Federal Student Loan Programs: Opportunities Exist to Improve Audit Requirements and Oversight Procedures
Published: 2010-07-21T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Higher Education Opportunity Act of 2008, Pub. L. No. 110-315, mandated GAO to study the financial and compliance audits and reviews required or conducted for the Federal Family Education Loan (FFEL) program and the Federal Direct Student Loan (DL) program. The Department of Education's (Education) Office of Federal Student Aid is responsible for administering these programs. This report focuses on (1) identifying differences and similarities in audit requirements and oversight procedures for the FFEL and DL programs, including anticipated changes to selected oversight activities and (2) describing how the Office of Federal Student Aid's policies and procedures are designed to monitor audits and reviews. To do so, GAO interviewed Education and inspector general officials and reviewed numerous audit guides, agency procedures, checklists, and audit tracking systems.
section_title: What GAO Found
paragraphs: GAO identified differences and similarities in audit requirements and oversight procedures for the two programs. Differences include the following: (1) The FFEL and DL programs generally had different audit requirements stemming primarily from divergent program structures. The FFEL program relied on lenders, guaranty agencies--which administer federal government loan guarantees to lenders--and other entities that were subject to statutory and regulatory audit requirements. The DL program did not have as many audit requirements because DL loans are provided by the federal government, and fewer external entities are involved. (2) GAO found differences in audit requirements for nonprofit and for-profit lenders. Certain applicable audit objectives included in Office of Management and Budget (OMB) requirements for compliance audits of nonprofit lenders were not included in the Department of Education Office of Inspector General (OIG) Lender Audit Guide for compliance audits of for-profit lenders. As a result, audits of lenders performed in accordance with the OIG Lender Audit Guide were at risk of omitting compliance testing for a key audit objective. Similarities in audit requirements and oversight procedures include these: (1) Schools were subject to annual financial statement and compliance audits under both programs. (2) The functions performed by the DL servicer, with which Education contracts to administer certain functions of the DL program, were similar to functions performed by lenders, guaranty agencies, and their servicers in the FFEL program. GAO's analysis found that objectives addressed by FFEL participant compliance audits were similar to the objectives addressed through oversight procedures for the DL servicer, such as Education's review of the servicer's monthly performance metrics. The passage of the Health Care and Education Reconciliation Act of 2010 terminated the authority to make new FFEL loans after June 30, 2010. Borrowers who would have been eligible to obtain new FFEL loans could receive loans under the DL program. Regarding Office of Federal Student Aid's monitoring activities, staff were to use financial statement audits to oversee the financial condition of the schools and guaranty agencies that participate in the student loan programs. Compliance audits of schools, lenders, guaranty agencies, and their third-party servicers help Education ensure that these participants comply with applicable statutes, regulations, and program requirements. The Office of Federal Student Aid was required to track findings in these audit reports. GAO found that third-party servicers for lenders in the FFEL program did not submit their audited financial statements to Education as required. Education lacked a policy and specific procedures to ensure receipt and review of these audited financial statements. Without such reviews, the Office of Federal Student Aid might not be informed of a third-party servicer's unfavorable audit opinion or significant reported findings that could affect program operations.
section_title: What GAO Recommends
paragraphs: GAO recommends that the Education Inspector General update the OIG Lender Audit Guide to include all appropriate regulatory requirements for audits of ongoing FFEL participants. GAO also recommends that the Secretary of Education develop and implement policies and procedures requiring Office of Federal Student Aid review of audited financial statements for lender servicers. The Education Office of Inspector General and Education agreed with GAO's recommendations.

section_title: Letter
paragraphs: In fiscal year 2009, the Department of Education (Education) provided or  oversaw the provision of over $90 billion in federal student loans to almost  11 million postsecondary students and their families under the Higher  Education Act of 1965 (HEA). Of that amount, Education guaranteed  $62.5 billion in loans from nonfederal lenders to 7.7 million borrowers  under the Federal Family Education Loan (FFEL) program and disbursed  $23.7 billion in loans to 2.9 million borrowers under the William D. Ford  Federal Direct Loan (DL) program. These two loan programs have  different operating structures that involve various participants.
Education’s Office of Federal Student Aid (Federal Student Aid), led by its  Chief Operating Officer, is responsible for overall program administration  and oversight of the FFEL and DL programs. As part of its oversight,  Federal Student Aid is required to review and resolve audits of entities  that participate in the operation of these programs. Schools, lenders,  guaranty agencies, and other program participants are subject to audits  and reviews focused on financial statements, internal controls, and  compliance with laws and program regulations.
In March 2010, the Health Care and Education Reconciliation Act of 2010  (HCERA) terminated the authority to make new FFEL loans after June 30,  2010. Instead, borrowers who would have been eligible to receive FFEL  loans could receive loans made by Education under the DL program.  However, FFEL loans outstanding after that date will continue under the  same structure with Federal Student Aid oversight for possibly 30 years,  depending on the repayment plan. Accordingly, Federal Student Aid  officials expect the audits and reviews of the FFEL program to remain part  of that oversight.
To identify how audits and reviews compare between the programs as well  as how Education uses these audits and reviews, the Higher Education  Opportunity Act (HEOA) of 2008, which revised and reauthorized the  HEA programs, mandated that GAO study the financial statement and  compliance audits and reviews required or conducted as part of the  management of FFEL and DL programs. In response to this mandate, on  September 30, 2009, we issued a report that identified the audits and  reviews for the FFEL and DL programs. For a summary of this  information, see appendix I. To complete our response to this mandate,  this report focuses on (1) identifying differences and similarities in audit  requirements and oversight procedures for the FFEL and DL programs  including anticipated changes to selected Federal Student Aid oversight  activities and (2) describing how Federal Student Aid’s policies and  procedures are designed to monitor audits and reviews.
To achieve the first objective, we analyzed audit requirements and  oversight procedures under both programs. For those audits and reviews  applicable to both programs, we compared the relevant audit guides to  assess whether the requirements were similar. We did not evaluate the  quality of the design of audit requirements or oversight procedures or the  extent to which the audit requirements or oversight procedures were  implemented. The scope of our work did not include program reviews  conducted by guaranty agencies and other Federal Student Aid reviews  because the review objectives were unique to each review. To address our  second objective, we analyzed Federal Student Aid’s policies and  procedures, observed systems demonstrations, and interviewed Federal  Student Aid officials to obtain an understanding of the agency’s processes  for monitoring receipt, acceptability, and resolution of required audits and  reviews. We did not confirm whether the processes were implemented as  designed. See appendix II for additional information about our scope and  methodology.
We conducted this performance audit at Federal Student Aid offices in  Washington, D.C., from August 2009 to July 2010 in accordance with  generally accepted government auditing standards (GAGAS). 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.
subsections: section_title: Background
paragraphs: The FFEL and DL programs have substantially different structures but  both provide student loans to help students meet the costs of obtaining a  postsecondary education. FFEL loans are provided by nonfederal lenders  and repayment is guaranteed by the federal government. Under the DL  program, the federal government provides loans to students and their  families, using federal capital. Figure 1 shows the FFEL and DL program  loan volume outstanding as of September 30, 2008 and 2009.
subsections: section_title: Overview of the FFEL Program
paragraphs: In the FFEL program, student loans are made by nonfederal lenders,  which can be for-profit or nonprofit entities. Lenders are protected against  borrower defaults by federal government guarantees that are administered  by guaranty agencies. Guaranty agencies are state or nonprofit entities  that also perform other administrative and oversight functions under the  FFEL program. For example, guaranty agencies provide counseling to  borrowers regarding delinquent loan repayment and initiate collections on  defaulted loans.
Generally, lenders provide the FFEL loan proceeds to a student’s school,  which then credits the student’s account and disburses the residual  amount, if any, to the student. Schools, lenders, and guaranty agencies  often employ third-party servicers to perform functions related to the  administration of the FFEL program. For example, a lender may hire a  servicer to process borrower payments. Table 1 details the number of  FFEL participants.
section_title: Overview of the DL Program
paragraphs: In the DL program, student loans are fully funded by the federal  government, which provides the loan proceeds to the student’s school.  The school then credits the student’s account and disburses any residual  amount to the student. Schools sometimes contract with third-party  servicers to assist in administering the operations of the DL program. In  addition, Education contracts with a servicer (DL servicer) to administer  certain aspects of the DL program, such as payment processing. The  number of participants in the DL program is detailed in table 2.
Under HCERA, no new FFEL loans may be made after June 30, 2010.  Borrowers who may have been eligible to obtain new FFEL loans prior to  the passage of HCERA could receive loans under the DL program.  Accordingly, the number of DL borrowers is expected to increase with the  expansion of the program. Education has awarded contracts to four  additional DL servicers to begin servicing direct loans by August 31, 2010.
section_title: Overview of Audit Guidance
paragraphs: Audits required under FFEL or DL are performed in accordance with  guidance issued by the Office of Management and Budget (OMB) or the  applicable Department of Education Office of Inspector General (OIG)  audit guide. States, local government entities, and nonprofit entities are  generally required to have their audits performed in accordance with OMB  Circular No. A-133, Audits of States, Local Governments, and Nonprofit  Institutions, although, if federal student assistance is the only federal  program in which the entity participates, OMB Circular No. A-133 gives the  entity the option of using the program-specific audit guide issued by the  OIG in place of the guidance produced under the Circular. For-profit  entities are required to have their audits performed in accordance with the  applicable OIG audit guide.
section_title: FFEL and DL Audit Requirements and Oversight Procedures Generally Differed with Divergent Program Structures, and Certain Audit Guidance Was Inconsistent with Regulations
paragraphs: The FFEL and DL programs generally have different audit requirements  stemming mainly from different program structures. The FFEL program  relies on lenders, guaranty agencies, and other entities that are subject to  statutory, regulatory, and contractual audit requirements. The DL program  does not have as many of these audit requirements because DL loans are  provided by the federal government, and fewer external entities are  involved. The audit requirements set out under the FFEL and DL programs  are similar with regard to schools and their servicers, which are  participants in both programs. We noted that certain for-profit lender audit  guidance was inconsistent with regulations. Finally, oversight procedures  for the DL servicer were designed to assess the DL servicer’s performance  in servicing loans in the program. Different oversight procedures are  planned for four additional DL servicers expected to begin servicing direct  loans by August 31, 2010.
subsections: section_title: Audit Requirements Generally Differed for the FFEL and DL Programs
paragraphs: The FFEL and DL programs have different statutory and regulatory  requirements for audits and program reviews, with more audit  requirements in place for the FFEL program, which involves more  participants external to the government. For instance, because the FFEL  program relies on thousands of nonprofit and for-profit lenders, there are  regulatory requirements for compliance audits and program reviews of  those lenders. Such requirements do not apply to the DL program, which  provides student loans through a single lender—the federal government.  Similarly, required agreed-upon procedures engagements for the  Ensuring Continued Access to Student Loans Act (ECASLA) and audits of  9.5% Special Allowance Payments are only applicable to lenders in the  FFEL program. Figure 2 summarizes the audit and review requirements for  the FFEL and DL programs, and appendix I includes more details about  these activities.
section_title: Both Programs Had Similarities in Audit Requirements for Schools and Their Servicers
paragraphs: While our analysis showed audit requirements generally differed, schools  under both programs had similar requirements to have annual financial  statement audits performed by independent public accountants (IPA).  School financial statement audits focus on whether the financial  statements are fairly presented in accordance with generally accepted  accounting principles. These financial statement audits are to be  performed in accordance with GAGAS. GAGAS also requires IPAs to  report on the results of certain tests performed on internal controls over  financial reporting and compliance with certain provisions of laws,  regulations, and program requirements. Financial statement audit reports  provide Education with information about the financial condition of  participants, any significant internal control deficiencies, and instances  of noncompliance. Third-party servicers employed by schools to aid in the  administration of their federal loans are not generally required to have  financial statement audits under either the FFEL or DL programs.
Both programs also require schools and school servicers to have annual  compliance audits performed by IPAs. The audits focus on whether these  participants comply with applicable statutes, regulations, and program  requirements. For example, school compliance audits for both programs  are designed to test whether schools perform student eligibility  validation. These audits are to determine whether a school has verified  that certain student requirements, such as citizenship and financial need,  have been met. In addition, schools participating in the student loan  programs are required to follow specified criteria for applying loan  proceeds to students’ accounts and disbursing residual amounts to  students within established time frames. To illustrate, for students  borrowing from the FFEL or DL programs, schools should not credit a  registered student’s account more than 10 days before the first day of  classes. For both programs, compliance with these requirements is  monitored through the annual compliance audit.
If performed properly, the required audits for FFEL and DL participants  should address federal and borrower interests. Audits address federal  fiscal interests if they are designed to help protect the government from  financial loss and address borrower interests if they are designed to help  ensure that qualified individuals (1) have access to federal student loans  and (2) are protected from financial loss. For instance, auditors assess  whether schools that participate in either program complied with refund  requirements. Refund requirements for both programs include the proper  return of program funds in the case of unearned tuition and other charges  for a student who received federal student aid if the student did not  register, dropped out, was expelled, or otherwise failed to complete the  period of enrollment. Proper refunds to the lender or federal government  reduce the outstanding loan amount, thus protecting federal and borrower  interests.
section_title: Certain Audit Guidance for FFEL Lenders Did Not Incorporate All Requirements
paragraphs: As noted previously, HCERA terminated the authority to make new FFEL  loans after June 30, 2010. However, FFEL loans outstanding after that date  will continue under the same structure with Federal Student Aid oversight  for many years, depending on the repayment plan. Accordingly, we  identified and reviewed audit objectives and related guidance and found  one area where the guidance for compliance audits of for-profit and  nonprofit FFEL lenders differed. FFEL lenders can be for-profit or  nonprofit and, in some cases, can be the schools themselves. For-profit  lenders are required to have their audits performed in accordance with the  OIG Lender Audit Guide. Nonprofit lenders are generally required to have  their audits performed in accordance with OMB Circular No. A-133,  although the Single Audit Act and OMB Circular No. A-133 allow lenders  to elect to have their audits performed using the OIG audit guide if federal  student assistance is the only federal program in which the lender  participates. “School lenders proceeds: Determine whether schools that made FFEL loans use borrower  interest payments, Education special allowance payments, interest subsidies, and any  proceeds from the sale of loans to supplement needs-based grants for its students, as  required.”
This audit objective is designed to assess whether school lenders  appropriately comply with regulations affecting significant amounts of  proceeds from loans. The OIG Lender Audit Guide has been  supplemented with several amendments for specific changes to audit  requirements, but has not been comprehensively updated since December  1996 and, as amended, did not address this audit objective. OIG officials  told us they plan to update the OIG Lender Audit Guide to appropriately  address this omission.
section_title: Education Has Designed Procedures for Oversight of the DL Servicer
paragraphs: The functions performed by the DL servicer are similar to certain  functions performed by lenders, guaranty agencies, and their servicers in  the FFEL program. The DL servicer is not required to have an independent  auditor perform financial and compliance audits similar to those required  of guaranty agencies, guaranty agency servicers, and lender servicers in  the FFEL program. Instead, Federal Student Aid directly oversees the DL  servicer’s performance as a federal contractor through monthly reviews of  performance metrics as well as other procedures, including monthly  reconciliations of loan balances recorded by the DL servicer to those in  Federal Student Aid records. Federal Student Aid officials are to review  reports generated by the Independent Quality Control Unit, a component  of the DL servicer that performs analysis to help ensure that the DL  servicer’s performance metrics are correctly calculated and accurately  reported and that corrective actions from prior audits are implemented.  These oversight procedures are designed to assess and evaluate the DL  servicer’s performance in servicing loans in the DL program.
Our analysis showed that the objectives of the oversight procedures to be  performed by Federal Student Aid over the DL servicer share some  similarities with the objectives being addressed by audits of FFEL lenders,  guaranty agencies, and their servicers. For example, both FFEL lenders  and the DL servicer are to update student records to reflect changes in a  student’s status—such as student enrollment, which affects the repayment  of the loan. For FFEL lenders, the performance of this function is to be  evaluated in the annual compliance audit of lenders performed by IPAs.  For the DL servicer, this function is to be evaluated through the oversight  procedures performed by Federal Student Aid staff, including monthly  reviews of performance metrics that monitor the DL servicer’s  performance. For example, Federal Student Aid is to monitor whether the  DL servicer meets the 2-day standard for completing student status  updates and the 98 percent standard for status update accuracy. Other  examples of similar functions monitored by compliance audits in the FFEL  program and by oversight procedures in the DL program include timely  and accurate application of loan payments to borrower accounts and  timely review and processing of loan discharge claims.
section_title: Different Oversight Procedures Apply to Additional DL Servicers
paragraphs: In 2009, Federal Student Aid awarded contracts to four additional  servicers to address increased direct loan volume stemming from changed  student loan market conditions and potential further volume increases.  HCERA, passed in March of 2010, terminated the authority to make new  FFEL loans after June 30, 2010, which, according to Federal Student Aid  officials, will add substantially to Federal Student Aid’s direct loan volume  and DL servicing needs. The new servicers, expected to begin servicing  direct loans by August 31, 2010, are subject to oversight procedures that  differ from the current DL servicer. According to Federal Student Aid’s  contract monitoring plan, these activities will include transaction analysis  and reconciliations as well as internal control and program compliance  reviews. For example, according to the contract monitoring plan, Federal  Student Aid staff are expected to perform periodic transaction analysis at  the borrower account level to determine the servicing accuracy of  transactions. Federal Student Aid officials and DL servicer are to discuss  issues identified through transaction analysis and the status of corrective  actions at weekly operational meetings. In addition, the monitoring plan  states that program compliance reviews are to be conducted as needed, at  least annually, to determine if servicing is in compliance with  requirements. According to Federal Student Aid officials, guidance for  some of these oversight procedures is under development.
The contract monitoring plan also calls for the additional DL servicers to  be subject to internal control examinations performed by IPAs in  accordance with Statement on Auditing Standards No. 70. Each  additional DL servicer is to provide Federal Student Aid with an IPA report  on the examination of its operational controls semiannually and on the  examination of its information technology controls annually. These  examinations are in addition to Education’s annual review of internal  controls required by OMB Circular No. A-123. In addition, the contracts  call for the additional DL servicers to be subject to performance measures  focused on default prevention and surveys of borrower satisfaction,  school satisfaction, and Federal Student Aid staff satisfaction with servicer  performance. These performance measures are to be used to compare the  additional DL servicers’ relative performance as one factor in determining  the allocation of direct loans to them for servicing. Education officials  expect to have these oversight procedures in place by the time the  additional DL servicers begin servicing direct loans.
section_title: Federal Student Aid Had Policies and Procedures Designed to Monitor Audits, but Certain Audit Reports Were Not Required to Be Reviewed
paragraphs: FFEL and DL participants submit required audits to Federal Student Aid.  Components of Federal Student Aid’s Program Compliance office,  including the School Eligibility Channel and Financial Partner Eligibility  and Oversight (Financial Partners) are responsible for providing oversight  by ensuring that the audits performed comply with statutory and  regulatory requirements. The School Eligibility Channel is responsible for  providing oversight of audits of schools and school servicers that  participate in the FFEL and DL programs. Financial Partners is  responsible for the oversight of audits of lenders, guaranty agencies, and  their servicers participating in the FFEL program. These activities are to  be accomplished through audit resolution and program review processes.  Figure 3 depicts the respective oversight responsibilities of the School  Eligibility Channel and Financial Partners.
The School Eligibility Channel and Financial Partners are responsible for  logging receipt of the audit report, performing an acceptability review, and  taking steps to resolve the audit. According to policies and procedures,  Federal Student Aid staff track findings contained in audit reports and use  them to oversee the programs by monitoring whether corrective actions  are taken. Tracking systems used by the School Eligibility Channel and  Financial Partners include the Postsecondary Education Participants  System (PEPS), eZ-Audit, and various Excel-based tracking sheets.  Figure 4 depicts the process used by Federal Student Aid components for  reviewing audit reports.
Some processes described in figure 4 are designed differently depending  on the type of participant. Specifically, according to Federal Student Aid  policies and procedures, schools are required to submit audit reports— both financial statement and compliance audits—to Federal Student Aid  electronically via the eZ-Audit system. Other participants, including  lenders, guaranty agencies, and their servicers, are expected to submit  reports in paper or electronic form. For audits performed in accordance  with OMB Circular No. A-133, Federal Student Aid staff are to ob tain the  audit reports from the Federal Audit Clearinghouse Web site, a  governmentwide audit information repository. Federal Student Aid staff  are to perform acceptability reviews on the audit reports using checklist that address issues such as whether all required reporting elements are  included. The School Eligibility Channel uses contractors to assist with the  acceptability review of school audit reports. After the acceptability review  is completed, Federal Student Aid policies and procedures require staff to  review the submitted audit report and notify the participant that th e audit  has been accepted or explain steps required for satisfactory audit  resolution. Statutes and regulations provide authority for Federal Studen Aid to perform a program review as a method of program oversight of  participants. Regulations also authorize Federal Student Aid to in administrative hearings that can lead to sanctions, including the  suspension of the participant from the program. Federal Student Aid staff are to enter resolution information into eZ-Audit or PEPS once an audit is  resolved. Similar processes are to be used for biennial p rogram reviews of  schools and lenders performed by guaranty agencies.
Special allowance payment audits and ECASLA agreed-upon procedure reports, also required from participating lenders, are subject to similar  report review procedures. Federal Student Aid procedures called for  using acceptability review checklists and Excel-based tracking sheets  designed specifically for these kinds of reports to ensure completeness of the reports and to track the status and ensure the resolution of reported  findings. For these reports, findings resolution could include adjusting  special allowance payments made to lenders or coordinating with the  lender to remove ineligible loans from an ECASLA portfolio.
Financial Partners has acknowledged that inefficiencies exist with the  current tracking system. For example, Financial Partners staff must  manually enter the receipt of the compliance audit reports in Excel-based  tracking sheets, while the receipt of the school audit reports are  automatically logged through eZ-Audit electronic submission. Further,  PEPS does not allow Financial Partners to readily identify those lenders  required to submit annual compliance audits. Accordingly, Financial  Partners staff must analyze database information to identify these lenders.  Further, because PEPS does not track all audit information that is  important to Financial Partners, staff supplement their use of PEPS with  Excel-based tracking sheets. To address these inefficiencies, Education is  in the process of designing a new system—referred to as Integrated  Partner Management (IPM)—that will replace the existing systems and,  among other things, provide the capability to track audit findings.  According to Education officials, IPM is currently in the requirements  phase, which is expected to be completed in July 2010, with  implementation in phases in 2012.
subsections: section_title: Gap Noted in Receipt and Review of Certain Audit Reports
paragraphs: We noted a gap in Education’s policies and procedures regarding review of  audited financial statements for lender servicers. Education regulations  require lender servicers that participate in the FFEL program to submit  audited financial statements to Education annually. However, our review  found that lender servicers did not submit their audited financial  statements to Education. Federal Student Aid did not have procedures in  place to review these financial statement audit reports and therefore did  not conduct any follow-up to ensure that the audit reports were received  and reviewed. Federal Student Aid officials told us they consider the risk  to the government of not receiving these servicers’ audited financial  statements to be low because lenders are ultimately responsible for the  loans and have the responsibility to ensure that their servicers are  financially capable. By not requiring the review of the audited financial  statements of lender servicers, Federal Student Aid runs the risk of  missing significant findings disclosed in these reports. Such findings could  relate to control weaknesses over information security and financial  reporting that may not be addressed in the annual compliance audits that  Federal Student Aid staff review.
Further, Federal Student Aid staff might not be informed if a lender  servicer received other than an unqualified audit opinion. Concerns such  as these might indicate potential problems regarding the servicer’s ability  to continue program operations effectively. In addition, because one  servicer may service multiple lenders, the risk to the government and  borrowers increases should one of these servicers be in violation of any  provision of federal regulations. According to GAO’s Internal Control  Management and Evaluation Tool , agencies should obtain and report to  managers any relevant external information that may affect the  achievement of its missions, goals, and objectives. Unless Federal Student  Aid receives and reviews these financial statement audit reports, it may  not be fully aware of risks to the government and borrowers, and its ability  to properly oversee the FFEL program could be impaired.
section_title: Conclusions
paragraphs: Significant federal resources are committed to providing loans so that  students’ educational goals can be achieved. Effectively overseeing the  FFEL and DL programs is critical to minimize the risks to taxpayers and  borrowers. Although no new FFEL loans will be made after June 30, 2010,  FFEL loans unpaid at that time will remain under Federal Student Aid’s  oversight for possibly 30 years. Improvements are needed in the audit  guidance and review procedures for the FFEL program. The gaps we  noted in the OIG Lender Audit Guide used to audit lenders and in Federal  Student Aid’s policies and procedures regarding its review of audited  financial statements for lender servicers expose the program to  unnecessary risk. As Education moves forward to administer the  expanded DL program, maintaining and enhancing its oversight  procedures will help ensure that federal and borrower interests continue  to be protected.
section_title: Recommendations for Executive Action
paragraphs: To help address any gaps in the guidance for audits FFEL lenders perform  in accordance with the OIG Lender Audit Guide, we recommend that the  Education Inspector General update the OIG Lender Audit Guide to  include all appropriate regulatory audit requirements.
To ensure that Education properly oversees the ongoing servicing of  outstanding FFEL student loans and mitigates risks related to lender  servicers, we recommend that the Secretary of Education direct the Chief  Operating Officer of the Office of Federal Student Aid to develop and  implement policies and procedures requiring Federal Student Aid review  of audited financial statements for lender servicers.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report, the Education Office of  Inspector General and Federal Student Aid agreed with our  recommendations. These comments are reprinted in their entirety in  appendixes III and IV, respectively. Regarding our recommendation to  update the OIG Lender Audit Guide, the Education Inspector General  concurred that the guide needs to be made current with all compliance  requirements and anticipates updating and issuing a revised guide by  December 2010. Regarding our recommendation to develop and  implement policies and procedures requiring the review of lender servicer  audited financial statements, the Chief Operating Officer of Federal  Student Aid acknowledged the need to update the OIG Lender Audit  Guide and existing processes and procedures to require lender servicers  to prepare and submit audited financial statements, and stated that  Federal Student Aid will review the audited financial statements.  Education also provided technical comments, which we incorporated in  this report, as appropriate.
We are sending copies of this report to the Secretary of Education, the  Inspector General of Education, and other interested parties. In addition,  the report will be available at no charge on GAO’s Web site at  http://www.gao.gov.
Please contact me on (202) 512-9095 if you or your staff have any  questions about this report. Contact points for our Office of Congressional  Relations and Office of Public Affairs can be found on the last page of this  report. Other major contributors to this report are listed in appendix V.
section_title: Appendix I: Summary of FFEL and DL Program Audits and Reviews
paragraphs: The following information is from GAO, Federal Student Loans: Audits  and Reviews of the Federal Family Education Loan and Federal Direct  Loan Programs, GAO-09-992R (Washington D.C.: Sept. 30, 2009),  enclosure, p. 16.
section_title: Appendix II: Objectives, Scope, and Methodology
paragraphs: To address the first objective, we reviewed our September 30, 2009, report  to determine the extent to which the audit and review requirements were  applicable to both the Federal Family Education Loan and the William D.  Ford Federal Direct Loan (DL) program participants in order to identify  similarities and differences. We obtained and reviewed relevant audit  guides to determine if the audit objectives addressed statutory and  regulatory requirements to be met by the programs’ participants. For the  DL program, we also interviewed knowledgeable officials regarding the  Department of Education’s (Education) procedures to oversee the  performance of the DL servicer, and we reviewed the relevant oversight  procedures. For nonprofit and for-profit schools and lenders, we analyzed  Office of Management and Budget (OMB) Circular No. A-133 and the  Education Office of Inspector General (OIG) audit guides to determine if  they addressed similar objectives. To assess whether the audits as  designed addressed federal and borrower interests, respectively, we  determined if the audits are designed to help protect the government from  financial loss, and help ensure that qualified individuals have access to  federal student loans and are protected from financial loss. For example,  we determined if the audit guides focused on determining whether the  students and lenders met eligibility requirements to participate in these  programs. We interviewed officials from Education’s Office of Federal  Student Aid (Federal Student Aid) and the OIG, including the Acting  Director of Financial Partner Eligibility and Oversight (Financial  Partners), the General Manager of the School Eligibility Channel, and the  Deputy Assistant Inspector General for Audit, to obtain clarification and  explanations for any discrepancies identified during our review of  documentation. The scope of our audit did not include testing that the  audit guides were used by the auditors as intended. In addition, our work  did not include program reviews conducted by guaranty agencies and  other Federal Student Aid reviews because (1) in some cases, these  reviews had similar objectives to the audits that we did include in our  study and (2) in other cases, the reviews were risk-based and addressed  specific operating conditions, and therefore these objectives were unique  to each review.
To address the second objective, we focused on the design of the  processes Education uses to oversee the programs and to ensure  compliance with statutory and regulatory requirements for the timely  submission of audit reports. We reviewed applicable statutes and  regulations and Federal Student Aid policies and procedures, including  process flow diagrams and audit acceptability checklists. To further our  understanding of the design of Education’s processes for overseeing these  programs and ensuring compliance, we observed systems demonstrations  that included automated and Excel-based systems used to track receipt of  audits and related findings. During these demonstrations, we observed  actual steps taken by staff in order to review, and if necessary resolve, the  audit. We obtained and reviewed supporting documentation referenced  during these demonstrations, such as audit acceptability checklists and  copies of Excel-based tracking sheets, used by staff to determine the  sufficiency of the audit report’s content and to ensure the timeliness of  audit submissions, respectively. We interviewed officials from Federal  Student Aid and OIG, including the Acting Director of Financial Partners,  the General Manager of the School Eligibility Channel, and the Deputy  Assistant Inspector General for Audit, to obtain clarification and  explanations for any discrepancies identified during our review of  documentation and the demonstrations. We focused on describing the  processes Education has designed to ensure that applicable requirements  are being met. While the scope of our audit did not include testing the  implementation of these processes including controls, as appropriate, we  noted any design deficiencies.
We requested comments on a draft of this report from Education. We  received written comments from the Education Inspector General and the  Chief Operating Officer of Federal Student Aid (reprinted in their entirety  in appendixes III and IV, respectively). We conducted this performance  audit at Federal Student Aid offices in Washington, D.C., from August 2009  to July 2010 in accordance with GAGAS. 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.
section_title: Appendix III: Comments from the Department of Education Office of Inspector General
section_title: Appendix IV: Comments from the Department of Education Office of Federal Student Aid
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, significant contributions to this  report were made by Jack Warner (Assistant Director), Jennifer Dent,  Chau Dinh, P. Barry Grinnell, and Danietta Williams. Francine DelVecchio  and Jason Kirwan also made key contributions.