GAO-09-992R Federal Student Loan Program

 

United States Government Accountability Office

Washington, DC 20548 

September 30, 2009 

Congressional Committees 

Subject: Federal Student Loans: Audits and Reviews of the Federal Family Education Loan 

and Federal Direct Loan Programs 

This letter formally transmits the enclosed briefing slides in response to section 1119 of 

Pub. L. No. 110-315, the Higher Education Opportunity Act. This act mandated GAO study 

the financial and compliance audits and reviews required or conducted for the Federal Family 

Education Loan and Federal Direct Loan Programs. On August 6 and 7, 2009, we briefed the 

staff of your respective committees on the types of audits, reviews, agreed-upon procedures, 

and reconciliations that are required or conducted for these programs. At your request, we 

have incorporated additional information on the agreed-upon procedures engagements 

required by the Ensuring Continued Access to Student Loans Act and the reconciliations 

performed by the Department of Education’s Office of Federal Student Aid. We obtained 

comments from the Department of Education and have incorporated changes in the enclosed 

documents, as appropriate. In a forthcoming report, we will provide an assessment of 

whether these audits and reviews as designed provide comparable coverage of the two loan 

programs. That report will also discuss how the Department of Education ensures that these 

audits and reviews comply with statutory and regulatory requirements and how the 

Department uses them to oversee these loan programs. 

We are sending copies of this letter to the appropriate congressional committees. We are also 

sending a copy to the Secretary of Education. The letter will be available at no charge on 

GAO’s Web site at http://www.gao.gov. Should you or your staff have any questions 

concerning this letter, please contact me at 202-512-9095 or at dalykl@gao.gov. Contact 

points for our Offices of Congressional Relations and Public Affairs may be found on the last 

page of this letter. Key contributors were Jack Warner, Assistant Director; Barry Grinnell; 

Chau Dinh; and Jennifer Dent. 

Kay L. Daly 

Director 

Financial Management and Assurance 

Enclosure - 1 
Page 2 GAO-09-992R Federal Student Loan Program

List of Committees 

The Honorable Tom Harkin 

Chairman 

The Honorable Michael B. Enzi 

Ranking Member 

Committee on Health, Education, Labor and Pensions 

United States Senate 

The Honorable George Miller 

Chairman 

The Honorable John P. Kline 

Ranking Member 

Committee on Education and Labor 

House of Representatives
Federal Student Loa

Audits and Reviews of the 

Family Education Loan and 

Direct Loan Program

Briefing for Staff of 

the Senate Committee on Health

Labor, and Pensions a

the House Committee on Educatio
Overview• Background

• Objective

• Scope and Methodology

• Preliminary Observations

• Types and Frequency of Audits and 

• Summary of Department of Educatio

Audits, Reviews, Agreed-Upon ProcReconciliations of the Federal Family 

(FFEL) and Federal Direct Loan (DL) p

Table 1) 
Background• The Higher Education Act (HEA) of 1965, a

authorizes Education to provide assistance education students with programs such as programs. 

• In fiscal year 2008, Education guaranteed a

$52.9 billion in new net loans to about 6 miunder the FFEL program and made approxbillion in new net loans to about 3 million reDL program.

• The Higher Education Opportunity Act of 20

L. No. 110-315, revised and reauthorized H
Background (cont.)FFEL and DL Program Participants• FFEL

• U.S. Government

• Schools

• Lenders

• Secondary Markets

• Guaranty Agencies

• Third-Party Servicers

• Borrowers

• DL

• U.S. Go• Schools • Third-P• Borrow
Background (cont.)Overview of FFEL Program
Background (cont.)Overview of DL Program
Background (cont.) 

Source: Department of Education’s National Student Loan Data System.Note: Loan totals include accrued interest. 

Loans Outstanding
Objective• Section 1119 of the HEOA mandated that GAO 

and compliance audits and reviews required or federal student loan programs under parts B (F

Title IV of the HEA.

• Our objective for this briefing was to identify the 

reviews, agreed-upon procedures, and reconcil

conducted for the FFEL and DL programs.
Scope and MethodologyWe categorized audits and reviews that are requir

follows:

• Required audits, reviews, and agreed-upon pro

required by statutes, regulations, or contract teraudits performed by independent public accounperformed by guaranty agency staff.

• Discretionary audits, reviews, and reconciliation

conducted but not required by statutes, regulati

terms that help enforce statutes, regulations, an

These include audits and reviews performed by 

of Federal Student Aid (FSA) and Office of Insp(OIG).
Scope and Methodology (conTo identify the types of audits, reviews, agreed-upon pr

reconciliations required or conducted for the FFEL an

• researched laws and regulations;• reviewed audit and review guides, including:

• Education FSA Review Guides, Policies, and Pr• OIG Audit Guides; • Office of Management and Budget (OMB) Circu

Compliance Supplements; and

• OIG Ensuring Continued Access to Student Loa

Agreed-Upon Procedures Guides

• interviewed knowledgeable officials from Education i

OIG; and

• reviewed lists of audit reports from systems used by 

filings and audit findings.
Scope and Methodology (con

We conducted our work from March 2009 t

accordance with all sections of GAO’s QuaFramework that are relevant to our objectivframework requires that we plan and perforengagement to obtain sufficient and appropmeet our stated objectives and to discuss aour work. We believe that the information aand the analysis conducted, provide a reasour work.
Types and Frequency of Audits aWe identified the following required audits, review

procedures:

• Financial statement audits performed annually t

reasonable assurance that school, guaranty ag

servicer financial statements are free of materia

• Compliance audits performed annually to asses

secondary market entity, guaranty agency, and compliance with applicable statutes, regulationsrequirements.

• ECASLA agreed-upon procedures engagement

participant compliance with the provisions of the programs.1

1The three ECASLA programs allow Education to buy certain loans from lenders to 

the FFEL program. The frequency of agreed-upon procedure engagements varies a
Types and Frequency of Audits a(cont.)• Special Allowance audits annually performed to 

accuracy of lender billings for the 9.5 percent sppayments.

2

• Guaranty agency biennial program reviews of le

volume of guarantees and of schools whose stuhave a default rate exceeding 20 percent to enf

and guaranty agency requirements. 

Education conducts additional discretionary audits • FSA conducts reviews of specific program issue

schools, lenders, secondary market entities, guand third-party servicers based on risk assessmcompelling factors that may indicate a review is 

• OIG conducts audits, investigations, and inspec

programs and operations based on risk assess

2Under the 9.5 percent Special Allowance Program, the federal government guarantees lenders a 9.

certain FFEL loans. GAO previously reported on these loans in Federal Family Education Loan Prog

Changes Could Avert Billions in Unnecessary Federal Subsidy Payments, GAO-04-1070 (Washingto
Types and Frequency of Audits a(cont.)Further, audits and reviews of Education as a 

focused specifically on FFEL and DL, provireview coverage of these programs:

• annual financial statement audits under the 

Officers (CFO) Act, as amended (31 U.S.C

• annual internal control assessment under O

A-123, and

• annual information security assessment un

Information Security Management Act.
Types and Frequency of Audits a(cont.)In addition to the audits and reviews, FSA pe

reconciliations as part of its continuing ovecontractors and schools associated with the ECASLA programs. Per FSA, these reconcintegral part of Education’s internal control ensure that loan disbursements, receipts, amade and recorded in Education and other participants’ records accurately and timely.

See Table 1 for a Summary of Department of 

Reviews, Agreed-Upon Procedures, and Rthe FFEL and DL Programs.
Table 1

AUDITEE and TYPE of REQUIRED 

AUDIT/REVIEW Objective Frequency1 Performed by Authority 

 Financial statements Provide reasonable assurance that entity financial statements are free of 

material misstatement.

Annually Independent Public 

Accountant (IPA) 

20 U.S.C. 1094(c)(1)(A) and 34 CFR S

 Compliance Assess entity compliance with applicable statutes, regulations, and program 

requirements. 

Annually IPA 20 U.S.C. 1094(c)(1)(A) and 34 CFR S

Program reviews Enforce federal, state, and guaranty agency requirements for schools having a 

student loan default rate exceeding 20 percent.

Biennially Guaranty Agency (GA) 34 CFR 682.410(c) 

Direct loan reconciliation Assess whether funds drawn down by each school equal the amount disbursed 

to students. 

Monthly with year-end 

closeout

Federal Student Aid 

(FSA)

34 CFR 685.102(b) and 20 U.S.C. 108

Compliance Assess: (1) accuracy of origination fee, interest, and special allowance 

payments and (2) compliance with applicable statutes, regulations, and program requirements. 

Annually IPA 20 U.S.C. 1078(b)(1)(U) and 34 CFR 

Special allowance audits Assess the accuracy of billings for the 9.5 percent special allowance payments. Annually IPA 20 U.S.C. 1078(b)(1)(U) Program reviews Enforce federal, state, and guaranty agency requirements. Biennially GA 34 CFR 682.410(c) 

 Compliance Assess entity compliance with applicable statutes, regulations, and program 

requirements.

At least once a year IPA 20 U.S.C.A. 1094(c)(1)(D) 

Agreed-upon procedures engagements Assess lender and secondary market compliance with the provisions of the 

Loan Purchase Commitment Program.

Once, for all loans sold 

each quarter

IPA Section 5 of the Master Loan Sales Ag

Agreed-upon procedures engagements 1) Assess lender and secondary market compliance with the provisions of the 

Loan Participation Program.

Based on loan volume 

and error rate3

IPA Section 8 of the Master Participation A

2) Assess custodian compliance with the provisions of the Master Participation Agreement.

Annually IPA Section 8 of the Master Participation A

Agreed-upon procedures engagements 1) Assess lender and secondary market compliance with provisions of the AssetBacked Commercial Paper Conduit Put Program -- Putability4 and Eligibility.5 Once to determine putability4 

Quarterly for eligibility5

IPA Section 20 of the Put Agreement, Sec

Loan Purchase Agreement, and ArticlNote Purchase Agreement 

2) Assess conduit administrator compliance with provisions of the Put Agreement.

Annually IPA Section 20 of the Put Agreement 

Financial statements Provide reasonable assurance that entity financial statements are free of 

material misstatement.

Annually IPA 34 CFR 682.410(b) 

 Compliance Assess entity compliance with applicable statutes, regulations, and program 

requirements.

Annually IPA 34 CFR 682.410(b) 

Financial statements of servicers for lenders and guaranty agencies 

Provide reasonable assurance that entity financial statements are free of material misstatement.

Annually IPA 34 CFR 668.23(d)(5) 

 Compliance Assess entity compliance with applicable statutes, regulations, and program 

requirements.

Annually IPA FFEL third-party servicers: 20 U.S.C. 

34 CFR 682.416(e); School third-party 668.23

TYPE of DISCRETIONARY 

AUDIT/REVIEW Objective Frequency Performed by Authority 

 FSA Reviews Address specific program issues and follow-up on prior audit findings. Based on risk FSA Lenders: 34 CFR 682.414(c); Guarant

CFR 668.24; Schools: 20 U.S.C. 10934 CFR 682.416(c)

OIG audits Audit, investigate, and inspect student loan programs and operations. Based on risk OIG Inspector General Act of 1978 and 5 U

RECONCILIATIONS OF 

ACCOUNTS Objective Frequency Performed by Authority 

 Reconciliations Help ensure that loan disbursements, receipts, and transfers are made and 

recorded in Education and other program participants' records accurately and timely.

Monthly FSA OMB Circular A-123, OMB Circular A-

1990, and ECASLA Agreements

2. Certain audits, reviews, and reconciliations are not applicable because the structure, operations, and participants of the FFEL and DL programs differ. 4. Putability -- Under this program, Education agrees to purchase loans that meet specific criteria from lenders, at the lender's discretion. The review is conducted once to ensure that loans are "putable." 5. Eligibility -- Under this program, "putable" loans are reviewed quarterly to ensure that they continue to meet specific criteria. 1. Exceptions to these frequencies are based on factors such as loan volume and the servicer's relationship with program participants.3. Every one, three, or six months. The error rate is the rate of ineligible loans identified in the previous engagement.

Third-Party ServicersSecondary MarketsGuaranty Agencies

Schools

Education Audits, Reviews, Agreed-Upon Procedures, and Reconciliations of the FFEL and DL Program

LendersLenders and Secondary Markets - Ensuring Continued Access to Student Loans Act (ECASLA)
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