Proprietary Schools: Stronger Department of Education Oversight Needed to Help Ensure Only Eligible Students Receive Federal Student Aid
Published: 2009-08-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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. 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. 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.

section_title: Letter
paragraphs: Institutions of higher education, including public colleges, private non- profit, 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. 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  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  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.
subsections: section_title: Background
subsections: section_title: Title IV Programs
paragraphs: 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.  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  program), and campus-based aid programs.  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.
section_title: Types of Title IV Eligible Institutions
paragraphs: 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 non- profit 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.   2-year–The program length for many community colleges and other  institutions offering associate’s degrees. These schools often also offer  certificate programs.
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. 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.
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.
section_title: Characteristics of Students Attending Proprietary Schools
paragraphs: 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.  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.
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 Asian- American 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.
section_title: Eligibility Criteria for School Participation in the Title IV Program
paragraphs: 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  monitoring, Education relies on department employees and independent  auditors of schools to conduct program reviews and audits of schools.
section_title: ATB Test
paragraphs: 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-to- benefit” or ATB test. 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.
section_title: Default Rates Calculated for Schools Participating in Title IV Loan Programs
paragraphs: 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  disbursement and delivery terms. 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. 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.
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.
section_title: Consequences of Student Loan Defaults
paragraphs: 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.
section_title: 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
subsections: section_title: Default Rates of Borrowers from Proprietary Schools Are Higher than Those of Borrowers from Other Schools and Increase over Time
paragraphs: 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. 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.
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  excluded from schools’ cohort rate calculations.  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.  Figure 4    Figure 4  illustrates the 2-year cohort default rate.  illustrates the 2-year cohort default rate.
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’  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.
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.
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.
Among less than 2-year schools, proprietary schools have higher default  rates than public schools, but nearly identical rates to those of private non- profit schools.  See figure 8.
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. 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  percent. 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.
section_title: Various Student Characteristics Contribute to Higher Default Rates, according to Research
paragraphs: 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.
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.
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 drop- out 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. The same study estimated no statistically significant  difference in drop-out rates between students at 4-year proprietary and  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. 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 income- contingent repayment plans were also more likely to default than those  who had not used those options.
section_title: 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
subsections: section_title: Education’s Weak Oversight of ATB Test Requirements Allows Ineligible Students to Receive Federal Aid
paragraphs: 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  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. 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. 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. 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  Education Office of Inspector General report. 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. Weaknesses in Education’s systems of controls for  monitoring test publishers may not adequately guard against fraud and  abuse in the ATB test program.
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. 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.
section_title: Education’s Weak Oversight of High School Diploma Requirements Does Not Adequately Protect against the Use of Diploma Mills to Obtain Federal Aid
paragraphs: 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.
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. Without a written policy that  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  individuals identify and avoid higher education diploma mills by listing  colleges and universities that are eligible to participate in federal student  aid programs. 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.
section_title: Conclusions
paragraphs: 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.
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  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.
section_title: Recommendations for Executive Action
paragraphs: 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:    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  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 state- approved high schools and make them available on the department’s  student financial aid Web site.
section_title: Agency Comments and Our Evaluation
paragraphs: 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:  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  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.
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.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: 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.
subsections: section_title: Analysis of Education Data
paragraphs: To determine how proprietary schools compare to public and private non- profit 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.
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.
section_title: Analysis of Education Policies and Records
paragraphs: 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  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.
section_title: Research Studies
paragraphs: 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.
section_title: Department of Education and Expert Interviews
paragraphs: 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.
section_title: Site Visits
paragraphs: 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  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.
section_title: Undercover Visits
paragraphs: 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.
section_title: Appendix II: Comments from the Department of Education
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: 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.
section_title: Related GAO Products
paragraphs: 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.