> ![](media/image1.png){width="0.9in"
> height="0.8604166666666667in"}**UNITED STATES DEPARTMENT OF
> EDUCATION**

OFFICE OF INSPECTOR GENERAL

August 1, 2008

Control Number

### ED-OIG/A19H0011

Lawrence A. Warder

Acting Chief Operating Officer

Federal Student Aid

U.S. Department of Education

830 First Street, NE, Suite 112G1

Washington, DC 20002

Dear Mr. Warder:

This **Final Audit Report**, entitled *Audit of the Department's Process
for Disbursing Academic Competitiveness Grants and National Science and
Mathematics Access to Retain Talent Grants*, presents the results of our
audit. The objectives of our audit were to identify and assess the
adequacy of processes and controls established by Federal Student Aid
(FSA) to ensure (1) students potentially eligible for an Academic
Competitiveness Grant (ACG) or National Science and Mathematics Access
to Retain Talent (SMART) Grant are appropriately identified and
notified, as well as applicable schools; (2) only eligible students have
received grants under these programs; and (3) schools required to
participate in the ACG and/or National SMART Grant program are doing so.
Our review included award years (AY) 2006-2007 and 2007-2008, with a
particular focus on program implementation in AY 2006-2007.

BACKGROUND

On February 8, 2006, President Bush signed into law the Deficit
Reduction Act of 2005 (Act) (Pub. L. No. 109-171). Included as a
subtitle within the Act is the "Higher Education Reconciliation Act of
2005" (HERA). HERA contained a new student grant program, the Academic
Competitiveness Grant Program, itself comprised of two separate grants:
the ACG and National SMART Grant. These grants were established to
encourage students to take more challenging courses in high school and
to pursue college majors in high demand in the global economy, such as
science, mathematics, technology, engineering, and critical foreign
languages. HERA mandated that \$790 million be appropriated for these
programs in fiscal year (FY) 2006, with a total of \$4.53 billion to be
appropriated through FY 2010. Funds not expended in one year are to be
carried forward to support awards in subsequent years. The programs were
effective July 1, 2006, thus ensuring awards could be made for the
2006-2007 award year.

Under the ACG program, students may receive up to \$750 (first-year ACG)
or \$1,300 (second-year ACG) to pay for higher education, provided they
have successfully completed a rigorous secondary school program of study
after January 1, 2006 for a first-year ACG or January 1, 2005 for a
second-year ACG. A rigorous secondary school program of study is one
that is established by a State or local educational agency and
recognized by the Secretary of Education (Secretary) as such. First-year
recipients must not have been previously enrolled in an undergraduate
program, and second-year recipients must have attained at least a 3.0
grade point average (GPA) in their first year of undergraduate
education.

Under the National SMART Grant program, qualifying third- and
fourth-year students may receive up to \$4,000 per year to pay for
higher education if majoring in mathematics, science, technology,
engineering, or a critical foreign language, as determined by the
Secretary in consultation with the Director of National Intelligence
(DNI). Recipients must also maintain a cumulative GPA of 3.0 in the
coursework required for their major.

Both programs require that recipients be U.S. citizens, receiving a
Federal Pell Grant during the same award year, and enrolled full-time in
a degree program. Taken together with other Federal, State, and school
student aid, grants cannot exceed a student's cost of attendance.
Program funding in excess of the amount needed to fund grants in a given
year can be carried over for use in subsequent years; conversely, if the
mandatory funding level is insufficient to fund program grants, grant
levels can be ratably reduced.

Students who are potentially eligible for an ACG award are notified upon
submitting the Free Application for Federal Student Aid (FAFSA).[^1]
Paper filers receive a comment on their Student Aid Report directing
them to answer additional questions regarding their eligibility --
specifically, the rigorous secondary school program of study completed
-- either online or by calling the Federal Student Aid Information
Center. Students using FAFSA on the Web are given the opportunity to
respond to these questions at the time they file. If it appears the
applicant might qualify for an ACG, FSA notifies the institution(s)
listed on their FAFSA. The institution must then obtain and review
documentation to support the student's statements. If deemed eligible, a
new award is created in the Common Origination & Disbursement (COD)
System. Data submitted by the institution is then matched to data in the
Central Processing System (CPS) to validate student eligibility, and
school eligibility is also confirmed through a check of data in the
Postsecondary Education Participant System (PEPS). If the student fails
to meet the necessary criteria, the school will receive a rejection
edit; if the new award is accepted, the COD System will process the
grant and permit the school to draw down funds for disbursement.[^2]

During AY 2006-2007, approximately \$242 million in ACG funds were
disbursed to 310,000 students, and approximately \$206 million in
National SMART Grant funds were disbursed to 64,000 students. As of May
9, 2008 -- 10 months into AY 2007-2008 -- approximately \$284 million in
ACG funds have been disbursed to 391,000 students, and approximately
\$184 million in National SMART Grant funds have been disbursed to
64,000 students.

AUDIT RESULTS

Except as noted below, we found FSA has generally established adequate
processes and controls over the ACG and National SMART Grant
programs.[^3] Specifically, we found FSA has instituted an effective
process for identifying and notifying potentially eligible applicants
and applicable schools, and ensuring only eligible students have
received grants. However, we noted FSA did not conduct sufficient
follow-up with non-participating schools to ensure those required to
participate in the ACG and/or National SMART program were doing so,
including but not limited to verifying statements regarding school
eligibility. As a result, funds may not have been made available to
students who were eligible for an ACG or National SMART Grant.

In its response to the draft audit report, FSA concurred with the
finding and its associated recommendations. FSA also provided corrective
actions designed to improve its oversight of school compliance with the
mandatory institutional participation requirement. The complete text of
the response is included as an Attachment to this report.

######### FINDING -- FSA Needs To Improve Its Oversight of School Compliance with the Mandatory Institutional Participation Requirement

 

Improvement is needed in FSA's monitoring of schools for compliance with
the ACG and National SMART Grant mandatory institutional participation
requirement. Specifically, we noted FSA did not conduct sufficient
follow-up with non-participating schools to ensure those required to
participate in the programs were doing so.

We reviewed information on school outreach provided by FSA, as well as
AY 2006-2007 disbursement data obtained from the COD System, and noted
the following:

[ACG Program]{.underline}

-   Of the 640 non-participating, potentially ACG-eligible schools on
    FSA's outreach list, 330 (52 percent) never responded.

    -   We selected a random sample of 75 (23 percent) of these schools
        and, through a review of available institutional data, found
        that 62 (83 percent) appeared to be eligible to participate in
        the ACG program.

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-   Of the 310 potentially ACG-eligible schools that responded when
    contacted by FSA, 70 (23 percent) stated their non-participation was
    due to the school itself being ineligible.[^4]

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-   We reviewed available data for all 70 of these schools and found
    that 51 (73 percent) appeared to be eligible to participate in the
    ACG program.[^5]

[National SMART Grant Program]{.underline}

-   Of the 425 non-participating, potentially National SMART
    Grant-eligible schools on FSA's outreach list, 218 (51 percent)
    never responded.

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-   We selected a random sample of 67 (31 percent) of these schools and,
    through a review of available institutional data, found that 18 (27
    percent) appeared to be eligible to participate in the National
    SMART Grant program.

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-   Of the 207 potentially National SMART Grant-eligible schools that
    responded when contacted by FSA, 64 (31 percent) stated their
    non-participation was due to the school itself being ineligible.

    -   We reviewed available data for all 64 of these schools and found
        that 14 (22 percent) appeared to be eligible to participate in
        the National SMART Grant program.

Under 34 C.F.R. § 691.7(a) and (b),[^6] an institution that offers one
or more eligible programs, as defined in § 691.2(d), for purposes of the
ACG and/or National SMART Grant program(s), and that participates in the
Federal Pell Grant program under 34 C.F.R. Part 690, must participate in
the ACG and/or National SMART Grant program(s).

An eligible program, for purposes of the ACG program, is defined at 34
C.F.R. § 691.2(d)(1) as any program that leads to an associate's degree
or a bachelor's degree; is a two-academic-year program acceptable for
full credit towards a bachelor's degree; or is a graduate degree program
that includes at least 3 academic years of undergraduate education.

An eligible program, for purposes of the National SMART Grant program,
is defined at 34 C.F.R. § 691.2(d)(2) as any program that leads to a
bachelor's degree in an eligible major or is a graduate degree program
in an eligible major that includes at least 3 academic years of
undergraduate education. An eligible major is defined at 34 C.F.R. §
691.17(a) and (b) as any major in one of the physical, life, or computer
sciences; mathematics; technology; engineering; or a critical foreign
language, as determined through consultation with the DNI, that has been
designated by the Secretary as eligible for the National SMART Grant
program.

A coordinating technical amendment at 34 C.F.R. § 690.7(a)(1) and (2) --
the Federal Pell Grant program regulations -- states that an institution
may not participate in the Federal Pell Grant program if the institution
offers at least one eligible program for purposes of the ACG and/or
National SMART Grant program(s), as defined in 34 C.F.R. § 691.2(d), but
does not participate in the ACG and/or National SMART Grant program(s).

To track non-participating schools, we noted FSA relied solely on an
Excel spreadsheet, edited by multiple individuals and based on
information obtained through telephone calls to financial aid
administrators. We found comments regarding the reasons schools did not
report disbursements were sometimes phrased in such a way as not to
allow for a clear determination regarding school eligibility, and/or
provided insufficient information or reasoning. We also noted this field
was often left blank, suggesting follow-up did not occur, and, as stated
above, later determined that over 50 percent of the schools contacted by
FSA never responded.

We learned FSA had relatively little time to implement the programs on
both the regulatory and operational levels. As a result, certain
processes related to compliance monitoring, including school outreach,
were not formalized.

Recently, FSA and the Office of Postsecondary Education discussed an
outreach plan for AY 2007-2008 that involved collecting certifications
from non-participating schools. E-mails were subsequently disseminated
to schools that appeared to be eligible for at least one of the programs
but had not yet submitted disbursement records. The e-mails requested
that each affected school review its records and complete a
certification stating whether it (1) has no eligible students, (2) has
identified eligible students and will send origination and disbursement
records by a specified date, or (3) will not be participating in the ACG
and/or National SMART Grant program(s) and will consequently withdraw
from the Federal Pell Grant program. Schools with no eligible students
were also asked to indicate whether they have procedures in place to
review all students who may be ACG or National SMART Grant-eligible in
future award years. The notification further stated schools that fail to
participate when they have eligible students would be referred to FSA's
School Participation Team and the Office of Administrative Action and
Appeals for a possible fine. FSA officials stated this certification
system would replace the spreadsheet system used for AY 2006-2007.

Because potentially eligible schools did not participate in the
programs, funds may not have been made available to students who were
eligible for an ACG or National SMART Grant. Of the \$790 million
appropriated for these programs for FY 2006, approximately \$448 million
(57 percent) was disbursed.[^7] Under-participation may have also
contributed to the Administration's proposal to rescind \$652 million in
unobligated balances in its FY 2009 budget, as it is thought remaining
balances are sufficient to meet estimated demand in these programs
through the 2010-2011 academic year.

**Recommendations**

We recommend that the Acting Chief Operating Officer take the following
actions to ensure schools required to participate in the ACG and/or
National SMART Grant programs do so:

1.  Establish and implement procedures for a formal, rigorous outreach
    and assessment process, to include the recent certification process.

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1.  Establish a program of administrative action under 34 C.F.R. Part
    668, Subpart G, to include fines and suspension or termination from
    the Federal Pell Grant program, for schools that offer eligible
    programs and enroll eligible students but do not participate in the
    ACG and/or National SMART Grant programs.

**FSA Response**

In its response to the draft audit report, FSA concurred with the
finding and its associated recommendations. FSA stated it views the
results of the audit as an opportunity to further enhance school
participation rates and to strengthen the effectiveness of its
procedures for monitoring schools' compliance with participation
requirements. This includes the collection of certifications from
potentially eligible but non-participating schools, as well as the
referral of eligible, non-participating schools for adverse
administrative action. FSA noted the recently-enacted "Ensuring
Continued Access to Student Loans Act of 2008" (Pub. L. No. 110-2270)
made important changes to the ACG and National SMART Grant programs
concerning eligibility, effective January 1, 2009, and that it believes
the expanded criteria will reduce the administrative barriers that may
have contributed to school participation rates during the first two
years of the programs.

OBJECTIVES, SCOPE, AND METHODOLOGY

The objectives of our audit were to identify and assess the adequacy of
processes and controls established by FSA to ensure (1) students
potentially eligible for an ACG or National SMART Grant are
appropriately identified and notified, as well as applicable schools;
(2) only eligible students have received grants under these programs;
and (3) schools required to participate in the ACG and/or National SMART
Grant programs are doing so.

To accomplish our objectives, we performed a review of internal control
applicable to the Department's process for disbursing ACG and National
SMART Grants. We reviewed statutory and regulatory requirements,
policies and procedures, operational guidance, and Dear Partner Letters.
We held discussions with FSA officials to obtain an understanding of the
award, disbursement, and monitoring processes. We reviewed prior audits
concerning the Federal Pell Grant disbursement process in FSA for
possible vulnerabilities. We reviewed data from various financial aid
systems and other materials related to the ACG and National SMART Grant
programs as further described below.

The scope of our review included AYs 2006-2007 and 2007-2008, with a
particular focus on program implementation in AY 2006-2007.

To achieve our first objective, we discussed with FSA the process for
identifying and notifying potentially eligible students using data
available in CPS, reviewed related procedures, and obtained templates of
notification emails and letters sent to students and parents at the
start of AY 2006-2007. Copies of actual communications were not
retained.

For our second objective, we obtained AY 2006-2007 ACG and National
SMART Grant recipient data from the COD System and evaluated each
universe for potentially ineligible students by verifying citizenship
and Federal Pell Grant receipt using IDEA data analysis software. We
also confirmed disbursements were made to students in appropriate grade
levels for the award received and, for the ACG program, reviewed for
information on recipient ages to identify any outliers. In addition, we
obtained from FSA data on schools that received a warning message for
students who received grants under the ACG and National SMART Grant
programs but no corresponding Federal Pell Grant. Our analysis of the
COD System data also enabled us to determine the number of unique
recipients, total funds disbursed, and number of schools that made
disbursements under each program.

To achieve our third objective, we reviewed information on school
outreach conducted by FSA in April/May 2007 to determine the reasons
potentially eligible schools gave for not participating in the programs.
We then compared this data with school funding data from the COD System
to determine whether any of these schools later made disbursements, and
removed those that did from the outreach lists. We used the National
Center for Education Statistics' Integrated Postsecondary Education Data
System (IPEDS) and school websites to research those schools that stated
they did not participate because they did not offer eligible degree
programs. We reviewed 70 potentially ACG-eligible schools, out of 310
total responders (23 percent). For the potentially National SMART
Grant-eligible schools, we reviewed only those that did not appear to
have a religious, art, or medical affiliation, as it was deemed likely
these schools would not offer National SMART Grant-eligible majors.
There were 64 such schools, out of 207 total responders (31 percent).

We also randomly selected 75 out of 330 (23 percent) potentially
ACG-eligible schools and 67 out of 218 (31 percent) potentially National
SMART Grant-eligible schools that did not respond to FSA's outreach
efforts, and reviewed associated IPEDS data and school websites to
determine whether they were eligible to participate in the programs.

[]{.mark}

To achieve our objectives, we relied on computer-processed data obtained
from CPS, COD, the National Student Loan Database System, IPEDS, and
PEPS. To test the reliability of this data, we compared detailed system
data to available summary data. Based on our analysis, we determined the
computer-processed data was sufficiently reliable for the purposes of
our review.

We conducted fieldwork at Department offices in Washington, DC, during
the period October 2007 through March 2008. We provided our audit
results to FSA staff during an exit conference conducted on May 12,
2008. Our audit was performed in accordance with generally accepted
government auditing standards appropriate to the scope of the review
described above.

ADMINISTRATIVE MATTERS

Corrective actions proposed (resolution phase) and implemented (closure
phase) by your office will be monitored and tracked through the
Department's Audit Accountability and Resolution Tracking System
(AARTS). Department policy requires that you develop a final corrective
action plan (CAP) for our review in the automated system within 30 days
of the issuance of this report. The CAP should set forth the specific
action items, and targeted completion dates, necessary to implement
final corrective actions on the finding and recommendations contained in
this final audit report.

In accordance with the Inspector General Act of 1978, as amended, the
Office of Inspector General is required to report to Congress twice a
year on the audits that remain unresolved after six months from the date
of issuance.

Statements that managerial practices need improvements, as well as other
conclusions and recommendations in this report, represent the opinions
of the Office of Inspector General. Determinations of corrective action
to be taken will be made by the appropriate Department of Education
officials.

In accordance with the Freedom of Information Act (5 U.S.C. §552),
reports issued by the Office of Inspector General are available to
members of the press and general public to the extent information
contained therein is not subject to exemptions in the Act.

We appreciate the cooperation given us during this review. If you have
any questions, please call Michele Weaver-Dugan at (202) 245-6941.

> Sincerely,

Keith West /s/

> Assistant Inspector General for Audit Services

cc: Martha Benjamin, Audit Liaison Officer, FSA

Marge White, Audit Liaison Officer, FSA

Pat Howard, Director, Student Financial Assistance Advisory and
Assistance Team, OIG

Attachment

**Attachment**

TO: Keith West

Assistant Inspector General for Audit Services

FROM: Lawrence A. Warder

Acting Chief Operating Officer

Federal Student Aid

SUBJECT: Draft Audit Report

Department\'s Process for Disbursing Academic Competitiveness Grants

> and National Science and Mathematics Access to Retain Talent Grants
>
> ED-OIG/ A19-H0011

Thank you for the opportunity to respond to the draft audit report,
Control Number ED-OIG/A19-H0011, entitled Department\'s Process for
Disbursing Academic Competitiveness Grants and National Science and
Mathematics Access to Retain Talent Grants.

Federal Student Aid concurs with the findings and recommendations as
presented in the report. The OIG has acknowledged that Federal Student
Aid has generally established adequate processes and controls over the
ACG and National SMART Grant programs, specifically noting that Federal
Student Aid has instituted an effective process for identifying and
notifying potentially eligible applicants and applicable schools, and
largely ensuring only eligible students have received grants. Federal
Student Aid was presented with a particularly difficult implementation
challenge for the 2006-2007 award year that was the focus of the OIG's
investigation.

Federal Student Aid views the results of the OIG audit as an opportunity
to further enhance school participation rates and to strengthen the
effectiveness of our procedures for monitoring schools' compliance with
participation requirements. Our response to the OIG's audit follows with
the noted exceptions:

Finding 1: FSA Needs To Improve Its Oversight of School Compliance with
the Mandatory Institutional Participation Requirement

**Recommendation 1.1:** Establish and implement procedures for a formal,
rigorous outreach and assessment process, to include the recent
certification process.

**Federal Student Aid Response:** Federal Student Aid agrees with this
recommendation and has begun a more formal process for ensuring that
eligible schools are participating in the two programs. For the
2007-2008 award year, Federal Student Aid began collecting
certifications from apparently eligible schools that were not yet
participating schools. E-mails were subsequently disseminated to schools
that appeared to be eligible for at least one of the programs but had
not yet submitted disbursement records. The e-mails requested that each
affected school review its records and complete a certification stating
whether it (1) has no eligible students, (2) has identified eligible
students and will send origination and disbursement records by a
specified date, or (3) will not be participating in the ACG and/or
National SMART Grant program(s) and will consequently withdraw from the
Federal Pell Grant program. Schools with no eligible students were also
asked to indicate whether they have procedures in place to review all
students who may be ACG or National SMART Grant-eligible in future award
years. The notification further stated schools that fail to participate
when they have eligible students would be referred to Federal Student
Aid's School Participation Team and the Office of Administrative Actions
and Appeals for a possible fine.

**Recommendation 1.2:** Establish a program of administrative action
under 34 C.F.R. Part 668, Subpart G, to include fines and suspension or
termination from the Federal Pell Grant program, for schools that offer
eligible programs and enroll eligible students but do not participate in
the ACG and/or National SMART Grant programs.

**Federal Student Aid Response:** Federal Student Aid agrees and plans
on making such referrals for administrative action before the end of the
2008-2009 award year. Recently, President Bush signed into law the
*Ensuring Continued Access to Student Loans Act of 2008* (ECASLA) (Pub.
L. No 110-2270). ECASLA made important changes to ACG and National SMART
Grant programs effective January 1, 2009 that will make part-time and
eligible non-citizens eligible. In addition, students in certificate
programs will also be eligible for ACG and 5^th^ year students will be
eligible for National SMART Grants. We believe these expanded
eligibility criteria will reduce the administrative barriers that may
have contributed to school participation rates in these programs. Given
these changes we believe that Spring 2009 is the best timeframe to
assess institutional participation and begin compliance activities.

If you have any questions please contact Kathleen Wicks Director, Grant
Operations at (202) 377- 3110.

[^1]: As most applicants had already submitted their FAFSA for AY
    2006-2007, FSA identified students potentially eligible for an ACG
    during the first year of the program using data available in the
    Central Processing System. These students, as well as parents for
    whom email addresses were provided on the FAFSA, were notified via
    email or letter on or around July 1, 2006, and directed to either
    visit an FSA website or call the Federal Student Aid Information
    Center for an additional eligibility assessment.

[^2]: A similar process is not used for the National SMART Grant because
    the FAFSA does not require students to identify their majors or
    major program GPA -- key criteria for the grant. Without this
    information, it would be very difficult to effectively narrow down
    the list of applicants to only those who might be eligible for a
    National SMART Grant. Furthermore, schools should have this
    information readily available in their student records.

[^3]: Conclusions on the adequacy of controls are limited to those
    controls in place at FSA and do not include controls in place at the
    individual institutional level.

[^4]: Other common responses, in addition to "no eligible students",
    were: (1) technical issues, i.e., rejected submissions, problems
    with upgrades, etc.; (2) use of a homegrown system/no CIP
    \[Classification of Instructional Program\] codes; (3) personnel
    issues, i.e., lack of training, new financial aid staff, etc.; and
    (4) slow screening of students.

[^5]: For both programs, we did not select for review schools that
    stated they had no eligible students, technical issues, personnel
    issues, etc., as these reasons for non-participation could be
    verified only by site visits to the individual schools. 

[^6]: The Department issued interim final regulations on July 3, 2006,
    effective for the 2006-2007 AY, and final regulations on November 1,
    2006, effective for the 2007-2008 AY (and the 2006-2007 AY, at the
    institution's discretion).

[^7]: An additional \$850 million was appropriated for these programs
    for FY 2007. According to FSA, as of May 9, 2008, approximately
    \$468 million (55 percent) has been disbursed.