February 19, 2004

#### Mr. Terrell Harrison

######## President and CEO

######## National Education Center -- Spartan School of Aeronautics

Tulsa International Airport

8820 E. Pine St.

P.O. Box 582833

Tulsa, Oklahoma 74158-2833

Dear Mr. Harrison:

This **Final Audit Report** (Control Number ED-OIG/A06-D0016) presents
the results of our audit of National Education Center -- Spartan School
of Aeronautics' compliance with Student Financial Assistance program
eligibility requirements, under Title IV of the Higher Education Act of
1965, as amended (HEA). Our objective was to determine if National
Education Center -- Spartan School of Aeronautics (NEC) disbursed Title
IV aid to students enrolled in ineligible, non-degree Federal Aviation
Administration (FAA) certified flight-training programs.

A draft of this Office of Inspector General (OIG) report was provided to
NEC. NEC did not agree with our finding and recommendations. We have
summarized NEC's comments after the Recommendation section in this
report. A copy of NEC's response is included as an Attachment to this
report.

NEC is a proprietary school, and its main campus is in Tulsa, Oklahoma.
The school received initial approval to participate in the Title IV,
Student Financial Assistance programs on March 24, 1967. The Accrediting
Commission of Career Schools and Colleges of Technology (Accrediting
Agency) accredited NEC. The school is licensed by the Oklahoma Board of
Private Vocational Schools (State Agency) and certified by the FAA.

NEC offers flight-training programs in which students may earn
baccalaureate degrees, associate degrees, or Professional Pilot
non-degree diplomas. The Professional Pilot non-degree diploma (diploma)
program is intended for individuals with no previous flight experience
who want to obtain the necessary FAA ratings to become a professional
pilot. At NEC, these individuals can enroll in one of three diploma
programs, ranging in length from 57 credit hours to 71 credit hours.

Each of the three non-degree diploma programs provide core ground school
and flight courses that allow a student to earn a Private Pilot rating,
Commercial Pilot rating, and Instrument rating (Professional Pilot Core
Courses) from the FAA. The three non-degree diploma programs also offer
the Certified Flight Instructor rating and the following additional FAA
ratings:

-   Certified Flight Instructor Instrument, under the 57-credit-hour
    Professional Pilot Option 1 (PP1) program, offered from January 1,
    1991, to May 1, 1998, as a 76-credit-hour program.

-   Multiengine, under the 57-credit-hour Professional Pilot Option 2
    (PP2) program, first offered in 1998.

-   Certified Flight Instructor Instrument, Multiengine Flight
    Instructor, and Multiengine, under the 71-credit-hour Professional
    Pilot Option 3 (PP3) program, first offered in 1998.

NEC also offers other Title IV eligible programs; in total, NEC
disbursed over \$19 million in Title IV aid for the award year July 1,
2000, through June 30, 2001. This amount included \$15.51 million in
Federal Family Education Loan (FFEL) Program loans (PLUS, Subsidized,
and Unsubsidized Loans), \$3.22 million in Federal Pell Grants (Pell),
\$187,956 in Federal Supplemental Educational Opportunity Grant (FSEOG),
and \$86,490 in Federal Work Study (FWS).

NEC disbursed Title IV aid to students enrolled in two ineligible
programs. We concluded that although the Department of Education
(Department) approved only one program, the 57-credit-hour PP1 "Aircraft
Pilot and Navigator (Professional)" program, NEC disbursed Title IV aid
for attendance in two additional Professional Pilot programs (PP2 and
PP3) that were not approved by the Department. For the period July 1,
2000, through June 30, 2002, NEC disbursed approximately \$312,000 in
Title IV aid to students enrolled in these two ineligible programs.

**Title IV Program Eligibility Requirements**

If a school adds a program after it has become eligible to participate
in the Title IV programs, that program may, under certain circumstances,
be considered eligible for Title IV funds without notification to the
Department. However, this interim program eligibility does not continue
indefinitely. When the school's eligibility is recertified, the school
must report that new program on the Application for Approval to
Participate in the Federal Student Financial Aid Programs (Application)
it submits to the Department.

-   "An eligible institution that adds an educational program after it
    has been designated as an eligible institution by the Secretary does
    not have to apply to the Secretary to have that additional program
    designated as an eligible program of that institution if the
    additional program . . . \[p\]repares students for gainful
    employment in the same or related recognized occupation as an
    educational program that has previously been designated as an
    eligible program at that institution by the Secretary . . . ." (34
    C.F.R. § 600.10(c)(2))

-   "If an institution participates in the title IV, HEA programs, the
    Secretary's designation of the institution as an eligible
    institution under the title IV, HEA programs expires when the
    institution's program participation agreement . . . expires." (34
    C.F.R. § 600.10(d)(1))

-   "A currently designated eligible institution . . . must apply to the
    Secretary for a determination that the institution continues to meet
    the requirements in this part and in 34 CFR part 668 if the
    institution wishes to . . . \[c\]ontinue to participate in the title
    IV, HEA programs beyond the scheduled expiration of the
    institution's current eligibility and certification designation . .
    . ." (34 C.F.R. § 600.20(b)(2)(i))

-   "To satisfy the requirements . . . of this section, an institution
    must apply in a format prescribed by the Secretary for that purpose
    and provide all the information and documentation requested by the
    Secretary to make a determination of its eligibility and
    certification." (34 C.F.R. § 600.20(d))

-   Section E of the Department's Application states, "Please provide
    the following information for each educational program that you are
    requesting be eligible to participate in federal student financial
    aid programs." Items 26 through 28 in Section E request identifying
    and other information concerning each program the school wishes to
    be eligible for federal student financial aid.

**The Institution Failed to Obtain Approval from the Department for
Certificate Programs**

According to its Financial Aid Administrator, NEC added the PP2 and PP3
programs to its curriculum in 1998. Since these programs are similar to
the approved PP1 program, already offered by the school, and since they
meet other regulatory requirements, NEC was not required to inform the
Department immediately in order for PP2 and PP3 to be considered
eligible programs, and students were eligible to receive Title IV funds
to attend the two new programs.

However, when NEC was required to submit an Application for
recertification, the Application it sent to the Department (updated on
March 21, 2000) did not include the PP2 and PP3 programs. As a result,
the Department did not approve PP2 and PP3 as eligible programs. Since
NEC's previous Program Participation Agreement (PPA) expired on June 30,
2000, the PP2 and PP3 programs lost Title IV eligibility on that date.

NEC may have obtained approval for its PP2 and PP3 programs as late as
July 1, 2000, without an interruption of those programs' eligibility for
Title IV funds. NEC failed to seek this approval. The PP2 and PP3
programs were not included in NEC's Application dated March 21, 2000,
nor on a subsequent Application dated June 5, 2001, which reported a
change of ownership. NEC's June 1, 2000, Eligibility and Certification
Approval Report (ECAR) reflects only one eligible Professional Pilot
program.

On the ECAR, the Department lists programs that meet the program
eligibility requirements. The 2000/2001 Student Financial Aid Handbook
(Handbook) states---

> The ECAR contains the most critical of the data elements that form the
> basis of the school's approval and also a list of the highest level of
> offering, any nondegree program or short-term programs, and any
> additional locations that have been approved for the SFA Programs.

For the purpose of our audit, we are questioning the approximately
\$312,000 in Title IV aid disbursed to students enrolled in the PP2 and
PP3 programs for the time period of July 1, 2000, through June 30, 2002,
and the Title IV aid disbursed after June 2002, for periods during which
the PP2 and PP3 programs were not approved by the Department.

We recommend that the Chief Operating Officer for Federal Student Aid
require NEC to---

1.  Take appropriate action to ensure that funds are not disbursed to
    students in PP2 and PP3 until program eligibility is established.

2.  Refund to lenders PLUS loan funds of \$114,090, subsidized loan
    funds of \$71,034, and unsubsidized FFEL loans of \$82,622 for award
    years 2000/2001 and 2001/2002, plus applicable interest.

3.  Refund to the Department Pell funds of \$37,203 and FSEOG funds of
    \$7,200 for award years 2000/2001 and 2001/2002.

4.  Calculate and pay the amount of all Title IV funds disbursed to
    students at NEC enrolled in the PP2 and PP3 programs after June 30,
    2002, plus applicable interest, for periods during which the
    Department did not approve those programs.

NEC did not concur with our finding and recommendations. A copy of the
letter from NEC is included as an Attachment to this report. In its
letter, NEC stated that---

-   At the time of recertification in March 2000, the Case Management
    Team in Dallas advised NEC that since the three Professional Pilot
    Programs offered were essentially the same program, with three
    options, the program only needed to be reported once on the
    institution's application. NEC continued to act on this advice when
    it submitted its change of ownership application in July 2001, and
    did not list the programs separately.

[]{.mark}

-   OIG auditors stated twice during the exit interview that PP2 and PP3
    were in fact eligible programs, except for the reporting omission.
    The programs were approved by both the state licensing authority and
    accrediting agency. PP1 and PP2 have the same number of credit hours
    and include nearly identical courses, and there is no reason that
    the Department would not have approved the programs if NEC had
    included them on its application. NEC states, "The OIG argument
    elevates form over substance and is unreasonable."

[]{.mark}

-   The OIG has no basis for contending that program eligibility expired
    when NEC applied for recertification. According to 34 C.F.R. §
    600.10(c)(3) an institution is only liable to repay the Secretary if
    it incorrectly determines a program meets all regulatory
    requirements. NEC does not believe that it made the wrong
    determination for the two additional Professional Pilot programs.

-   External audits have not raised any issues related to program
    eligibility. Since March 2000 NEC has had three external audits
    conducted, none of which had any liability assessed or any findings
    related to program eligibility.

In addition, NEC did not agree with our recommendations. NEC asked us to
recommend that the Chief Operating Officer for Federal Student Aid
require NEC to submit a new application to the Department, which would
include the two other versions of the Professional Pilot programs, and
not require NEC to pay any amounts to lenders or to the Department.

[]{.mark}

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We have not changed our finding or recommendations. NEC's response did
not provide any information to contradict the fact that the programs PP2
and PP3 have not been on its ECAR since March 2000.

NEC's response stated that it was advised by the Dallas Case Management
Team not to list the two additional programs on the ECAR; however, NEC
did not provide sufficient detail or evidence to corroborate its
position that it relied on advice from Case Management. NEC also stated
that the three programs were essentially the same programs; however,
NEC's catalog shows the programs as separate programs, and each program
received separate approval by the accrediting and state agencies.
Although the programs' core courses are the same, the ratings required
for graduating are different and a student must specify one of the
programs at registration. Since the three programs are separate
programs, and all non-degree programs must be included on the ECAR, PP2
and PP3 are not eligible for Title IV.

The OIG auditors did not state at the exit conference that the programs
were eligible, but that it appeared they may have been eligible, if they
had been included on NEC's Application. Section E of the Application
states, "Please provide the following information for each educational
program that you are requesting be eligible to participate in federal
student financial aid programs." Since the two programs were not on the
institution's ECAR or Application, the two programs have not been
approved by the Department and are not eligible for Title IV funds.

NEC stated that it did not incorrectly determine the eligibility of PP2
and PP3 programs when the programs were started in 1998. We are not
questioning whether NEC incorrectly determined the eligibility of PP2
and PP3 when the programs started in 1998. Our audit looked at whether
the additional programs were subsequently approved by the Department
when the school was recertified. As we describe in our report, when the
PPA expired in June 2000, the institution was required to include PP2
and PP3 on its Application, in order for those programs to continue
their eligibility for Title IV funding. NEC did not include those
programs in March 2000, and failed to include the two programs again
during recertification for change in ownership in June 2001. As a
result, PP2 and PP3 are not eligible to receive Title IV funds.

NEC did obtain the required annual compliance audit reports since March
2000, and we reviewed the compliance audit for the period of January 1,
2001, through December 31, 2001. Although the audit report did not have
a finding related to program eligibility, that does not preclude the
Office of Inspector General from reviewing program eligibility to ensure
the institution meets applicable laws and regulations.

In response to NEC's comment that OIG should recommend that NEC submit a
new Application to add PP2 and PP3 to its ECAR, we added a
recommendation that FSA take appropriate action to ensure that funds are
not disbursed to students in these programs until eligibility is
established.

Our objective was to determine if NEC disbursed Title IV aid to students
enrolled in ineligible, non-degree FAA certified flight-training
programs. To achieve our objective, we---

-   Reviewed the program eligibility requirements contained in the HEA
    and regulations.

-   Interviewed the NEC Financial Aid Administrator regarding the Title
    IV eligibility of flight training programs offered by the school.

-   Reviewed licensing certifications from the Accrediting Agency, the
    State Agency, and the FAA to determine if the PP1, PP2, and PP3
    programs were approved by other agencies.

-   Reviewed the school's 2000 catalog to determine what programs were
    offered.

-   Reviewed the school's Applications (last revised on 06/05/2001);
    1997, 2000, and 2001 ECAR; and 2001 PPA to determine if offered
    programs were approved for Title IV eligibility.

NEC provided us with a universe of 62 students that school officials
identified as Title IV recipients who were enrolled in the PP1, PP2, or
PP3 program from July 1, 1998, through June 30, 2002. We judgmentally
selected the first ten students listed in each of the three programs. We
reviewed the administrative and financial aid files for the 30 Title IV
recipients to determine if NEC disbursed Title IV aid to students
enrolled in ineligible programs.

Since we relied on computer-processed data obtained from school
officials to identify our universe of 62 students enrolled in PP1, PP2,
and PP3, we performed limited data reliability testing to ensure the
completeness of this universe. To test for completeness, we extracted
5,298 Title IV recipients from the National Student Loan Data System
(NSLDS) who were enrolled at NEC from July 1, 1998, through June 30,
2002. From the universe of 5,298, we selected a random sample of 50
Title IV recipients. We concluded that none of the students from the
sample of the 50 recipients were enrolled in the PP1, PP2, or PP3
program from July 1, 1998, through June 30, 2002. Consequently, we
concluded that the computer-processed universe of 62 Title IV recipients
appeared to be complete and sufficiently reliable to formulate
conclusions associated with the objectives of our audit.

We also relied on computer-processed data obtained from NSLDS for
background information. To verify reliability, we performed limited
tests of the data by comparing the data obtained from NSLDS to
information obtained from NEC officials.

Our review of Title IV program eligibility requirements covered the
period July 1, 1998, through June 30, 2002. Audit work was performed at
NEC, Tulsa, Oklahoma, during March and April 2003. We discussed our
preliminary results with NEC officials on April 4, 2003, and we held an
exit conference with NEC officials on November 4, 2003. Our audit was
conducted in accordance with generally accepted government auditing
standards appropriate to the scope described.

We did not assess the adequacy of NEC's management control structure
applicable to the program eligibility requirement because this step was
not necessary to achieve our audit objective. Instead, we relied on
reviews of appropriate licenses and student files to determine if Title
IV was disbursed to students enrolled in ineligible programs. Our
testing disclosed instances of non-compliance with Federal regulations
that led us to believe weaknesses existed. These weaknesses and their
effects are discussed in the AUDIT RESULTS section of this report.

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

If you have any additional comments or information that you believe may
have a bearing on the resolution of this audit, you should send them
directly to the following U.S. Department of Education official, who
will consider them before taking final Departmental action on this
audit:

Ms. Theresa S. Shaw, Chief Operating Officer

Federal Student Aid

U.S. Department of Education

Union Center Plaza, Rm. 112G1

> 830 First Street, NE
>
> Washington, DC 20202

It is the policy of the U.S. Department of Education to expedite the
resolution of audits by initiating timely action on the findings and
recommendations contained therein. Therefore, receipt of your comments
within 30 days would be greatly appreciated.

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.

If you have any questions or wish to discuss the contents of this
report, please contact me, at 214-880-3031. Please refer to the control
number in all correspondence related to this report.

> Sincerely,

**/Signed/**

> Sherri L. Demmel
>
> Regional Inspector General
>
> for Audit

Attachment