United States Government Accountability Office

GAO Report to Congressional Requesters

CAPITAL FINANCING

Department 

Management 

Improvements Could 

Enhance Education’s 

Loan Program for 

Historically Black 

Colleges and 

Universities 

October 2006 

 

GAO-07-64 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

October 2006

CAPITAL FINANCING

Department Management Improvements 

Could Enhance Education’s Loan 

Program for Historically Black Colleges 

and Universities 

Highlights of GAO-07-64, a report to 

congressional requesters 

Historically Black Colleges and

Universities (HBCU), which number 

around 100, undertake capital

projects to provide appropriate 

settings for learning, but many face

challenges in doing so. In 1992,

Congress created the HBCU Capital 

Financing Program to help HBCUs 

fund capital projects by offering

loans with interest rates near the 

government’s cost of borrowing. We

reviewed the program by considering 

(1) HBCU capital project needs and 

program utilization, (2) program 

advantages compared to other 

sources of funds and schools’ views 

on loan terms, (3) the Department of 

Education’s (Education) program 

management, and (4) certain 

schools’ perspectives on and 

Education’s plan to implement loan 

provisions specifically authorized by

Congress in June 2006 to assist in 

hurricane recovery efforts. To 

conduct our work, we reviewed

applicable laws and program 

materials and interviewed officials 

from federal agencies and 34 HBCUs. 

What GAO Recommends

We recommend that Education 

(1) comply with the law by regularly 

convening and consulting its 

Advisory Board, (2) improve school 

communications, (3) allow

semiannual repayments, (4) properly 

account for costs in conformance 

with the law, and (5) formally

monitor its contractor. Education

agreed with our findings and four of 

the five recommendations made in 

this report. The department

disagreed with our third 

recommendation. We continue to 

believe Education should allow 

semiannual repayments. 

HBCU officials we interviewed reported extensive and diverse capital 

project needs, yet just over half of available loan capital ($375 million) has 

ever been borrowed. About 23 HBCUs have taken steps to participate in the 

program, and 14 have become borrowers. Education has collected and 

reported limited data on the program’s utilization and has not established 

performance measures or goals to gauge program effectiveness, though 

Education officials noted they are developing measures and goals.

The HBCU loan program provides access to low-cost capital financing and 

flexibilities not always available elsewhere, but some loan terms and 

conditions discourage participation, though school officials said they remain 

interested in the program. The low interest rate and 30-year repayment 

period were regarded favorably by participants and nonparticipants alike, 

and the program makes funds available for a broader range of needs than 

some federal grant programs. However, the requirement to place in a pooled 

escrow 5 percent of loan proceeds—an insurance mechanism that reduces

federal program costs due to any program borrower’s potential delinquency

or default—monthly payments versus semiannual ones traditionally 

available from private sources of loans, and the extent to which some loans 

have been collateralized could discourage participation. 

While Education has taken steps to improve the program, significant 

weaknesses in its management control could compromise the program’s 

effectiveness and efficiency. Education has recently provided schools with 

both fixed and variable interest rate options, allowed for larger loans, and 

afforded more opportunities to negotiate loan terms. Also, Education has 

increased its marketing efforts for the program. However, Education has not 

established effective management control to ensure that it is 

(1) communicating with schools in a useful and timely manner, 

(2) complying with statutory requirements to meet twice each year with an 

advisory board composed of HBCU experts and properly account for the 

cost of the program, and (3) monitoring the performance of the program’s 

contractor. 

Officials from 4 HBCUs in Louisiana and Mississippi told us that in light of 

the extensive 2005 hurricane damage to their campuses, they were pleased 

with certain emergency loan provisions but concerned that there would not 

be sufficient time to take advantage of Education’s authority to waive or 

modify the program provisions. School officials from the 4 schools noted 

that their institutions had incurred extensive physical damage that was 

caused by water, wind, and, in one case, fire, and that the full financial 

impact of the hurricanes may remain unknown for years. Although 

Education officials told us that they have not yet determined the extent to 

which the authority under the emergency legislation to waive or modify 

program provisions for hurricane-affected institutions would be used, the 

department would be prepared to provide loans to hurricane-affected 

HBCUs. 

www.gao.gov/cgi-bin/getrpt?GAO-07-64. 

To view the full product, click on the link 

above. For more information, contact Cornelia 

Ashby at (202) 512-7215 or

ashbyc@gao.gov. 
Contents 

Letter 1

Results in Brief 3

Background 6

HBCUs Reported Substantial Capital Project Needs, but Only 

About Half of Available Program Funds Have Been Borrowed 10 

The Program Provides Needed Access to Low-Cost Capital 

Financing, but Certain Loan Terms and Conditions Discourage 

Participation 16

Education Has Taken Some Steps to Improve the Program, but 

Weaknesses in Management Control Exist 21 

HBCUs Affected by Hurricanes Expressed Satisfaction with 

Special Loan Provisions and Concerns with Application 

Deadline, while Education Officials Said They Would Evaluate

Loan Processes 28 

Conclusions 34

Recommendations for Executive Action 35 

Agency Comments 37 

Appendix I List of Historically Black Colleges and 

Universities GAO Interviewed 39 

Appendix II Number of HBCUs Eligible to Participate in Capital 

Financing Program by State (as of August 31, 2006) 40 

Appendix III HBCUs Located in Geographic Area Affected by

Hurricane Katrina in 2005 41 

Appendix IV Comments from the Department of Education 42 

Appendix V GAO Contact and Staff Acknowledgments 45 

Page i GAO-07-64 Capital Financing
Tables 

Table 1: Key Terms and Conditions for HBCU Capital Financing 

Loans 8 

Table 2: History of Loan Activity of the HBCU Capital Financing 

Program 14

Table 3: Education’s Indicators Measuring Program Utilization 15 

Table 4: Designated Bonding Authority’s Attendance and Scope of 

Activities at Conferences since 2002 23 

Figures 

Figure 1: The Renovated Kellogg Conference Center at Tuskegee 

University 13

Figure 2: Xavier University Science Building Auditorium Before 

and After Restoration from Flood Damage 30 

Figure 3: Exterior of Southern University’s Library with Waterline 

Indicating the Extent of Flooding 31 

Figure 4: Removed Asbestos from Dillard University Library 

Awaiting Disposal 32 

Page ii GAO-07-64 Capital Financing
Abbreviations 

APPA Association of Higher Education Facilities Officers 

DBA designated bonding authority 

FCRA Federal Credit Reform Act 

FEMA Federal Emergency Management Agency 

FFB Federal Financing Bank 

HBCU Historically Black Colleges and Universities 

HEA Higher Education Act 

NACUBO National Association of College and University Business 

Officers 

NAFEO National Association for Equal Opportunity in Higher 

Education 

NASULGC National Association of State Universities and Land Grant 

Colleges 

OMB Office of Management and Budget 

SACS Southern Association of Colleges and Schools 

SBA Small Business Administration 

UNCF United Negro College Fund 

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Page iii GAO-07-64 Capital Financing
United States Government Accountability Office

Washington, DC 20548 

October 18, 2006 

The Honorable Dale E. Kildee 

Ranking Minority Member 

Subcommittee on 21st Century Competitiveness

Committee on Education and the Workforce 

House of Representatives 

The Honorable Major R. Owens 

House of Representatives 

The nation’s Historically Black Colleges and Universities (HBCU), like 

many of the approximately 6,500 other institutions of higher education in 

the country,1

 undertake capital improvements, including renovating 

existing or constructing new instructional facilities, to provide their 

students appropriate settings for learning and social development. Many 

HBCUs, which number around 100 schools, face numerous challenges in

funding capital projects because they have relatively small enrollments, 

limited endowments, and face other financial constraints. Despite these 

challenges, HBCUs have distinguished themselves by granting a 

substantial portion of the degrees earned by African-Americans. For 

example, in school year 2003-2004, HBCUs granted about 13.5 percent of 

all degrees earned by African-Americans while constituting only 

1.5 percent of the nation’s postsecondary institutions. 

To help these schools fund capital projects, Congress created the HBCU 

Capital Financing Program in 1992 under the Higher Education Act of 1965 

(HEA) to provide eligible HBCUs with access to low-cost financing. The 

Department of Education (Education) is responsible for overall program 

management and is expected to regularly consult with the HBCU Capital 

Financing Advisory Board (Advisory Board). The Advisory Board is 

composed of the Secretary of Education, or the Secretary’s designee, 

presidents of private and public HBCUs, and other experts on HBCUs. 

Operation of the program is contracted to a designated bonding authority 

(DBA) that, among other lending functions, raises funds by issuing bonds 

for purchase by the Federal Financing Bank (FFB)—a government 

 1

 These are institutions recognized by the Department of Education as accredited 

institutions eligible for participation in federal student financial aid programs. 

Page 1 GAO-07-64 Capital Financing
corporation under the supervision and direction of the Department of 

Treasury (Treasury) that assists federal agencies in financing agencyissued or agency-guaranteed securities. Funds raised are subsequently lent 

to eligible HBCUs at an interest rate slightly above the government’s cost 

of borrowing to finance qualified capital projects. As part of its 

responsibilities in managing a federal credit program subject to the 

Federal Credit Reform Act of 1990 (FCRA), Education is required to 

determine the net cost to the government of extending credit over the life 

of a loan—the subsidy cost—in the year the loan is made. Congress must 

provide Education with budget authority to cover these costs before loans 

are provided to HBCUs. Since the program was first funded, 

appropriations legislation has, in general, limited the subsidy costs of the 

HBCU capital financing to no greater than zero. 

In August of 2005, the campuses of some HBCUs in the Gulf Coast were 

severely damaged by Hurricane Katrina or Rita. To assist these HBCUs in 

their recovery efforts, in June 2006, Congress, in the Emergency 

Supplemental Appropriations Act for Defense, the Global War on Terror, 

and Hurricane Recovery, 2006 (Emergency Act), amended certain 

statutory provisions for institutions affected by the Gulf Coast hurricane 

disasters and granted the Secretary of Education the authority to waive or 

modify any statutory or regulatory provisions of the program in 

connection with a Gulf Coast hurricane disaster. In addition, the 

Emergency Act provides that the authority to enter into, waive, or modify 

the terms of a loan agreement expires 1 year after the legislation’s 

enactment. 

In light of the upcoming reauthorization of the Higher Education Act, you 

had questions about the utilization of the program and Education’s 

management of the program. To address your interests, we reviewed the 

program by considering (1) the capital project needs of the nation’s 

HBCUs and the extent to which HBCUs have used the program; (2) the 

relative advantages of the program, if any, compared with other sources of 

funding, and schools’ perspectives on the loan terms and conditions; 

(3) whether Education’s administration and management of the program 

ensures program effectiveness; and (4) schools’ perspectives on the 

emergency loan provisions of the Emergency Act and Education’s plans 

for implementing them. 

To conduct our work, we reviewed and analyzed applicable laws and 

regulations as well as program data and documents pertaining to program 

participation, program policies, and agreements among Education, the 

DBA, the FFB, and participating schools. We also reviewed the methods 

Page 2 GAO-07-64 Capital Financing
and procedures—management controls—Education had in place or was 

planning to implement to manage the program. To provide some context 

for understanding HBCUs’ capital project needs, we analyzed available 

national studies concerning such needs of postsecondary institutions and 

HBCUs in particular. In addition, we reviewed alternative capital funding 

sources, including private sector financing and federal grants available to 

HBCUs and asked schools how these sources or funding options compare 

to the program. We interviewed officials representing Education, its DBA, 

the Advisory Board, the FFB, the Office of Management and Budget 

(OMB), the Small Business Administration (SBA), associations 

knowledgeable about HBCUs, and the Bond Market Association. We 

conducted semistructured interviews with 34 HBCUs. (See app. I.) We 

interviewed all 13 program participants that originated loans prior to 2006,

and a purposive sample of 21 nonparticipants. We selected 

nonparticipating schools based on (1) location, (2) type (2-year and 4-year,

public and private), and (3) enrollment size. Our selection of 

nonparticipating schools was made to obtain a variety of institutional 

perspectives and was not intended to be representative. During the course 

of our review, we conducted site visits to 5 schools,2

 3 of which were 

institutions affected by the hurricanes in 2005,

3

 and the other 2 institutions 

were program participants. Our interviews with program participants also 

included another institution affected by the 2005 hurricanes. We 

conducted our work from May 2005 to August 2006 in accordance with 

generally accepted government auditing standards. 

HBCU officials we interviewed reported extensive and diverse capital 

project needs, including construction and renovation of facilities and 

addressing deferred maintenance, yet just over half of the available HBCU 

Capital Financing Program loan capital has been borrowed. While capital 

project needs have not been well documented by national studies, the 

schools have individually identified and documented them. Despite 

reported needs, only 14 schools became borrowers—borrowing about 

$200 million, well below the $375 million limit Congress established. 

Education has collected and reported limited information on the 

program’s utilization and has not established performance measures or 

Results in Brief 

 2

 Schools we visited included Barber-Scotia College, Dillard University, Southern University

at New Orleans, Tuskegee University, and Xavier University. 

3

 A total of 8 HBCUs were affected by the 2005 hurricanes. 

Page 3 GAO-07-64 Capital Financing
goals to gauge program effectiveness, though Education officials noted 

that they are currently working on developing such measures and goals. 

The program provides access to low-cost capital financing and flexibilities 

not always available elsewhere, but some loan terms and conditions could 

discourage participation, though school officials said they remain 

interested in the program. Participants and nonparticipants alike looked

favorably on low interest rates and long repayment periods (up to 

30 years) offered by the program and noted that these may not be available 

in the private market for some borrowers. Further, while HBCUs may 

qualify for a variety of federal grants for capital projects, school officials 

said that the program makes funds available for a broader range of needs. 

However, school officials found that certain provisions of the program 

have discouraged participation. In particular, many officials remarked that

the requirement that they place in a pooled escrow account 5 percent of 

loan proceeds was a disincentive to participate in the program. The 

escrow funds, which reduce the federal budget cost of the program by 

offsetting the estimated costs of any program borrower’s loan delinquency 

or default, are returned to program participants if no such losses occur. 

The recent default of one borrower, however, has heightened awareness 

among participants of the financial risk for them inherent in the pooled 

escrow arrangement. Though not as prevalent a concern, Education’s 

requirement for monthly loan repayments was viewed by some as an 

undue burden, given that the DBA remits these payments to the FFB 

semiannually. Although the range of capital projects permissible under the 

program is wider than that offered through some federal grant programs 

we reviewed, many school officials would like to see additional projects 

funded, such as multipurpose community centers and campus 

beautification projects. While concerns were noted, many schools 

expressed an interest in participating again or for the first time, provided

that certain program improvements were made. 

While Education has taken some steps to improve the program, we found 

significant weaknesses in its management controls that compromise the 

extent to which Education can ensure program objectives are being 

achieved effectively and efficiently. Specifically, with respect to program 

improvements, Education has recently provided schools the choice of

fixed or variable interest rates, allowed for larger loan amounts, and 

afforded more opportunity for schools to negotiate loan terms that 

appealed to schools. In addition, Education has increased marketing of the 

program. However, Education has not established effective management 

control in several areas, including 

Page 4 GAO-07-64 Capital Financing
• Communication with HBCUs: Several HBCU officials reported that 

they lacked clear, timely, and useful information from Education and 

the DBA. For example, several officials said they did not receive 

updates about the status of their loans. For some schools, the process 

of getting the loan took more than a year. As a result of the lengthy 

process, capital project costs for some schools increased. School 

officials told us that the process could have been expedited had 

Education and the DBA made use of previous borrowers’ experiences 

to apprise them of problems that could affect their own applications. 

• Compliance with laws and regulations: Despite a statutory 

requirement that the Advisory Board meet with and advise the 

Secretary of Education at least twice each year, the Advisory Board has 

met only three times in the last 12 years. In addition, Education has not 

complied with requirements of the Federal Credit Reform Act of 1990. 

In particular, Education has not properly accounted for the costs of the 

program because it has excluded certain fees paid by borrowers to the 

government from its cost estimates, thereby overestimating program 

costs. Moreover, Education has allowed the DBA to collect and hold in 

trust fees paid, but has not established policies or procedures for the 

DBA concerning how it is to remit these funds to the government. 

• Monitoring the program contractor: Although the DBA has been under 

contract with Education for over 5 years, it has not been formally 

assessed for performance. Also, Education has not monitored the 

marketing activities of its DBA to ensure that loans are being fairly 

allocated among as many eligible institutions as possible. Because the 

DBA’s compensation is determined as a percentage of the amount 

borrowed, and the costs it incurs may not vary significantly from loan 

to loan, it is important to monitor its activities to ensure it is not 

making loans exclusively to schools that are likely to borrow larger 

amounts and for which its potential for profit is highest. Additionally, 

we found several instances of poor record keeping by the DBA, 

including missing key loan documentation, and until our review, 

Education was unaware that such documents were missing. 

HBCU officials whose campuses were affected by the hurricanes 

expressed satisfaction with the special loan provisions but had concerns 

about the time allowed to take advantage of them, while Education 

officials told us they are taking steps to evaluate the department’s loan 

processes. School officials from the 4 schools we spoke with noted that 

their institutions had incurred extensive physical damages caused by 

water, wind, and, for one school, fire. Many of these officials said that they 

have not been able to fully assess all hurricane-related costs, such as 

Page 5 GAO-07-64 Capital Financing
replacing property, repairing plumbing systems, landscaping, and 

replacing sidewalks, and that the assessment process was lengthy because 

of the time required to prioritize campus restoration needs, undertake 

complex assessments of historic properties, follow state assessment 

processes, and other factors. They noted that the difficulties they face in 

making their assessments may make it challenging for them to apply prior 

to the expiration of the specially authorized provisions. School officials 

appreciated the reduced interest rate and cost of issuance (both set at 

1 percent or less) and that the Secretary of Education was provided 

authority to waive or modify statutory or regulatory provisions for affected 

institutions to better assist them with their recovery. Although Education 

officials told us that they have not yet determined the extent to which the

department would make use of its authority to waive or modify program 

provisions, including statutory loan limits, the department would be 

prepared to provide loans to hurricane-affected HBCUs. They noted that 

the department has already notified eligible institutions of the availability 

of funds and would hold additional meetings with schools to gain an 

understanding of their capital improvement and restoration needs. 

In this report we are making several recommendations to the Secretary of

Education to ensure that the department is complying with provisions of 

the Higher Education Act of 1965 and the Federal Credit Reform Act of 

1990. Furthermore, Education should also implement a number of 

program improvements, such as revising the repayment frequency for 

HBCUs and increasing monitoring of the DBA to ensure program 

effectiveness and efficiency. 

In written comments on a draft of this report, Education agreed with our 

findings and all but one of our recommendations. Education’s written 

comments appear in appendix IV. Education also provided technical 

comments, which we incorporated where appropriate. 

Congress established the HBCU Capital Financing Program in 1992 under 

Title III, Part D, of the Higher Education Act of 1965, as amended, to 

provide HBCUs4

 with access to low-cost capital to help them to continue 

Background 

 4

 For purposes of this program, the Higher Education Act of 1965, as amended, generally 

defines an HBCU as a college or university that was established before 1964, whose

principal mission was and is the education of Black Americans, and is accredited or making 

reasonable progress toward accreditation by an accrediting agency or association 

recognized by Education.

Page 6 GAO-07-64 Capital Financing
and expand upon their educational missions. (See app. II for locations of

HBCUs eligible to participate in the program.) Program funds, raised 

through bonds issued by the DBA and purchased by the FFB, are lent to 

eligible schools with qualified capital projects.5

 Loan proceeds may be 

used for—among other things—repairing, renovating, or in exceptional 

circumstances, constructing and acquiring new instructional or residential 

facilities, equipment, or research instrumentation. Additionally, schools 

are able to refinance prior capital loans. Education guarantees loan 

repayment. 

Program Description Although Education administers the program, the DBA is responsible for 

many of the program’s operations and is subject to departmental 

oversight.6

 Specifically, the DBA works with prospective borrowers to 

develop loan applications and monitors and enforces loan agreements. 

The loan process consists of multiple steps. HBCUs interested in obtaining 

funds through the program must first complete a preliminary application

that includes information such as enrollment, some financial data—

including a description of existing debt—and proposed capital projects. 

On the basis of this information, the DBA determines whether the school 

should formally complete an application, which includes more detailed 

financial information, such as audited financial statements and various 

campus plans and assessments. To be approved for the loan, an HBCU 

must satisfy certain credit criteria and have qualified projects. Once the 

DBA determines a school’s eligibility status, a memorandum is sent to 

Education for final approval. When approved, the loan goes through a 

closing process during which certain terms and conditions may be 

negotiated. Table 1 describes key loan terms and conditions to which 

schools are subject. 

 5

 Funds can also be raised through the private market. However, to date, Education has

used only the FFB to finance the loans. 

6

 Education has had two DBAs. The current DBA, Commerce Capital Access Program 

Corporation, was selected by Education in 2001. The first DBA, selected in 1994 and 

terminated in 2000, was Educational Direct Loan Mortgage Company and Pryor, 

McClendon, Counts and Company. 

Page 7 GAO-07-64 Capital Financing
Table 1: Key Terms and Conditions for HBCU Capital Financing Loans 

Loan term Description 

Life of loan Loan maturity can be for 30 years or less. 

Interest rates Schools may choose either variable or fixed interest rates for loans. Interest rates are generally based on the 

government’s cost of borrowing. The FFB adds a surcharge of 1/8th of 1 percent per year to cover federal

administrative expenses. While the FFB levies the surcharge, Education is responsible for collecting it. 

Escrow By law, schools are required to place 5 percent of the outstanding loan balance in an escrow account to cover 

risks against delinquency and default. Funds held in escrow are pooled and available to cover the costs of any 

program borrower’s delinquent or defaulted loan. 

Other fees By law, the cost of bond issuance is limited to no more than 2 percent of the loan (including the DBA’s origination 

fee—currently set at 1.25 percent). 

Collateral Schools must provide collateral to obtain loan funds. 

Disbursement Loan disbursements are made incrementally as projects progress. 

Repayment Borrowers repay their loans monthly to the DBA, which in turn remits loan repayments to the FFB semiannually. 

The law requires that borrowers make payments to the DBA at least 60 days prior to the date for which payment 

on the bonds is expected to be needed. 

Other Each year, schools are required to submit financial statements for the DBA’s review. 

Source: GAO analysis.

Federal Credit Reform Act 

of 1990 

The Federal Credit Reform Act of 1990, along with guidance issued by 

OMB and accounting standards, provides the framework agencies are to 

use in calculating the federal budget costs of federal credit programs, such 

as the HBCU Capital Financing Program. The two principles of credit 

reform are defining subsidy cost and requiring that budget authority to 

cover these costs be provided in advance before new loan obligations are

incurred. OMB is responsible for coordinating the estimation of subsidy 

costs. Subsidy costs are determined by calculating the net present value7

of estimated cash flows to and from the government that result from 

providing loans and loan guarantees to borrowers. (Guaranteed loans that

are financed by the FFB are treated as direct loans for budgetary 

purposes, in accordance with FCRA.) Cash flows for direct loans include, 

for example, loan disbursements to borrowers and borrower repayments 

of principal and payments of interest to the government. Estimated cash 

flows are adjusted to reflect the risks associated with potential borrower 

 7

 “Present value” is the worth of future streams of returns or costs for a program in terms of

money paid immediately. In calculating present value, future amounts are converted into 

their “money now” equivalents using a discount rate. The discount rate is determined by 

OMB and is generally the average annual interest rate for marketable zero-coupon U.S.

Treasury securities with the same maturity from the date of disbursement as the cash flow

being discounted. 

Page 8 GAO-07-64 Capital Financing
delinquencies and defaults, and estimates of amounts collected on 

defaulted loans. Subsidy costs can be positive or negative. If the net 

present value of cash outflows exceeds the net present value of cash 

inflows, the government incurs a positive subsidy cost. On the other hand, 

the government realizes a gain in revenue if there is a negative subsidy. 

Since the program was established, appropriations legislation has, in 

general, limited the subsidy costs of the program to be no greater than 

zero. In addition, the legislation authorizing the program established a 

credit authority limit of $375 million; of this amount, private HBCUs are 

collectively limited to borrowing $250 million, and public HBCUs are 

collectively limited to borrowing $125 million. 

2005 Gulf Coast 

Hurricanes and Disaster 

Assistance 

Over a period of 2 months in 2005, three hurricanes struck the Gulf Coast 

region of the United States, resulting in more than $118 billion in estimated 

property damages.8

 Two of these hurricanes, Katrina and Rita, struck New 

Orleans and surrounding areas within a month of each other, resulting in 

significant damages to several institutions of higher education in the 

region and including the campuses of several HBCUs,9

 including Dillard 

University, Southern University at New Orleans, and Xavier University, in 

Louisiana, and Tougaloo College, in Mississippi. (See app. III for locations 

of the 8 hurricane affected HBCUs.) 

In June 2006, Congress passed the Emergency Act which, among other 

things, amends the HBCU Capital Financing Program to assist hurricaneaffected HBCUs in their recovery efforts. To be eligible, a school must be 

located in an area affected by a Gulf Coast hurricane disaster and 

demonstrate that it (1) incurred physical damage resulting from Hurricane 

Katrina or Rita; (2) has pursued other sources of compensation from 

insurance, Federal Emergency Management Agency (FEMA), or the Small 

Business Administration, as appropriate; and (3) has not been able to fully

reopen in existing facilities or to the levels that existed before the 

hurricanes because of physical damage to the institution. Key provisions 

include a lowered interest rate and cost of issuance (both set at 1 percent 

or less), elimination of the escrow, and deferment of principal and interest 

 8

 That is, Hurricanes Katrina, Rita, and Wilma, which have been collectively referred to as 

the Gulf Coast hurricanes. 

9

 Four HBCUs in Mississippi and Alabama (Jackson State University, Alcorn State 

University, Bishop State Community College, and Hinds Community College-Utica 

Campus) also reported damages to property totaling $4.5 million. 

Page 9 GAO-07-64 Capital Financing
payments from program participants for a 3-year period. The Emergency 

Act also provides the Secretary of Education with authority to waive or 

modify any statutory or regulatory provisions related to the program in 

connection with a Gulf Coast hurricane disaster.

FEMA assists states and local governments with the costs associated with

disaster response and recovery efforts that exceed a state or locale’s 

capabilities. Grants are also provided to eligible postsecondary 

educational institutions to help them recover from the disaster. Some 

institutions of higher education are subsequently provided with referrals 

to SBA when seeking assistance from FEMA. For private, nonprofit 

institutions, SBA’s disaster loans are designed to be a primary form of 

federal assistance. Unlike their public counterparts, private colleges must 

apply for low-interest, long-term disaster loans prior to seeking assistance 

from FEMA. Schools may apply for SBA loans, and the aggregate loan 

amount cannot exceed $1.5 million. In general, the loan terms for each 

loan include a maximum of 30 years for repayment with interest rates of at 

least 4 percent. 

HBCU officials we interviewed reported extensive and diverse capital 

project needs, including construction and renovation of facilities and 

addressing deferred maintenance, yet just over half of the available 

program loan capital has been borrowed. While HBCU capital project 

needs are not well documented by national studies, the schools 

themselves have individually identified and documented them. Despite 

reported needs, only about a quarter of HBCUs have taken steps to 

participate in the program, and about half of these HBCUs became 

borrowers. Education has collected and reported limited information on 

the program’s utilization and has not established performance measures or 

goals to gauge program effectiveness, though Education officials noted 

that they are currently working on developing such measures and goals. 

Disaster Assistance 

Agencies

HBCUs Reported 

Substantial Capital 

Project Needs, but 

Only About Half of 

Available Program 

Funds Have Been 

Borrowed 

Page 10 GAO-07-64 Capital Financing
There are few national studies that document the capital project needs of 

HBCUs, and they do not provide a current and comprehensive national

picture. The four that we identified and reviewed are more than several 

years old, narrowly scoped, or had limited participation.10 Specifically, the

studies are between 6 and 17 years old, and two studies focused only on

specific types of need—renovation of historic properties and campus 

wiring for computer networks.11 One study that addressed a broader range 

of needs and was among the most recent had a low response rate— 

37 percent. 

HBCUs Reported Having 

Substantial Capital Project 

Needs, although Such 

Needs Are Not Well 

Documented in National 

Studies 

Despite the lack of national studies, schools that we interviewed reported 

extensive, diverse, and ongoing capital project needs. School officials 

reported that they routinely conduct facility assessments12 as part of their 

ongoing strategic planning and that these assessments help determine the 

institutions’ short- and long-term capital needs. They said that capital 

projects, including the construction of new dormitories, renovation of 

aging or historic facilities, repair of infrastructure, and addressing longstanding deferred maintenance are needed for a variety of reasons. New 

facilities such as dormitories and student centers are often needed as a 

result of enrollment growth, for example, while modernization of existing

facilities is needed to accommodate technological advances. For example, 

Tuskegee University renovated an existing facility to house its hospitality 

management program, creating modern meeting facilities along with a fullservice hotel, which provides students with a real-world laboratory in 

which they gain immediate hands-on experiences (see fig. 1). In addition, 

many of the school officials who we interviewed reported that their 

schools had particularly old facilities, many of which are listed in the 

 10 (1) The Association of Higher Education Facilities Officers (APPA)/National Association 

of College and University Business Officers (NACUBO), The Decaying American Campus:

A Ticking Time Bomb 1989, (2) APPA/NACUBO and Sallie Mae, A Foundation to Uphold, 

1996, (3) U.S. Department of Commerce/National Association For Equal Opportunity In 

Higher Education (NAFEO), Historically Black Colleges and Universities: An Assessment

of Networking and Connectivity, 2000, and (4) GAO, Historic Preservation: Cost to 

Restore Historic Properties at Historically Black Colleges and Universities, 

GAO/RCED-98-51, (Washington, D.C.: Feb. 6, 1998). 

11 In 1998, HBCUs reported that an estimated $755 million was needed to restore 

712 historic properties. See GAO/RCED-98-51.

12 About 29 percent of HBCUs we contacted reported that their own staff conducted their

needs assessment, and the remaining schools reported that they relied on either an

architectural or an engineering firm to perform such assessments. 

Page 11 GAO-07-64 Capital Financing
National Register of Historic Places.13 Some school officials cited their 

need to repair or replace campus infrastructure. For example, some 

schools reported needing to replace leaking underground water pipes, 

while others reported the need to replace 100-year-old water and gas 

pipes. Many of the school officials we interviewed reported having 

deferred maintenance projects, some for over 15 years, and officials from 

3 schools estimated their schools’ deferred maintenance to be over 

$50 million. For some schools, the deferred maintenance is substantial in 

light of existing resources, according to HBCU officials. These types of 

capital projects are essential to ensuring student safety and preserving 

assets that directly affect their ability to attract, educate, and retain 

students. 

 13 Authorized under the National Historic Preservation Act of 1966, the National Register is 

part of a national program to coordinate and support public and private efforts to identify,

evaluate, and protect our historic and archeological resources. Properties listed in the 

register are significant to American history, architecture, archeology, engineering, and 

culture.

Page 12 GAO-07-64 Capital Financing
Figure 1: The Renovated Kellogg Conference Center at Tuskegee University 

Source: Tuskegee University.

Note: The University relied in part on the HBCU Capital Financing Program to renovate and expand 

this facility. In particular, a program loan was used to finance the upgrades of the heating and 

ventilation system. 

Approximately 14 Percent 

of HBCUs Have Borrowed 

Just Over Half of the 

Available Program Funds 

Over the life of the program, approximately 14 percent of HBCUs have 

borrowed just over half of the available funds despite the substantial 

needs reported by schools. Specifically, 23 HBCUs, according to

Education, have taken steps to participate in the program, and 14 became

borrowers, with loans totaling just over $200 million—below the 

program’s $375 million total limit. About 20 percent of the eligible private 

institutions have borrowed a little more than half of the $250 million 

allotted for private schools, and less than 8 percent of public institutions 

have borrowed less than two-thirds of the $125 million allotted for public 

schools. To date, loan participants have all been 4-year institutions. Taking 

into account loan repayments, the total amount of outstanding loans was 

about $168 million as of August 2006, leaving about $207 million available 

for loans (about $66 million for public schools and about $141 million for 

private schools). Table 2 shows the participants and the amounts of their 

loans. Regarding other schools that took steps to participate in the 

Page 13 GAO-07-64 Capital Financing
program but did not become borrowers, 6 schools were reported to have 

withdrawn their applications, and 6 others had applications pending. To 

date, only one school has been denied a loan. 

Table 2: History of Loan Activity of the HBCU Capital Financing Program

Institution Institution type Amount borrowed

Barber-Scotia College Private, 4-year $7,000,000

Miles College Private, 4-year $7,835,000

Tougaloo College Private, 4-year $8,200,000

Virginia Union University Private, 4-year $8,218,000

Bennett College Private, 4-year $8,700,000

Livingstone College Private, 4-year $13,000,000

Shaw University Private, 4-year $10,015,000

Bethune-Cookman College Private, 4-year $20,295,000

Clark Atlanta University Private, 4-year $23,905,000

Tuskegee University Private, 4-year $35,931,000

Subtotal for private institutions $143,099,000

West Virginia State University Public, 4-year $3,500,000

Lincoln University Public, 4-year $13,850,000

Harris Stowe State University Public, 4-year $15,264,000

South Carolina State University Public, 4-year $42,000,000

Subtotal for public institutions $74,614,000

Total $217,713,000

Source: GAO analysis of Education data. 

Note: Some schools have more than one loan; amount borrowed reflects total for all loans. 

Education Has Taken 

Limited Steps to 

Determine Schools’ 

Financing Needs and 

Collect Information and 

Report on Program 

Utilization and 

Effectiveness 

Education has collected and reported limited information concerning 

HBCUs’ capital financing needs and the schools’ utilization of the program. 

Education officials said that, beginning in 2005, to understand schools’ 

financing needs and whether the program could assist schools, the DBA 

engaged in an outreach effort through which it identified 15 schools that 

might be candidates for the program. Over the history of the program, 

Education has collected some information to track program utilization, 

including the number of inquiries and applications received and the loan

volume requested, approved, and awarded. However, Education has not 

widely reported such data. Education has provided certain elements of its 

program utilization data to Congress’ appropriations committees via its 

Page 14 GAO-07-64 Capital Financing
annual justifications of budget estimates documents. Table 3 shows the 

data collected by Education to track program utilization. 

Table 3: Education’s Indicators Measuring Program Utilization 

Dollars in millions 

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Total

Inquiries — — 25 30 — — 11 22 36 23 8 155

Pre-applications received — — — — 1 2 2 8 7 5 1 26

Applications received 4 4 3 3 1 2 2 3 2 1 1 26

Loan volume requested $20.5 $21.8 $12.3 $37.6 $100 $20.7 $32.1 $34.9 $29.5 $57.5 $18 $384.90

Loans approved 4 1 2 3 1 2 2 3 4 1 1 24

Loan volume approved $20.5 — $8.3 $37.6 $13.85 $20.7 $32.1 $24.9 $51.8 $42 $15.5 $267.25

Loans awarded 1 1 0 3 1 2 2 2 3 1 1 17

Volume awarded $3.5 $4.8 $0 $37.6 $7 $20.7 $32.1 $24.9 $29.8 $42 $15.3 $217.70

Source: Education and GAO analysis of budget justification documents. 

Note: (—) indicates that Education was unable to provide information for the indicator in that 

particular year. 

Education officials noted that while the data they collect are useful to 

indicate the extent to which the schools have used or accessed the 

program, they are inadequate to address questions concerning whether the 

program is under- or overutilized or to demonstrate program effectiveness. 

These officials noted that they believe program performance measures 

would be useful but that developing such measures is particularly 

challenging for a credit program like the HBCU Capital Financing 

Program. This is so in part because participation in a loan program is 

dependent on complex factors, such as schools’ funding needs, the 

availability of other sources of financing, and schools’ desire and capacity

to assume debt. Program officials cautioned against setting firm program 

participation goals, for example, because they would not want Education 

to be perceived as “pushing” debt onto schools that either do not want to,

or should not, assume loan obligations before their circumstances warrant 

doing so. Another complicating factor program officials cited was the 

small number of potential program beneficiaries. One Education official 

noted that Education has established performance goals and measures for 

its student grant and loan aid programs, which are based on sophisticated 

survey mechanisms designed to measure customer (students, parents, and

schools) satisfaction with the department’s aid application, receipt, and 

accounting processes. Because the scope of the student aid programs is 

large, encompassing millions of students and parents and thousands of 

Page 15 GAO-07-64 Capital Financing
schools, it is reasonable to develop and use such measures, the official 

noted. In contrast, such measures may not be meaningful given the small 

number of HBCUs and the frequency with which loans are made under the 

Capital Financing Program. Nevertheless, these officials told us that they

believe program performance measures would be useful to gauge program 

effectiveness. They have established a working group to develop 

performance measures for the program and were consulting with OMB 

and other federal officials with expertise on federal credit programs to 

guide their efforts. The officials noted that they do not have any firm 

schedule with respect to completing their development of program 

performance measures. 

The HBCU loan program provides access to low-cost capital financing and 

flexibilities not always available elsewhere, but some loan terms and 

conditions discourage participation, though school officials said they 

remain interested in the program. The low interest rate and long 

repayment period were regarded favorably by participants and 

nonparticipants alike, and the program makes funds available for a 

broader range of needs than some federal grant programs. However, the 

pooled escrow arrangement, monthly repayment terms, and the extent to

which some loans have been collateralized could discourage participation. 

The HBCU Capital Financing Program provides lower-cost financing and 

longer loan maturities and may be used for a broader range of capital 

projects by a greater number of schools than other funding sources, 

according to HBCU officials. Some officials noted that the program offers 

loans with lower interest rates than traditional bank loans. Moreover, the 

program’s interest rates are typically less than the interest rates schools 

would be required to pay investors if they issued their own bonds to raise 

funds. According to school officials and bond industry experts, some 

HBCUs could obtain, and some have obtained, lower interest rates than 

The Program Provides 

Needed Access to 

Low-Cost Capital 

Financing, but Certain 

Loan Terms and 

Conditions 

Discourage 

Participation 

The Program Provides 

Low-Cost Financing and 

Certain Flexibilities in 

Comparison to Other 

Capital Funding Sources 

Page 16 GAO-07-64 Capital Financing
those offered under the program by issuing their own tax-exempt bonds.14

However, this is predicated on a school’s ability to obtain a strong credit 

rating from a credit rating agency.

15 Schools with weaker or noninvestment 

grade credit ratings would likely have to pay investors higher interest 

rates. In addition, schools issuing taxable bonds would likely pay higher 

interest rates to investors, compared to the program’s interest rates, 

regardless of the schools’ credit ratings. While schools can lower interest 

rates paid to bond investors by purchasing bond insurance, the cost to do 

so may be prohibitive.16 For these reasons, officials at Education and 

HBCUs, as well as bond industry experts, told us that the HBCU Capital 

Financing Program may be ideally suited for schools that have or would 

receive a noninvestment grade rating. Participation in the program may 

also benefit schools by enhancing their ability to issue their own bonds in 

the future. An official at one HBCU, for example, told us that obtaining 

and repaying a loan under the program had allowed the school to 

demonstrate its fiscal stability and to subsequently issue its own bond with 

a lower interest rate than was then being offered under the program. 

In addition to citing lower interest rates, a large majority of the HBCU 

officials we spoke to said that the program’s 30-year loan repayment 

period was attractive, and some noted that private funding sources would 

likely offer 20 years or less. Some school officials noted that the longer 

repayment period allowed schools to borrow more or reduce the amount 

of monthly payments. Borrowing larger amounts, officials reported, 

allowed them to finance larger or more capital projects. Another school 

we spoke with that once considered using the program said that even 

 14 Under the Internal Revenue Code, qualified education facilities, such as HBCUs, are

permitted to issue tax-exempt bonds. In contrast to taxable bonds, tax-exempt bonds 

produce interest income that is exempt from federal taxation and may also be exempt from 

state and local taxation, especially if the owners live in the state in which the bond is 

issued. Because these investors do not pay taxes on their interest earnings, they are willing 

to accept a lower pretax rate of return on their investment, which lowers the financing

costs for schools that issue such bonds. 

15 Schools that issue bonds pay credit agencies, such as Standard & Poor’s, or Moody’s 

Investors’ Service, to assess their potential risk of default. Credit agencies assign ratings for 

bonds reflecting a spectrum of highest to lowest credit quality to help investors determine 

the risk associated with investments. Ratings can generally be grouped into two larger 

categories—investment and noninvestment grades. 

16 Bond insurance guarantees the payment of principal and interest on a bond issue if the 

issuer defaults. Credit rating agencies assign a bond rating based on the insurer’s ability to 

pay claims against defaults, rather than on the underlying credit of the issuer.

Page 17 GAO-07-64 Capital Financing
though it was able to issue a tax-exempt bond and obtain a more favorable 

interest rate, it could only obtain a 20-year maturity period for the bond. 

Some HBCU officials told us they preferred grants to loans but noted that, 

in general, compared to other federal grant programs, more HBCUs are 

eligible for the HBCU loan program, and that it also funds a wider variety 

of projects. Grants are available for most HBCUs under the Higher 

Education Act’s strengthening institutions programs, also administered by 

Education, which fund capital projects as well as other activities, such as

faculty and academic program development. However, fewer HBCUs are 

eligible for other federal grant programs that provide funding for capital 

projects. For example, the Department of Agriculture’s 1890 Facilities 

Grant Program is only for those 18 HBCUs that are land grant institutions. 

Similarly, the Department of Health and Human Services’ facilities 

improvement program provides only for those HBCUs with a biomedical 

and behavioral research program. While there are a variety of other 

assistance programs offered by charitable foundations, and state and local 

governments, available funding is limited. 

The Escrow Arrangement, 

among Other Terms and 

Conditions, Was Cited as a 

Disincentive to 

Participating in the 

Program 

HBCU officials we spoke with—participants and nonparticipants alike—

reported that a disincentive to participation in the program was the pooled

escrow; additionally, other terms and conditions, such as the monthly 

repayment schedule and the extent to which loans are collateralized, were 

also viewed by some as deterrents. Over half of HBCU respondents we 

spoke with—both participants and nonparticipants—agreed that the 

pooled escrow was a drawback, and over one-fifth said that it actually 

deters participation. The escrow funds, which reduce the federal budget 

cost of the program by offsetting the estimated costs associated with 

delinquent loan repayments and borrower defaults, net of collections, are 

returned to program participants if no such losses occur. However, a 

recent default by one borrower—the first to occur in the program’s 

history—has heightened awareness among program participants of the 

financial risk for them inherent in the pooled escrow arrangement.17 Since 

 17 Barber-Scotia College defaulted on its loan payments in September 2005. The outstanding

balance of the defaulted loan is about $7 million. Funds to cover the school’s delinquent

payments were withdrawn from the school’s escrow account. When the school’s escrow

account was depleted, the funds required to cover the school’s subsequent payments were 

drawn upon a pro rata basis from each program participant’s escrow account—schools

with larger outstanding loan balances will have more money withdrawn from their escrow 

accounts than schools with smaller outstanding loan balances. 

Page 18 GAO-07-64 Capital Financing
the default, Education has withdrawn funds from participating schools’ 

escrow accounts twice and will continue doing so until the default is 

resolved, leaving other schools uncertain as to how much of their own 

escrow accounts will remain or be replenished.18 The pooled escrow 

feature also presents a problem for state institutions because they are

prohibited from assuming the liability of another institution. One program 

official said that this issue was common for state schools because state 

law prohibits the lending of public funds to nonstate entities—considered 

to be the case when state funds in escrow are used to hedge against the 

delinquency of another institution. One participating public HBCU 

reported that it had to resolve this problem by accounting for its escrow 

payments as a fee that would not be returned to the school rather than a 

sum that could be recovered, as the program intends. Because the escrow

feature is mandated by law, any changes to this arrangement would 

require congressional authorization. Additionally, in order to maintain the 

federal subsidy cost of the program at or below zero, other alternatives—

such as assessing additional fees on borrowers, or requiring contributions 

to an alternative form of a contingency reserve—would be necessary in 

the absence of the pooled escrow arrangement. 

While frequency of payments is not as prevalent a concern as the pooled 

escrow, some schools objected to the program’s requirement that 

repayments be made monthly as opposed to semiannually, as is common 

in the private market. Schools participating in the HBCU Program have 

been required by the DBA to make payments monthly, although FFB 

lending policy is to require repayments only on a semiannual basis. 

Despite the fact that participants have met the terms of an extensive credit

evaluation process, DBA officials expressed the view that the monthly 

repayment requirement promotes good financial stewardship on the part 

of the schools. However, some HBCU officials said that they incur 

opportunity costs in making payments on a monthly versus a semiannual 

basis. They also noted that it would be more practical if payments were to 

coincide with the beginning of their semesters, when their cash flows are 

typically more robust. 

 18 According to Education, escrow account funds are sufficient to make loan repayments 

on behalf of the defaulted borrower for up to 12 years, provided no additional borrowers

default on their loans. Education officials said they are attempting to maintain close 

contact with the defaulting school and offering to work with it to resolve the default. Since 

the school pledged its entire campus as collateral for the loan, Education could ultimately 

foreclose and sell it to recover loan proceeds. 

Page 19 GAO-07-64 Capital Financing
Additionally, almost half of the participating schools expressed concern 

about the amount of collateral they had to pledge in order to obtain a loan. 

In most cases, program participants have pledged certain real property as 

collateral, though endowment funds and anticipated tuition revenue are 

also allowed as collateral. Some HBCU officials said their loans were 

overcollateralized in that the value of the real estate pledged as security 

exceeded the value of the loan. They noted that such circumstances can 

present a problem for those schools trying to obtain additional capital 

financing without sufficient assets remaining available as collateral. One 

nonparticipant cited the collateral required of other institutions as a 

reason for its decision not to participate. When asked about the amount of 

collateral required, Education and DBA officials reported that the extent

and amount of collateral required to obtain a loan under the program 

varies depending on the individual circumstances of an institution. The 

amount of collateral required may be less for institutions that have 

maintained relatively large endowments and stable tuition revenue and

more for institutions that have few or no physical properties to use as 

collateral, for example. Education officials further noted that requiring the 

value of collateral to be greater than the value of the loan was not an 

uncommon business practice. 

Overall, more than two-thirds of the participant schools and more than a 

third of the nonparticipants said they are interested in using the program 

but some said that their continued or future interest in the program would 

depend on its being modified. Several schools suggested the types of 

projects eligible for funding could be broadened, which might allow them 

to undertake capital projects that would, in turn, assist them in attracting 

and retaining additional students. Campus beautification projects and 

multipurpose community centers were cited as examples. In addition, they 

regarded new construction—for which program loans are available only 

under exceptional circumstances—as particularly important because new 

construction attracts more students and because renovations often incur 

unexpected costs. Nevertheless, many public HBCU school officials we 

spoke with said that in view of their states’ continuing fiscal constraints, 

they expect to consider the loan program as a future funding resource. 

Page 20 GAO-07-64 Capital Financing
While Education has taken limited steps to improve the program, we 

found significant weaknesses in management controls that compromise 

the extent to which Education can ensure program objectives are being 

achieved effectively and efficiently. Education has recently provided 

schools the choice of fixed or variable interest rates, allowed for larger 

loan amounts, and afforded more opportunity for schools to negotiate loan 

terms, which appealed to schools. In addition, Education has attempted to 

increase awareness of the program among HBCU officials through 

increased marketing of the program by the DBA. While Education has 

taken steps to improve the program, we found significant weaknesses in 

its management control with respect to its communications with HBCUs, 

compliance with program and financial reporting laws and guidance, and

monitoring of its DBA. 

Since 2001, Education has taken some steps to improve the program— 

in some cases by allowing greater negotiation of certain loan terms and 

conditions. Department officials said that changes to the program were 

necessary to remain competitive with other programs and the private 

market. These flexible terms included a variable interest rate option and 

the opportunity to negotiate the amount of additional debt that a school 

can subsequently assume through other financing arrangements. In fact, 

since 2003, 4 of the 7 schools that have received loans have taken 

advantage of the variable interest rate. Regarding the department’s 

monitoring of their debt, officials at another school said that they were 

able to negotiate with the DBA the amount of additional debt they could 

assume—from $500,000 to $1 million—before they would have to notify 

the department. School officials said this change was important because it

not only reduced their administrative burden but it also gave them 

additional leeway to pursue other capital financing. The program made 

greater use of loans for the sole purpose of refinancing existing debt since 

2003.

19 Two participants reported an estimated savings of at least 

$3.7 million by refinancing under the program. According to department 

officials, Education has also made greater use of the Secretary’s authority

to originate loans exceeding $10 million and to make multiple loans to an 

institution, providing schools with more purchasing power. Program 

officials said that while the limit on the amount and number of loans that 

Education Has Taken 

Some Steps to 

Improve the Program, 

but Weaknesses in 

Management Control 

Exist 

Education Has Recently 

Introduced Some Program 

Improvements, Including 

Flexible Loan Terms 

 19 Previously, refinancing was always coupled with a requirement that most proceeds be 

used for construction or renovation purposes, according to department officials. 

Page 21 GAO-07-64 Capital Financing
could be made was to prevent disproportionate use of the loan fund by 

larger and more affluent schools, it no longer reflected the reality of 

current costs for construction and renovation or the budgetary constraints 

facing many states. 

Additionally, program officials we spoke with said they had enhanced 

program marketing. For example, the DBA has developed a Web site 

describing the program and offering answers to frequently asked 

questions. In addition, officials reported attending the national and 

regional conferences for college executives shown in table 4, completing 

over 60 campus site visits and contacting other school officials by 

telephone. Program officials also reported that most schools received 

written correspondence or an e-mail to inform them of the program. By 

these efforts, all HBCUs have been contacted in 2005, according to DBA 

officials. They also said they timed these outreach efforts to correspond 

with schools’ annual budgetary and enrollment processes in order to 

prompt schools to think about potential capital projects that could fit the 

program. DBA officials said that their marketing approach for fiscal year 

2006 would be the same as in the previous year. 

Page 22 GAO-07-64 Capital Financing
Table 4: Designated Bonding Authority’s Attendance and Scope of Activities at Conferences since 2002 

Years attendeda

Conference name 2002 2003 2004 2005 HBCUs in membershipbDBA’s activity

Southern Association of 

Colleges and Schools 

(SACS) regional 

meetings 

• • • • 77 HBCUs in 11 states Breakfast and luncheon 

sponsorships, exhibit space, 

receptions, and dinners 

National Association of 

College and University 

Business Officers 

(NACUBO) national or 

regional conferences 

• • • c Exhibit space, client dinners 

United Negro College 

Fund’s annual events 

• • • 39 private 4-year colleges Event sponsorships, contact 

with meeting participants 

National Association of 

State Universities and 

Land Grant Colleges 

(NASULGC) Annual 

Meeting 

• 18 land grant HBCUs/other 

members 

Contact with meeting 

participants 

Thurgood Marshall 

President’s and 

Member Schools’

Professional 

Conference 

• School executives at 47 

HBCUs 

Contact with meeting 

participants 

National Association for 

Equal Opportunity in 

Higher Education’s 

annual conference 

• • • • All HBCU executives/other 

members 

Exhibit space, evening 

receptions 

White House Initiative 

on HBCUs National 

HBCU Week 

Conference 

• • • • All HBCU executives Direct contact with meeting 

participants, client dinners 

Source: GAO analysis.

a

GAO did not confirm conference attendance with host association/organization 

b

Information on HBCUs included in membership based on most recent data available. 

c

No description of HBCU membership was available. 

Weaknesses in 

Management Control Exist 

While Education has taken some steps to improve the HBCU loan 

program, we found significant weaknesses in its management control of 

the program with respect to its (1) communications with HBCUs, 

(2) compliance with program and financial reporting laws and guidance, 

and (3) monitoring of its DBA, as described below. 

Page 23 GAO-07-64 Capital Financing
Many HBCU officials we interviewed reported a lack of clear, timely, and 

useful information from Education and the DBA at various stages of the

loan process, and said the need to pursue such information themselves 

had sometimes led to delays. While program materials represent the loan

application as a 2- to 3-month process, about two-thirds of the loans made 

since January 2001 were not closed until 7 to 18 months after application.

Officials from one school said that it had taken 6 to 7 months for the DBA 

to relay from Education a clarification as to whether its proposed project 

was eligible. Other schools reported that Education had not provided 

timely or clear information about the status of their loans. In some cases, 

schools reported that the lengthy loan process resulted in project delays 

and cost increases over the intervening time period. An official from one 

school told us that it remained unclear to him why his school was denied a 

loan. 

Communication with HBCUs 

Education officials acknowledged that the loan process was lengthy for 

some borrowers and said its DBA had attempted to work with these 

borrowers to address problems with applications. School officials told us

that in some cases the loan process could have been expedited had 

Education and the DBA made use of previous borrowers’ experiences to 

apprise them of problems that could affect their own applications—such 

as the fact that title searches can be especially time consuming and 

problematic for private HBCUs, some of which did not receive all property 

deeds from their founders when they were established in the 1800s. With 

regard to making loan payments, several officials we interviewed said that

DBA officials had not provided information that was in sufficient detail. In

one situation, officials from one school reported that school auditors had 

questioned the accuracy of the loan payment amount for which the school

was billed by the DBA because the billing statements omitted information 

concerning the extent to which the amount billed included escrow 

payments. Other officials noted that they had not received written 

notification from the DBA concerning the full amount of their potential 

liability after funds had been withdrawn from the schools’ escrow 

accounts to cover payments on behalf of another borrower that had 

recently defaulted on a loan. 

Education has not complied with certain statutory requirements relating to

the program’s operations and how federal agencies are to account for the 

government’s cost of federal loan programs. In creating the program, 

Congress established within the Department of Education an HBCU 

Capital Financing Advisory Board composed of the (1) Secretary of 

Education or the Secretary’s designee, (2) three members who are 

presidents of private HBCUs, (3) two members who are presidents of 

Compliance with Program and 

Budget Laws and Federal 

Financial Accounting 

Standards 

Page 24 GAO-07-64 Capital Financing
public HBCUs, (4) the President of the United Negro College Fund or 

his/her designee, (5) the President of the National Association for Equal 

Opportunity in Higher Education or his/her designee, and (6) the 

Executive Director of the White House Initiative on HBCUs. By law, the 

Advisory Board is to provide advice and counsel to the Secretary of 

Education and the DBA concerning the capital financing needs of HBCUs, 

how these needs can be met through the program, and what additional 

steps might be taken to improve the program. To carry out its mission, the 

law requires that the board meet with the Secretary of Education at least 

twice each year. Despite this requirement, the board has met only three 

times in the past 12 years, the most recent meeting occurring in May 2005. 

According to Education officials, the Advisory Board did not routinely 

meet because of turnover among Education staff as well as HBCU 

presidents designated to serve on the board. Education officials told us 

that there could have been other reasons why the Advisory Board did not 

meet in earlier years, but none that they had knowledge of. Although 

Education officials told us that they had believed another Advisory Board 

meeting would be convened soon after the May 2005 meeting, no such 

meeting has yet been scheduled. 

We also found that Education has not fully complied with requirements of 

the Federal Credit Reform Act of 1990, which, along with guidance issued 

by OMB and accounting standards, provide the framework that Education 

is to use in calculating the federal budget costs of the program. In 

particular, Education has excluded certain fees paid by HBCUs from its 

calculations of program costs. The interest payments made by HBCUs on

program loans includes a surcharge of 1/8th of 1 percent assessed by FFB 

in accordance with its policy and as permitted by statutory provisions 

governing its transactions.20 Under the Federal Credit Reform Act of 1990, 

these fees—i.e., the surcharge—are to be recognized as cash flows to the 

government and included in agencies’ estimated costs of the credit 

programs they administer.21 In addition, these fees are to be credited to the

program’s financing account.22 OMB officials responsible for coordinating 

 20 12 U.S.C. § 2285(c). 

21 2 U.S.C. § 661d(c). 

22 A financing account records all of the cash flows resulting from direct loans or loan

guarantees. It disburses loans, collects repayments and fees, makes claim payments, holds 

balances, borrows from the Department of the Treasury, earns or pays interest, and

receives the subsidy cost payment from the credit program account. The credit program 

account receives and obligates appropriations to cover the subsidy cost of a direct loan or

loan guarantee and disburses the subsidy cost to the financing account. 

Page 25 GAO-07-64 Capital Financing
agencies’ subsidy cost estimates acknowledged that Education should 

include the fees in its budgetary cost estimates and noted that other 

agencies with similar programs do so. Further, the written agreement 

among Education, the FFB, and the DBA that governs the issuance of

bonds by the DBA for purchase by the FFB for the purpose of funding 

loans under the program also stipulates that these fees are to be credited

to Education. Despite these provisions, Education has not included the 

fees in its calculations of the federal cost of the program, thereby 

overestimating the program’s costs; nor has Education accounted for the 

fees on its financial statements.23 Instead, the DBA has collected and held

these fees in trust.24 Although the contract between Education and the 

DBA generally describes how the DBA is to manage the proceeds from and 

the payment of bonds issued to fund loans made to HBCUs, it does not 

specifically address how the DBA is to manage the payments that reflect 

the 1/8th of 1 percent paid by borrowers. In general, the DBA collects 

borrower repayments and remits the proceeds to the FFB to pay amounts 

due on the program’s outstanding bonds. However, the amounts paid to 

the FFB do not include the fees paid by borrowers. As a result, it is unclear 

how these funds, retained by the DBA, are to be eventually returned to the 

federal government. Moreover, Education has not monitored the DBA’s 

handling of these funds and is unaware of the accumulated balance. 

Although the current DBA has been under contract with Education for 

over 5 years, Education has not yet assessed its performance with respect 

to key program activities and contractual obligations, although Education 

officials said that they have been pleased with the DBA’s performance. 

One of these major activities is “marketing” the capital financing program 

among HBCUs in order to raise awareness and help ensure that the 

program is fully utilized. Although the DBA is required by its contract with 

Education to submit annual reports and audited financial statements to 

Education, it has not done so. While DBA officials told us the department 

has offered some informal assessments, Education officials have not

guided their marketing efforts. Still, we found indications that the DBA’s 

marketing strategy has likely suffered from a lack of guidance and 

Monitoring the Performance of 

the DBA 

 23 According to 31 U.S.C. § 3515, federal agencies are required to prepare and submit to 

OMB audited financial statements covering their operations. 

24 The DBA has collected this fee from all but one borrower—West Virginia State 

University, which received a loan in 1996 prior to the requirement that Education collect 

the fee. 

Page 26 GAO-07-64 Capital Financing
monitoring by Education. Officials we spoke with at 4 schools did not 

know of the program, and another eight told us they had learned about it 

from peers or advocacy organizations. Others were aware of the DBA’s 

marketing activities, but offered a number of suggestions for 

improvement, citing a need for more specific information as to the extent 

to which collateral would be needed, how the program meets the needs of

both private and public schools, or examples and testimonials about 

funded projects. Several school officials said DBA outreach through 

conferences was not necessarily well targeted—either because the 

selected conferences covered a full range of topics for a variety of schools 

and not only HBCUs, or because they focused on issues relating to either 

public or private HBCUs, or because they drew school officials not 

involved in facilities planning. Additionally, the DBA has reserved its 

direct contact marketing largely for 4-year schools. DBA officials justified 

this decision on grounds that smaller schools tended to have more 

difficulty borrowing and that they had targeted larger schools that they 

believed would be most likely to benefit from the program. However, as 

prescribed by law, loans are to be fairly allocated among as many eligible 

institutions as possible. Because the DBA’s compensation is determined as

a percentage of the amount borrowed, and the costs it incurs may not vary 

significantly from loan to loan, it is important to monitor its activities to 

ensure it is not making loans exclusively to schools that are likely to 

borrow larger amounts and for which its potential for profit is highest. 

With regard to the DBA’s basic responsibility for keeping records, we 

found several cases in which critical documents were missing from loan 

agreement files. Moreover, the DBA was unable to provide us with entirely 

complete files for any of the 14 institutions that had participated or were 

participating in the program. For example, documents that included loan 

applications, decision memoranda, financial statements, and real property 

titles were missing for several schools. In our file review, we found that 

files for 9 schools did not include the original application. Files for 

8 schools did not include the required financial statements for 

demonstrating long-term financial stability, and 5 lacked DBA memoranda 

pertaining to the decision to make the loan. Moreover, until our review, 

key Education officials were unaware that such documents were missing.25 

 25 Several of the files had been compiled by a prior bonding authority. Nevertheless, the 

DBA is required under its contract with Education to maintain files on participants for the

life of the program and a minimum of 6 years thereafter. 

Page 27 GAO-07-64 Capital Financing
Officials from four HBCUs in the Gulf Region we spoke with (Dillard 

University, Southern University at New Orleans, Xavier University, and 

Tougaloo College) told us that, in light of the extensive hurricane damage

to their campuses, they were pleased with the emergency loan provisions

but concerned that the 1-year authorization would not provide sufficient 

time for them to take advantage of the special program features. School 

officials from each of the four schools noted that their institutions had 

incurred physical damages caused by water, wind, and, in the case of one 

institution, fire, and that the actual financial impact of the hurricanes may 

remain unknown for years. Although Education officials told us that they 

have not yet determined the extent to which the department would make 

use of its authority to waive or modify program provisions for hurricaneaffected institutions, the department would be prepared to provide loans 

to hurricane-affected HBCUs. 

Officials from the three HBCUs we visited reported extensive damage to 

their campuses as a result of the 2005 hurricanes and noted that it may 

take another few years to determine the full financial impact. School 

officials told us that they have not been able to fully assess all hurricanerelated costs, such as replacing property, repairing plumbing systems, 

landscaping, and replacing sidewalks, and as result, current estimates are 

only preliminary. School officials noted that the assessment process was 

lengthy because of, among other things, the time required to prioritize 

campus restoration needs, undertake complex assessments of historic 

properties, follow state assessment processes, and negotiate insurance 

settlements. Each of the four schools we contacted incurred physical 

damages caused by water and wind; one school also incurred damage by

fire. For example, the campuses of all three schools in New Orleans were 

submerged in 2 to 11 feet of water for about a month after the hurricanes, 

damaging the first floors of many buildings as well as their contents. As a 

result, schools required removal of debris and hazardous waste (e.g., mold

and asbestos), repair and renovation, and the taking of actions

recommended by FEMA to mitigate future risks. Xavier University 

officials, who preliminarily estimated $40 million to $50 million in damage 

to their school, said that they faced the need to undertake several capital

projects, including replacing elevators, repairing roofs, and rehabilitating 

the campus auditorium and replacing its contents. According to officials 

from Southern University at New Orleans, state officials have estimated 

damages at about $17 million; at the time of our visit 10 months after the 

HBCUs Affected by 

Hurricanes Expressed 

Satisfaction with 

Special Loan 

Provisions and 

Concerns with 

Application Deadline, 

while Education 

Officials Said They 

Would Evaluate Loan 

Processes 

Gulf Area HBCUs 

Experienced Significant 

Hurricane Damage, and 

the Full Financial Impact 

May Remain Unknown for 

Years 

Page 28 GAO-07-64 Capital Financing
hurricanes, state insurance assessors were beginning their work on the 

campus library, where mold reached all three floors, covering books, art 

collections, card catalogues, and computers. Officials at Dillard University 

also reported extensive damage, preliminarily estimated as high as 

$207 million.26 According to officials, five buildings—which were used for 

academic support services and residential facilities—had to be demolished 

because of extensive damage; three of these buildings were destroyed by 

fire. Further, they also reported that the international studies building, 

built adjacent to a canal levee in 2003, will have to be raised at least 18 feet 

to make it insurable. Officials at Tougaloo College, in Mississippi, reported 

wind and water damage to the roofs of some historic properties, which 

along with other damages, they preliminarily estimated at $2 million. 

Figures 2-4 show some of the damages and restoration under way at the 

three schools we visited. 

 26 Officials also noted that the school had incurred additional costs, such as renting 

temporary space, architectural and legal services, and lost revenues, which collectively 

amounted to about $130 million. 

Page 29 GAO-07-64 Capital Financing
Figure 2: Xavier University Science Building Auditorium Before and After 

Restoration from Flood Damage

Sources: Xavier University.

Page 30 GAO-07-64 Capital Financing
Figure 3: Exterior of Southern University’s Library with Waterline Indicating the 

Extent of Flooding 

Source: GAO.

Page 31 GAO-07-64 Capital Financing
Figure 4: Removed Asbestos from Dillard University Library Awaiting Disposal 

Source: GAO.

Note: All of the affected HBCUs have resumed operations but are still in the process of restoring their

campuses to varying degrees. In the case of Southern University, it has created a new campus

nearby consisting of more than 400 trailers constructed by the U.S. Army Corps of Engineers while 

damage assessments are being made. By contrast, Dillard University had moved its operations—

classes, student services, administration—and students to a local hotel and other buildings as it 

undertook the restoration of its campus. Officials were scheduled to reopen that campus in 

September 2006. Xavier University had resumed operations on its campus in January 2006 while it 

continued to restore its facilities.

Schools Found Select 

Terms for Emergency 

Loans Favorable, but Said 

They Would Be Challenged 

to Make Application in the 

Time Allotted 

The school officials we spoke with found certain emergency provisions of 

the loan program favorable, but they expressed reservations about the 

time frame within which they are required to make application for the 

special loans. Most school officials appreciated the reduced interest rate 

and cost of issuance (both set at 1 percent or less) and that the Secretary 

of Education was provided discretion to waive or modify statutory or 

regulatory provisions, such as credit criteria, to better assist them with 

their recovery. They said the normal sources of information for credit 

evaluation—such as audited financial records from the last 5 years—

would be difficult to produce. Other conditions of the emergency loan

provisions some officials found favorable were the likelihood that loans 

would be awarded sooner—providing a timely infusion of funds—with 

Page 32 GAO-07-64 Capital Financing
more flexibility compared to other programs. Officials at both Dillard and 

Xavier Universities said that because their institutions had already spent a

significant amount of their available resources, the emergency loans could 

be used to bridge any emerging financial difficulties they experience as 

they continue to pursue insurance settlements and assistance from other 

federal agencies, including FEMA and SBA. Additionally, some school 

officials said that the program may allow for greater flexibility compared 

to FEMA and SBA aid. For example, some officials told us that in 

addressing damages caused by the hurricanes they would like to improve 

upon their facilities to mitigate potential environmental damages in the 

future and, at one school, upgrade an obsolete science laboratory with 

state-of-the-art equipment. They said, however, that in some cases FEMA 

aid is limited to restoring campus facilities to their prestorm conditions 

and in other cases desired improvements might not be consistent with 

requirements for historic preservation. 

While most school officials we spoke with found select provisions 

favorable, they expressed concerns with stipulations that limit the 

extension of the special provisions to 1 year, primarily because all of the 

costs associated with damage from the hurricanes have not been fully

identified. Further, officials at Southern University at New Orleans—a 

public institution—said that they are subject to an established capital

improvement approval process involving both its board of directors and 

state government officials that alone normally requires a year to complete.

Additionally, some of the schools are concerned that they may not be able 

to restore damaged and lost records needed to apply to the program. 

Officials reported that a time frame of at least 2 to 3 years would allow 

them to better assess the costs of the damages. Other concerns cited 

included eligibility requirements for the deferment provision, and officials 

from one institution expressed disappointment that the emergency 

provisions did not include some form of loan forgiveness. 

Education Is Preparing to 

Take Steps to Ensure It 

Can Provide Loans from 

Available Funds to Help 

Hurricane-Affected HBCUs 

Restore Their Campuses 

According to Education officials, they are preparing to take the steps 

necessary to ensure that the department is prepared to provide loans to 

hurricane-affected HBCUs. Education officials noted that in light of the

statutory limit on the total amount of loans it can make under the program 

and the balance of loans outstanding as of August 2006, about $141 million 

in funding is available for private, and $66 million for public, HBCUs—

both those affected by the hurricanes and others. The officials noted that 

the department had not yet determined to what extent the Secretary would 

use her discretion to waive or modify program requirements, including the 

Page 33 GAO-07-64 Capital Financing
statutory loan limits. They told us that some of their next steps included 

determining how the program’s application processes could be changed to

ensure that funds can be provided to hurricane-affected schools in a timely 

manner. They said the department would need to consider to what extent 

it would apply credit criteria to hurricane-affected institutions in light of 

the fact that these institutions would likely be experiencing fiscal stresses 

as they seek to rebuild their campuses and attempt to return to their prior 

levels of enrollment. They noted that they would talk with school officials 

to gain a better understanding of which program criteria remain 

applicable, but anticipate using fewer credit criteria in their 

determinations. Education officials also noted that they will likely have to

decide on the appropriate level of flexibility to exercise with respect to 

collateralizing loans for hurricane-affected HBCUs because some 

institutions may lack the collateral they had prior to the hurricanes. 

Moreover, these officials stated that the department would need to 

consider establishing limits on the types of projects for which it would 

provide funding to ensure that loans are not provided for capital projects 

for which other federal aid is available, such as that provided by FEMA. 

For example, program officials recognized that a significant cost of 

recovery for the schools in the Gulf Coast region is debris removal, but 

believe FEMA is likely to provide funding for such costs. Even with these 

challenges and outstanding questions, program officials said that they are 

confident the department will be able to lend funds to hurricane-affected 

institutions prior to expiration of the special legislative provisions 

applicable to hurricane-affected HBCUs. They noted that the department 

has already notified eligible institutions of the availability of funds and 

would hold additional meetings with schools to gain an understanding of 

their capital improvement and restoration needs. 

HBCUs play an important role in fulfilling the educational aspirations of 

African-Americans and others and in helping the nation attain equal 

opportunity in higher education. In establishing the Capital Financing 

Program, Congress sought to help HBCUs continue and expand their 

educational mission. The program has in fact assisted some HBCUs in 

financing their capital projects. Factors, however, including awareness of 

the program; clear, timely, and useful information concerning the status of 

loan applications and approvals; and certain loan terms and conditions, 

may be discouraging other schools from participating in the program. 

Some HBCUs have accessed even more attractive financing outside of the 

program, while yet others may face financial challenges that make it 

unwise to borrow through the program—factors that affect program 

utilization and make the development of program performance goals and 

Conclusions 

Page 34 GAO-07-64 Capital Financing
measures challenging. Despite the challenge, Education is attempting to 

design performance goals and measures—a positive step that if

successfully completed could be useful in informing Congress and others 

about the extent to which the program is meeting Congress’ vision in 

establishing it. 

HBCU officials had a number of suggestions, such as changing the 

frequency of schools’ loan repayments from a monthly to a semiannual 

basis, that they believed could improve the program and positively 

influence program utilization. By soliciting and considering such feedback 

from HBCU officials, Education could ensure that the program is optimally 

designed to achieve its objectives effectively and efficiently. However, 

Education has not made consistent use of the mechanism—the HBCU 

Capital Financing Advisory Board—Congress provided to help ensure 

Education received input from critical program stakeholders. Receiving

feedback from schools would also allow the department to better inform 

Congress about the progress made under the program. 

Effective management control is essential to ensuring that programs 

achieve results and depends on, among other things, effective 

communication. Agencies must promote relevant, reliable, and timely 

communication to achieve their objectives and for program managers to 

ensure the effective and efficient use of resources. Effective management 

control also entails ensuring that an agency complies with applicable laws 

and regulations and that ongoing monitoring occurs during the normal 

course of an agency’s operations. In failing to follow the requirements of 

the Federal Credit Reform Act, Education has overstated the budgetary 

cost of the program. Accurately accounting for the cost of federal 

programs is all the more important in light of the fiscal challenges facing

the nation. Moreover, failing to adequately monitor the DBA’s performance 

with respect to critical program responsibilities—record keeping, 

marketing, accounting, and safeguarding the federal funds it has been 

collecting from program borrowers—increases the program’s exposure to 

potential fraud, waste, abuse, and mismanagement. 

To better ensure that the HBCU Capital Financing Program can assist 

these schools to continue and expand their educational missions, GAO is 

making the following five recommendations for Executive Action. To 

ensure that it obtains the relevant, reliable, and timely communication that 

could help ensure that program objectives are being met efficiently and

effectively, and to meet statutory requirements, we recommend that the

Secretary of Education regularly convene and consult with the HBCU 

Recommendations for 

Executive Action 

Page 35 GAO-07-64 Capital Financing
Advisory Board. Among other things, the Advisory Board could assist 

Education in its efforts to develop program performance goals and 

measures, thereby enabling the department and the board to advise 

Congress on the program’s progress. Additionally, Education and the 

Advisory Board could consider whether alternatives to the escrow 

arrangement are feasible that both address schools’ concerns and the need 

to keep federal costs at a minimum. If Education determines that statutory 

changes are needed to implement more effective alternatives, it should 

seek such changes from Congress. 

To ensure program effectiveness and efficiency, we recommend that the 

Secretary of Education enhance communication with HBCU program 

participants by (1) developing guidance for HBCUs, based on other 

schools’ experiences with the program, on steps that applicants can take 

to expedite loan processing and receipt of loan proceeds, and (2) regularly

informing program applicants of the status of their loan applications and 

department decisions. 

In light of the program’s existing credit requirements for borrowers and 

the funds placed in escrow by borrowers to protect against loan 

delinquency and default, we recommend that the Secretary of Education 

change its requirement that borrowers make monthly payments to a 

semiannual payment requirement consistent with the DBA’s requirement 

to make semiannual payments to the FFB. 

To improve its estimates of the budgetary costs of the program, and to 

comply with the requirements of the Federal Credit Reform Act, we 

recommend that the Secretary of Education ensure that the program 

subsidy cost estimation process include as a cash flow to the government

the surcharge assessed by the FFB and paid by HBCU borrowers and pay 

such amount to the program’s financing account. Additionally, we 

recommend that the Secretary of Education audit the funds held by the 

DBA generated by this surcharge and ensure the funds are returned to the 

Department of the Treasury and paid to the program’s financing account.

To ensure adequate management control and efficient program operations, 

we recommend that the Secretary of Education increase its monitoring of 

the DBA to ensure its compliance with contractual requirements, including

record keeping, and that the DBA is properly marketing the program to all 

potentially eligible HBCUs. 

Page 36 GAO-07-64 Capital Financing
In written comments on a draft of this report, Education agreed with our 

findings and all but one of our recommendations and noted that our report 

would help it enhance the program and better serve the nation’s HBCUs. 

Education agreed with our recommendation to regularly convene and 

consult with the HBCU Advisory Board and noted that the department 

would leverage the board’s knowledge and expertise to improve program 

operations and that the department had scheduled a board meeting for 

October 27, 2006. Education also agreed with our recommendation to 

improve communications with HBCUs, noting that it would take steps 

including developing guidance based on lessons learned to expedite loan

processing and receipt of proceeds, and regularly informing applicants of 

their loan status and department decisions. Moreover, Education agreed

with our recommendation to improve its budget estimates for the 

program, indicating that it would work with OMB and Treasury to do so.

Further, with regard to our recommendation that the department increase 

its monitoring of its DBA, the department stated that it would require the 

DBA to submit quarterly reports on program participation and financing, 

identify and locate missing loan documentation, and maintain these efforts 

for each subsequent loan disbursal. Additionally, the department said that 

it was planning to conduct an audit of the DBA’s handling of loan funds 

and associated fees, as we recommended. 

Agency Comments 

With respect to our recommendation that would allow participating 

schools to make semiannual payments, Education said it would be 

imprudent to implement the recommendation at this time because of the 

potential for default as well as the exposure from a default by a current 

program participant. We considered these issues in the development of 

our recommendation and continue to believe that the credit evaluation 

performed by the DBA, the funds set aside by borrowers held in escrow, 

and the security pledged by borrowers provide important and sufficient 

measures to safeguard taxpayers against potential delinquencies and 

default. Further, while not noted in our draft report reviewed by the 

department, the law requires that borrowers make payments to the DBA at 

least 60 days prior to the date for which payment on the bonds is expected 

to be needed. In addition, borrowers have been required to submit, on an 

annual basis, audited financial reports and 3-year projections of income 

and expenses to the DBA. These measures provide additional safeguards 

as well as a mechanism to alert the department of potential problems. We 

added this information to our description of program terms and conditions 

in table 1. 

Education also provided technical comments that we incorporated into 

this report where appropriate. 

Page 37 GAO-07-64 Capital Financing
As agreed with your offices, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from its 

issue date. At that time, we will send copies to the Secretary of Education 

appropriate congressional committees, the Director of OMB, and other 

interested parties. We will also make copies available to others upon 

request. In addition, the report will be available at no charge on GAO’s 

Web site at http://www.gao.gov. 

If you or your staff have any questions about this report, please contact me 

at (202) 512-7215 or AshbyC@gao.gov. Contact points for our Office of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff that made major contributions to this report are 

listed in appendix IV. 

Cornelia M. Ashby 

Director, Education, Workforce, 

 and Income Security Issues 

Page 38 GAO-07-64 Capital Financing
Appendix I: List of Historically Black Colleges Appendix I: List of Historically Black and Universities GAO Interviewed 

Colleges and Universities GAO Interviewed 

1. Alabama Agricultural and Mechanical University Ala. 

2. Albany State University Ga. 

3. Allen University S.C.

4. Barber-Scotia College N.C.

5. Bennett College N.C.

6. Bethune-Cookman College Fla.

7. Bowie State University Md. 

8. Central State University Ohio

9. Cheney University of Pennsylvania Pa. 

10. Clark Atlanta University Ga. 

11. Dillard University La.

12. Fisk University Tenn.

13. Florida Memorial College Fla. 

14. Jarvis Christian College Tex. 

15. Kentucky State University Ky. 

16. Lincoln University Pa.

17. Livingstone College N.C.

18. Miles College Ala.

19. Norfolk State University Va. 

20. North Carolina Agriculture and Technical State University N.C. 

21. Saint Philip’s College Tex. 

22. Shaw University N.C.

23. South Carolina State University S.C. 

24. Southern University at New Orleans La. 

25. Tennessee State University Tenn. 

26. Texas College Tex.

27. Tougaloo College Miss.

28. Tuskegee University Ala.

29. Philander Smith College Ark. 

30. University of the District of Columbia D.C. 

31. University of Maryland Eastern Shore Md. 

32. Virginia Union University Va. 

33. West Virginia State University W.Va. 

34. Xavier University La.

Source: GAO.

Page 39 GAO-07-64 Capital Financing
A

Par

State (

ppendix II: Number of HBCUs Eligible to 

ticipate in Capital Financing Program by

as of August 31, 2006)

Page 40 GAO-07-64

Appendix II: Number of HBCUs Eligible to 

Participate in Capital Financing Program by 

State (as of August 31, 2006) 

9

6

7

3

2

5

1

2

4

2

2

5

10

1

1 8

8

4

14

1

2

Source: GAO data; map, Map Resources.

St. Thomas

1

 Capital Financing
Appendix III: HBCUs Loc

Area Affected b

ated in Geographic 

y Hurricane Katrina in 2005 

Page 41 GAO-07-64

Appendix III: HBCUs Located in Geographic 

Area Affected by Hurricane Katrina in 2005 

a

b

a

a

b

c

d

e

f

c

d

e

f

Source: GAO data; map, U.S Department of Commerce, Economics and Statistics Administration, U.S. Census Bureau.

Dillard University, Southern University at New Orleans, and Xavier University

Tougaloo College

Jackson State University

Alcorn State University

Bishop State Community College

Hinds Community College, Utica Campus

 Capital Financing
Appendix IV: Comments from the Department Appendix IV of Education : Comments from the 

Department of Education 

Page 42 GAO-07-64 Capital Financing
Appendix IV: Comments from the Department 

of Education 

Page 43 GAO-07-64 Capital Financing
Appendix IV: Comments from the Department 

of Education 

Page 44 GAO-07-64 Capital Financing
Appendix V: 

A

GAO Contact and Staff 

cknowledgments 

Page 45 GAO-07-64

Appendix V: GAO Contact and Staff 

Acknowledgments 

GAO Contacts Cornelia M. Ashby, Director, (202) 512-7215 

In addition to those named above the following individuals made 

important contributions to the report: Jeff Appel, Assistant Director; 

Tranchau Nguyen, Analyst-in-Charge; Carla Craddock; Holly Gerhart; 

Lauren Kennedy; Sue Bernstein; Margie Armen; Christine Bonham; 

Jessica Botsford; Michaela Brown; Richard Burkard; Carlos Diz; 

Kevin Jackson; Tom McCool. 

 Capital Financing

Staff 

Acknowledgments 

(130466) 
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