GAO 

United States Government Accountability Office

Report to the Chairman, Subcommittee 

on Higher Education, Lifelong Learning 

and Competitiveness, Committee on 

Education and Labor, House of 

Representatives 

PROPRIETARY 

SCHOOLS 

Stronger Department 

of Education 

Oversight Needed to 

Help Ensure Only 

Eligible Students 

Receive Federal 

Student Aid 

August 2009 

GAO-09-600 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

August 2009

PROPRIETARY SCHOOLS

Stronger Department of Education Oversight Needed 

to Help Ensure Only Eligible Students Receive 

Highlights of GAO-09-600, a report to the Federal Student Aid 

Chairman, Subcommittee on Higher 

Education, Lifelong Learning, and 

Competitiveness, Committee on Education 

and Labor, House of Representatives 

For-profit schools–also known as 

proprietary schools–received over 

$16 billion in federal loans, grants, 

and campus-based aid under Title 

IV of the Higher Education Act in 

2007/08. GAO was asked to 

determine (1) how the student loan 

default profile of proprietary 

schools compares with that of 

other types of schools and (2) the 

extent to which Education’s 

policies and procedures for 

monitoring student eligibility 

requirements for federal aid at 

proprietary schools protect 

students and the investment of 

Title IV funds. To address these 

objectives, GAO analyzed data and 

records from Education, examined 

Education’s policies and 

procedures, reviewed relevant 

research studies, conducted site 

visits and undercover 

investigations at proprietary 

schools, and interviewed officials 

from Education, higher education 

associations, and state oversight 

agencies. 

What GAO Recommends

GAO is making three 

recommendations for Education to 

strengthen its monitoring and 

oversight of federal aid eligibility 

requirements. Specifically, GAO 

recommends Education (1) 

improve its monitoring of basic 

skills tests and target schools for 

further review; (2) revise 

regulations to strengthen controls 

over basic skills tests; and (3) 

provide information and guidance 

on valid high school diplomas for 

use in gaining access to federal 

student aid. The Department of 

Education noted the steps it would 

take to address GAO’s 

recommendations. 

The Department of Education makes loans available to students to help them pay 

for higher education at public, private non-profit, and proprietary schools, and the 

students who attend proprietary schools are most likely to default on these loans, 

according to analysis of recent student loan data. As shown in the graph below, 

students from proprietary schools have higher default rates than students from 

other schools at 2, 3, and 4 years into repayment. Academic researchers have 

found that higher default rates at proprietary schools are linked to the 

characteristics of the students who attend these schools. Specifically, students 

who come from low income backgrounds and from families who lack higher 

education are more likely to default on their loans, and data show that students 

from proprietary schools are more likely to come from low income families and 

have parents who do not hold a college degree. Borrowers who are not successful 

in school and drop out also have high default rates. Ultimately, when student loan 

defaults occur, both taxpayers and the government, which guarantees the loans, 

are left with the costs. 

Proprietary Schools Have Higher Default Rates than Public and Private Non-Profit Schools Percentage of defaults

Source: GAO analysis of Education's 2004 cohort data from the National Student Loan Data System.

Public

Private non-profit

Proprietary

0

5

10

15

20

25

2-year

rate

3-year

rate

4-year

rate

Note: Education provided official 2-year default rates and modeled 3- and 4-year default rates, by 

sector, using December 2007 student loan data. 

Although students must meet certain eligibility requirements to demonstrate that 

they have the ability to succeed in school before they receive federal loans, 

weaknesses in Education’s oversight of these requirements place students and 

federal funds at risk of potential fraud and abuse at proprietary schools. Students 

are required to pass a test of basic math and English skills or have a high school 

diploma or GED to qualify for federal student aid. Yet, GAO and others have 

found violations of these requirements. For example, when GAO analysts posing 

as prospective students took the basic skills test at a local proprietary school, the 

independent test administrator gave out answers to some of the test questions. In 

addition, the analysts’ test forms were tampered with–their actual answers were 

crossed out and changed–to ensure the individuals passed the test. GAO also 

identified cases in which officials at two proprietary schools helped prospective 

students obtain invalid high school diplomas from diploma mills in order to gain 

access to federal loans. GAO’s findings do not represent nor imply widespread 

problems at all proprietary schools. However, GAO’s work has identified 

significant vulnerabilities in Education’s oversight. Education’s inadequate 

monitoring of basic skills tests and lack of guidance on valid high school diplomas 

enables unqualified students to gain access to federal student aid. Unqualified 

students are at greater risk of dropping out of school, incurring substantial debt, 

and defaulting on federal loans.

View GAO-09-600 or key components.

For more information, contact George A. 

Scott at (202) 512-7215 or scottg@gao.gov. 
Page i GAO-09-600 

Contents 

Letter 1

Background 3 

Education’s Analysis Shows That Default Rates Are Higher at 

Proprietary Schools than at Public and Private Non-Profit 

Schools and Studies Link High Default Rates to Borrowers’ 

Characteristics 13 

Weaknesses in Education’s Oversight of Federal Aid Eligibility 

Requirements Place Students and Title IV Funds at Risk of 

Potential Fraud and Abuse at Proprietary Schools 22 

Conclusions 28 

Recommendations for Executive Action 29 

Agency Comments and Our Evaluation 30 

Appendix I Objectives, Scope, and Methodology 33 

Appendix II Comments from the Department of Education 37 

Appendix III GAO Contact and Staff Acknowledgments 39 

Related GAO Products 40 

Tables 

Table 1: Age, Dependency Status, and Gender of Students at 

Proprietary, Public, and Private Non-Profit Schools 7 

Table 2: Family Income and Parental Education of Students at 

Proprietary, Public, and Private Non-Profit Schools 20 

Figures 

Figure 1: School Sectors by Percentage of Enrollments in Different 

Program Lengths for the 2007-2008 Academic Year 6 

Figure 2: Race of Students by School Sector 8 

Figure 3: ATB Test Process 10 

Figure 4: Defaults Captured by the 2-year Cohort Default Rate 14 

Proprietary Schools 
Figure 5: Proprietary Schools Have Higher Default Rates Than 

Public and Private Non-Profit Schools 15 

Figure 6: Among 4-year Schools, Proprietary Schools Have 

Consistently Higher Default Rates Than Other Schools 16 

Figure 7: Among 2-year Schools, Proprietary Schools Have Higher 

Default Rates Than Other Schools 17 

Figure 8: Among Less Than 2-year Schools, Private Non-profit and 

Proprietary Schools Have Nearly Identical Default Rates 18 

Abbreviations 

ATB ability-to-benefit 

CDR cohort default rate 

FSA Office of Federal Student Aid 

GED general equivalency diploma 

IPEDS Integrated Postsecondary Education Data System 

NCES National Center for Education Statistics 

NPSAS National Postsecondary Student Aid Study 

NSLDS National Student Loan Data System 

OIG Office of the Inspector General 

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Page ii GAO-09-600 Proprietary Schools
Page 1 GAO-09-600 

 

United States Government Accountability Office

Washington, DC 20548 

 

August 17, 2009 

The Honorable Rubén Hinojosa 

Chairman 

Subcommittee on Higher Education, Lifelong Learning 

 and Competitiveness 

Committee on Education and Labor 

House of Representatives 

Dear Mr. Chairman: 

Institutions of higher education, including public colleges, private nonprofit, and private for-profit schools, receive billions of dollars each year 

from the Department of Education (Education) to help students pay for 

school. In the 2007-2008 school year, private for-profit schools–also known 

as proprietary schools–received over $16 billion in loans, grants, and 

campus-based aid for disbursement to students under Title IV of the 

Higher Education Act. Currently, there are over 2,000 proprietary schools 

of higher education that participate in Title IV programs. Title IV funds for 

the proprietary sector have increased 164 percent since the 2001-2002 

school year, and grown at a substantially faster rate than Title IV funds for 

the public and private non-profit sectors.1

 Moreover, institutions of higher 

education, including proprietary schools, are poised to receive additional 

Title IV funds under the American Recovery and Reinvestment Act of 2009. 

In recent years, the scale and scope of proprietary schools have changed 

considerably. Once comprised of local, sole proprietor ownership, the 

nation’s proprietary institutions now range from small, privately-owned 

schools to profitable publicly traded corporations such as the Apollo 

Group, Corinthian Colleges, and Career Education Corporation. 

Traditionally focused on certificate and associate programs ranging from 

cosmetology to medical assistance and business administration, 

proprietary institutions have expanded their offerings to include 

bachelors, masters, and doctoral level programs. Both the certificate and 

degree programs provide students with training for careers in a variety of 

fields. Under current economic conditions, more students may attend 

proprietary schools to acquire additional work skills and training to help 

1

Title IV funding data beginning in the 2001-2002 school year are more accurate than data 

from prior years. 

Proprietary Schools 
 

them obtain jobs. Proprietary schools also provide course offerings 

through online education, and many proprietary schools have open 

admissions policies to accept any student who applies. 

Students can only receive Title IV funds, provided in the form of grants, 

loans, and campus-based aid, when they attend schools approved to 

participate in the Title IV program. The schools must ensure that the 

students receiving the funds meet certain eligibility requirements: 

generally, students must have a high school diploma, or a general 

equivalency diploma (GED), or demonstrate that they are ready for higher 

education by passing an independently administered “ability to benefit” 

(ATB) test of basic math and English skills or completing 6 credit hours 

applicable toward a degree or certificate offered at an institution of higher 

education. Students who receive loans under the Title IV program are 

responsible for repaying the loans, and those who default increase the cost 

of the Title IV program to the federal government and taxpayers. 

Given your interest in learning more about proprietary schools, we 

examined: (1) how the student loan default profile of proprietary schools 

compares with that of other types of schools and (2) the extent to which 

Education’s policies and procedures for monitoring eligibility 

requirements for federal aid at proprietary schools protect students and 

the investment of Title IV funds. 

To determine how the student loan default profile of proprietary schools 

compares with that of other types of schools, we analyzed Education data 

on school default rates from the National Student Loan Data System 

(NSLDS), reviewed studies on factors that contribute to student defaults, 

and conducted interviews with officials from Education and higher 

education associations. As part of our analysis of default rates at 

proprietary schools, we also looked at information on student 

characteristics and outcomes. We analyzed the most recent student survey 

data available from the 2004 National Postsecondary Student Aid Study 

(NPSAS), data on students during the 2007-2008 school year from the 

Integrated Postsecondary Education Data System (IPEDS), and data on 

student outcomes from a 6-year study following students beginning in the 

1995-1996 school year conducted by the National Center for Education 

Statistics (NCES). To assess the reliability of those data elements needed 

for our study, we (1) performed electronic testing of required data 

elements, (2) reviewed existing information about the data and the 

systems that produced them and (3) interviewed agency officials 

knowledgeable about the data. We determined that the data are 

sufficiently reliable for the purposes of this report. To determine the 

Page 2 GAO-09-600 Proprietary Schools
 

extent to which Education’s policies and procedures for monitoring 

student eligibility requirements for federal aid at proprietary schools 

protect students and the investment of Title IV funds, we reviewed 

Education’s policies and procedures for monitoring the administration of 

ability-to-benefit tests and for enforcing high school diploma requirements; 

reviewed relevant program reviews, independent audits, relevant laws and 

regulations, and enforcement actions taken against schools; and 

interviewed officials from Education, state education licensing agencies, 

and higher education associations. We also gathered information during 

school site visits conducted in California, Illinois, New York, and Virginia. 

We selected these sites for geographic diversity and a mixture of 

ownership types (independently-owned and publicly-traded schools) and 

degree and certificate programs. In addition, GAO anonymously tested 

institution compliance with Title IV eligibility requirements and sent, on 

two separate occasions, analysts posing as prospective students to take 

and purposely fail ATB tests at a local proprietary institution. We 

supplemented this work with a review of investigations conducted by 

Education’s Office of Inspector General and the New York Department of 

Education. 

We conducted this performance audit from October 2007 to August 2009, 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. For additional information on 

the methodology used for this review, see appendix I. 

Background 

Title IV Programs The Department of Education’s Office of Federal Student Aid (FSA) 

manages and administers student financial assistance programs authorized 

under Title IV of the Higher Education Act of 1965, as amended.2

 These 

programs include, among others, the William D. Ford Federal Direct Loan 

Program (Direct Loan program), the Federal Family Education Loan 

Program (FFEL program), the Federal Pell Grant Program (Pell Grant 

 

2

20 U.S.C. 1001 et seq. 

Page 3 GAO-09-600 Proprietary Schools
 

program), and campus-based aid programs.3 In the 2007-2008 school year, 

Title IV programs provided more than $85 billion in student aid. 

In 1990, we placed Education’s student financial aid programs on our high 

risk list of programs at risk of fraud, waste, abuse, and mismanagement. At 

the time, Education had various problems, including poor financial 

management and fragmented and inefficient information systems. In 2005, 

we removed these programs from the list due to improvements made to 

Education’s financial management of federal student aid programs and 

better integration of its information systems. However, we continue to 

monitor Education’s administration and oversight of federal student aid 

programs. 

Types of Title IV Eligible 

Institutions 

The Higher Education Act provides that a variety of institutions of higher 

education are eligible to participate in Title IV programs, including: 

• Public institutions–Institutions operated and funded by state or local 

governments, which include state universities and community colleges. 

• Private non-profit institutions–Institutions owned and operated by nonprofit organizations whose net earnings do not benefit any shareholder or 

individual. These institutions are eligible for tax deductible contributions 

in accordance with the Internal Revenue code (26 U.S.C. § 501(c)(3)). 

• Proprietary institutions–Institutions that are privately-owned whose net 

earnings can benefit a shareholder or individual; that is, for-profit 

institutions. 

These institutions can be further classified by their program lengths: 

• 4-year and above–The program length for colleges and universities. Such 

schools typically offer bachelor’s degrees and higher-level degrees. Some 

4-year and above schools also offer associate’s degrees, which generally 

take 2 years to complete. 

 

3

The Federal Supplemental Educational Opportunity Grant (FSEOG), Federal Work-Study 

(FWS), and Federal Perkins Loan programs are called campus-based programs and are 

administered directly by the financial aid office at each participating school. 

Page 4 GAO-09-600 Proprietary Schools
 

• 2-year–The program length for many community colleges and other 

institutions offering associate’s degrees. These schools often also offer 

certificate programs.4

• Less than 2-year–Includes schools, often referred to as “vocational and 

technical schools,” that offer certificate programs, but typically do not 

offer degrees. 

Overall, the proprietary sector receives the smallest percentage of Title IV 

funds–about 19 percent–compared with the public and private non-profit 

sectors, which receive about 48 and 33 percent, respectively.5

 However, 

the amount of Title IV funding going to the proprietary sector has risen 

significantly in recent years and some of the schools receiving the most 

Title IV funds are proprietary schools. 

Four-year and above schools account for the majority of enrollments in 

the public, private non-profit, and proprietary sectors. Two-year schools 

account for a significant percentage of the enrollments in the public and 

proprietary sectors, but only about 2 percent of enrollments in the private 

non-profit sector. Less than 2-year schools account for 19 percent of the 

enrollment in the proprietary sector, but are less than half of 1 percent of 

the enrollments at both public and private non-profit sectors. Figure 1 

shows school sectors by the percentage of enrollments in different 

program length categories. 

 

4

Education refers to these schools as “2-3 year schools.” Based on our analysis of the 

schools included in the 2-3 year category, we refer to this school group as “2-year schools” 

as most of them are schools with programs that are 2 years in length. 

5

For the purposes of this report, we refer to public, private non-profit and proprietary 

schools as separate sectors. The NCES uses the term “sector” differently and defines 

school sector as a combination of school control, such as public, private non-profit, and 

proprietary, and program length, such as 4-year and above, 2-year and less than 2-years. 

Page 5 GAO-09-600 Proprietary Schools
 

Figure 1: School Sectors by Percentage of Enrollments in Different Program 

Lengths for the 2007-2008 Academic Year 

Under Title IV of the Higher Education Act, a school can receive student 

aid if it offers courses of study such as certificate, associates, bachelor’s, 

graduate, or professional degree programs. Vocational and technical 

training, in which skills related to a specific trade, vocation or occupation 

are taught, are generally offered at community colleges as well as 

proprietary schools. Relative to the total number of schools in the Title IV 

program that award degrees and certificates, the proprietary sector 

awards a small percentage of bachelor’s degrees and above, but a 

substantial percentage of certificates. 

0

20

40

60

80

100

Proprietary

Non-profit

Public

Percentage

Type of school

Less than 2-year 

2-year

4-year and above

Source: GAO analysis of IPEDS data.

52

98

57

24

2 19

48

0 0

Page 6 GAO-09-600 Proprietary Schools
 

Students who attend proprietary schools generally have characteristics 

that differ from students at public and private non-profit schools. First, 

over half of the student population at proprietary schools is comprised of 

“non-traditional” students, such as students who are 25 years old and 

older. Second, more students at proprietary schools are financially 

independent compared to students at public and private non-profit 

schools.6

 Third, proprietary schools serve a higher percentage of women 

than schools in other sectors. See table 1 for analysis of Education’s data 

on age, dependency status, and gender of students in the three school 

sectors. 

Characteristics of Students 

Attending Proprietary 

Schools 

Table 1: Age, Dependency Status, and Gender of Students at Proprietary, Public, 

and Private Non-Profit Schools 

School sector 

Students age 25 

and older 

(percentage)

Financially 

independent 

students 

(percentage) 

Female students 

(percentage)

Proprietary 56 76 63

Public 35 50 54

Private non-profit 38 39 56

Source: GAO analyses of 2007/2008 IPEDS and 2004 NPSAS datasets. 

Lastly, proprietary schools have a higher percentage of minority students, 

specifically African-American and Hispanic students, than public and 

private non-profit schools. However, a higher percentage of AsianAmerican students attend both public and private non-profit schools than 

proprietary schools. See figure 2 for analysis of Education’s data on 

student race in the three school sectors. 

 

6

The NCES at the Department of Education classifies all graduate students and 

undergraduate students age 24 or older as independent. Students under the age of 24 can 

also be classified as independent if they are married or have dependents, are veterans or 

active military, or have been wards of the court. 

Page 7 GAO-09-600 Proprietary Schools
 

Figure 2: Race of Students by School Sector 

0

10

20

30

40

50

60

70

80

90

100

Proprietary

 Private 

 non-profit

Public

Percentage of students by race

Source: GAO analysis of 2007/2008 IPEDS dataset.

American Indian/Alaska Native

Asian/Pacific Islander

Hispanic

African-American

White, non-Hispanic

13

13

7

1

12

70

11

6

1

26

50

19

4

1

66

Eligibility Criteria for 

School Participation in the 

Title IV Program 

In order for students attending a school to receive Title IV funds, a school 

must be: 

(1) licensed or otherwise legally authorized to provide higher education in 

the state in which it is located, 

(2) accredited by an agency recognized for that purpose by the Secretary 

of the U.S. Department of Education, and 

(3) deemed eligible and certified to participate in federal student aid 

programs by Education. 

This is commonly referred to as the triad. Under the Higher Education Act, 

Education does not determine the quality of higher education institutions 

or their programs; rather, it relies on recognized accrediting agencies to do 

so. As part of its role in the administration of federal student aid programs, 

Education determines which institutions of higher education are eligible to 

participate in Title IV programs. Education is responsible for overseeing 

school compliance with Title IV laws and regulations and ensuring that 

only eligible students receive federal student aid. As part of its compliance 

Page 8 GAO-09-600 Proprietary Schools
 

monitoring, Education relies on department employees and independent 

auditors of schools to conduct program reviews and audits of schools. 

ATB Test Generally, students without a high school diploma or GED can qualify for 

Title IV loans, grants, and campus-based aid if they pass an independently 

administered test of basic math and English skills, called an “ability-tobenefit” or ATB test.7

 The intent of the test is to measure whether students 

have the basic skills needed to benefit from higher education and succeed 

in school. The test must be approved by the Secretary of Education and 

administered by an independent party. Students must pass the test prior to 

enrolling in classes and receiving Title IV funds. Since the inception of 

ATB test requirements, hundreds of thousands of non-high school 

graduates have qualified for Title IV aid by taking these tests. 

Under the ATB test program, Education is responsible for overseeing test 

publishers, who, in turn, are responsible for certifying and monitoring test 

administrators to ensure the independent and proper administration of 

ATB tests. Test publishers are required to conduct and submit to 

Education an analysis of test scores every 3 years to identify any test 

irregularities that would suggest ATB tests are not administered in 

accordance with test rules. Certified test administrators administer ATB 

tests to prospective students at schools. Figure 3 describes the ATB test 

process and how it is carried out. 

 

7

While eligibility for federal student aid is based on a number of factors, such as financial 

need and U.S. citizenship, for the purposes of our report we focus on whether a student has 

a high school diploma, GED or recognized equivalent, or has passed an independently 

administered ATB test. 

Page 9 GAO-09-600 Proprietary Schools
 

Figure 3: ATB Test Process 

Approves tests submitted by 

test publishers for ATB use

Sources: GAO analysis; images, Art Explosion.

Send test score 

analysis to Education 

every 3 years to 

identify test score 

irregularities 

suggesting improper 

test administration

Certify independent test 

administrators; decertify 

test administrators who 

improperly administer tests

Prospective students

School

Department of Education

Test publishers

Administer ATB test to 

prospective students at 

the school

Take ATB test 

at school

Send test answer sheets 

to test publisher for 

official scoring

Independent test administrators (ITAs)

Default Rates Calculated 

for Schools Participating in 

Title IV Loan Programs 

Education computes default rates for all schools with students who 

receive Title IV loans through the FFEL Program or the Direct Loan 

Program. Education calculates default rates each year by tracking whether 

borrowers in a cohort–a group of students who begin repaying their loans 

in a given fiscal year–at each school default on their federal student loans 

over a 2-year period. The resulting calculation is called the cohort default 

rate. For example, to calculate the 2-year default rate for the 2006 cohort, 

Education divided (1) the number of borrowers who began their 

repayment period in fiscal year 2006 and defaulted before the end of fiscal 

year 2007 (the numerator) by (2) the number of borrowers who began 

their repayment period in fiscal year 2006 (the denominator). The resulting 

default rate is expressed as a percentage with a higher percentage 

indicating more defaults. The majority of schools now have default rates 

under 10 percent, which is a qualifying rate for favorable loan 

Page 10 GAO-09-600 Proprietary Schools
 

disbursement and delivery terms.8 These terms allow schools to disburse 

loans in a single installment rather than in two or more installments. 

Borrowers begin repayment after dropping below half-time enrollment, 

graduating, or leaving their program.9

 Borrowers generally default when 

they do not make any payments on their loan for 270 days (about 9 

months) or more and they have not obtained a temporary cessation or 

reduction of payments—referred to as a deferment or forbearance—for 

reasons such as economic hardship, disability, or enrollment in another 

school that is eligible to participate in the Title IV program.10

Starting in January 1991, the Secretary of Education initiated proceedings 

for immediate loss, suspension, or termination of schools’ eligibility to 

participate in Title IV loan programs if their default rates were above 

specified thresholds. From 1992, the first year from which Education data 

were available on numbers of schools by sector subject to immediate loss, 

suspension, or termination from the Title IV program due to high default 

rates, until 1999, 1,846 schools, including 1,580 from the proprietary sector, 

were subject to sanctions. More recently, from 2000 until 2008, four 

schools were subject to immediate loss, suspension, or termination from 

the Title IV program due to high default rates, including three from the 

proprietary sector. According to an Education official, there are several 

possible explanations for the drop in defaults and, subsequently, for the 

drop in the number of schools subject to sanctions. For example, the 

Education official noted that the Department’s efforts to provide schools 

with default prevention training may have reduced default rates. In 

addition, he pointed out that many proprietary schools with chronically 

high default rates lost Title IV eligibility and subsequently went out of 

business in the early 1990s. 

 

8

As of fiscal year 2011, the qualifying rate for favorable loan disbursement and delivery 

terms will change to 15 percent. Higher Education Opportunity Act, Pub. L. No. 110-315, § 

427(a). 

9

Prior to entering repayment, borrowers who drop below half-time enrollment, graduate, or 

leave their program generally have a 6- to 12-month grace period. 

10This default definition applies to loans that require repayment on a monthly basis. Loans 

that require repayment on a less frequent basis default when payments are not made for 

330 days (about 11 months). 

Page 11 GAO-09-600 Proprietary Schools
 

Consequences of Student 

Loan Defaults 

When students do not make payments on their federal loans and the loans 

are in default, the federal government and taxpayers assume nearly all the 

risk and are left with the costs. For example, in the FFEL program, the 

federal government and taxpayers pick up 97 percent of the cost on 

defaulted loans. In the Direct Loan program, the federal government and 

taxpayers pick up 100 percent of the unpaid principle and accrued interest 

on defaulted loans. 

Though the federal government and taxpayers pick up the majority of the 

costs on defaulted loans, students who default are also at risk of facing a 

number of personal and financial burdens. For example, defaulted loans 

will appear on the student’s credit record, which may make it more 

difficult for them to obtain an auto loan, mortgage, or credit card. A 

negative credit record could also harm the student’s ability to obtain a job 

or rent an apartment. Students will also be ineligible for assistance under 

most federal loan programs and may not receive any additional Title IV 

federal student aid until the loan is repaid in full. Furthermore, the 

Department of Education can refer defaulted student loan debts to the 

Department of the Treasury to offset any federal and/or state income tax 

refunds due to the borrower to repay the defaulted loan. In addition, 

Education may require employers who employ individuals who have 

defaulted on a student loan to deduct 15 percent of the borrower’s 

disposable pay toward repayment of the debt. Garnishment may continue 

until the entire balance of the outstanding loan is paid. 

Page 12 GAO-09-600 Proprietary Schools
 

Education’s Analysis 

Shows That Default 

Rates Are Higher at 

Proprietary Schools 

than at Public and 

Private Non-Profit 

Schools and Studies 

Link High Default 

Rates to Borrowers’ 

Characteristics 

Default Rates of 

Borrowers from 

Proprietary Schools Are 

Higher than Those of 

Borrowers from Other 

Schools and Increase over 

Time 

Default rates measured 2 years after students begin repaying their loans 

show that students from proprietary schools have higher default rates than 

students from public and private non-profit schools. According to 

Education’s calculations from the group, or cohort, of students who 

entered repayment in fiscal year 2004, the proprietary sector’s 2-year 

cohort default rate is 8.6 percent.11 This rate is higher than the public and 

private non-profit sectors, which have rates of 4.7 percent and 3 percent, 

respectively. Although the proprietary sector’s rate is higher than other 

sectors, it is still below the threshold cut-off rates—25 percent for 3 years 

or 40 percent for 1 year—used by Education to disqualify schools from 

Title IV eligibility.12

While the cohort default rate is one of the means by which Education 

monitors schools’ eligibility to participate in Title IV programs, the rate 

captures only a small portion of all student loan defaults at schools. First, 

any defaults that occur over the life of the loan after the 2-year period are 

 

11Fiscal year 2004 cohort data were the most recent data available that allowed us to make 

comparisons of default rates at 2 years in 2006, 3 years in 2007, and 4 years in 2008. The 2-

year default rate was the official measurement used to track defaults until fiscal year 2009, 

when the 3-year default rate became the official default measurement. Higher Education 

Opportunity Act, Pub. L. No. 110-315, § 436(e). 

12In 2008, Congress increased the 3-year maximum default rate threshold from 25 percent 

to 30 percent, which will take effect in 2011. Higher Education Opportunity Act, Pub. L. No. 

110-315, § 436(a)(1). 

Page 13 GAO-09-600 Proprietary Schools
 

excluded from schools’ cohort rate calculations.13 Second, during the 2-

year period, borrowers are generally considered in repayment as long as 

they have made a payment in the last 270 days, or about 9 months. Third, 

borrowers who seek forbearances or deferments on their loans during that 

2-year cohort period are also considered to be in repayment.14 Figure 4 

illustrates the 2-year cohort default rate. 

Figure 4: Defaults Captured by the 2-year Cohort Default Rate 

Defaults

counted 

Defaults

not 

counted 

Cohort 

period 

begins

Cohort 

period 

ends

Sources: GAO analysis; images, Art Explosion.

2 year 

repayment 

period

Cohort

Year

Repayments continue in subsequent years 

until loan is paid off, which can take 

15 years or more

CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR

CALENDAR

CALENDAR

0 5 2 10 15

Borrowers who do 

not make payments 

for 270 days (9 

months) before 

cohort period ends, 

while not in 

forbearance or 

deferment

While borrowers from all sectors are defaulting at higher rates after the 2-

year period, Education’s default rate calculations of borrower’s 

repayments in the third and fourth years show that proprietary schools’ 

 

13Based on recent changes made to the default measurement, any defaults that occur after a 

3-year period will be excluded from a school’s cohort default rate calculation. 

14A previous GAO report about default rates (GAO/HEHS-99-135) noted these limitations in 

its finding that Education’s cohort default rate calculations are understated because 

borrowers who are in forbearance or deferment are considered to be in repayment even 

though they are not making any loan payments. Furthermore, these borrowers are not 

included in any subsequent cohorts after their period of forbearance or deferment is over. 

GAO recommended that Congress consider amending the Higher Education Act to exclude 

borrowers from schools’ cohort default rate calculations if the borrowers are in deferment 

or forbearance. To date, Congress has not made this change. 

Page 14 GAO-09-600 Proprietary Schools
 

default rates increase more than those of public and private non-profit 

schools. For example, 4 years after borrowers entered repayment, 23.3 

percent of proprietary school borrowers have defaulted, compared to 9.5 

percent of borrowers from public schools and 6.5 percent of borrowers 

from private non-profit schools, as shown in figure 5. 

Figure 5: Proprietary Schools Have Higher Default Rates Than Public and Private 

Non-Profit Schools 

Percentage of defaults

Source: GAO analysis of 2004 cohort data from NSLDS, provided by the Department of Education of

2-year, 3-year, and 4-year default rates by sector.

Public

Private non-profit

Proprietary

4.7

7.2

9.5

3

4.7

8.6

16.7

23.3

0

2

5

7

10

12

15

17

20

22

25

2-year rate 3-year rate 4-year rate

6.5

Note: Education provided official 2-year default rates and modeled 3- and 4-year default rates, by 

sector, using December 2007 student loan data. 

Generally, higher default rates in the proprietary sector persist for 

programs of different lengths. Among 4-year schools, the default rates at 2, 

3, and 4 years into repayment are higher among proprietary schools than 

other schools. Further, at 4-year schools, the default rate 4 years into 

repayment for proprietary schools is more than twice the rate of public 

and private non-profit schools. See figure 6. 

Page 15 GAO-09-600 Proprietary Schools
 

Figure 6: Among 4-year Schools, Proprietary Schools Have Consistently Higher 

Default Rates Than Other Schools 

Percentage of defaults

Source: GAO analysis of 2004 cohort data from NSLDS, provided by the Department of Education of

2-year, 3-year, and 4-year default rates by sector.

Public

Non-profit

Proprietary

3.5

5.3

7.1

2.8

7.3

13.7

19.2

0

2

4

6

8

10

12

14

16

18

20

2-year rate 3-year rate 4-year rate

4.5

6.2

4-year schools

Note: Education provided official 2-year default rates and modeled 3- and 4-year default rates, by 

sector, using December 2007 student loan data. 

Similarly, among 2-year schools, proprietary schools have higher default 

rates than other schools. For example, the default rate 4 years into 

repayment for proprietary schools is the highest–27.2 percent–of the three 

school sectors. See figure 7. 

Page 16 GAO-09-600 Proprietary Schools
 

Figure 7: Among 2-year Schools, Proprietary Schools Have Higher Default Rates 

Than Other Schools 

Percentage of defaults

Source: GAO analysis of 2004 cohort data from NSLDS, provided by the Department of Education of

2-year, 3-year, and 4-year default rates by sector.

2-year schools

Public

Private non-profit

Proprietary

8.1 7.4

9.9

12.2

16.6

27.2

0

5

10

15

20

25

30

2-year rate 3-year rate 4-year rate

12.9

16.2

19.5

Note: Education provided official 2-year default rates and modeled 3- and 4-year default rates, by 

sector, using December 2007 student loan data. 

Among less than 2-year schools, proprietary schools have higher default 

rates than public schools, but nearly identical rates to those of private nonprofit schools.15 See figure 8. 

 

15According to 2004 cohort data of individual schools for which Education calculated a 3-

year cohort default rate, among programs less than 2 years in length, there were 556 

proprietary schools, but only 86 public schools and 19 non-profit schools. 

Page 17 GAO-09-600 Proprietary Schools
 

Figure 8: Among Less Than 2-year Schools, Private Non-profit and Proprietary 

Schools Have Nearly Identical Default Rates 

Percentage of defaults

Source: GAO analysis of 2004 cohort data from NSLDS, provided by the Department of Education of

2-year, 3-year, and 4-year default rates by sector.

Public

Private non-profit

Proprietary

0

4

8

12

17

21

25

30

2-year rate 3-year rate 4-year rate

Less than 2-year schools

5.7

9 8.9

9.7

18.7 18.5

14.1

26.7 26.6

Note: Education provided official 2-year default rates and modeled 3- and 4-year default rates, by 

sector, using December 2007 student loan data. 

Even though the proprietary sector generally has higher cohort default 

rates than the public and private non-profit sectors, many individual 

proprietary schools have lower rates than the sector as a whole. Using a 

fiscal year 2004 dataset of 3-year cohort default rates for individual 

schools, we found that some proprietary schools had among the lowest 

default rates of all schools in the country.16 Our results indicated that 121 

proprietary schools, or about 9.3 percent of all proprietary schools for 

which Education calculated cohort default rates, had rates under 5 

 

16Education’s fiscal year 2004 dataset was the only one available for individual schools that 

measured default rates for longer than 2 years. 

Page 18 GAO-09-600 Proprietary Schools
 

percent.17 Furthermore, 18 of those schools had no students who defaulted 

on their loans over the 3-year period. These proprietary schools with 

relatively low default rates represent a variety of ownership types and 

program offerings. 

Various Student 

Characteristics Contribute 

to Higher Default Rates, 

according to Research 

Variations in default rates across school sectors may reflect the 

characteristics of the students who attend the schools, according to 

academic research studies. Although the research linking explanatory 

factors to federal student loan defaults is limited, especially in recent 

years, we found in 8 of the 11 studies that we reviewed that there are 

multiple demographic characteristics of borrowers that correlate with 

higher default rates.18

In several of the studies, two borrower characteristics closely linked to 

higher default rates are low family income and parents who lack a higher 

education degree. Analysis of Education’s data shows that the annual 

median family income of students at proprietary schools is significantly 

lower than that of students at public and private non-profit schools. Data 

analysis also show that a significantly lower percent of parents of 

proprietary school students have an associate’s degree or higher, 

compared to parents of public and private non-profit school students. See 

table 2 for data on family income and parental education of students at 

proprietary, public, and private non-profit schools. 

 

17Across all sectors, schools with cohort default rates of less than 5 percent qualify for the 

most favorable loan disbursement and delivery terms. Such schools can disburse student 

loans in a single payment at the start of the year for study-abroad students. Further, 

schools that have a cohort default rate under 10 percent for the 3 most recent fiscal years 

can disburse federal student loans at the start of the semester and in a single installment if 

the period of enrollment does not exceed 1 term or 4 months. 20 U.S.C. §§ 1078-7(a)(3) and 

(e). 

18The remaining three studies examined factors other than demographic characteristics 

that may correlate with high default rates. 

Page 19 GAO-09-600 Proprietary Schools
 

Table 2: Family Income and Parental Education of Students at Proprietary, Public, 

and Private Non-Profit Schools 

School sector 

Annual median 

 family income 

Parents with associate’s 

degree or higher (percentage)

Proprietary $24,300 37

Public 40,400 52

Private non-profit 49,200 61

Source: GAO analysis of 2004 NPSAS dataset. 

Note: These numbers are estimates and include both dependent and independent students. 

Student age was also linked to default rates in some of the research 

studies, with borrowers who take out student loans at an older age being 

more likely to default on their loans. One of the studies that linked age to 

default rates suggested that older students may default at higher rates 

because they tend to have other obligations besides paying for college. 

These obligations may include paying a mortgage or paying for child care. 

Our analysis of Education’s data shows that proprietary schools serve a 

higher percentage of older students than public and private non-profit 

schools and the majority of students at proprietary schools are 25 years 

old and older. 

Research also shows that borrowers’ success in school may help predict 

whether they will default. We found studies published in national journals 

that showed that borrowers who have a low grade point average and who 

are not continuously enrolled in school before they leave their programs 

are more likely to default. Across the three school sectors and program 

lengths, a factor closely associated with increased default rates was dropout rates. In six different research studies—three that examined default 

rates from national datasets and three that examined default rates from 

state-specific datasets—default rates were positively correlated with drop 

outs, or students who failed to complete their programs. A 6-year study by 

Education’s NCES, which followed students who began higher education 

in the 1995-1996 school year, found that a larger estimated percentage of 

students at 4-year proprietary schools dropped out than students at private 

non-profit schools.19 The same study estimated no statistically significant 

difference in drop-out rates between students at 4-year proprietary and 

 

19The study presented results for whether students attained a degree from or were still 

enrolled at the first institution they attended. For the purposes of our study, we considered 

those who had neither a degree nor where still enrolled as drop-outs. 

Page 20 GAO-09-600 Proprietary Schools
 

public schools. In addition, the study estimated that 6 years after 

beginning a 4-year school, a significantly smaller percentage of proprietary 

students attained their bachelor’s degree compared to those at public and 

private non-profit schools. In contrast, data show that for students who 

first started at 2-year proprietary schools, there is a significantly higher 

percentage who attained their associate’s degrees compared to students at 

public schools.20 While program completion was an important factor in 

predicting default rates, we reviewed one study that found that completing 

associate’s and bachelor’s degrees were significantly correlated with lower 

default rates, but completing a certificate or license was not. 

Characteristics of borrowers’ loans and their repayment options may help 

predict default rates as well. For example, a factor in predicting defaults 

can be the amount that borrowers take out in loans; those who borrow 

smaller amounts, according to one study, may have a higher likelihood of 

defaulting than those who borrow larger amounts. Researchers estimated 

that borrowing larger amounts is correlated with higher levels of 

education—such as graduate or professional programs—which give 

borrowers an increased earning potential so that they are better able to 

repay their loans. In another study that examined characteristics of 

borrowers’ loans and repayment options, researchers estimated that those 

who graduated with a bachelor’s degree and used the forbearance or 

deferment options after entering repayment were more than twice as likely 

to default. Finally, borrowers who had consolidated loans and incomecontingent repayment plans were also more likely to default than those 

who had not used those options.21

 

20There is no significant difference in associate’s degree attainment between students at 

proprietary schools and students at private non-profit schools. 

21Income-contingent repayment plans are based on a borrower’s income, family size, and 

loan amount. Consolidated loans are those that are generally based on the weighted 

average of the interest rates on the loans being consolidated. 

Page 21 GAO-09-600 Proprietary Schools
 

Weaknesses in 

Education’s Oversight 

of Federal Aid 

Eligibility 

Requirements Place 

Students and Title IV 

Funds at Risk of 

Potential Fraud and 

Abuse at Proprietary 

Schools 

Education’s Weak 

Oversight of ATB Test 

Requirements Allows 

Ineligible Students to 

Receive Federal Aid 

Through separate investigations at proprietary schools, we, along with 

other federal and state investigative agencies, found test administrators or 

school officials violating rules to ensure prospective students without high 

school diplomas passed required tests and obtained access to Title IV aid. 

Generally, prospective students without high school diplomas or GEDs 

must pass ATB tests to become eligible to receive federal financial aid, and 

test administrators are responsible for administering ATB tests at schools 

in accordance with test publisher rules. When we conducted our own 

investigation of compliance with ATB requirements, we found improper 

activities that compromised the integrity of the test process. For example, 

in 2008 we sent two GAO analysts who posed as prospective students to a 

local branch of a publicly traded proprietary school to deliberately flunk 

an ATB test. Each analyst was sent separately to the school and on both 

occasions, the independent test administrator gave them and all the test 

takers in the room–about 20 in total–answers to some of the test 

questions. We later obtained copies of the analysts’ test forms and found 

that they had been tampered with–their actual answers had been crossed 

out and changed–to ensure the analysts passed and would become eligible 

to receive Title IV funds. We turned over the information on testing 

violations to Education’s Office of Inspector General (OIG), which then 

used the information to further investigate the ATB tests at this school. 

Investigators at the OIG and the New York Department of Education have 

previously reported finding similar problems. For example, in one case the 

Page 22 GAO-09-600 Proprietary Schools
 

OIG found personnel at a proprietary school in Louisiana had changed the 

failing test scores of prospective students to allow 80 individuals to pass 

and inappropriately qualify for federal funding.22 Likewise, in two separate 

New York investigations in which multiple undercover operatives were 

sent to flunk ATB tests at local proprietary schools, test answers were 

changed by either the test administrator or school officials to ensure all 

people posing as students passed and gained access to federal aid.23 In 

addition to giving out test answers and falsifying test results, test 

administrators and officials at proprietary schools have violated other ATB 

test rules, impairing the independence of the testing process and allowing 

ineligible students to access federal financial aid. Regulations governing 

the test process require test administrators, who are certified by test 

publishers to administer ATB tests, to be independent of the school at 

which tests are taken and to submit test answer sheets directly to the test 

publisher for scoring. However, Education’s Office of Inspector General 

previously found violations of the requirement for independent test 

administration, in which proprietary school officials inappropriately 

administered tests. In another case involving improper testing at a 

proprietary school, the Education OIG found that test administrators failed 

to follow test rules that govern when students can retake the test on the 

same form. As a result, 724 students who passed improper retests received 

over $3 million in federal financial aid.24 While OIG officials told us that 

some of their cases have involved public schools, they reported that most 

of their findings regarding abuse of ATB tests have involved proprietary 

schools. When ATB tests are not properly administered, a prospective 

student’s ability to benefit from higher education may not be accurately 

assessed. As a result, prospective students who are academically 

unqualified are more likely to be admitted to a school and receive federal 

student aid. Such students are at greater risk of dropping out of school, 

incurring substantial debt, and defaulting on their federal student loans. 

These problems result, in part, from key weaknesses in Education’s 

oversight of ATB testing, which were previously identified in a 2002 

 

22Investigation of Moler Beauty College (Department of Education OIG Investigative 

Reports: Apr. 12, 2006). 

23Interboro Institute, Admission Requirements Review (New York State Education 

Department: Oct. 5, 2005); Investigative Report: CaliberTraining Institute (New York 

State Education Department: Apr. 10, 2007). 

24Audit of Wonderlic’s Ability to Benefit (ATB) Program (Department of Education OIG 

Audit Control Number ED-OIG/03-B0022: February 2002). 

Page 23 GAO-09-600 Proprietary Schools
 

Education Office of Inspector General report.25 As part of its report, the 

OIG recommended changes to strengthen Education’s monitoring of test 

publishers. Education approves the tests for ATB use and test publishers 

monitor how tests are administered. However, Education has done little 

since then to strengthen its oversight of test publishers. Although test 

publishers are required to conduct and submit to Education test score 

analyses every 3 years to help identify test score irregularities, Education 

has not followed up with test publishers to ensure that all comply with 

these requirements. For example, as of early 2009, one of the four 

approved test publishers had yet to submit test score analyses due in April 

2005 and in April 2008 for two of its approved tests. Further, the same test 

publisher had failed to submit test score analysis also due in April 2008 for 

another of its approved tests. Similarly, two of the four test publishers 

failed to submit test score analyses due to Education in January 2008. 

Education officials told us the employee responsible for test publisher 

oversight and review of test submissions retired in 2008. Since that time 

and until March 2009, no one at Education had followed up to obtain 

unsubmitted test score analyses, increasing the risk of unidentified test 

violations and fraudulent access to federal student aid. In response to our 

review, Education followed up with test publishers in the spring of 2009 to 

obtain missing test score submissions. In addition to ensuring the 

timeliness of submissions, Education should also ensure that the analyses 

conducted by test publishers are sufficient to identify improper testing. 

When we spoke with OIG and Education officials, they told us that one 

test publisher provides thorough analyses that have led to the 

identification of possible violations; however, other test publishers 

provide only cursory analyses of test scores. According to the Standards 

for Internal Controls in the Federal Government, federal agencies need to 

have systems in place that ensure timely, effective, and efficient oversight 

of government programs and continually monitor programs to address 

potential risks.26 Weaknesses in Education’s systems of controls for 

monitoring test publishers may not adequately guard against fraud and 

abuse in the ATB test program. 

 

25Audit of FSA’s Controls Over ED-Approved ATB Programs (Department of Education 

OIG Audit Report ED-OIG/A03-B0001: Aug. 22, 2002). 

26GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 

(Washington, D.C.: November 1999). Internal control standards and the definition of 

internal control in Circular No. A-123 are based on the aforementioned GAO standards. 

Page 24 GAO-09-600 Proprietary Schools
 

In addition to problems with Education’s monitoring of test publishers, 

Education regulations do not allow for timely identification of improper 

test administration. Education’s regulations only require test publishers to 

conduct test score analyses every 3 years. Consequently, test 

administrators who improperly administer tests can go undetected for 3 

years before violations are discovered, resulting in an increased risk of 

fraud and abuse. As part of the internal control standards for federal 

agencies, the evaluation of a program should depend on the risks 

associated with the program and should ensure that timely information is 

available to allow for effective monitoring.27 Given the risks of potential 

fraud and abuse associated with the ATB test program, the analysis of test 

scores every 3 years may leave the program vulnerable to violations. 

Education and test publisher officials we spoke with suggested that more 

frequent analyses of test scores by test publishers could improve the 

integrity of the testing process. 

Education’s regulations also do not specifically require test publishers to 

follow up on test score irregularities or report any corrective actions to 

Education. While test publishers are required to identify test score 

irregularities that raise suggestions that tests are not being properly 

administered, there is no requirement that test publishers further 

investigate irregularities to determine if actual violations occurred. In 

addition, regulations require that test publishers decertify test 

administrators who fail to properly administer tests; however, Education 

regulations do not require test publishers to report to Education on the 

implementation of their decertification process. Because test publishers 

are not required to provide Education with the results of their 

decertification activities, Education cannot be assured that test 

administrators found in violation of test rules are decertified. Likewise, 

without further requirements in regulation for test publishers to provide 

information on test administrators, Education has no way to determine 

whether test administrators decertified by one publisher are instead 

administering tests for other publishers, and therefore cannot protect 

against the risk of future violations. 

 

27GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington, 

D.C.: August 2001). 

Page 25 GAO-09-600 Proprietary Schools
 

During our review, we identified cases in which proprietary schools 

helped students obtain high school diplomas from diploma mills–entities 

that provide invalid diplomas, usually for a fee and little academic work–in 

order to obtain access to federal student loans. Through one of our site 

visits and interviews with students and student interest groups, we learned 

of cases where recruiters at two separate publicly traded proprietary 

schools referred students to diploma mills for invalid high school diplomas 

in order to gain access to federal loans without having to take an ATB test. 

In one case, a student interest group told us a student who dropped out of 

high school in the 9th grade was guided by the proprietary school to take 

an online test to receive a high school diploma. Based on our discussion 

with a state education agency, we confirmed that the entity that provided 

the diploma was a diploma mill. In another case, a student told us he was 

flunking out of high school when a recruiter at the proprietary school 

directed him to a place where he could pay a fee to take a test and obtain a 

high school diploma. Based on our review of that county’s listing of high 

schools considered diploma mills, we later determined that the entity 

offering the high school diploma was a diploma mill. Although Education 

has also identified some cases of high school diploma mills–including one 

in which a proprietary school had arrangements with a diploma mill to 

secure high school diplomas for 30 students who obtained $76,000 in 

federal financial aid–Education regional officials told us that the problem 

may be more widespread than is known. 

Education’s Weak 

Oversight of High School 

Diploma Requirements 

Does Not Adequately 

Protect against the Use of 

Diploma Mills to Obtain 

Federal Aid 

Despite evidence of invalid high school diplomas being used to gain access 

to federal student loans, Education has not established clearly written 

policies to help ensure high school diploma requirements are met for Title 

IV funding. Although senior Education officials told us that the 

department’s official policy is that high school diplomas from diploma 

mills are not acceptable for Title IV eligibility and the department 

prosecutes diploma mill cases, Education officials told us they do not 

explicitly assert this policy in any written form. Rather, Education notes in 

its Federal Student Aid Handbook that a high school diploma is one that 

comes from a school recognized by the state in which the school is 

located. Internal control standards provide that federal agencies should 

employ effective ways to record and communicate important information 

to employees and others, such as in policy manuals, to enable them to 

carry out their duties and responsibilities.28 Without a written policy that 

 

28GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington, 

D.C.: August 2001). 

Page 26 GAO-09-600 Proprietary Schools
 

clearly communicates Education’s position against the use of diploma 

mills to obtain access to federal student aid, Education staff and external 

parties such as schools and independent auditors–who must comply or 

monitor compliance with Title IV rules–lack important information 

regarding eligibility requirements. Education officials have acknowledged 

that the use of high school diplomas from diploma mills to obtain access 

to federal student aid is a problem and that more guidance would be 

helpful. In May 2009, Education announced plans to convene public 

forums to help inform the development of proposed regulations that 

would address matters related to Title IV program integrity, including the 

definition of a high school diploma as a condition of receiving federal 

student aid. 

In addition to weaknesses in its policies governing high school diploma 

requirements, Education provides limited guidance and tools that 

Education program review staff, schools, and independent auditors can 

use to help identify high school diploma mills. Though Education, in its 

Federal Student Aid Handbook, advises officials to contact state education 

agencies if they question the validity of a high school diploma, Education 

officials told us that program review staff have no other guidance to help 

them judge whether there is a potential problem. Further, they 

acknowledged that in many cases, the identification of an invalid high 

school diploma is based on the experience of the program review staff and 

whether something appears to be wrong. For example, when a reviewer 

finds an unusually large number of students with high school diplomas 

coming from the same school located outside the state, this may prompt 

the reviewer to look into the origin of the diplomas further. As we noted 

earlier, standards for internal controls in the federal government require 

federal agencies to communicate relevant and reliable information to help 

agency staff and external stakeholders carry out their responsibilities. 

Education provides limited information and resources that would help 

internal and external reviewers and schools better monitor compliance 

with high school diploma requirements. Education officials told us that a 

comprehensive list of recognized high schools could help Education staff 

and schools better identify diplomas from diploma mills. Several states 

already provide lists of the high schools they recognize and make them 

available to the public on their Web sites. However, Education provides 

little information on these already available resources that could help 

officials identify invalid high school diplomas. In contrast, Education 

already maintains information and resources on its Web site to help 

Page 27 GAO-09-600 Proprietary Schools
 

individuals identify and avoid higher education diploma mills by listing 

colleges and universities that are eligible to participate in federal student 

aid programs.29 Education’s limited guidance to help both internal and 

external parties detect the use of high school diploma mills for Title IV 

eligibility may hinder its efforts to ensure that students receiving federal 

financial aid have the ability to succeed in higher education. 

Proprietary schools have become a rapidly growing sector of higher 

education in this country and will likely continue to grow with the 

availability of additional federal funding and an increased demand for 

education and job training. Many of these schools play an important role in 

providing a range of students, including non-traditional and disadvantaged 

students, with an opportunity to obtain the education they need to 

increase their work skills and find jobs. However, students who attend 

proprietary schools are more likely to default on their federal student 

loans, which can tarnish their credit records, make it difficult for them to 

obtain employment, and jeopardize their long-term financial well-being. 

Students from lower-income backgrounds can be particularly hurt when 

they default on their loans. In addition, taxpayers and the government, 

which guarantees the loans, are left with the cost when students default on 

their school loans. 

Conclusions 

To decrease the likelihood that students will default on their loans, it is 

critical that Education increase its oversight of federal student aid 

eligibility requirements to make sure that only students who have the 

ability to benefit receive federal funds to attend college. While our findings 

do not represent nor should they be interpreted as implying widespread 

problems at all proprietary schools, our work has identified significant 

vulnerabilities in Education’s oversight that should be addressed. Without 

better oversight of the ATB testing process to ensure more frequent 

identification of improper testing, and stronger processes for handling and 

reporting improper testing, both the integrity of the testing process and the 

qualifications of students who receive federal funding cannot be assured. 

In addition, without stronger controls, such as clear guidance from 

Education banning the use of high school diploma mills to obtain federal 

 

29The Higher Education Opportunity Act, which reauthorized and amended the Higher 

Education Act, provides that the Secretary shall maintain information and resources on the 

department’s Web site to assist students, families, and employers in understanding what a 

college diploma mill is and how to identify and avoid such diploma mills Pub. L. No. 110-

315, § 109.

Page 28 GAO-09-600 Proprietary Schools
 

aid and information on how to identify diploma mills, the government 

cannot be assured that its student aid funds are only provided to students 

who have an ability to benefit from higher education. Unqualified students 

who receive federal financial aid for higher education programs are at 

greater risk of dropping out of school, incurring substantial debt, and 

defaulting on federal loans. Targeted improvements in these areas would 

help provide greater assurance that the federal investment in higher 

education and students are adequately protected. 

In order to help ensure the eligibility of Title IV recipients, the Secretary of 

Education should strengthen the department’s process for monitoring the 

ATB program. Education should: 

Recommendations for 

Executive Action 

• Conduct regular follow-up of ATB test analyses submissions to ensure 

federally approved test publishers provide complete submissions as 

required; and 

• Use data provided by test publishers on schools where test 

administrators improperly administered tests and were later 

decertified to target schools for further review. 

In order to help ensure that only eligible students receive Title IV funds, 

the Secretary of Education should revise regulations to strengthen 

controls over the ATB testing process. For example, under its authority to 

regulate the administration of tests, Education could consider: 

• Requiring test publishers to conduct an interim or mid-point analysis–a 

supplement to the 3-year test score analysis and submission 

requirement–to provide a preliminary review of potential testing 

problems, and submit a copy of their results to the Secretary; or 

• Requiring test publishers to have a process to follow-up on identified 

test score irregularities, take action to decertify test administrators if 

test irregularities suggest improper test administration, report actions 

taken as a result of test score analyses to the Secretary and prohibit 

test publishers from using ATB test administrators who have been 

decertified by any test publisher. 

In order to protect against the use of high school diplomas from diploma 

mills to obtain Title IV eligibility and help ensure that only students with 

Page 29 GAO-09-600 Proprietary Schools
 

the ability to benefit from higher education receive federal aid, the 

Secretary of Education should: 

• Create guidance, using information gathered from public hearings or other 

forums regarding the definition of a high school diploma, to clearly 

communicate to Education staff, schools, and independent auditors the 

department’s position that diplomas from high school diploma mills 

cannot be used for Title IV eligibility purposes. For example, Education 

could provide this guidance through regulation or the Federal Student Aid 

Handbook; and 

• Establish a cost-effective and readily available source of information that 

the department’s program review staff, schools, and independent auditors 

can use to help them determine whether a high school diploma is from a 

diploma mill. For example, Education could obtain existing lists of stateapproved high schools and make them available on the department’s 

student financial aid Web site. 

We provided a draft of this report to the Department of Education for 

review and comment. The agency provided written comments, which are 

reproduced in appendix II. In its comments, Education noted the steps it 

will take to address our recommendations: 

Agency Comments 

and Our Evaluation 

In response to our recommendation that Education strengthen its 

oversight process for monitoring the ATB program, Education commented 

that it is changing its procedures for monitoring ATB test publishers to 

ensure that required reports and analyses are submitted in a timely 

manner, and program compliance staff are provided the information. 

In response to our recommendation that Education strengthen regulations 

that govern the ATB test process, Education commented that it is 

considering the management of the ATB testing process as a topic to 

include in the new round of upcoming negotiated rulemaking sessions. 

In response to our recommendation that Education provide guidance and 

establish a cost-effective and readily available source of information to 

protect against the use of diplomas from high school diploma mills, 

Education provided the following comments. With regard to providing 

guidance, Education noted that it is considering revising the regulations 

regarding high school diplomas through the upcoming negotiated 

rulemaking process. Education noted that final regulations would become 

effective no sooner than July 1, 2011, as provided under the Higher 

Education Act of 1965, as amended. In the interim, Education will provide 

Page 30 GAO-09-600 Proprietary Schools
 

additional guidance in the next revision of the Federal Student Aid 

Handbook. However, in regards to providing a source of information to 

help protect against the use of diplomas from high school diploma mills, 

Education commented that there is no centralized source for information 

about all high schools and no specific statutory authority for Education to 

create and maintain one, making it unlikely that it will be able to establish 

a readily available source of such information. Further, Education stated 

that it can only expend appropriated funds for authorized purposes, and 

this use is not authorized under the Department of Education Organization 

Act or other federal education laws. We acknowledge that there is no 

centralized source for information about all high schools and we do not 

recommend that Education investigate the status of all high schools. 

Rather, we recommend that Education collect readily available 

information, such as already existing lists of state-approved high schools, 

and make them available on its student financial aid website. Under the 

Higher Education Act, as amended, Education is responsible for 

administering and overseeing the Title IV student aid programs, including 

the eligibility requirements for obtaining Title IV funds. Education's 

oversight includes the responsibility to protect against the improper use of 

Title IV funds. Given that publishing information on state-recognized high 

school diplomas on its Web site will assist Education in carrying out its 

oversight responsibilities, in our view, Education's appropriations are 

available to fund this effort. 

As agreed with your office, unless you publicly announce the contents of 

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

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

Education and interested congressional committees. The report will also 

be available at no charge on the GAO Web site at www.gao.gov. 

Page 31 GAO-09-600 Proprietary Schools
 

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

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

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

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

listed in appendix III. 

Sincerely yours, 

Income Security Issues 

George A. Scott, Director 

Education, Workforce, and 

Page 32 GAO-09-600 Proprietary Schools
Appendix I: 

Methodology 

Objectives, Scope, and 

Page 33 GAO-09-600 

Appendix I: Objectives, Scope, and 

Methodology 

This appendix discusses in detail our methodology for addressing two 

research questions: (1) How does the student loan default profile of 

proprietary schools compare with that of other types of schools? and (2) 

To what extent do Education’s policies and procedures for monitoring 

student eligibility requirements for federal aid at proprietary schools 

protect students and the investment of Title IV funds? To address these 

questions, we analyzed data and records obtained from Education; 

reviewed federal laws, regulations, agency policies, and relevant research 

studies and investigations; conducted interviews with Education officials 

and with other representatives of the higher education community; and 

conducted site visits and undercover visits to schools. We conducted our 

work from October 2007 through August 2009 in accordance with 

generally accepted government auditing standards. Those standards 

require that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and conclusions 

based on our audit objectives. We believe that the evidence obtained 

provides a reasonable basis for our findings and recommendations based 

on our audit objectives. 

To determine how proprietary schools compare to public and private nonprofit schools in regard to federal student loan default profiles, we 

analyzed fiscal year 2004 cohort default rate data that Education 

calculated from the National Student Loan Data System (NSLDS). NSLDS 

includes data from schools, agencies that guaranty loans, the Direct Loan 

program, and other Education programs. We used fiscal year 2004 cohort 

default rate data to analyze default rates 2, 3, and 4 years after students 

entered repayment. These data were drawn from NSLDS in December 

2007. From the dataset of 3-year cohort default rates for individual 

schools, we conducted our own analysis to calculate the numbers of 

proprietary schools that had default rates of 0 and under 5 percent. We 

chose 5 percent because it is a qualifying rate for the most favorable loan 

disbursement and delivery terms in all school sectors. In addition, we used 

Education calculations of Title IV funding for the various sectors over time 

from NSLDS for background information. We began our data analysis of 

Title IV funding in the 2001/02 award year after learning from a data 

specialist at Education that data prior to 2001/02 are considered less 

accurate because the Department used different methodologies to identify 

and calculate Title IV funding data. To ensure that the Title IV funding and 

cohort default rates from NSLDS were accurate for us to report 

Education’s data and for us to conduct our own analysis, we reviewed 

information about the data itself and the NSLDS system and interviewed 

an Education official knowledgeable about the data and the system. 

Analysis of Education 

Data 

Proprietary Schools 
Appendix I: Objectives, Scope, and 

Methodology 

Additionally, we reviewed the analyses that Education performed and 

determined that the data were accurate and reliable for our purposes. 

As part of our analysis of student default rates, we examined data on 

student demographics and outcomes. To identify information on 

borrowers’ dependency status and their parents’ education and income 

levels, we analyzed the most recent student survey data available from the 

2004 National Postsecondary Student Aid Study (NPSAS). NPSAS is a 

nationally representative sample of students in postsecondary education 

institutions, including undergraduate and graduate students from all types 

of institutions. To provide information on borrowers’ age, gender, 

enrollment, and racial status, we analyzed the most recent data available 

on schools during the 2007/08 school year from the Integrated 

Postsecondary Education Database System (IPEDS). IPEDS contains data 

on postsecondary institutions such as student demographics, enrollments, 

and finances. Finally, to provide information on student outcomes, 

specifically degree attainment and drop-out rates, we used data from the 

Descriptive Summary of 1995-96 Beginning Postsecondary Students: 

Six Years Later study, conducted by the National Center for Education 

Statistics (NCES). The NCES study provides information on enrollment, 

persistence, and attainment of students from the time they began higher 

education for the first time in academic year 1995-1996 until the 2000-2001 

academic year. We tested results from this study for statistical significance 

and reported on our findings. The 1995/96 study was the most recent that 

included data on bachelor’s degree attainment 6 years from the time that 

students started school. NCES’s study of its most recent cohort—those 

who began their postsecondary education in 2003/04—is now in progress; 

therefore, 6-year results are not yet available. 

We assessed the reliability of the datasets we used from NPSAS, IPEDS, 

and NCES for our study by: (1) performing electronic testing of required 

data elements, (2) reviewing existing information about the data and the 

system that produced them, and (3) conducting interviews with a data 

specialist from Education. Based on these assessments, we determined 

that data were sufficiently reliable for the purposes of reporting. 

To determine the extent to which Education’s policies and procedures for 

monitoring student eligibility requirements for federal aid at proprietary 

schools protect students and the investment of Title IV funds, we reviewed 

Education’s policies and procedures for monitoring the administration of 

ability-to-benefit (ATB) tests and high school diploma requirements. We 

also reviewed relevant program reviews and independent audits of schools 

Analysis of Education 

Policies and Records 

Page 34 GAO-09-600 Proprietary Schools
Appendix I: Objectives, Scope, and 

Methodology 

found to be in violation of ATB test administration procedures, relevant 

laws and regulations, and enforcement actions taken against schools. To 

assess the number of schools subjected to sanctions due to their high 

cohort default rates, we also examined Education’s records from 1992 

through the present. We selected 1992 as it was the first year from which 

Education data were available on numbers of schools by sector that were 

subject to immediate loss, suspension, or termination from the Title IV 

program. 

To understand the different factors that are linked to high default rates, we 

reviewed 11 academic studies about student defaults. Our criteria for 

selecting studies were those that were original research, peer-reviewed, or 

performed with a strong methodology and focused on explanatory factors 

for default rates. The studies we used were published from 1994 through 

2008. For each of the selected studies that are used in this report, we 

determined whether the studies’ findings were generally reliable. We 

evaluated the methodological soundness of each study and only reported 

on those results deemed statistically significant. 

Research Studies 

To examine Education’s oversight of proprietary schools, we interviewed 

officials from Education, 10 state education licensing agencies, ATB test 

publishers, and education associations. At Education, we spoke with 

officials in Federal Student Aid, field offices, the General Counsel’s office, 

the Office of Inspector General, and the Office of Postsecondary 

Education. The ATB publishers we spoke with were Wonderlic Inc., ACT, 

and College Board. We interviewed experts from a broad range of higher 

education associations and interest groups including the American 

Association of Community Colleges, the Career College Association, the 

American Association of Collegiate Registrars and Admissions Officers, 

the “I Have a Dream” Foundation, the National Association for Collegiate 

Admission Counseling, the National Association of Student Financial Aid 

Administrators, and the National Consumer Law Center. 

Department of 

Education and Expert 

Interviews 

To understand schools’ administrative, admissions, and financial aid 

practices as they relate to Education’s policies and procedures for 

monitoring Title IV funds, we conducted site visits at proprietary schools 

in California, Illinois, New York, and Virginia. We selected these sites for 

geographic diversity and chose schools that represented a mixture of 

ownership types (independently-owned and publicly-traded schools), and 

degree and certificate programs. We also conducted site visits at 

Site Visits 

Page 35 GAO-09-600 Proprietary Schools
Appendix I: Objectives, Scope, and 

Methodology 

community colleges in Maryland and Illinois to provide us with a 

perspective of comparable programs in the public sector. We selected 

these schools based on geographic diversity and their breadth of both 

certificate and degree programs. During all site visits, we interviewed 

administrators, faculty, staff, and students to learn about topics including 

admissions practices, financial aid disbursement, and program offerings. 

To examine the extent to which Education’s policies and procedures for 

monitoring student eligibility requirements for federal aid at proprietary 

schools protect students and the investment of Title IV funds, we tested 

compliance with ATB tests. To do so, GAO analysts, acting in an 

undercover capacity, posed as prospective students on two separate 

occasions to take and purposely fail ATB tests at a local proprietary 

school. We chose this proprietary school chain based on geographic 

proximity. We supplemented this work with a review of investigations 

conducted by Education’s Office of Inspector General and the New York 

Department of Education. 

Undercover Visits 

Page 36 GAO-09-600 Proprietary Schools
Appendix II: Comments from the Department Appendix II: Comments from the Department of Education 

of Education 

Page 37 GAO-09-600 Proprietary Schools 
Appendix II: Comments from the Department 

of Education 

Page 38 GAO-09-600 Proprietary Schools
Appendix III: GAO

A

 Contact and Staff 

cknowledgments 

Page 39 GAO-09-600 

Appendix III: GAO Contact and Staff 

Acknowledgments 

George A. Scott (202) 512-7215 or scottg@gao.gov

In addition to the contact name above, the following staff members made 

important contributions to this report: Melissa Emrey-Arras, Assistant 

Director; Kathy Peyman and Claudine Pauselli, Co-Analysts-in-Charge; 

Karen Febey; Jessica Mace; and Lauren Mohlie. Also, Jean McSween, John 

Mingus, and George Quinn provided guidance on the study’s design and 

data analysis; Jessica Botsford provided legal advice; Mimi Nguyen and 

Cheron Brooks assisted with report graphics; and Ashley McCall provided 

library services. In addition, Paul Desaulniers, Kim Perteet, and Ashanta 

Williams made contributions to the report. Susan Aschoff and Charlie 

Willson advised the team on writing the report and Nagla El-Hodiri, Carla 

Craddock and Michelle St. Pierre verified our findings. 

GAO Contact 

Staff 

Acknowledgments 

Proprietary Schools 
Related GAO Products Related GAO Products 

Student Loans: Default Rates Need to Be Computed More Appropriately. 

HEHS-99-135. Washington, D.C.: July 28, 1999. 

Proprietary Schools: Analysis of Comments Received from an 

Association of Schools. HEHS-98-12R. Washington, D.C.: October 1997. 

Proprietary Schools: Poorer Student Outcomes at Schools That Rely More 

on Federal Student Aid. HEHS-97-103. Washington, D.C.: June 1997. 

Proprietary Schools: Millions Spent to Train Students for Oversupplied 

Occupations. HEHS-97-104. Washington, D.C.: June 1997. 

School Accreditation: Activities of Seven Agencies That Accredit 

Proprietary Schools. HRD-90-179BR. Washington, D.C.: September 1990. 

Many Proprietary Schools Do Not Comply With Department of 

Education’s Pell Grant. HRD-84-17. Washington, D.C.: August 1984. 

(130811) Page 40 GAO-09-600 Proprietary Schools
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