**UNITED STATES DEPARTMENT OF EDUCATION**

OFFICE OF INSPECTOR GENERAL

Audit Services

New York Audit Region

**May 19, 2008**

> **Control Number**
>
> **ED-OIG/A02H0007**

Dr. James Melville

President & Chief Executive Officer

Technical Career Institutes, Inc.

320 West 31^st^ Street

New York, NY 10001-2789

Dear Dr. Melville:

This **Fina**l **Audit Report**, entitled *Technical Career Institutes,
Inc.'s Administration of the Federal Pell Grant and Federal Family
Education Loan Programs*, presents the results of our audit. The purpose
of the audit was to determine whether Technical Career Institutes, Inc.
(TCI) administered the Pell Grant and Federal Family Education Loan
(FFEL) programs in accordance with the Higher Education Act of 1965, as
amended (HEA), and applicable Federal regulations. Specifically, we
examined (1) institutional and program eligibility (excluding the 90/10
rule), (2) student eligibility, (3) award calculations and
disbursements, and (4) return of Title IV funds. Our review covered the
period from July 1, 2005, through June 30, 2006.

BACKGROUND

TCI, located at 320 West 31^st^ Street in New York City, is a
proprietary, single-campus college that provides higher education and
technical education services. In 1909, TCI opened as the Marconi
Institute. In 1974, the name of the college was changed to TCI. On June
30, 2005, TCI was acquired by EVCI Career Colleges Holding Corporation,
which also owns Interboro Institute and Pennsylvania School of Business.

TCI is accredited by the Middle States Commission on Higher Education
and currently offers associate degrees in the following areas: (1)
Business and New Media Technology, (2) Computer and Electronics
Technology, and (3) Climate Control Technology. TCI also offers
certificates for shorter programs. Educational programs are provided on
a standard-term calendar measured in semester credit hours. TCI's
academic calendar consists of three 15-week semesters: fall, spring, and
summer. The enrollment in each of the semesters is about 3,000 students.

TCI participates in the following Title IV, HEA, programs: Pell Grant,
Federal Supplemental Educational Opportunity Grant, FFEL, William D.
Ford Federal Direct Loan (Direct Loan), Federal Perkins Loan, and
Federal Work-Study. During the period of July 1, 2005, through June 30,
2006, TCI received a total of \$20,541,317 in Title IV funding, which
included \$10,572,764 in Pell Grants and \$8,881,954 in FFEL.

AUDIT RESULTS

We determined that TCI met requirements in the HEA and regulations for
institutional (excluding the 90/10 rule), program, and student
eligibility and for award calculations. However, our review disclosed
that (1) TCI improperly paid \$440,487 to FFEL lenders to pay off its
students' loans and prevent their default; and (2) TCI had internal
control deficiencies in the administration of Title IV programs during
the period under review.

In its comments on the draft report, TCI did not concur with our Finding
No. 1 or its recommendations. TCI did not concur with most of Finding
No. 2 and its recommendations: it concurred with two exceptions
identified in the finding. TCI's comments are summarized at the end of
each finding.

Except for personally identifiable information (that is, information
protected under the Privacy Act of 1974, 5 U.S.C. § 552a), the entire
narrative of TCI's comments is included as an Attachment to this report.
Because of the voluminous nature of and the inclusion of personally
identifiable information in the attachments to the College's comments,
we have not included them with the Attachment. Copies of the attachments
to TCI's comments, less the personally identifiable information, are
available on request.

**FINDING NO. 1 -- TCI Improperly Paid Lenders to Reduce Its Cohort
Default Rates.**

TCI improperly paid \$440,487 to FFEL lenders to pay off its students'
loans and to prevent their default. TCI's FFEL and Direct Loan Programs
Default Reduction Measures (default prevention policy), implemented at
TCI as of October 2005, states that for---

> First term Title IV withdrawals with loans

1.  A federal refund is calculated at the time of withdrawal

2.  Timely refunds are made to federal programs in the order regulated
    by the Department of Education

3.  If the student fails to return to school the following term, TCI
    fully refunds all FFELP/FDSLP \[FFEL and Direct Loan programs\] loan
    funds that remain on the student's account (spring withdrawals are
    reviewed in the fall)

4.  Students with balances due on account are sent notification to
    complete payments plans with the school

5.  Students not completing payment plans with the school are sent to an
    outside collection agency approximately 150 days from the end date
    of their last term

TCI paid the lenders \$440,487 to pay off the FFEL loans received by 301
students who withdrew during their first semester at TCI.[^1] For 5 of
the 13 students in our random sample of withdrawn students, TCI paid the
lenders \$6,889 to pay off the FFEL amounts earned by these
students.[^2] TCI then attempted to collect the loan amounts from its
students by entering into repayment plans scheduled to begin 150 days
after the end of the students' last semester at TCI. None of the five
students in our sample made payments within 150 days. TCI marked the
students' accounts as delinquent and sent the debts to an outside
collection agency.

Pursuant to 34 C.F.R. § 668.22(e)(2),[^3] a borrower is entitled to the
applicable percentage of loan funds earned prior to his or her
withdrawal:

> The percentage of title IV grant or loan assistance that has been
> earned by the student is---

\(i\) Equal to the percentage of the payment period or period of
enrollment that the student completed . . . as of the student\'s
withdrawal date, if this date occurs on or before completion of 60
percent of the . . . \[p\]ayment period or period of enrollment for a
program that is measured in credit hours; or

> . . . . . . .

\(ii\) 100 percent, if the student\'s withdrawal date occurs after
completion of 60 percent of the . . . \[p\]ayment period or period of
enrollment for a program that is measured in credit hours . . . .

In addition to denying an entitlement to students, by making payments on
loans to prevent students' defaults, TCI's default prevention policy
results in loans that must be considered in default for purposes of
calculating TCI's cohort default rate:

-   Pursuant to Section 435(m)(2)(B) of the HEA, "A loan on which a
    payment is made by the school, such school's owner, agent,
    contractor, employee, or any other entity or individual affiliated
    with such school, in order to avoid default by the borrower, is
    considered as in default for purposes of this subsection."

-   Pursuant to 34 C.F.R. § 668.183(c)(1)(iii), "\[A\] borrower in a
    cohort for a fiscal year is considered to be in default if . . .
    \[b\]efore the end of the following fiscal year, you or your owner,
    agent, contractor, employee, or any other affiliated entity or
    individual make a payment to prevent a borrower's default on a loan
    that is used to include the borrower in that cohort."

According to TCI officials, TCI implemented its default prevention
policy because it had problems with its cohort default rates in prior
years, and it wanted to reduce its cohort default rates to maintain its
Title IV eligibility. For fiscal years (FYs) 1992 through 1995, TCI's
cohort default rates exceeded 25 percent. Based on these rates, TCI
would have lost its eligibility to participate in the FFEL and Direct
Loan programs if it had not prevailed in its appeals. TCI instituted its
default prevention policy in November 1994.[^4]

As a result of TCI's payments on its student's loans, TCI's students
were denied access to the FFEL loan funds to which they were entitled.
This could have harmed the students by damaging their credit (when their
outstanding balances were referred to outside collection agencies) and
by denying the students access to the terms of FFEL Program loans,
including grace periods, low-cost repayment plans, deferments,
forbearances, cancellations, and other benefits.

TCI's payments on its students' loans may have made its cohort default
rate calculations incorrect for all fiscal years after FY 1994, and TCI
may have retained its eligibility for Title IV programs improperly. We
found the calculation of TCI's FY 2005 official cohort default rate was
incorrect, because the borrowers for whom TCI made loan payments to
prevent defaults, as per 34 C.F.R. § 668.183 (c)(1)(iii), should have
been considered to be in default for purposes of TCI's cohort default
rates calculation. However, the student borrowers were not included in
the numerator of TCI's cohort default rate calculation based on these
loans, and only two of these borrowers were included in the denominator
of the calculation.[^5]

**Recommendations**

We recommend that the Acting Chief Operating Officer for Federal Student
Aid (FSA) require TCI to―

1.  Stop making payments to lenders on students' loans for the purpose
    of preventing their default;

2.  Identify all of the students for whom it made such payments on or
    after July 1, 2005;

3.  Rescind all collection agency referrals for the affected students;

4.  Direct the collection agencies to retract any negative reports made
    to credit agencies concerning the affected students; and

5.  Inform the affected students of its improper practice and of their
    rights and recourses under the HEA and all applicable consumer laws.

We recommend that the Acting Chief Operating Officer for FSA―

6.  Recalculate TCI's cohort default rate for FY 2005, including the
    borrowers for whom TCI made payments as defaulted for the purposes
    of the calculation, and take appropriate action under 34 C.F.R. Part
    668, Subpart M;

7.  In TCI's cohort default rate calculations for FYs 2006 and 2007,
    include as defaulted the borrowers for whom TCI made such payments;
    and

8.  Consider limiting, suspending, or terminating TCI's participation in
    the Title IV, HEA programs, under 34 C.F.R. Part 668, Subpart G,
    based on TCI's practice of making payments on its students' FFEL
    Program loans.

[]{.mark}

**TCI Comments**

TCI did not concur with our finding or recommendations. TCI disagreed
with our finding for the following reasons:

1.  TCI's payments cannot be considered improper because they do not
    meet the criteria in 34 C.F.R. § 668.183(c)(1)(iii): they were not
    payments made "to prevent a borrower's default on a loan that is
    used to include the borrower in \[a\] cohort." For a loan to be
    included in a cohort, the loan must have entered repayment during
    the cohort year (34 C.F.R. § 668.183(b)(1)). A FFEL Stafford loan
    enters repayment on the date following the end of its grace period,
    which is never less than six months after the borrower stops
    attending (34 C.F.R. §§ 682.200(b) and 682.209(a)(3)(i)). All of
    TCI's payments were made less than six months after students stopped
    attending, so the loans did not enter repayment, and TCI's payments
    on the loans did not affect TCI's cohort default rate calculation.

2.  TCI's students were not denied FFEL funds to which they were
    entitled. Disbursements of FFEL loans were made to the students
    before they withdrew, and as such, the disbursements complied with
    requirements in 34 C.F.R. § 668.22(e). Each student in the OIG
    sample "was disbursed the Title IV aid that he or she had earned
    during the period of enrollment and each student knowingly and
    voluntarily acknowledged and consented to TCI's default prevention
    policy."

3.  TCI's default prevention practices were no more harmful to students
    than defaulting on a FFEL loan. For example, students are charged
    fixed or variable rates of interest on their FFEL loans, but TCI did
    not charge interest. TCI does refer delinquent accounts to a
    collection agency after 150 days have passed and in-house collection
    has not been productive, but the collection agencies used by TCI are
    "*not* authorized to send reports of any sort to credit reporting
    bureaus." The only time that a student might be subject to a
    negative credit report would be when a seriously delinquent account
    is referred to a third-party collection agency for litigation and a
    judgment is obtained. Such a referral does not cause more harm to
    the student than he or she would suffer after default on a FFEL
    loan, and "TCI does not believe that any such reports have been made
    since July 1, 2005." The report cites no evidence that any student
    suffered any harm, so its findings are purely speculative.

4.  According to Chapter 2.1 of the Department's *Cohort Default Rate
    Guide*, loans that are fully refunded or cancelled within 120 days
    of disbursement are not included in a school's cohort default rate
    calculation. Regardless of whether the loans meet the criteria 34
    C.F.R. § 668.183(c)(1), loans for three of the five students in the
    report's sample were returned within 120 days and, as such, would
    not be included in TCI's cohort default rate calculation.

5.  If the loans on which TCI made payments were included in its cohort
    default rates, the change to the rates would not cause a loss of
    eligibility. According to its calculations, TCI's cohort default
    rates for FYs 2002 through 2005 would not have exceeded the 25
    percent threshold if those loans were included as defaulted, and TCI
    did not expect its cohort default rates for FYs 2006 or 2007 would
    exceed 25 percent.

6.  TCI's default prevention plan was properly implemented,
    administered, and sanctioned by the Department and TCI's guaranty
    agency, New York Higher Education Services Corporation (HESC).
    During an April 1999 program review, the Department analyzed TCI's
    default prevention policy and did not communicate any concerns. HESC
    reviewed TCI's default prevention plan in 1996, 1998, and 1999, and
    consistently found that it complied with the Department's cohort
    default rate regulations.

TCI disagreed with our recommendations for this finding, but stated that
it has suspended making payments to FFEL lenders as part of its default
prevention policy and that it has ceased referring students' accounts to
collection agencies or for litigation. TCI acted in "good faith and
substantial reliance" on guidance provided by the Department and HESC,
and stated that it would be inappropriate to take any adverse action
against TCI, as provided in Recommendation 1.8.

**OIG Response**

We have considered TCI's comments, but have not revised our finding or
recommendations. Our responses to each of TCI's comments are below:

1.  For cohort default rate purposes, the definition of "repayment"
    cited by TCI is not applicable to loans that are repaid in full
    before the borrower would have otherwise entered repayment. Pursuant
    to 34 C.F.R. § 668.182(f)(3), the loans that TCI repaid in full are
    considered to have entered repayment on the dates that TCI made the
    payments for the borrowers:

> For the purposes of this subpart, a loan is considered to enter
> repayment on the date that a borrower repays it in full, if the loan
> is paid in full before the loan enters repayment under paragraphs
> (f)(1) or (f)(2) of this section.
>
> As such, there is no exception to the requirements in Section
> 435(m)(2)(B) of the HEA or 34 C.F.R. § 668.183(c)(1)(iii), quoted in
> our finding, for schools that pay off a student's loan fully within
> 180 days of the student's last date of attendance.

2.  TCI misses the point when it responds that it made initial FFEL
    disbursements to students during the term and that those funds were
    earned by students. TCI denied students FFEL funds when it revoked
    those disbursements by repaying the students' loans in full: its
    students were not allowed to use funds that they had earned and to
    which they were entitled, under 34 C.F.R. § 668.22, to pay for their
    educational expenses. Pursuant to 34 C.F.R. § 682.101(b)---

> Institutions of higher education, including most colleges,
> universities, graduate and professional schools, and many vocational,
> technical schools may participate as schools, enabling an eligible
> student or his or her parents to obtain a loan to pay for the
> student's cost of education.
>
> TCI compounded the denial when it employed collection agencies to
> collect charges from students that had previously been satisfied with
> FFEL funds.
>
> TCI claims that its students "knowingly and voluntarily acknowledged
> and consented to TCI's default prevention policy," but TCI's comments
> provide no evidence that it allowed any student to receive a FFEL loan
> without authorizing TCI to return the loan funds. Our audit did not
> identify any such students. Further, the authorizations TCI's students
> were required to sign did not provide a method for students to refuse
> to authorize TCI's return of their loan funds, and TCI's written
> default reduction measures did not include any procedures for cases in
> which students refused to sign an authorization.

3.  TCI's terms of repayment were not as generous as those for repayment
    of a FFEL loan. As the most substantive example, under TCI's terms
    of repayment, a borrower was considered to be in default if he or
    she did not begin making payments within 150 days after he or she
    ended attendance. It takes about 600 days for a borrower to default
    on a FFEL loan after the student ends attendance.[^6] All of the
    students in our sample defaulted on their obligations under TCI's
    loan terms; it is much less likely that they would have defaulted
    under the terms for FFEL program loans.

> TCI's assertion that its collection agencies were not authorized to
> report to credit reporting bureaus until an account was referred for
> litigation and a judgment was obtained is not confirmed by the
> attachments it provides with its comments. Of the six agreements that
> TCI provided, only one limited reporting to a credit bureau in the
> manner described by TCI in its comments. Regardless, our
> Recommendation 1.4 would not require any action by TCI for borrowers
> who were not subject to negative credit reporting: if no borrowers
> were referred to credit bureaus, TCI would not need to take any action
> under that recommendation.

4.  The Department's *Cohort Default Rate Guide* does not support TCI's
    assertion that the loans it repaid in full within 120 days of
    disbursement must be considered as cancelled and excluded from the
    cohort default rate calculation. The *Cohort Default Rate Guide*
    provides separate instructions for the treatment of loans that were
    repaid in full, without reference to the date that the loans were
    repaid (they are included in the calculation), and for loans that
    were cancelled within 120 days of the disbursement date (they are
    excluded from the calculation). The agreement for repaying a FFEL
    loan (the promissory note) is an agreement between the borrower and
    the lender. Unless the school determines that its certification of
    the student's eligibility is incorrect (or a return to Title IV
    calculation is required under 34 C.F.R. § 668.22), it does not have
    any standing to cancel the loan: only the student or the lender can
    cancel the loan because they are the only parties to the agreement.
    Since TCI has provided no evidence that the students or lenders
    initiated cancellations of the loans, or that the borrowers were
    ineligible for the amounts they received, the repayment by the
    school must be considered payment in full of the loan, not a
    cancellation.

5.  It is unclear whether TCI's recalculation of its cohort default
    rates excluded loans that TCI repaid within 120 days of the
    student's last date of attendance, considering them to be cancelled.
    If TCI excluded those loans, its recalculations are inaccurate (see
    our response to TCI's fourth comment). We cannot comment on other
    potential inaccuracies in TCI's recalculation because TCI did not
    provide support for the numbers it used.

> However, cohort default rate calculations must be accurate, regardless
> of their effect on a school's eligibility under 34 C.F.R. § 668.187,
> because cohort default rates are used for many other purposes. For
> example, if a school's three most recent cohort default rates are less
> than ten percent, the school may deliver loan proceeds in a single
> installment or choose not to delay the delivery of the first
> installment of a loan for first-time, first-year borrowers (34 C.F.R.
> § 682.604(c)(5)(i) and (c)(10)(i)), and if a school's most recent
> cohort default rate is less than five percent, an eligible home
> institution may deliver loan proceeds in a single installment to a
> student studying abroad (34 C.F.R. § 682.604(c)(10)(ii)). If TCI's
> recalculations of its cohort default rates were accurate, TCI's
> eligibility for these benefits would be affected.

6.  The 1999 FSA program review report cannot be used as approval of
    TCI's practice. The report did not include any reference to TCI's
    default prevention policy and stated that "\[t\]he absence of
    statements in the report concerning the institution's specific
    practices must not be construed as acceptance, approval, or
    endorsement of those specific practices and procedures."

> The report of a 1998 compliance review by HESC, provided by TCI as an
> attachment to its comments, may appear to find that the default
> management plan was compliant. The report stated, "The following
> report does not identify any areas of regulatory non-compliance. TCI
> has implemented a complete default management program resulting in
> decreases in the cohort default rate." However, the report did not
> directly state that TCI's practice of repaying borrowers' loans was in
> compliance with regulations, and the report provided a disclaimer that
> stated---
>
> Although the review was thorough, it cannot be assumed to be
> all-inclusive. Absence of statements in the report concerning TCI's
> specific practices and procedures must not be construed as acceptance,
> approval, or endorsement of those specific practices and procedures.
>
> Regardless of guidance that TCI may or may not have received, HESC
> does not have the authority to issue policy interpretations for the
> Department. We must rely on the HEA and the Department's regulations
> as criteria for our audit.

As to TCI's comment that it would be inappropriate to take an adverse
action as provided in Recommendation 1.8, the Acting Chief Operating
Officer for FSA is responsible for determining whether such an action is
appropriate.

[]{.mark}

**FINDING NO. 2 -- TCI's Administration of Title IV Programs Needs
Improvement.**

Our review disclosed internal control deficiencies in TCI's
administration of Title IV programs during the July 1, 2005, through
June 30, 2006, audit period.  TCI had an Office Procedure Manual that
consisted of memoranda dated October 18, 2001, through November 7, 2003.
However, this manual lacked adequate written policies and procedures
pertaining to the internal operations in the administration of Title IV
programs, specifically for the calculation and timely return of Title IV
funds, the proper disbursement of Pell Grant funds, and the accurate and
timely updating of the Common Origination and Disbursement (COD)
System.[^7]

Pursuant to 34 C.F.R. § 668.16(b)(4), "The Secretary considers an
institution to have . . . administrative capability if the institution .
. . \[h\]as written procedures for or written information indicating the
responsibilities of the various offices with respect to the approval,
disbursement, and delivery of Title IV, HEA program assistance and the
preparation and submission of reports to the Secretary . . . ."

TCI did not have adequate written policies and procedures because TCI
did not believe it needed them. According to TCI officials,
TCI\'s personnel had sufficient institutional knowledge and did not need
formal written policies and procedures for the return of Title IV funds,
Pell Grant disbursements, and updates to COD.

As a result of its inadequate internal controls over the administration
of Title IV programs, TCI placed the \$20,541,317 in Title IV funds that
it received during July 1, 2005, through June 30, 2006, at risk of being
misused.

**TCI incorrectly calculated the return of Title IV**

We reviewed files for 30 withdrawn students and found that TCI
incorrectly determined the withdrawal date used in the return of Title
IV calculations. We found that, for 15 of 30 randomly sampled students
(50 percent), TCI did not return \$5,445 of Title IV funds, due to
incorrect withdrawal dates. TCI did not return \$4,682 for 14 students
who unofficially withdrew and \$763 for one student who was
terminated:[^8]

-   For the 14 students who unofficially withdrew, TCI---

    -   Administratively withdrew, before the mid-point of the payment
        period, 4 students who were absent from all classes for three
        consecutive weeks. TCI incorrectly determined the withdrawal
        date for these students by using the processing dates for their
        withdrawals, which were one to four days after the actual
        withdrawal dates. As a result, TCI did not return \$341 in Title
        IV funds.[^9]

    -   For 9 students, incorrectly determined the return of \$3,538 in
        Title IV funds because it did not use the mid-point as the
        withdrawal date.

    -   For 2 students, incorrectly determined the return of \$803 in
        Title IV funds because it did not use the last date of
        attendance after the mid-point (which was less than 60 percent)
        as the withdrawal date. Instead, TCI used the last date of
        attendance, plus three weeks, per its policy.

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-   For the terminated student, TCI used the date that it processed the
    change of the student's status in its database, and not the date
    when the termination decision was signed by the school's official.
    As a result, TCI did not return \$763 in Title IV funds.

TCI's institutional policy regarding unofficial withdrawals states, "If
a student is absent from all classes for three consecutive weeks, the
College administratively withdraws the student from the institution. . .
. For federal Title IV refund purposes, the withdrawal date of an
unofficial withdrawal is the date the College administratively withdraws
the student from classes."

Though this policy indicates that TCI administratively withdraws a
student on the date that is three weeks after the student last attended
class, in practice TCI uses the date that the withdrawal is processed
weekly in its database. Since TCI's policy to determine a student's
withdrawal date conflicts with its practice, it is not in compliance
with regulatory requirements.

According to 34 C.F.R. § 668.22(c)(1)---

> \[F\]or a student who ceases attendance at an institution that is not
> required to take attendance, the student's withdrawal date is ---
>
> \(i\) The date, as determined by the institution, that the student
> began the withdrawal process prescribed by the institution;
>
> \(ii\) The date, as determined by the institution, that the student
> otherwise provided official notification to the institution, in
> writing or orally, of his or her intent to withdraw;
>
> \(iii\) If the student ceases attendance without providing official
> notification to the institution of his or her withdrawal . . . the
> mid-point of the payment period (or period of enrollment, if
> applicable) . . . ."

Volume 5 of the *2005-2006* *Federal Student Aid Handbook (FSA
Handbook)* states---

> If a school administratively withdraws a student (e.g., expels,
> suspends, or cancels the student's registration) who has not notified
> the school of his or her intent to withdraw, the last possible date of
> withdrawal for the student is the date the school terminates the
> student's enrollment. However, an institution may not *artificially*
> create a withdrawal date for such a student that is beyond the
> midpoint of the period by simply choosing to withdraw the student
> after the midpoint. Of course, if the school can document that the
> student continued his or her attendance past the midpoint, the school
> may use a later date.

Under 34 C.F.R. § 668.22(c)(3), "\[A\]n institution that is not required
to take attendance may use as the student's withdrawal date a student's
last date of attendance at an academically related activity provided
that the institution documents that the activity is academically related
and documents the student's attendance at the activity."

For circumstances beyond the student\'s control, 34 C.F.R. §
668.22(c)(1)(iv) provides that the student's withdrawal date is---

> If the institution determines that a student did not begin the
> institution\'s withdrawal process or otherwise provide official
> notification (including notice from an individual acting on the
> student\'s behalf) to the institution of his or her intent to withdraw
> because of illness, accident, grievous personal loss, or other such
> circumstances beyond the student\'s control, the date that the
> institution determines is related to that circumstance.

**Return of unearned Title IV funds was untimely**

TCI did not always return Title IV funds timely for students who
withdrew. For 2 of 30 sampled students who withdrew, unearned Title IV
funds were not returned within the required timeframe. These returns
were 1 and 118 days late.[^10]

Pursuant to 34 C.F.R. § 668.22(j)(1), "An institution must return the
amount of title IV funds for which it is responsible . . . as soon as
possible but no later than 30 days after the date of the institution\'s
determination that the student withdrew . . . ."

**Incorrectly Disbursed Pell Grant Funds**

TCI did not verify student enrollment status before making a second
disbursement of a Pell Grant for 1 of the 30 students in the sample we
used to test compliance with eligibility and disbursement requirements.
This student's second Pell Grant disbursement for the 2005-2006 Award
Year was calculated based on full-time enrollment. It should have been
based on half-time enrollment because (1) the student was enrolled in a
noncredit or reduced credit remedial course leading to a high school
diploma or the recognized equivalent as part of his full-time course
load, and (2) the student registered for an additional class not
required in his program of study.[^11]

Pursuant to 34 C.F.R. § 668.20(c)(1)---

> In determining a student\'s enrollment status under the Title IV, HEA
> programs . . . an institution may not take into account any noncredit
> or reduced credit remedial course if . . . \[t\]hat course is part of
> a program of instruction leading to a high school diploma or the
> recognized equivalent of a high school diploma, even if the course is
> necessary to enable the student to complete a degree or certificate
> program . . . .

Pursuant to 34 C.F.R. § 690.80(b)(1)---

> If the student's enrollment status changes from one academic term to
> another term within the same award year, the institution shall
> recalculate the Federal Pell Grant award for the new payment period
> taking into account any changes in the cost of attendance.

TCI should have reduced the student's scheduled Pell Grant disbursements
from \$2,025 to \$1,012, to reflect the student's half-time, six
credits, eligibility for Title IV. As a result, TCI over-awarded the
Pell Grant for 1 of 30 students in our sample by \$1,013.

**Pell Grant Data Reported Incorrectly to COD**

TCI incorrectly reported \$8,368 in Pell Grant data to COD for 12 of
4,083 Pell Grant recipients. When we compared the Pell Grant
disbursement information provided to us by TCI to information in COD, we
found that data did not match for 12 students. This occurred because TCI
did not capture and reconcile the errors identified by EDExpress, which
rejected or adjusted some transactions.[^12] Eleven of the twelve
students' Pell Grants were rejected (totalling \$8,268) and one
student's Pell Grant was adjusted by \$100 due to a data entry error.
These changes were not reported to COD timely, and as a result,
subsequent Title IV funds may have been inappropriately awarded.

Pursuant to 34 C.F.R. § 690.83(b)(1)---

> An institution shall report to the Secretary any change in enrollment
> status, cost of attendance, or other event or condition that causes a
> change in the amount of a Federal Pell Grant for which a student
> qualifies by submitting to the Secretary the student\'s Payment Data
> that discloses the basis and result of the change in award for each
> student.

The Department provided reporting deadline dates for the 2005-2006 award
year in its notice published in the Federal Register on June 7, 2005 (70
FR 33134):

> \[A\]n institution is required to submit disbursement information no
> later than the earlier of:

(a) 30 calendar days after the institution makes a disbursement or
    becomes aware of the need to make an adjustment to previously
    reported disbursement data; or

(b) October 2, 2006.

As of November 27, 2007, after discussion with TCI officials, the COD
data for 8 of the 12 students had been updated. Data for the four
remaining students had not been adjusted.

**Recommendations**

We recommend that the Acting Chief Operating Officer for FSA require TCI
to---

1.  Develop, implement, and ensure that its personnel adhere to written
    policies and procedures for the administration of Title IV programs;

2.  Return to the Department \$6,458 (\$5,445 in Title IV funds and
    \$1,013 in Pell Grant funds) and applicable interest;

3.  Identify all students for whom TCI used an incorrect withdrawal date
    during the period July 1, 2004, to the present, recalculate the
    return of Title IV funds for those students in accordance with
    applicable regulations, and return any Title IV funds due to the
    Department or FFEL lenders, with all applicable interest;

4.  Identify all students to whom TCI disbursed Pell Grants for
    attendance in any noncredit or reduced credit remedial course that
    reduced enrollment from full-time status during the period July 1,
    2004, to the present, recalculate Pell Grant disbursements for those
    students in accordance with applicable regulations, and return any
    Title IV funds due to the Department with all applicable interest;
    and

5.  Verify that data is reported correctly to COD.

[]{.mark}

**TCI Comments**

TCI did not concur with most of our finding. TCI concurred with
Recommendations 2.4 and 2.5, did not concur with Recommendation 2.3, and
did not concur with parts of Recommendations 2.1 and 2.2. TCI's comments
on the finding are summarized below:

1.  TCI did maintain written office procedures which explained its
    policies and procedures, and those written procedures were
    distributed to its staff. The OIG misinterpreted the comment
    provided in its report: TCI did not intend to imply that its staff
    was too knowledgeable and experienced to require written policies
    and procedures.

2.  TCI calculated the return of Title IV funds correctly. Though TCI's
    catalog mistakenly described its policy as an "unofficial"
    withdrawal policy, TCI's policy was to administratively disenroll
    students if they did not attend for 21 days. Under 34 C.F.R. §
    668.22(c)(1)(iv), these administrative withdrawals are considered
    "circumstances beyond the student's control" and are treated as
    official withdrawals. TCI is required to use the date that it took
    action as the withdrawal date, rather than the 21^st^ day the
    student was absent or the midpoint of the payment period, because 34
    C.F.R. § 668.22(c)(1)(iv) specifies that the withdrawal date is "the
    date that the institution determines is related to that
    circumstance."

> This rule is further supported by the quotation from the *FSA
> Handbook* provided in the OIG finding, which specifies that "the last
> possible date of withdrawal for the student is the date the school
> terminates the student's enrollment." The qualification provided in
> the quotation (that the "institution may not *artificially* create a
> withdrawal date . . . beyond the midpoint of the period by simply
> choosing to withdraw the student after the midpoint" \[emphasis in
> original\]) is not applicable. TCI did not use an "artificial"
> withdrawal date because "it implemented and observed a standard policy
> for all students throughout each payment period."
>
> Since 2001, TCI has confirmed the compliance of its policy, verbally
> and in writing, with Department officials on at least three occasions.
> An official with the Department's Office of Postsecondary Education
> confirmed the compliance of TCI's policy by writing---
>
> If, as in your example, an institution has a policy that a student is
> considered to be withdrawn after he or she is absent for 21
> consecutive days and the institution applies the policy consistently
> throughout the period to all students, an administrative withdrawal
> made in accordance with the policy that occurs after the midpoint
> would not be viewed as circumventing the use of the midpoint as the
> withdrawal date for an unofficial withdrawal.

3.  The untimely returns of Title IV funds identified in the finding
    were within the Department's compliance thresholds. Pursuant to 34
    C.F.R. § 668.173(c)(2), "\[t\]he Secretary does not consider an
    institution to be out of compliance . . . if the institution is
    cited in any audit or review report because it did not return
    unearned funds in a timely manner for one or two students."

4.  TCI agreed that it made a Pell Grant overpayment of \$1,013 and has
    returned that amount. After reviewing its policies and procedures,
    and performing an internal file review of 30 additional students,
    TCI determined that the overpayment was an isolated incident due to
    a single instance of human error.

5.  Except for supplemental data for one student, TCI has updated COD
    with accurate data for the 12 Pell Grant recipients identified in
    the finding. However, the error rate for this deficiency is 0.3
    percent (12 / 4,083 = 0.3 percent), which is well within the 5
    percent compliance threshold provided in 34 C.F.R. § 668.173(c)(2).
    TCI has implemented additional policies and procedures to verify
    that Pell Grant data is reported timely and accurately.

For the reasons described above, TCI concurred with Recommendations 2.2
(for the return of \$1,013 only), 2.4, and 2.5, and did not concur with
Recommendations 2.2 (for the return of \$5,445 only) and 2.3. In its
comments on Recommendation 2.1, TCI stated that it will continue to
revise and add to its written office procedures, without concurring that
its current written policies and procedures are inadequate.

**OIG Response**

We have considered TCI's comments, but have not revised our finding or
recommendations. Our responses to TCI's comments on the findings and
recommendations are provided below:

1.  TCI did not provide any additional written policies or procedures to
    support its assertion that its written policies and procedures are
    adequate. We reported the statements of TCI's officials as they were
    made to us. As such, we have no basis for revising our finding or
    recommendation for this issue.

2.  Though TCI did provide documentation of written and verbal guidance
    received from Department officials that appears to support its
    policy, TCI's practice did not comply with regulatory requirements
    for return to Title IV calculations in 34 C.F.R. § 668.22. In
    essence, TCI is asserting that, since its policy was to
    administratively withdraw students after they were absent for 21
    days, the requirements in 34 C.F.R. § 668.22(c)(1)(iv) are
    applicable, and those in 34 C.F.R. § 668.22(c)(1)(iii) are not. Both
    paragraphs are included in this quotation:

> \[F\]or a student who ceases attendance at an institution that is not
> required to take attendance, the student's withdrawal date is---
>
> . . . . . . .
>
> \(iii\) If the student ceases attendance without providing official
> notification to the institution of his or her withdrawal in accordance
> with paragraph (c)(1)(i) or (c)(1)(ii) of this section, the mid-point
> of the payment period (or period of enrollment, if applicable);
>
> \(iv\) If the institution determines that a student did not begin the
> institution's withdrawal process or otherwise provide official
> notification (including notice from an individual acting on the
> student's behalf) to the institution of his or her intent to withdraw
> because of illness, accident, grievous personal loss, or other such
> circumstances beyond the student's control, the date that the
> institution determines is related to that circumstance . . . .
>
> TCI relied on the requirements in 34 C.F.R. § 668.22(c)(1)(iv) as
> criteria for its policy, but the requirements in that paragraph are
> limited to "illness, accident, grievous personal loss, or other such
> circumstances beyond the student's control." By itself, a student's
> cessation of attendance or decision to withdraw without notifying TCI
> is not a circumstance "beyond the student's control," and TCI has not
> documented that any of the withdrawals in question were the result of
> any "such circumstance" similar to those listed in the regulations.
> Since the requirements in 34 C.F.R. § 668.22(c)(1)(iii) are clearly
> intended for the unofficial withdrawals we identified, we used those
> requirements to evaluate TCI's compliance.
>
> Contrary to its assertion, TCI is not required to use as the
> withdrawal date the date that TCI took action to administratively
> withdraw a student. Neither of the citations provided by TCI limit its
> determination to the date it took action: 34 C.F.R. § 668.22(c)(1)(iv)
> specifies only that the date must be "related" to the circumstance
> (not necessarily the date the action was taken) and the *FSA Handbook*
> provides requirements for "the last possible date" (not the only
> possible date). Under 34 C.F.R. § 668.22(k), TCI is required to
> provide information to its students about its return to Title IV
> calculations. TCI's catalog stated, ". . . if a student is absent from
> all classes for three consecutive weeks, the College administratively
> withdraws the student from the institution." This statement does not
> describe any intervening period between the three-week absence and the
> student's withdrawal date.
>
> TCI asserts that its practice did not "*artificially* create a
> withdrawal date," as that phrase is used in the *FSA Handbook*,
> because TCI has "implemented and observed a standard policy for all
> students throughout each payment period." Our finding does not depend
> on the "artificial" language in the *FSA Handbook*. The regulations at
> 34 C.F.R. § 668.22(c)(3) do not allow the school to use an unofficial
> withdrawal date later than the midpoint of the payment period unless
> it can show that the date is "the student's last date of attendance at
> an academically-related activity." A school may use a date after the
> midpoint only if the date is a day that the student actually attended,
> not a date chosen by the school.

3.  The requirements that TCI cites from 34 C.F.R. § 668.173(c)(2) do
    not provide that, unless more than two exceptions are identified, a
    school is in compliance with requirements for the timely returns of
    Title IV funds. The criteria in 34 C.F.R. § 668.173(c)(2) are
    applicable only to compliance with requirements for refund reserve
    standards, not timeliness of returns. Our report does not find that
    TCI failed to comply with refund reserve standards.

4.  TCI did not provide documentation to support its return of the
    \$1,013 Pell Grant overpayment, so we have not changed our
    recommendation. If the Department can verify from its records that
    TCI has returned the \$1,013, it will not need to require an
    additional payment.

As we discussed in our response to TCI's third comment, the thresholds
provided in 34 C.F.R. § 668.173 are only used to determine compliance
with refund reserve standards. They cannot be used to determine
compliance with COD reporting requirements.

OBJECTIVES, SCOPE, AND METHODOLOGY

Our audit objective was to determine whether TCI administered the Pell
Grant and FFEL programs in accordance with the HEA and applicable
Federal regulations. Specifically, we examined (1) institutional and
program eligibility (excluding the 90/10 rule), (2) student eligibility,
(3) award calculations and disbursements, and (4) return of Title IV
funds. Our review covered the period from July 1, 2005, through June 30,
2006.

To accomplish our audit objective, we―

-   Obtained an understanding of applicable Federal laws and
    regulations.

-   Reviewed TCI's Compliance Audit Reports prepared by its Independent
    Public Accountant for the years ended September 30, 2005, and
    December 31, 2005; a program review report issued by FSA, dated
    April 3, 2000; and correspondence from TCI's accrediting agency.

-   Reviewed TCI's policies and procedures included in its college
    catalog; TCI's Office Procedure Manual that included memoranda dated
    October 18, 2001, through November 7, 2003; and various forms used
    by TCI's Student Financial Services, Registrar, and Student Affairs
    Offices, applicable to its financial aid processes and gained an
    understanding of processes used to administer Title IV funds.

-   Interviewed TCI's Vice President and Assistant Vice President for
    Student Financial Services, Director of Student Financial Services,
    Registrar and Assistant Registrar, Financial Aid Advisors, and other
    officials from TCI's offices of Student Financial Services,
    Credentials and Testing, and Admissions.

-   Examined approvals and correspondence from the school's accrediting
    and state oversight agencies.

-   Observed classes while in session and toured the institution's
    facilities.

-   Gained an understanding of TCI's accounting system for students
    enrolled in Title IV eligible programs.

-   Contacted and obtained information from TCI's Independent Public
    Accountant and FSA officials from New York and Boston offices.

We relied upon computerized student Title IV data provided by TCI
officials and computerized information obtained from COD and NSLDS to
select our student eligibility and disbursement sample and our return of
Title IV samples. We were able to match all Pell Grant recipients'
disbursement information provided by TCI with information obtained from
COD, with the exception of 12 students for whom we determined that TCI
did not update COD records in a timely manner.

FFEL information from NSLDS does not include any field to identify a
loan with a specific loan year or period. We could not perform a direct
overall NSLDS loan match to the TCI supplied Title IV loan information.
However, based on the overall comparison between the NSLDS data and the
TCI loan information, the TCI listing appeared reasonably complete. As a
result, we used TCI's supplied data for both Pell Grant and FFEL
recipients.

We tested the accuracy of TCI's supplied student data by comparing
selected source records to the TCI Pell Grant and FFEL recipient student
files. We tested the completeness of the TCI Pell Grant information by
matching it to the information obtained from COD, with the exception of
the 12 students. We tested the TCI loan list completeness by comparing
it to the NSLDS loan listing. Based on the comparison, we concluded that
the TCI Title IV listing was sufficiently reliable for the purpose of
our audit.

To evaluate TCI's compliance with Title IV student eligibility,
disbursement, and award calculation requirements, we randomly selected
30 students from the universe of 4,559 students who were awarded a total
of \$20,541,317 in Title IV funding. This included \$10,572,764 in Pell
Grants, \$8,881,954 in FFEL, \$1,032,532 in Federal Supplemental
Educational Opportunity Grants, and \$54,067 in Federal Perkins Loans.
We reviewed academic, financial aid, and accounting files for the 30
students in our sample.

To evaluate TCI's compliance with return of Title IV requirements, we
reviewed files for a sample of 30 withdrawn students. Twenty of the
sampled students were randomly selected from a universe of 710 students
who withdrew and had a Title IV refund paid. The remaining 10 sampled
students were randomly selected from a universe of 792 students that TCI
identified from its electronic database as students who withdrew from
the institution during our audit period but had no returns of Title IV
funds paid.

We performed our fieldwork at TCI's location in New York, New York. We
held an exit conference with TCI officials on November 14, 2007. We
conducted this performance audit in accordance with generally accepted
government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide
a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objectives.

ADMINISTRATIVE MATTERS

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, including the recovery
of funds, will be made by

the appropriate Department of Education officials in accordance with the
General Education

Provisions Act.

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 Education Department official, who will
consider them before taking final Departmental action on this audit:

> Lawrence A. Warder
>
> Acting Chief Operating Officer
>
> Federal Student Aid
>
> U. S. Department of Education
>
> Union Center Plaza
>
> 830 First Street, NE, Room 112G1
>
> Washington, DC 20202

It is the policy if 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 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.

Sincerely,

/s/

> Daniel P. Schultz
>
> Regional Inspector General
>
> for Audit
>
> []{.mark}

Attachment

[]{.mark}

**Attachment: TCI Comments**

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height="9.945833333333333in"}

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[^1]: We identified a total of 1,502 students who withdrew from TCI
    during the period under review.

[^2]: Our original sample for the return of Title IV funds included 30
    withdrawn students: 13 students who had FFEL loans and/or other
    Title IV funding, and 17 students who did not have FFEL loans but
    had other Title IV funding.

[^3]: Unless otherwise specified, all C.F.R. citations are to the July
    1, 2005, volume.

[^4]: For FY 1995, TCI's original cohort default rate was 33.4 percent,
    but after an appeal it was revised to 24.7 percent.

[^5]: The two students were included in TCI's cohort default rate
    calculation for FY 2005. However, both of the students began and
    ended their TCI attendance in FY 2006, and the dates their loans
    were made were consistent with dates for loans to students who were
    included in TCI's FY 2006 cohort default rate. Neither student
    should have been included in TCI's FY 2005 cohort default rate
    calculation. Instead, both students should have been included in the
    FY 2006 cohort default rate calculation.

[^6]: For most borrowers, default occurs after 6 months in a grace
    period, then 60 days during which the lender schedules the first
    payment, then 270 days of delinquency on the loan by the borrower,
    and after that, an average of about 90 days for the default claim to
    be filed and paid (34 C.F.R. §§ 682.200(b), 682.209(a)(2) and (3),
    and 682.406(a)).

[^7]: The Final Audit Report, ED-OIG/A09G0030, entitled *Technical
    Career Institutes\' Verification of Applicant Information*
    *Submitted on the Free Application for Federal Student Aid* (FAFSA),
    determined that TCI had policies and procedures in place that
    ensured FAFSA information was verified in accordance with applicable
    laws and regulations. TCI's written policies and procedures, as
    included in its college catalog and internal memoranda, were
    adequate for its administration of its verification process, but
    were not adequate for the requirements reviewed during our audit or
    for TCI's general administration of the Title IV programs.

[^8]: The student was terminated due to incomplete immunization
    requirements.

[^9]: One student was counted twice in our calculation of students for
    whom TCI did not return Title IV funds due to incorrect withdrawal
    dates. This student withdrew from two semesters during our review
    period, and TCI miscalculated the return of Title IV twice.

[^10]: TCI miscalculated the return of Title IV funds for one of the two
    untimely returns.

[^11]: New York State High School Equivalency Diploma and TCI degree
    requirements for Ability-to-Benefit students entering Fall 2004
    state that for a student majoring in Industrial Electronics
    Technology (IETC), HIS-103 American History I was not a degree
    courses but it counted as a noncredit or reduced credit remedial
    course leading to a high school diploma or the recognized
    equivalent. COM204, Intro to Java Programming, was not an approved
    course for the IETC degree program, and it was not a noncredit or
    reduced credit remedial course leading to a high school diploma or
    the recognized equivalent.

[^12]: EDExpress is the financial aid management software provided free
    of charge by ED, which TCI used to administer its Pell Grant funds.