversight

The National Direct Student Loan Program Requires More Attention by the Office of Education and Participating Institutions

Published by the Government Accountability Office on 1977-06-27.

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

                         DOCUMENT RESUME
02445 - [A18128463
The National Direct Student Loan Program Requires Fore Attention
by the Office of Education and Participating Institutions.
HAD-77-109; B-164031(1). June 27, 1977. 18 pp.

Report to Secretary, Department of Health, Education, and
Welfare; by Gregory J. Ahart, Director, Human Resources Div.
Issue Area: Education, Training, and Employment Programs:
    Student Assistance Programs for Post-Secondary Education
     (1101).
Contact: Human Resources Div.
Budget Function: Education, Manpower, and Social Services:
     Higher Education (502).
Organization Concerned: Office of Education.
Congressional Relevance: House CcmSittee on Education and Labor;
     Senate Committee on Human Resources.
Authority: Education Amendments of 1972 (P.L. 92-318). National
     Defense Education Act of 1958, as &mended, title II. Higher
     Education Act of 1965, as amended.
         The National Direct Student Loan (NDSL) program, one of
three student financial aid programs administered by the Office
of Education (OE), provides for the establishment of loan funds
at postsecondary educational institutions so that they can make
loans to qualified students.  " ndings/Conclusions: Several
problems were noted in the adaixistration of the program.
Because OB has not provided adequate program guidance for
participating institutions, there has been a lack of
understanding regarding requirements. The most current NDSL
program manual, published in 1967, was out of print, and did not
contain current program regulations. It was also found that in
some cases students were receiving veterans' benefits in
addition to student loans. Another area in need of improvement
was in loan servicing and collection. Concerns were expressed
about increasing delinquency rates and failure to adhere to
collecting procedures. OR is responsible for monitoring the
performance of participating institutions, but it has not always
checkel on the accuracy of information submitted by
institutions, and followups on audits have not been adequate.
Recommendations: The Commissioner of Education should: (1)
provide necessary program guidance to institutions; (2) attempt
to collect NDSL accounts before writing then off; (3) instruct
financial aid officers to coordinate various types of aid
received by students; (4) instruct institutions with high
delinquency rates to follow prescribed collection procedures;
(5) modify the processing of fiscal operations reports to allow
for more timely tabulation of data and periodically test
accuracy of information; and (6) develop guidelines on
conducting on-site reviews. (HTW)
UNITED STATES
GENERAL ACCOUNTING OFFICE




The National Direct Student Loan
Program Requires More Attention
By The Office Of Education
And Participating Institutions
Office of Education
Department of Health, Education, and Welfare
GAO reviewed the administration of the Na-
tional Direct Student Loan program by the
Office of Education and participating insti-
tutions and found problems in the areas of
loan servicing and collection. The Office of
Education needs to provide technical assis-
tance to participating institutions and moni-
tor their performance. Appropriations for the
program are over $300 million annually, and
the combined net worth of National Direct
Student Loan funds at participating institu-
tions totals over $3 billion. Delinquency rates
have continued to increase, thereby diminish-
ing loan funds availabie to needy students.




HRD-77-109                                        JUNE 27, 1977
                    UNITED STATES GENERAL ACCOUNTING OFFICE
                            WASHINGTON, D.C. 209

HUMAN PAOULt
    DIVISION




     B-164031(1)


     The Honorable
     The Secretary of Health,
       Education, and Welfare

     Dear Mr. Secretary:
          Because of continuing congressional interest in
                                                           Federal
     student financial aid programs, we surveyed the
                                                      National Di-
     rect Student Loan (NDSL) program administered by
     of Education (OE). The program was established the Office
     II of the National Defense Education Act of 1958,under title
     and the Education Amendments of 1972 incorporated as amended,
                                                        this title
     into part E, title IV of the Higher Education Act
                                                        of 1965,
     as amended. In 1972 the name of the program was
     the National Defense Student Loan program to the  changed from
                                                       National Di-
     rect Student Loan program.

          The program provides for the establishment of loan
    at postsecondary educational institutions, so they        funds
    long-*erm, low-interest loans to qualified students can  make
    financial assistance to pursue a course of study     who need
                                                      on at least
    a half-time basis. Federal funds are generally
                                                     provided each
    year to participating institutions. The Federal
    the program is 90 percent with the institutions   share under
                                                     supplying the
    remaining 10 percent. The institutions are responsible
    making and collecting the loans.                          for

          The NDSL program is one of three OE student financial
    aid programs for which financial aid officers at
                                                      the insti-
    tutions determine eligibility and the amount of
                                                     aid. The
    others are the College Work-Study and the Supplemental
    cational Opportunity Grant programs, both of which      Edu-
    thorized by the Higher Education Act of 1965, as    are au-
                                                      amended.
    The three programs are usually referred to as campus-based
    student aid programs. An institution
    pate in any combination of individual may  choose to partici-
                                           programs or all three
    programs.

         Appropriations for the NDSL program for fiscal year
    1976 were $332 million, $321 million of which was
    Federal capital cortributions, and the remainder for new
                                                      was for
B-164031(1)



loan cancellations and institutional loans.   Since the pro-
gram began, the net cumulative Federal capital contribution
totals over $3.2 billion. Loan collections by institutions
were about $215 million in fiscal year 1976.

     Our survey was conducted at OE headquarters in Washing-
ton, D.C.; at the offices of the Regional Commissioners for
Education in regions III (Philadelphia), V (Chicago), and
IX (San Francisco); and at four postsecondary educational
institutions--a public ,aiversity and a community college in
Maryland, and a proprietary school and an institution offering
specialized training for handicapped students in Washington,
D.C. At the institutions visited we discussed their programs,
reviewed procedures for adhering to published guidelines and
regulations, and examined the files of selected NDSL bor-
rowers.

     We noted problems in the administration of the NDSI4 pro-
gram by OE and the institutions we visited. These problems
concerned the need to

     -- provide program guidance at institutions so they can
        promptly and effectively implement established require-
        ments and changes in the program,

     -- establish procedures to determine other Federal aid
        received by NDSL recipients,

     -- emphasize to schools their responsibility for collect-
        ing on loans to reduce delinquency rates,

     -- provide technical assistance to participating institu-
        tions and periodically review their administration of
        the program, and

     -- improve the efficiency of reporting requirements and
        tabulating program data.

     We recognize that our findings are based on results of
visits to a limited number of institutions; however, we do
not believe that the problems we found are unique to only
Department of Health, Education, and Welfare (HEW) regions
and the institutions included in our survey.  Many of our
findings have also been noted by others who have reviewed
various aspects of the NDSL program.




                               2
B-164031(1)



NEED FOR PROGRAM GUIDANCE AT INSTITUTIONS

     Because OE has not provided adequate ptoqram guidance
for institutions participating in the NDSL program, those
participating in the program for the first time have been
unclear regarding requirements, and'previously participat-
ing institutions have not implemented changes brought about
by new legislation. The most current NDSL program manual
was published in 1957 and is out-of-print, and the Federal
program regulations in effect when we started our survey
were not current.

     In addition to the problems created for institutions
trying to establish NDSL programs, lack of up-to-date pro-
gram guidance can create problems for institutions with
established NDSL programs.  For example, institutions that
have participated in the program for several years have
loan accounts in their books which they considered uncol-
lectible even though the Education Amendments of 1972 allow
them to assign such accounts to OE. Although this may have
jeopardized ultimate collection of these accounts, we believe
that OE should first attempt it before writing them off as
uncollectible.

Program manual

     In at least one region, copies of an NDSL program marual
were not available to give to schools entering the program
for the first time. Due to numerous changes in the law since
1967 (when the latest manual was published), an updated manual
is needed, especially for new schools participating in the
program.

     OE program officials said that the Education Amendments
of 1972 mandated that all essential program requirements be
published as regulations. These officials distinguished be-
tween such regulations and manuals--such as the 1967 manual
which contains helpful hints on program operations. They
also told us that various nongovernmental organizations pub-
lish manuals, and that OE has distributed a fiscal and
accounting manual to institutions. They have reviewed a col-
lections manual under preparation by one of these nongovern-
mental organizations and have contracted for the preparation
of a training manual by another such organization.   However,
these manuals were not available to institutions participat-
ing in the NDSL program as of April 1977.



                              3
B-164031(1)



     We believe that OE needs to see that the manuals and
regulations discussed above will provide the necessary guid-
ance for institutions that participate in the NDSL program.
If OE program officials believe that the manuals and regu-
lations ate sufficient, then a procedure should be estab-
lished to promptly update them as changes occur.

Program regulations
     The Education Amendments of 1972 (P.L. 92-318, enacted
June 23, 1972) require the Commissioner of Education to study
all rules and regulations pertaining to OE programs, to re-
port the results of this study within I year to the appro-
priate legislative committees of the Congress, and within 60
days after submission of the report, to publish all rules
and regulations in the Federal Register.

     In October 1975, OE published a Notice of Proposed Rule-
making in the Federal Register, soliciting comments and recom-
mendations, and providing for public hearings on proposed
regulations for the ND£L program. In November 1976, interim
regulations were published. OE officials attributed the
lengthy delay in revising the program regulations to internal
clearance procedures and lack of staff.

     Without an updated procedures manual and revised program
regulations, institutions cannot administer the NDSL program
without problems.  For example, the Education Amendments of
1972 provide that institutions may assign to OE those NDSL
accounts which had been "* * * in default for at least 2 years
despite due diligence on the part of the institution in mak-
ing collection * * *." For over 4 years this provision was
not implemented by regulation, and because the term 'in de-
fault" had not been defined, institutions had not assigned
defaulted accounts to OE.

     The interim regulations published in November 1976 pro-
vide for assigning accounts to OE; however, the delay has
caused schools to keep in their books accounts which they
consider uncollectible.  Two institutions we visited main-
tained an "inactive" group of loans for which they no longer
attempted collection. We believe the delay in assigning
uncollectible accounts to OE has decreased the likelihood
of collecting these loans.

     OE program officials said that if institutions report
that they have followed OE's procedures for billing and


                              4
B-164031(1)


collecting on accounts by documenting that borrowers cannot
be located despite thorough checks or that they lack the
ability to pay, then OE will probably write off these loans
and attempt no further collection. However, it does not
appear t:hat OE has the resources to routinely check on the
reliability'of information reported by institutions, and
we found that institutions were not adhering to OE's recom-
mended billing and collecting procedures (see p. 10). Based
on our visits at institutions and the results obtained by
OE under the Guaranteed Student Loan (GSL) program when it
pursued lenders in default (see below ), we believe that
it would not be in the best interest of the Federal Govern-
ment to write off these NDSL accounts without first attempt-
ing, on at least a sample basis, further collection efforts
to see if it is warranted from a cost-benefit standpoint.

     The GSL program provides for Federal collection efforts
after an account has been purchased from a lender because
of default. During fiscal year .976, OE employed over 100
collectors at its 10 regions to recover money from student
borrowers who defaulted.  In addition, OE plans to contract
with private agencies for the collection of defaulted GSL
loans. GSL program officials have had some success in pur-
suing borrowers after lenders have failed to collect. Of
more than $280 million paid to lenders for defaulted loans,
OE has collected about $25 million.

     A procedure similar to that used in the GSL program
might be applied to defaulted NDSL accounts to determine
their ultimate collectivity. A great deal of work will be
involved once schools begin assigning defaulted NDSL ac-
counts to OE. An OE official estimated that initially the
number of such accounts could be as high as 150,000.  Pro-
cedures had not been developed nor had staff been assigned
for handling these accounts at the time of our fieldwork.
OE officials said that procedures are being developed and
that they plan to recruit three people for this job.

     We do not believe that these procedures will be suffi-
cient to avoid delays and backlogs in the processing of
such accounts. For example, using OE's estimates, three
persons would require 2 years to determine collectivity
of these accounts if they could do 100 each workday, which
seems unlikely.

Conclusions and recommendations

     Institutions should be provided with timely, accurate,
and comprehensive information on policies and procedures


                              5
B-164031(1)


concerning administration of education programs, and this
information should be updated as changes occur.

     We recommend, therefore, that you direct the Commissioner
of Education to take prompt action to provide the necessary
program guidance to institutions participating in Lhe NDSL
program. Until this is done; new procedures and policies
could be made available to regional OE staff and to institu-
ticns through memoranda and letters or other means deemed
suitable by you or the Commissioner.

     Also, we recommend that you direct the Commissioner to
attempt collecting NDSL accounts befort writing them off.
Because this could be a major undertaking, priority should
be given to developing plans and procedures so that the
Federal investment in the NDSL program will be adequately
protected and collection costs will not be greater than
amounts recovered. Consideration could be given to a sample
collection project to determine if a program-wide collection
effort by OE would be feasible from a cost-benefit stand-
point.

NEED TO CONSIDER OTHER AID
REC7IVED BY NDSL RECIPIENTS
AND EMPHASIZE LOAN SERVICING
AND COLLECTION ACTIVITIES

     Generally, administration of the NDSL program is per-
formed by two separate offices of an institution--the finan-
cial aid office and the business office. The financial aid
office is responsible for determining the eligibility of
prospective students and for approving loans. Unlike most
other Federal student aid programs, the NDSL program requires
commitment and involvement on the part of the institutions
long after students have completed their studies. This is
a result of the repayment requirements of the loans. In-
stitutions usually delegate responsibility for loan collec-
tion to the business office.

     We found little problem with institutions adhering to
program eligibility requirements and confirming that a
documented need for financial aid existed. However, at
one institution the financial aid office did not routinely
check to see if loan applicants were receiving veterans'
benefits. We do not believe that this is an isolated
instance.

     We believe that the failure of some institutions to
vigorously pursue collection of NDSL accounts adversely

                               6
B-164031(1)



affects the NDSL program's delinquency rate. OE needs to
advise institutions that it is their responsibility to col-
lect on these accounts, and when institutions refuse to
comply, OE should initiate appropriate remedial action.
Financial aid offices need to consider other
aid received by NDSL recipients
     The NDSL, College Work-Study, and Supplemental Educa-
tional Opportunity Grant programs allow financial aid of-
ficers some discretion in putting together a total pack-
age of aid for individual students. For this reason, we
reviewed selected student files to determine whether NDSL
program eligibility requirements were met and whether a docu-
mented need for financial aid existed. We found few prob-
lems in these areas at financial aid offices. However,
at one institution we discovered that loan applicants who
were receiving veterans' benefits did not always list them
as a resource on their applications for financial rid. At
this institution, the financial aid office did not routinely
check with the office of veterans' affairs on campus to
see if the loan applicant was receiving veterans' BJenefits.
This could result in these students receiving aid an ex-
cess of their needs. We made a random check of NDSL bor-
rowers whose last names began with the letter "B" and com-
pared it to a list of students receiving veterans' bene-
fits; we found four students who in addition to their student
loans were receiving veterans' benefits. We found one case
where an individual was receiving veterans' benefits of
$270 a month, but did not indicate it on the NDSL loan ap-
plication. Institution officials agreed that this indivi-
dual was awarded financial aid in excess of need.
     We suggested that the financial aid officer establish
procedures to prevent t.iis situation from occurring and
asked that a check be made to determine the extent of the
problem. Subsequently, the financial aid officer reported
to us that five students had been "overawarded" a total
of $3,347 for academic year 1975-76. Institution offi-
cials said that they initiated action to bill these stu-
dents for :ne amount of excess aid, and a new policy was
instituted to identify aid applicants who were receiving
veterans' benefits. Although we found this situation at
only one institution during our survey, we have since
found this problem at several other institutions which
we selected for our ongoing review of systems to determine
financial need.


                              7
B-164031(1)


     OE program officials advised us that their program regu-
lations failed to require institutions to recognize veterans'
benefits as a resource, and that this would be corrected when
final regulations are issued.
        Recommendation

     We recommend that you direct the Commissioner of Educa-
tion to promptly instruct financial aid officers, as part of
their responsibility to coordinate the various types of aid
received by students, to use information available on campus
regarding other Federal funds available to students. Specl.
fically, checks should be made so that financial aid officers
will be aware of other Federal funds which students are ,-&-
ceiving, such as veterans' benefits, so that this can be con-
sidered when determining the financial need of students.
Need to emphasize loan
servicing and collection
     Institutions usually delegate responsibility for servic-
ing and collecting loans to the business office. Since it
was intended that the NDSL program would be financed by
yearly capital contributions and loan repayments, an insti-
tution's performance in loan servicing and collecting has a
direct impact on the amount of funds available for lending
and the success of the program in serving needy students.
We considered the delinquency rate as one measure of how
well institutions serviced and collected the loans they had
awarded.
        NDSL program delinquency
        rates are Increasing
     In a letter to the Secretary of HEW dated November 5,
1976, we pointed out the need to reconsider the method used
for computing the delinquency rate for the NDSL program.
Our concern was that OE's method did not accurately measure
the performance of participating institutions in servicing
and collecting on loans. On January 19, 1977, the Under
Secretary of HEW advised us that HEW agreed that the OE
method for computing the delinquency rate needed to be im-
proved, and that OE would adopt our method with one change
in the r(.,ommended ccmputation.
        Delinquancy rates have been a cause of concern for some
time.     An HEW Audit Agency report to the Commissioner of

                                   8
B-364031(1)



Education in April 1973 noted that as of fiscal year 1970,
almost 21 percent of the institutions participating in the
NDSL program had experienced delinquency rates between 11
and 30 percent. For 7 percent of the institutions, delin-
quency rates ranged from 31 to 60 percent. The report
cited the delinquency problem as a matter of 'serious con-
cern," persisting "* * * primarily because many institu-
tions have not effectively implemented collection proce-
dures prescribed by OE."

      On the basis of this report, the Secretary of EZW sug-
gested in spring of 1973 that action be taken by OE to
withhold or curtail loans at institutions having delinquency
rates in excess of 50 percent. Plans were developed by OE
to (1) identify institutions with delinquency rates over
50 percent, (2) use this information when reviewing appli-
cations for funds from these institutions, and (3) report
on efforts to reduce delinquency rates in excess of 50 per-
cent.

     According to OE officials, the first two objectives were
met but the third has not been achieved because of higher
priority work and the lack of available staff.  OE can and
has limited participation in the program by reducing the
amount of the Federal capital contribution when reviewing
the institutions' applications for funds. For example, in
award periods 1976-77 and 1977-78 respectively, 223 and 440
institutions had their capital contributions reduced to zero.
However, there are no formal procedures and the interim re-
gulations do not require OE to suspend or terminate institu-
tions from participating in the NDSL program because of a
high delinquency rate, nor has OE ever suspended or termi-
nated any ;-;.itutions for this reason.

      As of June 30, 1975, 129 (4 percent) of the participa-
ting institutions had delinquency rates of 50 percent or
more according to an OE report. Eight institutions had
more than $1,000,000 in delinquent principal. For the
period ended June 30, 1976, using OE's report on delin-
quency rates, we categorized the rates and compared them
with the HEW Audit Agency's earlier findings. The results
are shown in the following table. Although 3,167 institutions
particip!ated during fiscal year 1976, at the time of our
survey, delinquency rate information had been processed
Dy OE for only 2,663.



                              9
B-164031(1)



                   Period ended               Period ended
               June 30, 1970 (note a)         June 30, 1976
Delinquency     Number of     Percent      Number of     Percent
   rate        institutions      of       institutions      of
in percent      reporting       total      reporting       total
 0   - 10         1,370            71.6     1,338          50.:!
11   - 30           392            20.5       804          30.2
31   - 60           131             6.8       425          16.0
61   - 100           21             1.1       -96           3.6
     Total        1,914        100.0        2;663         100.0
a/From HEW Audit Agency report, dated April 17, 1973, "Review
  of the Administration of Collection Activities--National Di-
  rect Student Loan Program."

     Institutions with delinquency rates over 10 percent rose
from 544 to 1,325; this was an increase from about 28 to almost
50 percent of the institutions which reported in 1970 and 1976,
respectively. Institutions with delinquency rates over 60
percent rose from 21 to 96 (1.1 percent to 3.6 percent) of the
1,914 and 2,663 institutions which reported to OE in 1970 and
1976, respectively.

      Loan servicing and collecting
      procedures not adhered to
      by institutions

     At the institutions we visited, it was apparent that
the collecting procedures prescribed by OE were not being
followed. At three of the four institutions, responsible of-
ficials were not familiar with the prescribed procedures.
For example, we found that:

      -- The 4-year public institution only recently established
         procedures to see that exit interviews were held with
         students leaving school.

      -- The community college did not routinely bill borrowers
         for their loan repayments.

      -- Neither of the above institutions promptly initiated
         collection action once an account became delinquent.

     OE loan collection guidelines stress the importance of
conducting an exit interview with each departing borrower.


                              10
B-164031(1)


It is often the last opportunity to remind the borrowers of
their loan obligations, to discuss the terms and conditions
of their loans, and to obtain current information to enable
the school to keep in contact with them.

     At the 4-year public institution we visited, which had
delinquency rates cf 14 percent and 16 percent in fiscal
years 1975 and 1976, respectively, there had been no regular
procedure until about a year ago to see that exit interviews
were conducted. At this institution, the business office
used the record of the exit interview to transfer the stu-
dent's account from in-school to out-of-school status. The
failure to conduct exit interviews resulted in students hav-
ing in-school status long after they had left school.  In
such cases, the students would not be promptly billed for
repayment. We checked the first 94 students listed on the
school's In-School Loan Journal and found that almost 20
percent of these individuals had been out of school for at
least one semester, and that in most cases, exit interviews
had not been conducted.

     At the community college, we found that no systematic
procedure existed for billing borrowers, as prescribed by
OE. After the students were out of school for some time,
they were each sent a copy of a repayment schedule. Such
a schedule should normally be provided at the time of the
exit interview. The institution did not require any ac-
knowledgement of the schedule from the borrower.

     When a scheduled payment was missed, a series of form
letters were dispatched at 10 to 14 day intervals. These
letters were not sent by certified or registered mail, and
no attempt was made to verify borrowers' addresses. In
some students' folders, we found letters returned as not
deliverable. The form letter specified neither the amount
nor the due date of the missed payment.

     We do not believe that the billing operation provided
maximum efficiency in servicing and collecting loans. This
institution reported delinquency rates of 62 and 68 percent
for fiscal years 1975 and 1976, respectively.

      According to OE procedures, an account is to be con-
sidered delinquent 4 months after the due date, and if col-
lection action has not already been initiated, then it should
begin.   It is generally agreed that the longer an account
is delinquent, the smaller the chance is for ultimate collec-
tion.

                             11
B-164031(1)



     Also, at this community college, we examined 3everal
accounts which were being turned over to a collection agency.
These accounts averaged 13.9 months overdue, ranging from
8 to 32 months. We looked at 49 accounts which had, as of
April 1976, been with a private collection agency an average
of 17.9 months. On the average, these accounts were 11.5
months overdue when they were turned over for collection.
Of the total $18,454.47 principal outstanding on these ac-
counts, the collection agency had collected $854.53. The
agency returned 14 accounts to the institution as uncollec-
tible. In our opinion, the lack of systematic billing and
collecting procedures was a contributing factor to this
institution's high delinquency rate.

     At the 4-year public institution which had a delin-
quency rate of 16 percent in fiscal year 1976, officials
said that prior to 1974, they had done little to collect
on delinquent accounts.  In the spring of 1974 a State col-
lection unit was established and the institution was re-
quired to turn all delinquent accounts over to this unit.
At the time of our visit, the institution had transferred
about 1,100 accounts; howev-r, it still had over 1,300
delinquent accounts in its cooks. A 1975 study by the
institution noted a large backlog of delinquent accounts
and recommended that temporary staff b% assigned to alle-
viate the problem. In our discussion with the business
officer, he said that collection of delinquent NDSL ac-
counts did not have a high priority in his overall opera-
tion. Be did not consider the hiring of temporary staff
to be a feasible solution.

     OE officials said that all these example, of inade-
quate loan servicing were violations of the requirements
now set forth in the interim regulations. They said that
failure to comply with the requirements could be grounds
for termination from the program, but that prior to the
regulations, adoption of such procedures was suggested
to participating institutions byv CE, but these were merely
suggestions which lacked the force of law.

     Conclusions and recommeandatiors

     We recognize that the delinquency problem is a diffi-
cult one; however, improvements in the performance of OE
and lending institutions can significantly reduce the de-'
linquency rate. The number of institutions experiencing
problems with NDSL borrowers becoming delinquent on their


                              12
B-164031(1)



accounts is increasing. It was apparent at the institutions
we visited that collection procedures prescribed by OE were
not being followed.  For example, exit interviews were not
held with borrowers leaving school; borrowers were not rou-
tinely billed for loan repayments; and prompt collection ac-
tions were not initiated on delinquent accounts.

     We recommend that you direct the Commissioner of Educa-
tion to instruct those institutions which have high or in-
creasing delinquency rates to follow prescribed collection
procedures, especially those noted above, and to assist
those institutions needing help in complying with procedures.
We further recommend that you direct the Cormissioner of
Education to conduct investigations at institutions which
persistently show high delinquency rates to determine if
they have been complying with OE procedures. Those in-
stitutions which refuse to cooperate should be suspended
or terminated from the program.

NEED TO EFFECTIVELY MONITOR
PARTICIPATING INSTITUTIONS

     The methods used to monitor the performance of insti-
tutions participating in the NDSL program have been:

     -- Review of fiscal operations reports and evaluation
        of applications which institutions submit to OE.

     -- Institutional program reviews by the 10 OE regional
        offices.

     -- Audits of the institutions' NDSL funds.

     OE has not checked on the accuracy of information
submitted by institutions. We found several instances of
inconsistent information being reported to OE by institu-
tions. Also, we question whether OE regional office per-
sonnel responsible for onsite reviews of the three campus-
based aid programs will be able to conduct program reviews
as recommended in an OE report on reducing program abuse.
In addition, there have not been adequate followups on
audits of institutions participating in the NDSL program,
and consequently backlogs have developed. OE officials
consistently pointed to a lack of staff as the reason for
these problems.




                              13
B-164031(1)



Need to improve fiscal operations reports

     Each year institutions participating in the NDSL pro-
gram must submit a fiscal operations report to OE. The
report contains information on (1) the financial status of
the NDSL funds, (2) the record of borrower repayments, can-
cellations, and delinquencies, and (3) collection activi-
ties. The application due date follows the deadline for
submission of fiscal operations reports by about 2 months.
Program officials told us that roughly 10 percent of the
institutions do not submit the fiscal operations reports
on time, but that only about 2 to 3 percent fail to sub-
mit them by the application due date.

     OE's processing of fiscal operations reports is com-
plicated and time consuming. After the data is keypunched,
it is checked for internal consistency.     Final editing and
tabulation of fiscal operations data can take from 2 :o 3
years. Data for fiscal years 1974 and 1975 was still being
tabulated as of March 1977.

     OE also does not check the accuracy of the information
that is reported. For example, institutions are allowed to
clair :n allowance for administrative expenses not exceeding
3 percent of the total amount of funds advanced to students
during the year.  If they enter an amount in excess of 3 per-
cent, t?1 report is returned with the error message stating
that the figure may not exceed 3 percent of the total funds
advanced. The institution may then change the administra-
tive expense claim to an acceptable figure. OE does not
verify whether the revised figure is correct or merely one
which satisfies the 3-percent criteria.

     In our visits to institutions, we found several cases
where the information reported on the fiscal operations
report did not reflect the information in the NDSL accounts
at the institution. Using the accounts and working with
institution officials, we could not reconcile the infor-
mation on the fiscal operations reports to the institutions'
records. At one institution a newly appointed business
officer cold not tell us how a particular section of the
report had been completed for the previous year.  Since
the institution's automated system did not furnish this
data, he could not tell us how this section of the report
would be prepared for the following year.

     Because of the lengthy delays and the absence of veri-
fication, we question the effectiveness of these fiscal

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B-164031(1)


operations reports as a source of information for use in
monitoring and evaluating an institution's performance.

     OE officials said that reconciliation of data reported
on the fiscal operations report and an institution's records
is an audit function to be performed when the institution's
NDSL funds are audited. They cited the interim regulations
which require all participating institutions to have their
programs audited no less than every 2 years. However, we
found that there has not been adequate followups on audit
exceptions in the past, and this new requirement in the
regulations can result in further backlogs in resolving
such exceptions unless changes are made.  (See p. 16.)
Need to conduct onsite program reviews

     Another way to assist and monitor an institution's
administration of the NDSL program is through onsite re-
views. Program staff at the OE regional offices are re-
sponsible for such reviews for all three campus-based aid
programs. In addition, the regions are responsible for
processing the institution's annual application for funds
and for providing day-to-day technical assistance. The
regional staffs report to the regional directors of HEW;
OE headquarters has little control over the activities
of the regions and provides little guidance on procedures
to be followed in monitoring institutions. For example,
OE headquarters has not provided regions with a standard
program review guide to be used during onsite visits, and,
therefore, the regions operate autonomously when conduct-
ing program reviews.

     During fiscal year 1976, more than 3,000 institutions
participated in the NDSL program. Forty-five OE staff
members were assigned to the 10 regions to monitor the three
campus-based programs. Tn its February 1976 report on pro-
gram integrity to the Senate and House Appropriations Com-
mittees, OE noted that due % the lack of regional staff
for monitoring institutions, one region had experimented
with contracting for cncitie rocram reviews. At one of
the regions we visited, we found the same practice occurring.
At a third region, contract employees were used, although
regional officials said that thev were not for routine moni-
toring of institutions. We asked OE program officials and
OE's regional liaison officer about the exte).t and cost of
contracting for such services, but they we-e unable to pro-
vide us with such data.



                            15
B-164031(1)



     According to OE's office of grant and procurement man-
agement, contract employees should not be used for technical
monitoring since this is a function of the Federal Govern-
ment, not to be delegated outside of OE.

     An OE report on reducing program abuse recommended that
institutions receive program reviews at least once every
3 years.  The report noted that in order to accomplish this,
additional staff would be required and each program officer
would have to perform a minimum of 25 reviews each year.
Based on our work at the three regions we visited, we ques-
tion whether OE will gs able to achieve this objective. The
three regions were responsible for almost half of the in-
stitutions participating in the NDSL program for fiscal
year 1976. On the average, there was one program officer
for every 102 institutions, and program officers averaged
14 program reviews a year. At one of the regions, the pro-
gram officers averaged nine reviews.

      The OE report cited above contained a draft of a stand-
ard program review checklist to be used by all of the regions.
It also included a proposed management agreement whereby the
Rergional Commissioner and Deputy Commissioner for Postsecond-
ary Education would agree to performing an established number
of program reviews each year to see that each institution
received a review at least once every 3 years. This proposal
and the standard checklist have not yet been adopted.   Pro-
gram officials said that these matters were still under con-
sideration.

Need to resolve audit exceptions

     Until the interim regulations were published in Novem-
ber 1976, there were no requirements for institutions to
have their NDSL accounts audited. With the new regulations,
an audit must be performed at least biennially.   In the
early days of the program, some audits were dont: by the HEW
Audit Agency.  In fiscal year 1967 the HEW Audit Agency be-
gan accepting audits by private accounting firms.   Since
then, most of the audits of NDSL funds have been done by
private firms, and the HEW Audit Agency does fewer than
5 percent of the audits.

     Audits by private accounting firms are reviewed by the
HEW Audit Agency and then by the NDSL program staff.  Before
the audits are closed, program staff members work with institu-
tions to resolve significant deficiencies.  This may require


                             16
B-164031(1)



a considerable amount of time on the part of program offi-
cials and institutions.

     In fiscal year 1976, 1,010 audits of the NDSL program
were performed. Staffing limitations have curtailed ade-
quate followups on the audits, and consequently backlogs
have developed. Now that the program regulations require
audits every other year, it can be expected that the back-
logs in following up audit exceptions will increase, unle3s
procedural changes are made or more staff is assigned to
the resolution of audits.

Lack of program staff

     There have been differences between the Administration
and the Congress over continuing the NDSL program. OE pro-
gram officials pointed to a lack of staff as the main rea-
son that more attention had not been devoted to resolving
problems in the administration of the NDSL program. OE has
advised the Congress that from fiscal years 1970 to 1976,
the combined OE headquarters and regional staff assigned
to the campus-based programs increased by 6 percent. Dur-
ing the same period the number of participating institu-
tions increased by 77 percent, and the amount of newly
awarded Federal funds increased by 95 percent.

     The fiscal year 1977 budget approved an additional
70 positions for the three campus-based programs, 24 of
which were to be for the NDSL program. OE believes that
if these positions are filled, it would significantly con-
tribute to the detection, prevention, and control of the
problems noted in our review.

Conclusions and recommendations

     We recommend that you direct the Commissioner of
Education to modify the processing of fiscal operations
reports to allow for more timely tabulation of the data
furnished by institutions. Also, OE should periodically
test the accuracy of information on the fiscal operations
reports to see whether it agrees with institutions' rec-
ords. This could be done on a sample basis.

     We also recommend that you direct the Commissioner
to develop guidelines on conducting onsite reviews of the
NDSL program for the use of regional staffs, and establish
a system for periodic program reviews of all participating


                             17
B-164031(1)



institutions. The practice of contracting for program re-
views in place of OE staff reviews should be stopped.

     If the NDSL program is to continue, we believe that the
shortcomings recognized by OE and the problems we have noted
will not change unless necessary resources are applied to
monitor the administration of the NDSL program and to pro-
vide technical assistance to participating institutions.



     As you know, section 236 of the Legislative Reorganiza-
tion Act of 1970 requires the head of a Federal agency to
submit a written statement on actions taken on our recom-
mendations to the House Committee on Government Operations
and the Senate Committee on Governmental Affairs not later
than 60 days after the date of the report and to the House
and Senate Committees on Appropriations with the agency's
first request for appropriations made more than 60 days
after the date of the report.

     We are sending copies of this letter to the Senate Com-
mittee on Governmental Affairs; the House Committee on Gov-
ernment Operations; the Senate Committee on Humah Resources;
the House Committee on Education and Labor; the House Commit-
tee on Appropriations; and the Subcommittee on Labor and
Health, Education and Welfare, Senate Committee on Appropria-
tions.  Copies are being sent to the Director, Office of
Management and Budget; the Assistant Secretary for Education;
the Assistant Secretary, Management and Budget; and the Com-
missioner of Education.

     We appreciate the cooperation and assistance given our
staff during the work.
                             Sincerely yours,




                              irector




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