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August 13, 2010

Honorable Tom Harkin
United States Senate
Washington, DC 20510

Honorable Michael Enzi
United States Senate
Washington, DC 20510

Dear Mr. Chairman and Senator Enzi:

Thank  you for holding the second in a series of hearings on the accountability and  oversight of proprietary institutions of higher education that participate in  the Federal student assistance programs authorized under Title IV of the Higher  Education Act of 1965, as amended (HEA).   Let me assure you that the Department will respond quickly and  aggressively to the troubling findings of the U.S. Government Accountability  Office (GAO) investigation that documented indicators of fraud and deceptive  marketing practices at several for-profit colleges.  Given the important and growing role that  for-profit colleges play in delivering higher education programs, it is  essential that we do all we can to identify and eliminate exploitive practices  when they occur.  I am writing to  describe our current plan.

As  you know, GAO sent undercover investigators posing as students to 15 for-profit  colleges. Recognizing that the severity of the issues varies, at all 15  schools, GAO found false or misleading statements about accreditation, the  requirements for repayment of student loans, graduation rates, job placement, or  likely earnings.  In four cases, school  officials encouraged students to submit apparently fraudulent financial  information in order to qualify for federal student aid.

The  unethical and potentially illegal practices uncovered by GAO are  unacceptable.  We have a responsibility  to ensure that students can make informed choices about investing in postsecondary  education, and that taxpayers’ investments in the Federal student aid programs  are helping students.  We will act  swiftly on that responsibility. We are investigating  the specific findings of wrongdoing, strengthening our enforcement of existing  rules, creating new approaches to detect and prevent abusive recruiting  practices, and expanding institutional disclosure and related consumer information.

Response  to the GAO Findings

The  Department’s Office of Inspector General (OIG) will examine GAO’s specific  findings.  The OIG will take appropriate  action, including referring for criminal prosecution all individuals who are  determined to have been involved in fraudulent or criminal activities.

Federal  Student Aid (FSA) is also reviewing the GAO findings as a possible basis for  investigations of and enforcement actions against schools.  FSA may demand the return of improperly obtained  funds or terminate an institution’s eligibility to participate in the Federal  student aid programs.  These actions  reinforce the Department’s current oversight efforts, including both on-site  and off-site program reviews, targeted data reviews, and review of consumer  complaints and reports of waste, fraud, and abuse.

Finally,  FSA Chief Operating Officer Bill Taggart will send a letter shortly to all college  presidents to remind them of the potential consequences of fraudulent or  deceptive recruitment, admissions, and financial aid activities.

Expanding  and Strengthening Enforcement

The  Department is already in the process of strengthening FSA’s oversight of the  Federal student aid programs, and GAO’s findings have led the Department to  explore other options for improving this oversight.  The Department, in its 2011 Budget request,  is seeking additional resources to increase the capacity for and effectiveness  of Departmental oversight.  FSA is also  in the process of hiring more than 60 additional staff to strengthen oversight  of schools and conduct 50 percent more program reviews of postsecondary  institutions each year.  In the near  future, FSA will also hire a new Chief Customer Experience Officer to manage  consumer protection activities.

In  light of GAO’s findings, FSA is also exploring potential enhancements to  existing data  analysis efforts under way  that provide early indicators of fraud or other risks of impropriety.  For example, FSA is developing a new  Integrated Partner Management System that will capture information from audits,  financial statements, accrediting agencies, and recertification reviews, which  will be used to target enforcement efforts.

In addition, we will be reviewing  GAO’s undercover project and its methods as well as the similar practices of  other Federal agencies.  As part of FSA’s planned investment in its  consumer protection activities, the Department will be developing a program to  use these methods to assess institutional compliance with existing statutory  and regulatory requirements, including testing the accuracy and appropriateness  of information provided by institutions to prospective students through  recruiters and financial aid advisors.

Finally,  the recently enacted Improper Payments Elimination and Recovery Act established  a recovery audit contractor program, while new fraud detection and forensic  auditing tools show promise in strengthening efforts to prevent fraud and  abuse.  We are committed to working with  the Office of Management and Budget and the Chief Financial Officers Council to  identify government-wide best practices that may have application for higher  education and student aid programs.  This review is consistent with FSA’s  business model to continuously challenge status quo enforcement mechanisms in  search of solutions that have the potential to improve on current results.

Stronger Rules 
  The Department has proposed new  regulations for program integrity for Title IV programs that are on schedule to  be finalized by November 1, 2010, and, under the HEA master calendar, will be  effective July 1, 2011.  The proposed  rules include enhanced state enforcement measures, additional guidance on misrepresentation,  and changes to rules on incentive compensation.

States  have a critical role and responsibility in overseeing postsecondary  institutions, along with accrediting agencies and the Department.  Postsecondary institutions are required to  have a state license to be eligible for Federal financial aid.  However, state oversight activities vary  widely.  Under the proposed rules, schools  receiving Federal student aid would be required to have a license  from a state entity that maintains a list of authorized institutions and has  procedures to accept and investigate complaints, and to remove institutions  from the list.  The loss of a license from  this agency would mean that the school would become ineligible to participate  in the Federal student aid programs.

The  proposed rules would also grant the Department stronger authority to prevent an  institution from making false, erroneous, or misleading statements about its  educational programs, its financial charges, and the employability of its  graduates.  The proposed rules would apply  to all statements made by institutions and their agents to students,  prospective students, members of the public, accrediting agencies, states, and  the Department.

The HEA  prohibits institutions from providing any commission, bonus, or other incentive  payment based directly or indirectly on success in securing enrollments or  financial aid to any person or entity engaged in any student recruiting or  admission activity.  However, the current  regulations provide 12 “safe harbors” that allow schools to avoid this  rule.  These safe harbors have given  license to some institutions to pay their recruiters based on success in securing  enrollments.  The proposed rule would  eliminate these exceptions because allowing compensation based on the number of  enrollees creates incentives to pressure or deceive prospective students.

These  proposed rules, when finalized, will complement the Department’s companion set  of proposed program integrity rules, which would set standards for non-degree  programs at all institutions and most educational and training programs at  for-profit institutions to demonstrate that they are preparing students for  “gainful employment,” as required by the HEA.   In their entirety, the proposed rules will help to ensure that students are  protected from unscrupulous  practices and  protect taxpayers from the misuse of Federal funds.

Consumer  Disclosure

In  some cases observed by GAO, prospective students struggled to get accurate  information on the academic programs in which they were interested.  This information included program costs,  graduation rates, and job placement rates.  The Department is working to make this and  related information available directly to students and families to the extent  possible.  The Department’s  on-line Free Application for Federal Student  Aid (FAFSA) form gives students an independent source of information on  graduation rates, retention rates, and transfer rates.  The FAFSA also links to the Department’s  College Navigator Web site, which recently added new information on college  “net price,” which is the actual cost of attendance – not just the sticker  price – including living expenses and scholarships, for students of different  incomes.  The College Navigator Web site  also includes detailed college information, including programs offered and  graduation rates.

The  Department has also recently proposed regulations that would require additional  data disclosure to prospective students.  For example, certain non-degree and  educational and training programs  as mentioned above, which are eligible to receive Federal student aid for their  students if they prepare those students for “gainful employment in a recognized  occupation,” would be required  to disclose their former students’ student loan repayment rates and  debt-to-income ratios.

My  staff and I will continue to work with you, your colleagues, and other Federal  agencies to detect and eliminate fraudulent or misleading activities by  postsecondary educational institutions that endanger students, put taxpayers at  risk, and otherwise misuse Federal funds.   We thank you for your leadership on this important issue and look  forward to an open dialogue and meaningful action in the days and weeks ahead.

| | Sincerely, 
| | -----------
| | /s/        
| | Arne Duncan

cc:  Committee on Health, Education, Labor, and Pensions