Capital Financing: Department Management Improvements Could Enhance Education's Loan Program for Historically Black Colleges and Universities
Published: 2006-10-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Historically Black Colleges and Universities (HBCU), which number around 100, undertake capital projects to provide appropriate settings for learning, but many face challenges in doing so. In 1992, Congress created the HBCU Capital Financing Program to help HBCUs fund capital projects by offering loans with interest rates near the government's cost of borrowing. We reviewed the program by considering (1) HBCU capital project needs and program utilization, (2) program advantages compared to other sources of funds and schools' views on loan terms, (3) the Department of Education's (Education) program management, and (4) certain schools' perspectives on and Education's plan to implement loan provisions specifically authorized by Congress in June 2006 to assist in hurricane recovery efforts. To conduct our work, we reviewed applicable laws and program materials and interviewed officials from federal agencies and 34 HBCUs.
section_title: What GAO Found
paragraphs: HBCU officials we interviewed reported extensive and diverse capital project needs, yet just over half of available loan capital ($375 million) has ever been borrowed. About 23 HBCUs have taken steps to participate in the program, and 14 have become borrowers. Education has collected and reported limited data on the program's utilization and has not established performance measures or goals to gauge program effectiveness, though Education officials noted they are developing measures and goals. The HBCU loan program provides access to low-cost capital financing and flexibilities not always available elsewhere, but some loan terms and conditions discourage participation, though school officials said they remain interested in the program. The low interest rate and 30-year repayment period were regarded favorably by participants and nonparticipants alike, and the program makes funds available for a broader range of needs than some federal grant programs. However, the requirement to place in a pooled escrow 5 percent of loan proceeds--an insurance mechanism that reduces federal program costs due to any program borrower's potential delinquency or default--monthly payments versus semiannual ones traditionally available from private sources of loans, and the extent to which some loans have been collateralized could discourage participation. While Education has taken steps to improve the program, significant weaknesses in its management control could compromise the program's effectiveness and efficiency. Education has recently provided schools with both fixed and variable interest rate options, allowed for larger loans, and afforded more opportunities to negotiate loan terms. Also, Education has increased its marketing efforts for the program. However, Education has not established effective management control to ensure that it is (1) communicating with schools in a useful and timely manner, (2) complying with statutory requirements to meet twice each year with an advisory board composed of HBCU experts and properly account for the cost of the program, and (3) monitoring the performance of the program's contractor. Officials from 4 HBCUs in Louisiana and Mississippi told us that in light of the extensive 2005 hurricane damage to their campuses, they were pleased with certain emergency loan provisions but concerned that there would not be sufficient time to take advantage of Education's authority to waive or modify the program provisions. School officials from the 4 schools noted that their institutions had incurred extensive physical damage that was caused by water, wind, and, in one case, fire, and that the full financial impact of the hurricanes may remain unknown for years. Although Education officials told us that they have not yet determined the extent to which the authority under the emergency legislation to waive or modify program provisions for hurricane-affected institutions would be used, the department would be prepared to provide loans to hurricane-affected HBCUs.

section_title: Letter
paragraphs: The nation’s Historically Black Colleges and Universities (HBCU), like  many of the approximately 6,500 other institutions of higher education in  the country, undertake capital improvements, including renovating  existing or constructing new instructional facilities, to provide their  students appropriate settings for learning and social development. Many  HBCUs, which number around 100 schools, face numerous challenges in  funding capital projects because they have relatively small enrollments,  limited endowments, and face other financial constraints. Despite these  challenges, HBCUs have distinguished themselves by granting a  substantial portion of the degrees earned by African-Americans. For  example, in school year 2003-2004, HBCUs granted about 13.5 percent of  all degrees earned by African-Americans while constituting only   1.5 percent of the nation’s postsecondary institutions.
To help these schools fund capital projects, Congress created the HBCU  Capital Financing Program in 1992 under the Higher Education Act of 1965  (HEA) to provide eligible HBCUs with access to low-cost financing. The  Department of Education (Education) is responsible for overall program  management and is expected to regularly consult with the HBCU Capital  Financing Advisory Board (Advisory Board). The Advisory Board is  composed of the Secretary of Education, or the Secretary’s designee,  presidents of private and public HBCUs, and other experts on HBCUs.  Operation of the program is contracted to a designated bonding authority  (DBA) that, among other lending functions, raises funds by issuing bonds  for purchase by the Federal Financing Bank (FFB)—a government  corporation under the supervision and direction of the Department of  Treasury (Treasury) that assists federal agencies in financing agency- issued or agency-guaranteed securities. Funds raised are subsequently lent  to eligible HBCUs at an interest rate slightly above the government’s cost  of borrowing to finance qualified capital projects. As part of its  responsibilities in managing a federal credit program subject to the  Federal Credit Reform Act of 1990 (FCRA), Education is required to  determine the net cost to the government of extending credit over the life  of a loan—the subsidy cost—in the year the loan is made. Congress must  provide Education with budget authority to cover these costs before loans  are provided to HBCUs. Since the program was first funded,  appropriations legislation has, in general, limited the subsidy costs of the  HBCU capital financing to no greater than zero.
In August of 2005, the campuses of some HBCUs in the Gulf Coast were  severely damaged by Hurricane Katrina or Rita. To assist these HBCUs in  their recovery efforts, in June 2006, Congress, in the Emergency  Supplemental Appropriations Act for Defense, the Global War on Terror,  and Hurricane Recovery, 2006 (Emergency Act), amended certain  statutory provisions for institutions affected by the Gulf Coast hurricane  disasters and granted the Secretary of Education the authority to waive or  modify any statutory or regulatory provisions of the program in  connection with a Gulf Coast hurricane disaster. In addition, the  Emergency Act provides that the authority to enter into, waive, or modify  the terms of a loan agreement expires 1 year after the legislation’s  enactment.
In light of the upcoming reauthorization of the Higher Education Act, you  had questions about the utilization of the program and Education’s  management of the program. To address your interests, we reviewed the  program by considering (1) the capital project needs of the nation’s  HBCUs and the extent to which HBCUs have used the program; (2) the  relative advantages of the program, if any, compared with other sources of  funding, and schools’ perspectives on the loan terms and conditions;   (3) whether Education’s administration and management of the program  ensures program effectiveness; and (4) schools’ perspectives on the  emergency loan provisions of the Emergency Act and Education’s plans  for implementing them.
To conduct our work, we reviewed and analyzed applicable laws and  regulations as well as program data and documents pertaining to program  participation, program policies, and agreements among Education, the  DBA, the FFB, and participating schools. We also reviewed the methods  and procedures—management controls—Education had in place or was  planning to implement to manage the program. To provide some context  for understanding HBCUs’ capital project needs, we analyzed available  national studies concerning such needs of postsecondary institutions and  HBCUs in particular. In addition, we reviewed alternative capital funding  sources, including private sector financing and federal grants available to  HBCUs and asked schools how these sources or funding options compare  to the program. We interviewed officials representing Education, its DBA,  the Advisory Board, the FFB, the Office of Management and Budget  (OMB), the Small Business Administration (SBA), associations  knowledgeable about HBCUs, and the Bond Market Association. We  conducted semistructured interviews with 34 HBCUs. (See app. I.) We  interviewed all 13 program participants that originated loans prior to 2006,  and a purposive sample of 21 nonparticipants. We selected  nonparticipating schools based on (1) location, (2) type (2-year and 4-year,  public and private), and (3) enrollment size. Our selection of  nonparticipating schools was made to obtain a variety of institutional  perspectives and was not intended to be representative. During the course  of our review, we conducted site visits to 5 schools, 3 of which were  institutions affected by the hurricanes in 2005, and the other 2 institutions  were program participants. Our interviews with program participants also  included another institution affected by the 2005 hurricanes. We  conducted our work from May 2005 to August 2006 in accordance with  generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: Congress established the HBCU Capital Financing Program in 1992 under  Title III, Part D, of the Higher Education Act of 1965, as amended, to  provide HBCUs with access to low-cost capital to help them to continue  and expand upon their educational missions. (See app. II for locations of  HBCUs eligible to participate in the program.) Program funds, raised  through bonds issued by the DBA and purchased by the FFB, are lent to  eligible schools with qualified capital projects. Loan proceeds may be  used for—among other things—repairing, renovating, or in exceptional  circumstances, constructing and acquiring new instructional or residential  facilities, equipment, or research instrumentation. Additionally, schools  are able to refinance prior capital loans. Education guarantees loan  repayment.
subsections: section_title: Program Description
paragraphs: Although Education administers the program, the DBA is responsible for  many of the program’s operations and is subject to departmental  oversight. Specifically, the DBA works with prospective borrowers to  develop loan applications and monitors and enforces loan agreements.  The loan process consists of multiple steps. HBCUs interested in obtaining  funds through the program must first complete a preliminary application  that includes information such as enrollment, some financial data— including a description of existing debt—and proposed capital projects.  On the basis of this information, the DBA determines whether the school  should formally complete an application, which includes more detailed  financial information, such as audited financial statements and various  campus plans and assessments. To be approved for the loan, an HBCU  must satisfy certain credit criteria and have qualified projects. Once the  DBA determines a school’s eligibility status, a memorandum is sent to  Education for final approval. When approved, the loan goes through a  closing process during which certain terms and conditions may be  negotiated. Table 1 describes key loan terms and conditions to which  schools are subject.
section_title: Federal Credit Reform Act of 1990
paragraphs: The Federal Credit Reform Act of 1990, along with guidance issued by  OMB and accounting standards, provides the framework agencies are to  use in calculating the federal budget costs of federal credit programs, such  as the HBCU Capital Financing Program. The two principles of credit  reform are defining subsidy cost and requiring that budget authority to  cover these costs be provided in advance before new loan obligations are  incurred. OMB is responsible for coordinating the estimation of subsidy  costs. Subsidy costs are determined by calculating the net present value  of estimated cash flows to and from the government that result from  providing loans and loan guarantees to borrowers. (Guaranteed loans that  are financed by the FFB are treated as direct loans for budgetary  purposes, in accordance with FCRA.) Cash flows for direct loans include,  for example, loan disbursements to borrowers and borrower repayments  of principal and payments of interest to the government. Estimated cash  flows are adjusted to reflect the risks associated with potential borrower  delinquencies and defaults, and estimates of amounts collected on  defaulted loans. Subsidy costs can be positive or negative. If the net  present value of cash outflows exceeds the net present value of cash  inflows, the government incurs a positive subsidy cost. On the other hand,  the government realizes a gain in revenue if there is a negative subsidy.  Since the program was established, appropriations legislation has, in  general, limited the subsidy costs of the program to be no greater than  zero. In addition, the legislation authorizing the program established a  credit authority limit of $375 million; of this amount, private HBCUs are  collectively limited to borrowing $250 million, and public HBCUs are  collectively limited to borrowing $125 million.
section_title: 2005 Gulf Coast Hurricanes and Disaster Assistance
paragraphs: Over a period of 2 months in 2005, three hurricanes struck the Gulf Coast  region of the United States, resulting in more than $118 billion in estimated  property damages. Two of these hurricanes, Katrina and Rita, struck New  Orleans and surrounding areas within a month of each other, resulting in  significant damages to several institutions of higher education in the  region and including the campuses of several HBCUs, including Dillard  University, Southern University at New Orleans, and Xavier University, in  Louisiana, and Tougaloo College, in Mississippi. (See app. III for locations  of the 8 hurricane affected HBCUs.)
In June 2006, Congress passed the Emergency Act which, among other  things, amends the HBCU Capital Financing Program to assist hurricane- affected HBCUs in their recovery efforts. To be eligible, a school must be  located in an area affected by a Gulf Coast hurricane disaster and  demonstrate that it (1) incurred physical damage resulting from Hurricane  Katrina or Rita; (2) has pursued other sources of compensation from  insurance, Federal Emergency Management Agency (FEMA), or the Small  Business Administration, as appropriate; and (3) has not been able to fully  reopen in existing facilities or to the levels that existed before the  hurricanes because of physical damage to the institution. Key provisions  include a lowered interest rate and cost of issuance (both set at 1 percent  or less), elimination of the escrow, and deferment of principal and interest  payments from program participants for a 3-year period. The Emergency  Act also provides the Secretary of Education with authority to waive or  modify any statutory or regulatory provisions related to the program in  connection with a Gulf Coast hurricane disaster.
section_title: Disaster Assistance Agencies
paragraphs: FEMA assists states and local governments with the costs associated with  disaster response and recovery efforts that exceed a state or locale’s  capabilities. Grants are also provided to eligible postsecondary  educational institutions to help them recover from the disaster. Some  institutions of higher education are subsequently provided with referrals  to SBA when seeking assistance from FEMA. For private, nonprofit  institutions, SBA’s disaster loans are designed to be a primary form of  federal assistance. Unlike their public counterparts, private colleges must  apply for low-interest, long-term disaster loans prior to seeking assistance  from FEMA. Schools may apply for SBA loans, and the aggregate loan  amount cannot exceed $1.5 million. In general, the loan terms for each  loan include a maximum of 30 years for repayment with interest rates of at  least 4 percent.
section_title: HBCUs Reported Substantial Capital Project Needs, but Only About Half of Available Program Funds Have Been Borrowed
paragraphs: HBCU officials we interviewed reported extensive and diverse capital  project needs, including construction and renovation of facilities and  addressing deferred maintenance, yet just over half of the available  program loan capital has been borrowed. While HBCU capital project  needs are not well documented by national studies, the schools  themselves have individually identified and documented them. Despite  reported needs, only about a quarter of HBCUs have taken steps to  participate in the program, and about half of these HBCUs became  borrowers. Education has collected and reported limited information on  the program’s utilization and has not established performance measures or  goals to gauge program effectiveness, though Education officials noted  that they are currently working on developing such measures and goals.
subsections: section_title: HBCUs Reported Having Substantial Capital Project Needs, although Such Needs Are Not Well Documented in National Studies
paragraphs: There are few national studies that document the capital project needs of  HBCUs, and they do not provide a current and comprehensive national  picture. The four that we identified and reviewed are more than several  years old, narrowly scoped, or had limited participation. Specifically, the  studies are between 6 and 17 years old, and two studies focused only on  specific types of need—renovation of historic properties and campus  wiring for computer networks. One study that addressed a broader range  of needs and was among the most recent had a low response rate—  37 percent.
Despite the lack of national studies, schools that we interviewed reported  extensive, diverse, and ongoing capital project needs. School officials  reported that they routinely conduct facility assessments as part of their  ongoing strategic planning and that these assessments help determine the  institutions’ short- and long-term capital needs. They said that capital  projects, including the construction of new dormitories, renovation of  aging or historic facilities, repair of infrastructure, and addressing long- standing deferred maintenance are needed for a variety of reasons. New  facilities such as dormitories and student centers are often needed as a  result of enrollment growth, for example, while modernization of existing  facilities is needed to accommodate technological advances. For example,  Tuskegee University renovated an existing facility to house its hospitality  management program, creating modern meeting facilities along with a full- service hotel, which provides students with a real-world laboratory in  which they gain immediate hands-on experiences (see fig. 1). In addition,  many of the school officials who we interviewed reported that their  schools had particularly old facilities, many of which are listed in the  National Register of Historic Places. Some school officials cited their  need to repair or replace campus infrastructure. For example, some  schools reported needing to replace leaking underground water pipes,  while others reported the need to replace 100-year-old water and gas  pipes. Many of the school officials we interviewed reported having  deferred maintenance projects, some for over 15 years, and officials from  3 schools estimated their schools’ deferred maintenance to be over   $50 million. For some schools, the deferred maintenance is substantial in  light of existing resources, according to HBCU officials. These types of  capital projects are essential to ensuring student safety and preserving  assets that directly affect their ability to attract, educate, and retain  students.
section_title: Approximately 14 Percent of HBCUs Have Borrowed Just Over Half of the Available Program Funds
paragraphs: Over the life of the program, approximately 14 percent of HBCUs have  borrowed just over half of the available funds despite the substantial  needs reported by schools. Specifically, 23 HBCUs, according to  Education, have taken steps to participate in the program, and 14 became  borrowers, with loans totaling just over $200 million—below the  program’s $375 million total limit. About 20 percent of the eligible private  institutions have borrowed a little more than half of the $250 million  allotted for private schools, and less than 8 percent of public institutions  have borrowed less than two-thirds of the $125 million allotted for public  schools. To date, loan participants have all been 4-year institutions. Taking  into account loan repayments, the total amount of outstanding loans was  about $168 million as of August 2006, leaving about $207 million available  for loans (about $66 million for public schools and about $141 million for  private schools). Table 2 shows the participants and the amounts of their  loans. Regarding other schools that took steps to participate in the  program but did not become borrowers, 6 schools were reported to have  withdrawn their applications, and 6 others had applications pending. To  date, only one school has been denied a loan.
section_title: Education Has Taken Limited Steps to Determine Schools’ Financing Needs and Collect Information and Report on Program Utilization and Effectiveness
paragraphs: Education has collected and reported limited information concerning  HBCUs’ capital financing needs and the schools’ utilization of the program.  Education officials said that, beginning in 2005, to understand schools’  financing needs and whether the program could assist schools, the DBA  engaged in an outreach effort through which it identified 15 schools that  might be candidates for the program. Over the history of the program,  Education has collected some information to track program utilization,  including the number of inquiries and applications received and the loan  volume requested, approved, and awarded. However, Education has not  widely reported such data. Education has provided certain elements of its  program utilization data to Congress’ appropriations committees via its  annual justifications of budget estimates documents. Table 3 shows the  data collected by Education to track program utilization.
Education officials noted that while the data they collect are useful to  indicate the extent to which the schools have used or accessed the  program, they are inadequate to address questions concerning whether the  program is under- or overutilized or to demonstrate program effectiveness.  These officials noted that they believe program performance measures  would be useful but that developing such measures is particularly  challenging for a credit program like the HBCU Capital Financing  Program. This is so in part because participation in a loan program is  dependent on complex factors, such as schools’ funding needs, the  availability of other sources of financing, and schools’ desire and capacity  to assume debt. Program officials cautioned against setting firm program  participation goals, for example, because they would not want Education  to be perceived as “pushing” debt onto schools that either do not want to,  or should not, assume loan obligations before their circumstances warrant  doing so. Another complicating factor program officials cited was the  small number of potential program beneficiaries. One Education official  noted that Education has established performance goals and measures for  its student grant and loan aid programs, which are based on sophisticated  survey mechanisms designed to measure customer (students, parents, and  schools) satisfaction with the department’s aid application, receipt, and  accounting processes. Because the scope of the student aid programs is  large, encompassing millions of students and parents and thousands of  schools, it is reasonable to develop and use such measures, the official  noted. In contrast, such measures may not be meaningful given the small  number of HBCUs and the frequency with which loans are made under the  Capital Financing Program. Nevertheless, these officials told us that they  believe program performance measures would be useful to gauge program  effectiveness. They have established a working group to develop  performance measures for the program and were consulting with OMB  and other federal officials with expertise on federal credit programs to  guide their efforts. The officials noted that they do not have any firm  schedule with respect to completing their development of program  performance measures.
section_title: The Program Provides Needed Access to Low-Cost Capital Financing, but Certain Loan Terms and Conditions Discourage Participation
paragraphs: The HBCU loan program provides access to low-cost capital financing and  flexibilities not always available elsewhere, but some loan terms and  conditions discourage participation, though school officials said they  remain interested in the program. The low interest rate and long  repayment period were regarded favorably by participants and  nonparticipants alike, and the program makes funds available for a  broader range of needs than some federal grant programs. However, the  pooled escrow arrangement, monthly repayment terms, and the extent to  which some loans have been collateralized could discourage participation.
subsections: section_title: The Program Provides Low-Cost Financing and Certain Flexibilities in Comparison to Other Capital Funding Sources
paragraphs: The HBCU Capital Financing Program provides lower-cost financing and  longer loan maturities and may be used for a broader range of capital  projects by a greater number of schools than other funding sources,  according to HBCU officials. Some officials noted that the program offers  loans with lower interest rates than traditional bank loans. Moreover, the  program’s interest rates are typically less than the interest rates schools  would be required to pay investors if they issued their own bonds to raise  funds. According to school officials and bond industry experts, some  HBCUs could obtain, and some have obtained, lower interest rates than  those offered under the program by issuing their own tax-exempt bonds.  However, this is predicated on a school’s ability to obtain a strong credit  rating from a credit rating agency. Schools with weaker or noninvestment  grade credit ratings would likely have to pay investors higher interest  rates. In addition, schools issuing taxable bonds would likely pay higher  interest rates to investors, compared to the program’s interest rates,  regardless of the schools’ credit ratings. While schools can lower interest  rates paid to bond investors by purchasing bond insurance, the cost to do  so may be prohibitive. For these reasons, officials at Education and  HBCUs, as well as bond industry experts, told us that the HBCU Capital  Financing Program may be ideally suited for schools that have or would  receive a noninvestment grade rating. Participation in the program may  also benefit schools by enhancing their ability to issue their own bonds in  the future. An official at one HBCU, for example, told us that obtaining  and repaying a loan under the program had allowed the school to  demonstrate its fiscal stability and to subsequently issue its own bond with  a lower interest rate than was then being offered under the program.
In addition to citing lower interest rates, a large majority of the HBCU  officials we spoke to said that the program’s 30-year loan repayment  period was attractive, and some noted that private funding sources would  likely offer 20 years or less. Some school officials noted that the longer  repayment period allowed schools to borrow more or reduce the amount  of monthly payments. Borrowing larger amounts, officials reported,  allowed them to finance larger or more capital projects. Another school  we spoke with that once considered using the program said that even  though it was able to issue a tax-exempt bond and obtain a more favorable  interest rate, it could only obtain a 20-year maturity period for the bond.
Some HBCU officials told us they preferred grants to loans but noted that,  in general, compared to other federal grant programs, more HBCUs are  eligible for the HBCU loan program, and that it also funds a wider variety  of projects. Grants are available for most HBCUs under the Higher  Education Act’s strengthening institutions programs, also administered by  Education, which fund capital projects as well as other activities, such as  faculty and academic program development. However, fewer HBCUs are  eligible for other federal grant programs that provide funding for capital  projects. For example, the Department of Agriculture’s 1890 Facilities  Grant Program is only for those 18 HBCUs that are land grant institutions.  Similarly, the Department of Health and Human Services’ facilities  improvement program provides only for those HBCUs with a biomedical  and behavioral research program. While there are a variety of other  assistance programs offered by charitable foundations, and state and local  governments, available funding is limited.
section_title: The Escrow Arrangement, among Other Terms and Conditions, Was Cited as a Disincentive to Participating in the Program
paragraphs: HBCU officials we spoke with—participants and nonparticipants alike— reported that a disincentive to participation in the program was the pooled  escrow; additionally, other terms and conditions, such as the monthly  repayment schedule and the extent to which loans are collateralized, were  also viewed by some as deterrents. Over half of HBCU respondents we  spoke with—both participants and nonparticipants—agreed that the  pooled escrow was a drawback, and over one-fifth said that it actually  deters participation. The escrow funds, which reduce the federal budget  cost of the program by offsetting the estimated costs associated with  delinquent loan repayments and borrower defaults, net of collections, are  returned to program participants if no such losses occur. However, a  recent default by one borrower—the first to occur in the program’s  history—has heightened awareness among program participants of the  financial risk for them inherent in the pooled escrow arrangement. Since  the default, Education has withdrawn funds from participating schools’  escrow accounts twice and will continue doing so until the default is  resolved, leaving other schools uncertain as to how much of their own  escrow accounts will remain or be replenished. The pooled escrow  feature also presents a problem for state institutions because they are  prohibited from assuming the liability of another institution. One program  official said that this issue was common for state schools because state  law prohibits the lending of public funds to nonstate entities—considered  to be the case when state funds in escrow are used to hedge against the  delinquency of another institution. One participating public HBCU  reported that it had to resolve this problem by accounting for its escrow  payments as a fee that would not be returned to the school rather than a  sum that could be recovered, as the program intends. Because the escrow  feature is mandated by law, any changes to this arrangement would  require congressional authorization. Additionally, in order to maintain the  federal subsidy cost of the program at or below zero, other alternatives— such as assessing additional fees on borrowers, or requiring contributions  to an alternative form of a contingency reserve—would be necessary in  the absence of the pooled escrow arrangement.
While frequency of payments is not as prevalent a concern as the pooled  escrow, some schools objected to the program’s requirement that  repayments be made monthly as opposed to semiannually, as is common  in the private market. Schools participating in the HBCU Program have  been required by the DBA to make payments monthly, although FFB  lending policy is to require repayments only on a semiannual basis.  Despite the fact that participants have met the terms of an extensive credit  evaluation process, DBA officials expressed the view that the monthly  repayment requirement promotes good financial stewardship on the part  of the schools. However, some HBCU officials said that they incur  opportunity costs in making payments on a monthly versus a semiannual  basis. They also noted that it would be more practical if payments were to  coincide with the beginning of their semesters, when their cash flows are  typically more robust.
Additionally, almost half of the participating schools expressed concern  about the amount of collateral they had to pledge in order to obtain a loan.  In most cases, program participants have pledged certain real property as  collateral, though endowment funds and anticipated tuition revenue are  also allowed as collateral. Some HBCU officials said their loans were  overcollateralized in that the value of the real estate pledged as security  exceeded the value of the loan. They noted that such circumstances can  present a problem for those schools trying to obtain additional capital  financing without sufficient assets remaining available as collateral. One  nonparticipant cited the collateral required of other institutions as a  reason for its decision not to participate. When asked about the amount of  collateral required, Education and DBA officials reported that the extent  and amount of collateral required to obtain a loan under the program  varies depending on the individual circumstances of an institution. The  amount of collateral required may be less for institutions that have  maintained relatively large endowments and stable tuition revenue and  more for institutions that have few or no physical properties to use as  collateral, for example. Education officials further noted that requiring the  value of collateral to be greater than the value of the loan was not an  uncommon business practice.
Overall, more than two-thirds of the participant schools and more than a  third of the nonparticipants said they are interested in using the program  but some said that their continued or future interest in the program would  depend on its being modified. Several schools suggested the types of  projects eligible for funding could be broadened, which might allow them  to undertake capital projects that would, in turn, assist them in attracting  and retaining additional students. Campus beautification projects and  multipurpose community centers were cited as examples. In addition, they  regarded new construction—for which program loans are available only  under exceptional circumstances—as particularly important because new  construction attracts more students and because renovations often incur  unexpected costs. Nevertheless, many public HBCU school officials we  spoke with said that in view of their states’ continuing fiscal constraints,  they expect to consider the loan program as a future funding resource.
section_title: Education Has Taken Some Steps to Improve the Program, but Weaknesses in Management Control Exist
paragraphs: While Education has taken limited steps to improve the program, we  found significant weaknesses in management controls that compromise  the extent to which Education can ensure program objectives are being  achieved effectively and efficiently. Education has recently provided  schools the choice of fixed or variable interest rates, allowed for larger  loan amounts, and afforded more opportunity for schools to negotiate loan  terms, which appealed to schools. In addition, Education has attempted to  increase awareness of the program among HBCU officials through  increased marketing of the program by the DBA. While Education has  taken steps to improve the program, we found significant weaknesses in  its management control with respect to its communications with HBCUs,  compliance with program and financial reporting laws and guidance, and  monitoring of its DBA.
subsections: section_title: Education Has Recently Introduced Some Program Improvements, Including Flexible Loan Terms
paragraphs: Since 2001, Education has taken some steps to improve the program—  in some cases by allowing greater negotiation of certain loan terms and  conditions. Department officials said that changes to the program were  necessary to remain competitive with other programs and the private  market. These flexible terms included a variable interest rate option and  the opportunity to negotiate the amount of additional debt that a school  can subsequently assume through other financing arrangements. In fact,  since 2003, 4 of the 7 schools that have received loans have taken  advantage of the variable interest rate. Regarding the department’s  monitoring of their debt, officials at another school said that they were  able to negotiate with the DBA the amount of additional debt they could  assume—from $500,000 to $1 million—before they would have to notify  the department. School officials said this change was important because it  not only reduced their administrative burden but it also gave them  additional leeway to pursue other capital financing. The program made  greater use of loans for the sole purpose of refinancing existing debt since  2003. Two participants reported an estimated savings of at least   $3.7 million by refinancing under the program. According to department  officials, Education has also made greater use of the Secretary’s authority  to originate loans exceeding $10 million and to make multiple loans to an  institution, providing schools with more purchasing power. Program  officials said that while the limit on the amount and number of loans that  could be made was to prevent disproportionate use of the loan fund by  larger and more affluent schools, it no longer reflected the reality of  current costs for construction and renovation or the budgetary constraints  facing many states.
Additionally, program officials we spoke with said they had enhanced  program marketing. For example, the DBA has developed a Web site  describing the program and offering answers to frequently asked  questions. In addition, officials reported attending the national and  regional conferences for college executives shown in table 4, completing  over 60 campus site visits and contacting other school officials by  telephone. Program officials also reported that most schools received  written correspondence or an e-mail to inform them of the program. By  these efforts, all HBCUs have been contacted in 2005, according to DBA  officials. They also said they timed these outreach efforts to correspond  with schools’ annual budgetary and enrollment processes in order to  prompt schools to think about potential capital projects that could fit the  program. DBA officials said that their marketing approach for fiscal year  2006 would be the same as in the previous year.
section_title: Weaknesses in Management Control Exist
paragraphs: While Education has taken some steps to improve the HBCU loan  program, we found significant weaknesses in its management control of  the program with respect to its (1) communications with HBCUs,   (2) compliance with program and financial reporting laws and guidance,  and (3) monitoring of its DBA, as described below.
subsections: section_title: Communication with HBCUs
paragraphs: Many HBCU officials we interviewed reported a lack of clear, timely, and  useful information from Education and the DBA at various stages of the  loan process, and said the need to pursue such information themselves  had sometimes led to delays. While program materials represent the loan  application as a 2- to 3-month process, about two-thirds of the loans made  since January 2001 were not closed until 7 to 18 months after application.  Officials from one school said that it had taken 6 to 7 months for the DBA  to relay from Education a clarification as to whether its proposed project  was eligible. Other schools reported that Education had not provided  timely or clear information about the status of their loans. In some cases,  schools reported that the lengthy loan process resulted in project delays  and cost increases over the intervening time period. An official from one  school told us that it remained unclear to him why his school was denied a  loan.
Education officials acknowledged that the loan process was lengthy for  some borrowers and said its DBA had attempted to work with these  borrowers to address problems with applications. School officials told us  that in some cases the loan process could have been expedited had  Education and the DBA made use of previous borrowers’ experiences to  apprise them of problems that could affect their own applications—such  as the fact that title searches can be especially time consuming and  problematic for private HBCUs, some of which did not receive all property  deeds from their founders when they were established in the 1800s. With  regard to making loan payments, several officials we interviewed said that  DBA officials had not provided information that was in sufficient detail. In  one situation, officials from one school reported that school auditors had  questioned the accuracy of the loan payment amount for which the school  was billed by the DBA because the billing statements omitted information  concerning the extent to which the amount billed included escrow  payments. Other officials noted that they had not received written  notification from the DBA concerning the full amount of their potential  liability after funds had been withdrawn from the schools’ escrow  accounts to cover payments on behalf of another borrower that had  recently defaulted on a loan.
section_title: Compliance with Program and Budget Laws and Federal Financial Accounting Standards
paragraphs: Education has not complied with certain statutory requirements relating to  the program’s operations and how federal agencies are to account for the  government’s cost of federal loan programs. In creating the program,  Congress established within the Department of Education an HBCU  Capital Financing Advisory Board composed of the (1) Secretary of  Education or the Secretary’s designee, (2) three members who are  presidents of private HBCUs, (3) two members who are presidents of  public HBCUs, (4) the President of the United Negro College Fund or  his/her designee, (5) the President of the National Association for Equal  Opportunity in Higher Education or his/her designee, and (6) the  Executive Director of the White House Initiative on HBCUs. By law, the  Advisory Board is to provide advice and counsel to the Secretary of  Education and the DBA concerning the capital financing needs of HBCUs,  how these needs can be met through the program, and what additional  steps might be taken to improve the program. To carry out its mission, the  law requires that the board meet with the Secretary of Education at least  twice each year. Despite this requirement, the board has met only three  times in the past 12 years, the most recent meeting occurring in May 2005.  According to Education officials, the Advisory Board did not routinely  meet because of turnover among Education staff as well as HBCU  presidents designated to serve on the board. Education officials told us  that there could have been other reasons why the Advisory Board did not  meet in earlier years, but none that they had knowledge of. Although  Education officials told us that they had believed another Advisory Board  meeting would be convened soon after the May 2005 meeting, no such  meeting has yet been scheduled.
We also found that Education has not fully complied with requirements of  the Federal Credit Reform Act of 1990, which, along with guidance issued  by OMB and accounting standards, provide the framework that Education  is to use in calculating the federal budget costs of the program. In  particular, Education has excluded certain fees paid by HBCUs from its  calculations of program costs. The interest payments made by HBCUs on  program loans includes a surcharge of 1/8th of 1 percent assessed by FFB  in accordance with its policy and as permitted by statutory provisions  governing its transactions. Under the Federal Credit Reform Act of 1990,  these fees—i.e., the surcharge—are to be recognized as cash flows to the  government and included in agencies’ estimated costs of the credit  programs they administer. In addition, these fees are to be credited to the  program’s financing account. OMB officials responsible for coordinating  agencies’ subsidy cost estimates acknowledged that Education should  include the fees in its budgetary cost estimates and noted that other  agencies with similar programs do so. Further, the written agreement  among Education, the FFB, and the DBA that governs the issuance of  bonds by the DBA for purchase by the FFB for the purpose of funding  loans under the program also stipulates that these fees are to be credited  to Education. Despite these provisions, Education has not included the  fees in its calculations of the federal cost of the program, thereby  overestimating the program’s costs; nor has Education accounted for the  fees on its financial statements. Instead, the DBA has collected and held  these fees in trust. Although the contract between Education and the  DBA generally describes how the DBA is to manage the proceeds from and  the payment of bonds issued to fund loans made to HBCUs, it does not  specifically address how the DBA is to manage the payments that reflect  the 1/8th of 1 percent paid by borrowers. In general, the DBA collects  borrower repayments and remits the proceeds to the FFB to pay amounts  due on the program’s outstanding bonds. However, the amounts paid to  the FFB do not include the fees paid by borrowers. As a result, it is unclear  how these funds, retained by the DBA, are to be eventually returned to the  federal government. Moreover, Education has not monitored the DBA’s  handling of these funds and is unaware of the accumulated balance.
section_title: Monitoring the Performance of the DBA
paragraphs: Although the current DBA has been under contract with Education for  over 5 years, Education has not yet assessed its performance with respect  to key program activities and contractual obligations, although Education  officials said that they have been pleased with the DBA’s performance.  One of these major activities is “marketing” the capital financing program  among HBCUs in order to raise awareness and help ensure that the  program is fully utilized. Although the DBA is required by its contract with  Education to submit annual reports and audited financial statements to  Education, it has not done so. While DBA officials told us the department  has offered some informal assessments, Education officials have not  guided their marketing efforts. Still, we found indications that the DBA’s  marketing strategy has likely suffered from a lack of guidance and  monitoring by Education. Officials we spoke with at 4 schools did not  know of the program, and another eight told us they had learned about it  from peers or advocacy organizations. Others were aware of the DBA’s  marketing activities, but offered a number of suggestions for  improvement, citing a need for more specific information as to the extent  to which collateral would be needed, how the program meets the needs of  both private and public schools, or examples and testimonials about  funded projects. Several school officials said DBA outreach through  conferences was not necessarily well targeted—either because the  selected conferences covered a full range of topics for a variety of schools  and not only HBCUs, or because they focused on issues relating to either  public or private HBCUs, or because they drew school officials not  involved in facilities planning. Additionally, the DBA has reserved its  direct contact marketing largely for 4-year schools. DBA officials justified  this decision on grounds that smaller schools tended to have more  difficulty borrowing and that they had targeted larger schools that they  believed would be most likely to benefit from the program. However, as  prescribed by law, loans are to be fairly allocated among as many eligible  institutions as possible. Because the DBA’s compensation is determined as  a percentage of the amount borrowed, and the costs it incurs may not vary  significantly from loan to loan, it is important to monitor its activities to  ensure it is not making loans exclusively to schools that are likely to  borrow larger amounts and for which its potential for profit is highest.
With regard to the DBA’s basic responsibility for keeping records, we  found several cases in which critical documents were missing from loan  agreement files. Moreover, the DBA was unable to provide us with entirely  complete files for any of the 14 institutions that had participated or were  participating in the program. For example, documents that included loan  applications, decision memoranda, financial statements, and real property  titles were missing for several schools. In our file review, we found that  files for 9 schools did not include the original application. Files for   8 schools did not include the required financial statements for  demonstrating long-term financial stability, and 5 lacked DBA memoranda  pertaining to the decision to make the loan. Moreover, until our review,  key Education officials were unaware that such documents were missing.
section_title: HBCUs Affected by Hurricanes Expressed Satisfaction with Special Loan Provisions and Concerns with Application Deadline, while Education Officials Said They Would Evaluate Loan Processes
paragraphs: Officials from four HBCUs in the Gulf Region we spoke with (Dillard  University, Southern University at New Orleans, Xavier University, and  Tougaloo College) told us that, in light of the extensive hurricane damage  to their campuses, they were pleased with the emergency loan provisions  but concerned that the 1-year authorization would not provide sufficient  time for them to take advantage of the special program features. School  officials from each of the four schools noted that their institutions had  incurred physical damages caused by water, wind, and, in the case of one  institution, fire, and that the actual financial impact of the hurricanes may  remain unknown for years. Although Education officials told us that they  have not yet determined the extent to which the department would make  use of its authority to waive or modify program provisions for hurricane- affected institutions, the department would be prepared to provide loans  to hurricane-affected HBCUs.
subsections: section_title: Gulf Area HBCUs Experienced Significant Hurricane Damage, and the Full Financial Impact May Remain Unknown for Years
paragraphs: Officials from the three HBCUs we visited reported extensive damage to  their campuses as a result of the 2005 hurricanes and noted that it may  take another few years to determine the full financial impact. School  officials told us that they have not been able to fully assess all hurricane- related costs, such as replacing property, repairing plumbing systems,  landscaping, and replacing sidewalks, and as result, current estimates are  only preliminary. School officials noted that the assessment process was  lengthy because of, among other things, the time required to prioritize  campus restoration needs, undertake complex assessments of historic  properties, follow state assessment processes, and negotiate insurance  settlements. Each of the four schools we contacted incurred physical  damages caused by water and wind; one school also incurred damage by  fire. For example, the campuses of all three schools in New Orleans were  submerged in 2 to 11 feet of water for about a month after the hurricanes,  damaging the first floors of many buildings as well as their contents. As a  result, schools required removal of debris and hazardous waste (e.g., mold  and asbestos), repair and renovation, and the taking of actions  recommended by FEMA to mitigate future risks. Xavier University  officials, who preliminarily estimated $40 million to $50 million in damage  to their school, said that they faced the need to undertake several capital  projects, including replacing elevators, repairing roofs, and rehabilitating  the campus auditorium and replacing its contents. According to officials  from Southern University at New Orleans, state officials have estimated  damages at about $17 million; at the time of our visit 10 months after the  hurricanes, state insurance assessors were beginning their work on the  campus library, where mold reached all three floors, covering books, art  collections, card catalogues, and computers. Officials at Dillard University  also reported extensive damage, preliminarily estimated as high as   $207 million. According to officials, five buildings—which were used for  academic support services and residential facilities—had to be demolished  because of extensive damage; three of these buildings were destroyed by  fire. Further, they also reported that the international studies building,  built adjacent to a canal levee in 2003, will have to be raised at least 18 feet  to make it insurable. Officials at Tougaloo College, in Mississippi, reported  wind and water damage to the roofs of some historic properties, which  along with other damages, they preliminarily estimated at $2 million.  Figures 2-4 show some of the damages and restoration under way at the  three schools we visited.
section_title: Schools Found Select Terms for Emergency Loans Favorable, but Said They Would Be Challenged to Make Application in the Time Allotted
paragraphs: The school officials we spoke with found certain emergency provisions of  the loan program favorable, but they expressed reservations about the  time frame within which they are required to make application for the  special loans. Most school officials appreciated the reduced interest rate  and cost of issuance (both set at 1 percent or less) and that the Secretary  of Education was provided discretion to waive or modify statutory or  regulatory provisions, such as credit criteria, to better assist them with  their recovery. They said the normal sources of information for credit  evaluation—such as audited financial records from the last 5 years— would be difficult to produce. Other conditions of the emergency loan  provisions some officials found favorable were the likelihood that loans  would be awarded sooner—providing a timely infusion of funds—with  more flexibility compared to other programs. Officials at both Dillard and  Xavier Universities said that because their institutions had already spent a  significant amount of their available resources, the emergency loans could  be used to bridge any emerging financial difficulties they experience as  they continue to pursue insurance settlements and assistance from other  federal agencies, including FEMA and SBA. Additionally, some school  officials said that the program may allow for greater flexibility compared  to FEMA and SBA aid. For example, some officials told us that in  addressing damages caused by the hurricanes they would like to improve  upon their facilities to mitigate potential environmental damages in the  future and, at one school, upgrade an obsolete science laboratory with  state-of-the-art equipment. They said, however, that in some cases FEMA  aid is limited to restoring campus facilities to their prestorm conditions  and in other cases desired improvements might not be consistent with  requirements for historic preservation.
While most school officials we spoke with found select provisions  favorable, they expressed concerns with stipulations that limit the  extension of the special provisions to 1 year, primarily because all of the  costs associated with damage from the hurricanes have not been fully  identified. Further, officials at Southern University at New Orleans—a  public institution—said that they are subject to an established capital  improvement approval process involving both its board of directors and  state government officials that alone normally requires a year to complete.  Additionally, some of the schools are concerned that they may not be able  to restore damaged and lost records needed to apply to the program.  Officials reported that a time frame of at least 2 to 3 years would allow  them to better assess the costs of the damages. Other concerns cited  included eligibility requirements for the deferment provision, and officials  from one institution expressed disappointment that the emergency  provisions did not include some form of loan forgiveness.
section_title: Education Is Preparing to Take Steps to Ensure It Can Provide Loans from Available Funds to Help Hurricane-Affected HBCUs Restore Their Campuses
paragraphs: According to Education officials, they are preparing to take the steps  necessary to ensure that the department is prepared to provide loans to  hurricane-affected HBCUs. Education officials noted that in light of the  statutory limit on the total amount of loans it can make under the program  and the balance of loans outstanding as of August 2006, about $141 million  in funding is available for private, and $66 million for public, HBCUs— both those affected by the hurricanes and others. The officials noted that  the department had not yet determined to what extent the Secretary would  use her discretion to waive or modify program requirements, including the  statutory loan limits. They told us that some of their next steps included  determining how the program’s application processes could be changed to  ensure that funds can be provided to hurricane-affected schools in a timely  manner. They said the department would need to consider to what extent  it would apply credit criteria to hurricane-affected institutions in light of  the fact that these institutions would likely be experiencing fiscal stresses  as they seek to rebuild their campuses and attempt to return to their prior  levels of enrollment. They noted that they would talk with school officials  to gain a better understanding of which program criteria remain  applicable, but anticipate using fewer credit criteria in their  determinations. Education officials also noted that they will likely have to  decide on the appropriate level of flexibility to exercise with respect to  collateralizing loans for hurricane-affected HBCUs because some  institutions may lack the collateral they had prior to the hurricanes.  Moreover, these officials stated that the department would need to  consider establishing limits on the types of projects for which it would  provide funding to ensure that loans are not provided for capital projects  for which other federal aid is available, such as that provided by FEMA.  For example, program officials recognized that a significant cost of  recovery for the schools in the Gulf Coast region is debris removal, but  believe FEMA is likely to provide funding for such costs. Even with these  challenges and outstanding questions, program officials said that they are  confident the department will be able to lend funds to hurricane-affected  institutions prior to expiration of the special legislative provisions  applicable to hurricane-affected HBCUs. They noted that the department  has already notified eligible institutions of the availability of funds and  would hold additional meetings with schools to gain an understanding of  their capital improvement and restoration needs.
section_title: Conclusions
paragraphs: HBCUs play an important role in fulfilling the educational aspirations of  African-Americans and others and in helping the nation attain equal  opportunity in higher education. In establishing the Capital Financing  Program, Congress sought to help HBCUs continue and expand their  educational mission. The program has in fact assisted some HBCUs in  financing their capital projects. Factors, however, including awareness of  the program; clear, timely, and useful information concerning the status of  loan applications and approvals; and certain loan terms and conditions,  may be discouraging other schools from participating in the program.  Some HBCUs have accessed even more attractive financing outside of the  program, while yet others may face financial challenges that make it  unwise to borrow through the program—factors that affect program  utilization and make the development of program performance goals and  measures challenging. Despite the challenge, Education is attempting to  design performance goals and measures—a positive step that if  successfully completed could be useful in informing Congress and others  about the extent to which the program is meeting Congress’ vision in  establishing it.
HBCU officials had a number of suggestions, such as changing the  frequency of schools’ loan repayments from a monthly to a semiannual  basis, that they believed could improve the program and positively  influence program utilization. By soliciting and considering such feedback  from HBCU officials, Education could ensure that the program is optimally  designed to achieve its objectives effectively and efficiently. However,  Education has not made consistent use of the mechanism—the HBCU  Capital Financing Advisory Board—Congress provided to help ensure  Education received input from critical program stakeholders. Receiving  feedback from schools would also allow the department to better inform  Congress about the progress made under the program.
Effective management control is essential to ensuring that programs  achieve results and depends on, among other things, effective  communication. Agencies must promote relevant, reliable, and timely  communication to achieve their objectives and for program managers to  ensure the effective and efficient use of resources. Effective management  control also entails ensuring that an agency complies with applicable laws  and regulations and that ongoing monitoring occurs during the normal  course of an agency’s operations. In failing to follow the requirements of  the Federal Credit Reform Act, Education has overstated the budgetary  cost of the program. Accurately accounting for the cost of federal  programs is all the more important in light of the fiscal challenges facing  the nation. Moreover, failing to adequately monitor the DBA’s performance  with respect to critical program responsibilities—record keeping,  marketing, accounting, and safeguarding the federal funds it has been  collecting from program borrowers—increases the program’s exposure to  potential fraud, waste, abuse, and mismanagement.
section_title: Recommendations for Executive Action
paragraphs: To better ensure that the HBCU Capital Financing Program can assist  these schools to continue and expand their educational missions, GAO is  making the following five recommendations for Executive Action. To  ensure that it obtains the relevant, reliable, and timely communication that  could help ensure that program objectives are being met efficiently and  effectively, and to meet statutory requirements, we recommend that the  Secretary of Education regularly convene and consult with the HBCU  Advisory Board. Among other things, the Advisory Board could assist  Education in its efforts to develop program performance goals and  measures, thereby enabling the department and the board to advise  Congress on the program’s progress. Additionally, Education and the  Advisory Board could consider whether alternatives to the escrow  arrangement are feasible that both address schools’ concerns and the need  to keep federal costs at a minimum. If Education determines that statutory  changes are needed to implement more effective alternatives, it should  seek such changes from Congress.
To ensure program effectiveness and efficiency, we recommend that the  Secretary of Education enhance communication with HBCU program  participants by (1) developing guidance for HBCUs, based on other  schools’ experiences with the program, on steps that applicants can take  to expedite loan processing and receipt of loan proceeds, and (2) regularly  informing program applicants of the status of their loan applications and  department decisions.
In light of the program’s existing credit requirements for borrowers and  the funds placed in escrow by borrowers to protect against loan  delinquency and default, we recommend that the Secretary of Education  change its requirement that borrowers make monthly payments to a  semiannual payment requirement consistent with the DBA’s requirement  to make semiannual payments to the FFB.
To improve its estimates of the budgetary costs of the program, and to  comply with the requirements of the Federal Credit Reform Act, we  recommend that the Secretary of Education ensure that the program  subsidy cost estimation process include as a cash flow to the government  the surcharge assessed by the FFB and paid by HBCU borrowers and pay  such amount to the program’s financing account. Additionally, we  recommend that the Secretary of Education audit the funds held by the  DBA generated by this surcharge and ensure the funds are returned to the  Department of the Treasury and paid to the program’s financing account.
To ensure adequate management control and efficient program operations,  we recommend that the Secretary of Education increase its monitoring of  the DBA to ensure its compliance with contractual requirements, including  record keeping, and that the DBA is properly marketing the program to all  potentially eligible HBCUs.
section_title: Agency Comments
paragraphs: In written comments on a draft of this report, Education agreed with our  findings and all but one of our recommendations and noted that our report  would help it enhance the program and better serve the nation’s HBCUs.  Education agreed with our recommendation to regularly convene and  consult with the HBCU Advisory Board and noted that the department  would leverage the board’s knowledge and expertise to improve program  operations and that the department had scheduled a board meeting for  October 27, 2006. Education also agreed with our recommendation to  improve communications with HBCUs, noting that it would take steps  including developing guidance based on lessons learned to expedite loan  processing and receipt of proceeds, and regularly informing applicants of  their loan status and department decisions. Moreover, Education agreed  with our recommendation to improve its budget estimates for the  program, indicating that it would work with OMB and Treasury to do so.  Further, with regard to our recommendation that the department increase  its monitoring of its DBA, the department stated that it would require the  DBA to submit quarterly reports on program participation and financing,  identify and locate missing loan documentation, and maintain these efforts  for each subsequent loan disbursal. Additionally, the department said that  it was planning to conduct an audit of the DBA’s handling of loan funds  and associated fees, as we recommended.
With respect to our recommendation that would allow participating  schools to make semiannual payments, Education said it would be  imprudent to implement the recommendation at this time because of the  potential for default as well as the exposure from a default by a current  program participant. We considered these issues in the development of  our recommendation and continue to believe that the credit evaluation  performed by the DBA, the funds set aside by borrowers held in escrow,  and the security pledged by borrowers provide important and sufficient  measures to safeguard taxpayers against potential delinquencies and  default. Further, while not noted in our draft report reviewed by the  department, the law requires that borrowers make payments to the DBA at  least 60 days prior to the date for which payment on the bonds is expected  to be needed. In addition, borrowers have been required to submit, on an  annual basis, audited financial reports and 3-year projections of income  and expenses to the DBA. These measures provide additional safeguards  as well as a mechanism to alert the department of potential problems. We  added this information to our description of program terms and conditions  in table 1.
Education also provided technical comments that we incorporated into  this report where appropriate.
As agreed with your offices, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days from its  issue date. At that time, we will send copies to the Secretary of Education  appropriate congressional committees, the Director of OMB, and other  interested parties. We will also make copies available to others upon  request. In addition, the report will be available at no charge on GAO’s  Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-7215 or AshbyC@gao.gov. Contact points for our Office of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff that made major contributions to this report are  listed in appendix IV.
section_title: Appendix I: List of Historically Black Colleges and Universities GAO Interviewed
subsections: section_title: Alabama Agricultural and Mechanical University
paragraphs: Ala.
Ga.
S.C.
N.C.
N.C.
Fla.
Md.
Pa.
Ga.
La.
Tenn.
Fla.
Tex.
Ky.
Pa.
N.C.
Ala.
Va.
N.C.
Tex.
N.C.
S.C.
La.
Tenn.
Tex.
Miss.
Ala.
Ark.
D.C.
Md.
Va.
W.Va.
La.
section_title: Appendix II: Number of HBCUs Eligible to Participate in Capital Financing Program by State (as of August 31, 2006)
paragraphs: ppendix II: Number of HBCUs Eligible to  ticipate in Capital Financing Program by as of August 31, 2006)
section_title: Appendix III: HBCUs Located in Geographic Area Affected by Hurricane Katrina in 2005
section_title: Appendix IV: Comments from the Department of Education
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to those named above the following individuals made  important contributions to the report: Jeff Appel, Assistant Director;  Tranchau Nguyen, Analyst-in-Charge; Carla Craddock; Holly Gerhart;  Lauren Kennedy; Sue Bernstein; Margie Armen; Christine Bonham;   Jessica Botsford; Michaela Brown; Richard Burkard; Carlos Diz;   Kevin Jackson; Tom McCool.