Student Loans and Foreign Schools: Assessing Risks Could Help Education Reduce Program Vulnerability
Published: 2003-07-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Recent events have increased concerns about the potential for fraud in Education's student loan programs related to loans for U.S. residents attending foreign schools. In 2002, GAO's Office of Special Investigations created a fictitious foreign school that Education subsequently certified as eligible to participate in the student loan program. GAO investigators subsequently successfully obtained approval for student loans totaling $55,000 on behalf of three fictitious students. Over the past decade, Education's Inspector General has investigated many instances of suspected student loan fraud involving individuals applying for loans for purported attendance at foreign schools. The conference report accompanying the 2001 Labor, Health and Human Services, and Education Appropriations Act mandated that GAO examine and report on fraud, waste, and abuse with respect to student loans for Americans attending foreign schools.
section_title: What GAO Found
paragraphs: Foreign schools offer unique educational opportunities for Americans and help ensure that U.S. students have a wide range of options in pursuing postsecondary education. Almost 70 percent of all U.S. residents receiving Federal Family Education Loan Program (FFELP) funds to attend foreign schools are in medical school and they account for three-quarters of the total loan volume. While some foreign schools participating in the FFELP enroll large numbers of U.S. residents, others enroll only a few, as seen in the table below, which also indicates the countries wherein FFELP loan volume is highest. We found that FFELP is vulnerable to fraud, waste, and abuse in several ways. For instance, many foreign schools do not submit required audited financial statements and program compliance audit reports, which would allow Education to monitor for and detect significant fraud or other illegal acts. For fiscal year 2001, about 57 percent of foreign schools failed to submit audited financial statements, while the vast majority of foreign schools failed to submit program compliance audit reports. Education has taken limited steps to address instances of vulnerabilities to fraud, waste, and abuse. For example, Education has issued a reference guide and conducted training for foreign school officials. However, a number of foreign school officials reported that they had not received training prior to administering FFELP funds. In addition, we found that some foreign school officials are not properly determining and documenting student eligibility for loans; as a result FFELP funds may be provided to students who should not be receiving them. We also found that the on-line training to which Education refers foreign school officials presents information in some cases that is contrary to how foreign schools are to administer FFELP. Education could take additional action to reduce the potential for fraud, waste, and abuse, but will have to address the trade-offs that arise from its actions that may affect student access and burden for various program participants. A comprehensive risk assessment is one method that Education could employ to determine how to balance an appropriate level of oversight with the desire to provide American students access to foreign educational opportunities.

section_title: Letter
paragraphs: Recent events have increased concerns about the potential for fraud in the  Department of Education’s student loan programs, especially as it relates  to U.S. citizens and permanent residents (hereafter referred to as U.S.  residents) attending foreign schools. The Federal Family Education Loan  Program (FFELP), which provided about $23 billion in loans to students in  fiscal year 2000, is the only federal student financial aid program in which  foreign schools participate; about $226 million in FFELP loans were  disbursed to U.S. residents attending 407 foreign schools in the 2000-01  academic year. Many of these foreign schools enroll only a small number  of U.S. residents who receive FFELP funds, but a few schools enroll large  numbers.
The conference report accompanying the 2001 Labor, Health and Human  Services, and Education Appropriations Act directed that we examine and  report on the problem of fraud, waste, and abuse related to loans for U.S.  residents attending foreign schools. Accordingly, our specific objectives  were to determine (1) ways in which FFELP is vulnerable to fraud, waste,  and abuse with respect to loans for U.S. residents attending foreign  schools; (2) what Education has done to reduce FFELP’s vulnerability; and  (3) additional actions that might reduce program vulnerability to fraud,  waste, and abuse.
To address our objectives, we discussed the vulnerability of FFELP and  actions that Education has taken or could take to address such  vulnerability with officials from Education’s Office of Federal Student Aid  (FSA) and Office of Inspector General (OIG), school administrators and  representatives of lenders and guaranty agencies that help to administer  FFELP and guarantee payment to lenders if students fail to repay loans.  We also reviewed relevant documents published by Education, such as  The Student Guide, The Student Financial Aid Handbook for Foreign  Schools 2001-2002, and FSA’s on-line training tutorial. We also reviewed  the Higher Education Act (HEA) and related Education regulations. To  further address the first objective, we reviewed GAO and OIG reports on  fraud investigations. In addition, to assess selected foreign schools’ ability  to manage FFELP and their roles in reducing program vulnerability, we  conducted site visits to the administrative offices of four schools,  conducted telephone interviews with the administrators of an additional  eight schools, and reviewed student files at eight schools.  We selected  these schools to reflect a variety of foreign schools in terms of degree  programs offered, school type (private for-profit, private nonprofit, and  public), U.S. resident student enrollment, and whether they had electronic  access to Education’s information systems. In reviewing student files at  those schools with fewer than 25 students receiving FFELP funds, we  reviewed the files of all such students to determine whether school  officials had ensured students’ eligibility for loans.  In reviewing student  files at those schools with more than 25 students receiving FFELP funds,  we reviewed the files for those students for whom Education informed  schools, following its initial review of eligibility for student aid, that  additional information was needed to determine that students qualified for  loans. We also obtained information from Education’s Postsecondary  Education Participants System (PEPS) to determine whether schools were  meeting the requirements for participation in FFELP. To further address  the second and third objectives, we interviewed others involved in the  FFELP process, such as school administrators and lending and guaranty  agency officials, and reviewed relevant documents provided by those  officials.
We conducted our work between July 2002 and May 2003 in accordance  with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: Foreign schools can offer unique educational opportunities for U.S.  residents, such as improved language proficiency and knowledge of other  cultures, and help ensure that U.S. residents have a wide range of options  in pursuing postsecondary education. The number of loans certified for  U.S. residents attending foreign schools has risen from just under 4,600 in  the 1993-94 academic year to over 13,000 in the 2000-01 academic year.  Over 500 schools in 44 foreign countries are currently eligible to  participate. About 9,000 of these students attend foreign medical schools  and account for about three-quarters of the total loan volume. By country,  the highest volume of FFELP loans—over $35 million—are for students  attending school in Dominica; its sole eligible institution is a private, for- profit medical school. England, ranked fourth in loan volume, and Canada,  seventh, have the largest number of institutions eligible to participate in  the FFELP—182 and 108, respectively. Those countries participating in the  FFELP and the top 10 foreign schools in loan volume for the 2000-01  academic year are indicated in figure 1. While a few foreign schools enroll  large numbers of U.S. residents who receive FFELP funds, the majority of  foreign schools enroll only a small number. For example, Queen’s College  at the University of Oxford had just 3 students receiving FFELP funds in  2001. For more information on the ranges for numbers of U.S. residents  receiving FFELP funds for attendance at schools in different countries, see  appendix I.
In order to participate in FFELP, foreign schools must submit a variety of  documents, such as an application and a copy of the most recent course  catalog. Once Education initially certifies the school for participation, the  school enters into a Program Participation Agreement (PPA) with  Education that requires it to comply with the laws, regulations, and  policies governing FFELP. PPAs vary, but some may be valid for up to   6 years. To maintain its ability to participate, the foreign school must  demonstrate that it is administratively capable of providing the education  promised and of properly managing the program, and that it is financially  responsible. Schools must submit program compliance audits and audited  financial statement reports to Education on an annual basis. Program  compliance audit reports are intended to demonstrate schools’ ability to  administer FFELP in compliance with HEA and related Education  regulations, while audited financial statements serve as evidence of  schools’ financial responsibility. Schools must submit recertification  materials to Education for continued participation in FFELP before the  expiration of their current PPA.
Education evaluates the application and accompanying documentation to  determine whether a school is eligible to participate. Education’s Foreign  Schools Team, consisting of eight staff members and one director, is  responsible for assisting and overseeing foreign schools. Some of the ways  in which the team oversees foreign schools, which are similar to the way  Education oversees domestic schools, are presented in table 1. Education  also has responsibility for maintaining information systems involved in the  loan process, which is discussed more fully below.
While Education and the foreign schools each have specific  responsibilities, other parties are involved in the student loan process,  including students, lenders, and guaranty agencies. Students are  responsible for filing certain loan application materials, while lenders  make loans, and guaranty agencies repay lenders the loan funds if the  borrower defaults.
Regardless of whether a student plans to attend a foreign or domestic  school, a student applying for a FFELP loan is required to first submit a  Free Application for Federal Student Aid (FAFSA). The student must also  sign the Master Promissory Note (MPN), which outlines the students’  responsibilities for repaying the loan. The information provided by the  student on the FAFSA is checked by Education against various  information systems, including Social Security Administration databases  and the National Student Loan Database System (NSLDS), to test the  accuracy of information and to assess the student’s loan history.
The administrators of the school the student plans to attend must certify  the student’s eligibility for loans and the loan amount based on the output  from the FAFSA.  This output will indicate whether there are any issues  with the student’s eligibility based on the information provided by the  student and the edit checks against the various databases. For example,  the output would indicate if the check against SSA’s databases revealed  that the social security number provided did not match the name provided  by the student, or if the check against Education’s NSLDS revealed that  the student was in default on previous loans. In addition, the output  includes the Expected Family Contribution, which is the amount the  student and his family are expected to contribute to educational expenses.  The administrators determine the student’s financial need based on this  information, the cost of attendance, and the amount of financial aid other  than FFELP funds that the student is expected to receive.
Once the school has certified the student’s eligibility and loan amount and  the student has signed the MPN, the lender can disburse the loan.  Although lenders disburse loans for students attending domestic schools  to the school, a chief difference for students attending foreign schools is  that lenders may disburse loans either directly to students or to the foreign  school the student is attending. The guaranty agency then sends to the  student’s school a student status confirmation report (SSCR), which lists  all students for whom loans were guaranteed for attendance at the school.
School officials must indicate the enrollment status of these students and  return the form to the guaranty agency.
section_title: FFELP is Vulnerable to Fraud, Waste, and Abuse in Several Ways with Respect to U.S. Residents Attending Foreign Schools
paragraphs: FFELP is vulnerable to fraud, waste, and abuse in several ways. Some  school officials who do not have electronic access to Education’s  information systems are improperly documenting and determining student  eligibility for loans and are unaware of the proper procedures to do so,  which could result in ineligible students receiving federal funds. In  addition, Education has not conducted any on-site reviews to assess  schools’ ability to administer FFELP since November 2000. Moreover,  exposure to fraud, waste, and abuse is increased because students  attending foreign schools, unlike students attending domestic schools, can  choose to receive loans directly and in one lump sum for the entire  academic year. Further, foreign schools do not submit required audited  financial statements and program compliance audit reports, which  compromises Education’s ability to monitor for and detect significant  fraud or other illegal acts.  Also, an investigation by our Office of Special  Investigations revealed vulnerability in Education’s process for  determining the eligibility of foreign schools to participate in FFELP.
subsections: section_title: Some Foreign School Officials Are Not Properly Determining and Documenting Student Eligibility for Loans
paragraphs: Interviews with foreign school officials and our review of school files  revealed that some officials are not properly determining and documenting  students’ eligibility for FFELP loans. As a result, FFELP funds may be  provided to students who should not be receiving them.  In particular, we  found that several schools were using incorrect versions of documents  Education generated to alert school officials to information that might  indicate a student is ineligible for FFELP loans. We identified this problem  among those schools that did not have electronic access to Education’s  information systems that contain data needed to determine students’  eligibility for loans. Of the over 500 foreign schools participating in FFELP,  only 32 can electronically access these information systems. However,  these 32 schools certified about 70 percent of the total foreign school  FFELP loan volume for fiscal year 2001.
Electronic access to Education’s information systems can help ensure that  schools use the correct information to determine whether students should  be receiving FFELP loans.  In accessing Education’s information systems,  schools can obtain Institutional Student Information Reports (ISIR), which  Education generates to help schools determine whether students are  eligible for loans. ISIRs contain summary information provided on  students’ FAFSAs as well as the results of various computer matches that  Education conducts. ISIRs indicate, among other things, whether an  applicant’s social security number reported on the FAFSA is valid,  whether a loan applicant has ever defaulted on a student loan, and how  much an applicant has previously borrowed. Electronic access to  Education’s information systems under its existing procedures will not be  granted unless a foreign school has among its staff a person who  possesses a U.S. social security number. Few foreign schools meet this  requirement. In the absence of obtaining ISIRs, foreign school officials  must rely on and obtain from students a special eight-page version of the  Student Aid Report (SAR), which is also generated by Education and  contains information similar to that found in the ISIR. Education typically  provides students with only an abbreviated two-page SAR, which  summarizes information students submit on the FAFSA, but does not  contain all of the information foreign school officials need to determine  whether a student is eligible for a loan. Students must specifically request  the special eight-page version from Education. Rather than documenting  and determining student eligibility based on the eight-page SAR, we found  that certain foreign school officials were improperly basing their student  eligibility determinations on the two-page SAR.
In reviewing files to determine if schools were properly determining and  documenting students’ eligibility for FFELP loans, we found that the   2 schools with electronic access to Education’s information systems had  copies of ISIRs for every student file we reviewed. Each of these schools  had certified in excess of $30 million in FFELP loans and together certified  about 30 percent of the total FFELP loan volume for fiscal year 2001.  However, 5 of the 6 schools without access to Education’s information  systems, which collectively certified over $3 million in FFELP loans for  fiscal year 2001, did not have copies of ISIRs or eight-page SARs on file  indicating that schools may have approved loans without obtaining the  information necessary for determining student eligibility. Some school  officials, in fact, told us that they verified students’ eligibility for loans  based of the two-page SAR and were unaware that without the eight-page  SAR or ISIR, students’ eligibility for loans could not be properly verified  and documented.
The inability of foreign school officials to electronically access  Education’s information systems also creates the potential for delays in  schools confirming and reporting student enrollment. Schools must  confirm the enrollment of students who have borrowed FFELP funds  through the use of a SSCR. Without timely and accurate reporting of  student enrollment, detecting an individual who receives an FFELP loan  but never enrolls in a foreign school is made more difficult.  Schools that  have electronic access to Education’s information systems can enter these  data directly into Education’s information systems. Guaranty agencies can  then retrieve data through these information systems and monitor whether  students whose loans the agency has guaranteed are in fact enrolled in the  foreign school. Schools that do not have electronic access to Education’s  information systems, however, rely on guaranty agencies to send them  SSCRs, which they then must return to guaranty agencies via postal mail.  Several school officials told us that the inefficiency and lack of  dependability of postal mail interfered with their timely submission of  SSCRs.
section_title: Education Has Not Recently Conducted On- Site Program Reviews, Which Could Help Ensure Program Integrity
paragraphs: Education has not conducted an on-site program review—which is  intended to assess, promote, and improve schools’ compliance with laws  and regulations and help ensure program integrity—at a foreign school  since November 2000. Program reviews can supplement the information  provided to Education through the required annual audit reports and also  help Education to monitor for fraud. Between March 1999 and November  2000, Education conducted six such program reviews at foreign schools  (or the U.S. administrative office of the foreign school). As a result of  these reviews, Education identified problems with how schools were  administering FFELP. For example, the reviews revealed that some  foreign school administrators had certified FFELP loans for students in  excess of allowable loan limits and certified loans without verifying  students’ eligibility for FFELP loans. However, a senior FSA official stated  that because of budget constraints, on-site visits at foreign schools may  not be a feasible use of Education’s funds at this time.
section_title: Loan Disbursement Processes for Foreign Schools May Exacerbate Potential Loss of FFELP Funds
paragraphs: Exposure to potential loss through instances of fraud, waste, and abuse is  exacerbated by the fact that students attending foreign schools, unlike  those attending domestic schools, may choose to receive loans directly  from the lender rather than through their schools and may receive all loan  proceeds in one lump sum for the entire academic year rather than receive  the proceeds in multiple disbursements during the academic year. For  example, Education’s OIG investigated a case in which a single individual  submitted about 50 fraudulent loan applications for over $900,000 by  falsely claiming enrollment at foreign medical schools. About 26 of the  loans, totaling about $400,000 in FFELP funds, were disbursed to the  individual before the fraud was detected. Such cases of fraud underscore  the importance of foreign schools confirming and reporting student  enrollment information to guaranty agencies. Over the past decade,  Education’s OIG has investigated 90 cases of suspected FFELP fraud,  many of which involved individuals requesting to receive loan proceeds  directly and posing as foreign school students.  During this same time  period, according to an Inspector General official, the OIG recouped about  $2.75 million in restitution from the successful prosecution of cases and  prevented an additional $1.2 million from being disbursed.
section_title: Many Foreign Schools Fail to Submit Required Annual Audit Reports That Could Help Education Monitor for and Detect Fraud, Waste, and Abuse
paragraphs: Many foreign schools have not submitted required annual audited financial  statement and program compliance audit reports, which enable Education  to monitor whether schools are using correct procedures to award,  disburse, and account for the use of federal funds as well as help  Education monitor for and detect significant fraud or other illegal acts.   According to Education’s OIG Foreign School Audit Guide, the annual  audit reports are the primary tools used by Education program managers  to meet their stewardship responsibilities in overseeing FFELP.  For fiscal  year 2001, about 57 percent of foreign schools failed to submit audited  financial statements. Collectively, these schools certified about   $38 million in FFELP loans, about 17 percent of the total foreign school  loan volume during the period. Further, Education regulations require  foreign schools that certify $500,000 or more in FFELP loans during a  fiscal year to have audited financial statements presented in U.S. Generally  Accepted Accounting Principles (GAAP). For fiscal year 2001, nearly one- third of the foreign schools that certified $500,000 or more in FFELP loans  failed to submit audited financial statements. Moreover, of those schools  that certified $500,000 or more in FFELP loans and submitted audited  financial statements for the period, over half did not submit statements  presented into U.S. GAAP as required. (See table 2.)
In addition to submitting audited financial statements, all foreign schools  are required to submit program compliance audit reports on an annual  basis. These reports address schools’ compliance with the laws and  regulations that are applicable to FFELP.  In fiscal year 2001, however,  only 7 percent of all foreign schools submitted such reports. Of schools  that certified $500,000 or more in FFELP loans, over 40 percent failed to  submit program compliance audit reports. The vast majority of those  schools that certified less than $500,000 in FFELP loans also failed to  submit such reports. While those schools that submitted program  compliance audit reports collectively certified about 75 percent of the  total FFELP loan volume for fiscal year 2001, the remaining schools  certified about $59 million in FFELP loans. (See table 3.)
section_title: Some Foreign Schools Do Not Provide Loan Counseling for Student Borrowers
paragraphs: Interviews with foreign school officials and our review of school files  revealed that some foreign schools do not provide loan counseling.  Despite that default rates for foreign schools as a whole are relatively low,  loan counseling is important because new students often have little or no  experience with repaying and managing debt. Such counseling can help  borrowers avoid defaulting on their loans, which can, in turn, help prevent  waste from occurring in FFELP. Two of the schools we visited, which are  also the schools with electronic access to Education’s information  systems, had staff available to provide loan counseling and school officials  reported doing so both prior to students’ arrival on campus and after  students’ registration on campus. Other school officials, who had certified  loan volumes ranging from $100,000 to about $1 million, stated that loan  counseling was not provided as required by regulations.
section_title: No On-Site Visits Conducted to Verify Existence of Foreign Schools
paragraphs: Education’s current eligibility certification process does not include  conducting on-site visits to verify the existence of foreign schools.  As we  reported in November 2002, due in part to this weakness, Education  granted approval to a fictitious foreign school that our undercover  investigators created and which enabled our investigators to obtain  approval for FFELP loans for fictitious students. To obtain approval to  participate in FFELP, our investigators created various false documents  required to be submitted with its PPA, including a course catalog, audited  financial statements, and a letter purporting to be from United Kingdom  government authorities acknowledging the school as a nonprofit, degree- granting institution. Education did not verify the existence of the school  with foreign government officials or other parties or sources before  certifying the school as eligible to participate in FFELP. After receiving  approval of their fictitious school, our investigators also requested and  obtained information necessary for the school to certify student eligibility  for loans. Our investigators then sought FFELP loans by filing FAFSAs  using three different fictitious student identities and applying for loans  from three different lenders.  Our investigators created false school  certifications of these students’ eligibility for loans and also created false  student enrollment reports. Two of the three lenders to whom our  investigators submitted applications approved loans totaling, in the  aggregate, $55,000, at which point we completed the investigation. Based  on the results of our investigation, we recommended that Education  implement a process, including conducting on-site visits, to ensure that a  foreign school applying to participate in FFELP actually exists.
section_title: Education Has Taken Limited Steps to Reduce the Vulnerability of FFELP to Fraud, Waste, and Abuse but FFELP Remains Vulnerable
paragraphs: Education has taken limited steps—since the beginning of 2002 and  throughout the course of our audit work—to reduce the vulnerability of  FFELP to fraud, waste, and abuse; however, its actions in some cases have  been limited or have achieved limited results. In an effort to share more  information with foreign school officials to help them comply with HEA  and Education requirements, Education has increased the technical  assistance it provides to foreign schools by publishing a reference guide  and holding a series of training sessions. In addition, to assist foreign  schools in complying with audit requirements, Education’s OIG issued a  Foreign School Audit Guide in September 2002. However, interviews with  foreign school officials and review of school files revealed that these  efforts may not be sufficient to ensure that FFELP is being properly  administered by the schools. Our review also found that the on-line  training tutorial made available to foreign school officials on Education’s  Web site does not contain information specific to foreign schools and even  has information contrary to how foreign schools are to administer FFELP.  Moreover, while Education requested that all foreign schools with overdue  audited financial statements and certain schools with overdue program  compliance audit reports submit them, it has not decided on the  consequences for schools that do not comply with the request.  Finally, in  response to our fraud investigation, Education established new  procedures for staff to use in certifying schools’ eligibility to participate in  FFELP and provided its staff training on the new procedures yet no new  foreign schools have been approved for participation in FFELP since the  summer of 2002.
subsections: section_title: Reference Handbook and Training Provided to Foreign School Officials, Yet Some Officials Remain Unaware of How to Properly Administer FFELP
paragraphs: Education has provided a reference handbook and training to foreign  school officials; however, our interviews with several school officials and  our review of schools’ files revealed that they remain unaware of how to  properly administer FFELP, which may increase the risk of fraud, waste,  and abuse occurring. In January 2002, Education issued the Student  Financial Aid Handbook for Foreign Schools: 2001-2002. The Handbook  was designed to help participating foreign schools achieve manageable,  student-friendly administration of FFELP and to ensure that schools are  aware of the legal requirements of participating in FFELP. According to  FSA, the Handbook was mailed to all foreign schools participating in  FFELP and it is currently posted to Education’s Web site. Education also  held a series of training sessions for foreign school officials during 2002 in  several locations, including Canada, Australia, England, Scotland, and  Puerto Rico. Also, in September 2002, Education’s OIG issued a Foreign  School Audit Guide, which assists foreign school officials in complying  with the audited financial statement and program compliance audit  requirements. To supplement this information, Education offers an on-line  training tutorial, FSA COACH, for school officials’ use, although it was  not specifically designed for foreign school officials.
However, Education’s efforts to improve FFELP administration through  training may have fallen short because knowledge of the training materials  available was not widespread among the school officials we spoke to  during our review. For instance, two foreign school administrators  indicated that they had not received the Handbook from Education. In  addition, as previously discussed, some foreign school officials were  unaware of how to properly document and determine student eligibility  for FFELP loans. Furthermore, although HEA regulations require training  for officials at schools newly certified to participate in FFELP, Education  officials did not provide information about training requirements or  opportunities to our undercover investigators when we created the  fictitious foreign school. An FSA official said that Education does not  require foreign school officials to travel to the United States to attend  available training before certifying a schools’ eligibility to participate in  FFELP because of concerns about the financial burden on foreign schools.  Instead, FSA provides training materials, along with information about  how to use FSA COACH, to school officials. However, some  administrators remain unaware of any on-line information, and when we  interviewed foreign school officials at schools that have been participating  in FFELP for a number of years, several indicated that they had not  received training prior to administering FFELP.
Even when training materials did reach FFELP administrators, these  materials may have been insufficient to assist school officials. While some  officials told us that they found the information and training useful, other  officials told us that they did not. For example, several foreign school  officials we spoke with indicated that the training sessions were very  useful and indicated that holding such trainings more frequently would be  valuable. One school official, however, commented that his peers found  the regulatory and legislative information contained in the Handbook  beyond their grasp, and that some of the information was confusing,  especially for those school officials in countries where student financial  aid is administered in an entirely different fashion than in the United  States. Many other school officials commented on the need for better on- line information. Some found Education’s Web page difficult to navigate  and some reported being unable to find needed information. Finally, while  reviewing COACH, we found that much of the information contained  within it was not applicable to foreign schools and, in some instances, it  presents information that is contrary to how foreign schools operate. (See  table 4.)
While COACH was not designed specifically for foreign schools,  Education directs foreign school officials to COACH for training materials  upon certification, and the COACH tutorial states that it is a  comprehensive introductory course on school requirements for  administering FFELP and other student financial aid programs.
section_title: Education Has Requested Foreign Schools to Submit Overdue Audited Financial Statement and Program Compliance Audit Reports but Has Not Decided on Consequences for Schools That Fail to Do So
paragraphs: In December 2002, during the course of our review, Education sent letters  to all foreign schools requesting that they submit overdue audited financial  statement reports.  They also requested schools that certify $500,000 or  more in FFELP loans to submit program compliance audit reports for the  4 most recent fiscal years.  Education told the schools that failure to  submit the requested documents within 45 days would result in  consequences.  Education is now considering revoking or denying schools’  certification to participate in FFELP if it did not receive overdue audited  financial statement and program compliance audit reports.
section_title: In Response to Our Investigation, Education Has Taken Steps to Address Deficiencies Identified in Creating a Fictitious Foreign School, but Some Changes Have Not Yet Been Implemented
paragraphs: According to Education officials, FSA revised internal procedures for  verifying schools’ legitimacy, and its foreign schools’ team was retrained.  The retraining covered school eligibility requirements with an emphasis on  the importance of validating with the appropriate foreign education office  that a school is legitimate. To help staff verify that a school is legitimate,  Education modified an internal checklist to include space for documenting  the source and date of validation in the school’s file. Since learning of our  investigation, Education verified the existence of all schools that are  participating in FFELP, by either checking that the school is approved on  an official Web site, or by corresponding or speaking with country  education offices and ministries. Additionally, with respect to new  applications from schools that have not previously participated in FFELP,  Education no longer accepts a post office box address as the official  location of a school or a third party servicer that administers FFELP for  the school.
Education has not yet implemented some planned changes in its  procedures for determining FFELP eligibility of new foreign school  applicants. Consequently, no new foreign schools have been certified to  participate in FFELP since Education became aware of the school we  created in May 2002, even though applications have been received from   19 schools. Education is currently considering implementing a process  similar to that used when a domestic school applies for participation. This  process would entail circulating the name of the school and its owners  among a number of officials in FSA and other Education offices to  determine whether staff have any information or knowledge that would  affect a decision to certify the school’s eligibility to participate in FFELP.  Education’s International Affairs staff, who coordinate the agency’s  various international programs, would be among those to whom such  information would circulate. If any staff were to raise concerns about the  school or its owners, Education would consider conducting an on-site  program review.
section_title: Additional Actions to Reduce Program Vulnerability Will Require Balancing Competing Goals
paragraphs: Education could take additional action to address the goal of reducing the  vulnerability of FFELP to fraud, waste, and abuse, such as more strictly  enforcing school audit requirements or providing electronic access to  information systems to help school officials more easily determine  students’ eligibility for FFELP loans. However, any steps that Education  takes will likely involve trade-offs that may affect access, accountability,  and burden for various participants in FFELP. For example, Education  could aggressively enforce foreign schools’ audit reporting requirements,  but this may lead to unintended consequences, including limiting students’  access to such institutions if foreign schools withdraw from FFELP as a  result. Other potential steps include changing disbursement procedures to  help limit the federal government’s exposure to loss, but doing so may  increase burdens for schools and students. In addition, providing foreign  school officials with electronic access to information may help them  properly determine student eligibility for FFELP loans, but may increase  security risks. Additionally, we have developed tools that could help  Education determine how to balance the objectives of providing U.S.  residents with access to foreign schools while protecting the taxpayers’  investment that is intended to help provide that access.
subsections: section_title: Stricter Enforcement of School Audit Requirements Would Provide Education More Data to Assess Vulnerability, but May Reduce Student Access
paragraphs: Education could more strictly enforce school audit report requirements,  but doing so may limit U.S. residents’ access to foreign schools. FSA  officials have stated that while Education is committed to maintaining the  integrity of the FFELP program, it is also committed to providing access to  international education opportunities for U.S. resident students and does  not want to create barriers to those opportunities. As previously  discussed, a large number of foreign schools have failed to submit  required audited financial statement and compliance audit reports to  Education in a timely manner. FSA officials told us that balancing  enforcement of these statutory and regulatory provisions with providing  students access to foreign schools is challenging. In their opinion, the  current compliance audit requirements may place an undue burden and  result in excessive costs for foreign schools that enroll few U.S. residents.  Several foreign school officials we spoke to also told us that they found  such audits to be costly, considering that students receiving FFELP loans  constituted very small proportions of their student bodies. According to  these officials, these audit requirements provide a disincentive to  participate in FFELP in order to avoid what they perceive as an  administrative and financial burden. Education officials are now  considering whether to issue letters to foreign schools that certify less  than $500,000 annually in FFELP loans requesting program compliance  audit reports and whether an alternative approach to overseeing these  schools should be taken.
In addition to requiring foreign schools to submit audited financial  statements and compliance reports, another potential step Education is  considering relates to the requirement that certain schools submit audited  financial statements under U.S. GAAP. Several school administrators and  government officials in the United Kingdom told us that they found the  requirement for schools to submit audited financial statements presented  in U.S. GAAP to be burdensome, in light of the audit requirements of their  home country. They stated that they believed that the United Kingdom’s  accounting standards are sufficiently comparable to U.S. GAAP that  Education should accept their statements for purposes of meeting FFELP  statutory and regulatory requirements. Doing so, according to these  officials, would reduce the administrative and financial burden associated  with the requirement. Further, because Education’s regulation requiring  that audited financial statements be presented under U.S. GAAP applies  only to foreign schools that certify $500,000 or more in FFELP loans, these  officials told us that foreign schools have an incentive to limit enrollment  of students receiving FFELP loans so that they do not exceed this  threshold.
Education is currently considering whether to allow exemptions for  foreign schools located in Canada and the United Kingdom—which  collectively accounted for 314, or about 62 percent of the total foreign  schools participating in the FFELP during academic year 2000-01—to its  regulations requiring audited financial statements be presented into U.S.  GAAP. According to an FSA official, the justification for such an  exemption is based on the results of a comparison of several foreign  countries’ auditing standards contained in Education’s policies and  procedures manual, developed in consultation with a private accounting  firm. While the purpose of the manual is to provide a methodology for FSA  staff to use in assessing the financial health of foreign schools certifying  less than $500,000 in FFELP loans, the manual does contain a limited  analysis comparing the selected foreign countries’ accounting standards  with U.S. GAAP and the potential effects of Education relying on foreign  standards on the results of its analyses.
section_title: Changing Loan Disbursement Procedures Would Reduce Exposure to Fraud, Waste, and Abuse, but Decrease Lender, School, and Student Flexibility
paragraphs: Education could seek statutory, and consider regulatory, changes to loan  disbursement procedures to address the potential for fraud, waste, and  abuse; however, such changes could have a significant impact on schools  and students. In our discussions with FFELP lenders and school officials,  we found that disbursement methods and preferences vary among both  lenders and schools. For example, representatives of one large FFELP  lender told us that it is their standard operating procedure to disburse  student loan proceeds directly to student borrowers by sending them  checks. In contrast, a representative of another large FFELP lender, which  specializes in making FFELP loans to students attending foreign medical  schools, told us that it only (1) issues checks that are payable to both the  student borrower and the foreign school and (2) sends these checks, or  electronically transfers loan proceeds, to foreign schools, requiring  student borrowers to obtain their funds through the schools. Some foreign  school officials encourage students to receive their loan proceeds in this  manner, as it helps the school maintain control of the funds. According to  a guaranty agency official, a school official, and an FSA official some  schools do not have financial aid offices or routinely carry out such  functions at their institutions and therefore do not have the resources to  be an intermediary between lenders and students. Other school officials  told us that they are prohibited by local regulations from taking out  student fees from loan checks and remitting the difference to students.
In addition to receiving loan proceeds directly from lenders, students  attending foreign schools may also receive loan proceeds in one lump sum  rather than in multiple disbursements. According to many of the lenders  and foreign school officials we spoke to, students frequently elect to  receive their loan proceeds in this way, particularly students who are  enrolled in 1-year graduate programs. Yet, several school officials told us  that they prefer multiple disbursements for their students as the school is  on a semester or trimester calendar and multiple disbursements provide  them more assurance that expenses will be paid. One lending official,  however, told us of an instance in which a student had trouble entering a  country because she did not have sufficient proof that she had enough  funds for the academic year. Thus, allowing students to receive loan  proceeds in one lump sum might help students in such situations.
Education is considering taking additional steps with respect to current  disbursement procedures. As previously discussed and as documented by  prior OIG investigations, the disbursement procedures used to provide  loan proceeds to U.S. residents attending foreign schools exposes the  federal government to increased risk for potential losses. Education is  considering encouraging or requiring lenders to take steps prior to  disbursing loan funds to students attending foreign schools. These steps  could include (1) confirming that schools are eligible to participate in  FFELP, (2) verifying that students are accepted for enrollment at foreign  schools prior to disbursing funds, and (3) continuing to notify foreign  schools when loan disbursements are made to student borrowers.
section_title: Providing Schools Electronic Access to Education Data Could Improve Eligibility Determinations but Increases Information Security Risks
paragraphs: Providing electronic access to Education’s information systems needed to  determine student eligibility may help improve schools’ administrative  capacity but may also increase information security risk. The lack of  electronic access decreases schools’ administrative capacity, as foreign  school officials have difficulty obtaining the documentation necessary to  determine student eligibility and impedes the exchange of SSCRs with  guaranty agencies. Education is currently working to address these issues  and is considering providing foreign school officials with an alternative to  requiring that someone on their staff possess a U.S. social security number  to access its information systems. However, poor information security is a  high-risk area across the federal government with potentially devastating  consequences. Threats to the security of any data system may include  attempts to access private information by unauthorized users, user error,  as well as pranks and malicious acts. Potential damage arising from such  threats could include, among other things, the disclosure of sensitive  information, disruption of critical services, the interruption of services and  benefits, and the corruption of federal data and reports. Therefore,  Education needs to carefully weigh the benefits and risks of providing  such access to foreign school administrators.
section_title: Risk Assessments Can Help Agencies Balance Competing Goals Inherent in Addressing Program Vulnerability
paragraphs: We have found that conducting a risk assessment is one of several critical  steps that agencies need to undertake to identify and address major  performance challenges and areas that are at risk for fraud, waste, and  abuse. We have also developed tools to assist agencies in undertaking  such assessments. These tools provide a framework for identifying areas  at greatest risk as well as various reports which can assist agencies in  evaluating internal controls and addressing improper payments resulting  from fraud, waste, and abuse. These tools could be useful to Education in  weighing the advantages and disadvantages of various ways of overseeing  and assisting foreign schools. Among other things, these tools highlight the  importance of conducting risk assessments—comprehensive reviews and  analyses of program operations to determine the nature and extent of  program risks—and identifying cost-effective control activities to address  identified risks.
section_title: Conclusions
paragraphs: Foreign schools’ ability to participate in FFELP supports wide-ranging  educational opportunities for U.S. residents and ensures that these  students have a variety of options in pursuing postsecondary education. In  light of recent events highlighting the vulnerability of FFELP with respect  to U.S. residents attending foreign schools, Education has taken some  important steps, and could take additional steps, both immediate and  longer term, to decrease the vulnerability of the program. Ensuring that  foreign school officials know how to properly administer the program,  especially what steps they need to take to ensure that students are eligible  to receive federal funds, is critical to reducing the program’s vulnerability  to fraud, waste, and abuse. Education has taken steps to provide school  officials with additional information concerning their responsibilities yet  as we have shown, foreign school officials may need more information.  Training that is convenient and specifically designed for foreign school  officials could help bridge this information gap.  Education is also  considering what regulatory flexibilities it might extend to some foreign  schools while also considering stricter enforcement of current statutory  and regulatory provisions. The use of a risk assessment could help ensure  that Education appropriately identifies the risks involved in the program  and how best to balance the objectives of providing U.S. residents with  access to foreign schools while protecting the taxpayers’ investment  intended to help provide that access. In taking such actions, Education  might identify alternative regulatory and oversight methods that would  strike such a balance.
section_title: Recommendations for Executive Action
paragraphs: To help ensure that foreign school officials have the knowledge necessary  to properly administer FFELP, we recommend that the Secretary of  Education develop on-line training resources specifically designed for  foreign school officials.
To better ensure that Education is adequately overseeing foreign schools  participating in FFELP, we recommend that the Secretary of Education  undertake a risk assessment to determine how best to ensure  accountability while considering costs, burden to schools and students,  and the desire to maintain student access to a variety of postsecondary  educational opportunities. Further, after completing the risk assessment, if  Education determines that legislative and/or regulatory changes are  justified, we recommend that the Secretary seek any necessary legislative  authority and/or implement any necessary regulatory changes.
section_title: Agency Comments
paragraphs: In written comments on our draft report, Education agreed with our  reported findings and recommendations and, among other things, said that  it has begun to reengineer its process for determining the eligibility of  foreign schools to participate in FFELP. Education also provided technical  clarification, which we incorporated where appropriate. Education’s  written comments appear in appendix II.
We are sending copies of this report to the Secretary of Education,  appropriate congressional committees, and other interested parties. In  addition, the report will also be available at no charge on GAO’s Web site  at http://www.gao.gov.
If you or your staffs have any questions about his report, please contact  me on (202) 512-8403 or Jeff Appel on (202) 512-9915. Gillian Martin and  Cara Jackson made significant contributions to this report.
section_title: Appendix I: Characteristics of Foreign Schools Participating in FFELP, by Country
section_title: Appendix II: Comments from the Department of Education