The Department of Education’s Office of Federal Student Aid (FSA) manages and administers student financial assistance programs authorized under Title IV of the Higher Education Act of 1965, as amended. These programs include, among others, the William D. Ford Federal Direct Loan Program (Direct Loan program), the Federal Family Education Loan Program (FFEL program), the Federal Pell Grant Program (Pell Grant program), and campus-based aid programs. In the 2007-2008 school year, Title IV programs provided more than $85 billion in student aid. In 1990, we placed Education’s student financial aid programs on our high risk list of programs at risk of fraud, waste, abuse, and mismanagement. At the time, Education had various problems, including poor financial management and fragmented and inefficient information systems. In 2005, we removed these programs from the list due to improvements made to Education’s financial management of federal student aid programs and better integration of its information systems. However, we continue to monitor Education’s administration and oversight of federal student aid programs. The Higher Education Act provides that a variety of institutions of higher education are eligible to participate in Title IV programs, including: Public institutions–Institutions operated and funded by state or local governments, which include state universities and community colleges. Private non-profit institutions–Institutions owned and operated by non- profit organizations whose net earnings do not benefit any shareholder or individual. These institutions are eligible for tax deductible contributions in accordance with the Internal Revenue code (26 U.S.C. § 501(c)(3)). Proprietary institutions–Institutions that are privately-owned whose net earnings can benefit a shareholder or individual; that is, for-profit institutions. These institutions can be further classified by their program lengths: 4-year and above–The program length for colleges and universities. Such schools typically offer bachelor’s degrees and higher-level degrees. Some 4-year and above schools also offer associate’s degrees, which generally take 2 years to complete. 2-year–The program length for many community colleges and other institutions offering associate’s degrees. These schools often also offer certificate programs. Less than 2-year–Includes schools, often referred to as “vocational and technical schools,” that offer certificate programs, but typically do not offer degrees. Overall, the proprietary sector receives the smallest percentage of Title IV funds–about 19 percent–compared with the public and private non-profit sectors, which receive about 48 and 33 percent, respectively. However, the amount of Title IV funding going to the proprietary sector has risen significantly in recent years and some of the schools receiving the most Title IV funds are proprietary schools. Four-year and above schools account for the majority of enrollments in the public, private non-profit, and proprietary sectors. Two-year schools account for a significant percentage of the enrollments in the public and proprietary sectors, but only about 2 percent of enrollments in the private non-profit sector. Less than 2-year schools account for 19 percent of the enrollment in the proprietary sector, but are less than half of 1 percent of the enrollments at both public and private non-profit sectors. Figure 1 shows school sectors by the percentage of enrollments in different program length categories. Under Title IV of the Higher Education Act, a school can receive student aid if it offers courses of study such as certificate, associates, bachelor’s, graduate, or professional degree programs. Vocational and technical training, in which skills related to a specific trade, vocation or occupation are taught, are generally offered at community colleges as well as proprietary schools. Relative to the total number of schools in the Title IV program that award degrees and certificates, the proprietary sector awards a small percentage of bachelor’s degrees and above, but a substantial percentage of certificates. Students who attend proprietary schools generally have characteristics that differ from students at public and private non-profit schools. First, over half of the student population at proprietary schools is comprised of “non-traditional” students, such as students who are 25 years old and older. Second, more students at proprietary schools are financially independent compared to students at public and private non-profit schools. Third, proprietary schools serve a higher percentage of women than schools in other sectors. See table 1 for analysis of Education’s data on age, dependency status, and gender of students in the three school sectors. Lastly, proprietary schools have a higher percentage of minority students, specifically African-American and Hispanic students, than public and private non-profit schools. However, a higher percentage of Asian- American students attend both public and private non-profit schools than proprietary schools. See figure 2 for analysis of Education’s data on student race in the three school sectors. In order for students attending a school to receive Title IV funds, a school must be: (1) licensed or otherwise legally authorized to provide higher education in the state in which it is located, (2) accredited by an agency recognized for that purpose by the Secretary of the U.S. Department of Education, and (3) deemed eligible and certified to participate in federal student aid programs by Education. This is commonly referred to as the triad. Under the Higher Education Act, Education does not determine the quality of higher education institutions or their programs; rather, it relies on recognized accrediting agencies to do so. As part of its role in the administration of federal student aid programs, Education determines which institutions of higher education are eligible to participate in Title IV programs. Education is responsible for overseeing school compliance with Title IV laws and regulations and ensuring that only eligible students receive federal student aid. As part of its compliance monitoring, Education relies on department employees and independent auditors of schools to conduct program reviews and audits of schools. Generally, students without a high school diploma or GED can qualify for Title IV loans, grants, and campus-based aid if they pass an independently administered test of basic math and English skills, called an “ability-to- benefit” or ATB test. The intent of the test is to measure whether students have the basic skills needed to benefit from higher education and succeed in school. The test must be approved by the Secretary of Education and administered by an independent party. Students must pass the test prior to enrolling in classes and receiving Title IV funds. Since the inception of ATB test requirements, hundreds of thousands of non-high school graduates have qualified for Title IV aid by taking these tests. Under the ATB test program, Education is responsible for overseeing test publishers, who, in turn, are responsible for certifying and monitoring test administrators to ensure the independent and proper administration of ATB tests. Test publishers are required to conduct and submit to Education an analysis of test scores every 3 years to identify any test irregularities that would suggest ATB tests are not administered in accordance with test rules. Certified test administrators administer ATB tests to prospective students at schools. Figure 3 describes the ATB test process and how it is carried out. Education computes default rates for all schools with students who receive Title IV loans through the FFEL Program or the Direct Loan Program. Education calculates default rates each year by tracking whether borrowers in a cohort–a group of students who begin repaying their loans in a given fiscal year–at each school default on their federal student loans over a 2-year period. The resulting calculation is called the cohort default rate. For example, to calculate the 2-year default rate for the 2006 cohort, Education divided (1) the number of borrowers who began their repayment period in fiscal year 2006 and defaulted before the end of fiscal year 2007 (the numerator) by (2) the number of borrowers who began their repayment period in fiscal year 2006 (the denominator). The resulting default rate is expressed as a percentage with a higher percentage indicating more defaults. The majority of schools now have default rates under 10 percent, which is a qualifying rate for favorable loan disbursement and delivery terms. These terms allow schools to disburse loans in a single installment rather than in two or more installments. Borrowers begin repayment after dropping below half-time enrollment, graduating, or leaving their program. Borrowers generally default when they do not make any payments on their loan for 270 days (about 9 months) or more and they have not obtained a temporary cessation or reduction of payments—referred to as a deferment or forbearance—for reasons such as economic hardship, disability, or enrollment in another school that is eligible to participate in the Title IV program. Starting in January 1991, the Secretary of Education initiated proceedings for immediate loss, suspension, or termination of schools’ eligibility to participate in Title IV loan programs if their default rates were above specified thresholds. From 1992, the first year from which Education data were available on numbers of schools by sector subject to immediate loss, suspension, or termination from the Title IV program due to high default rates, until 1999, 1,846 schools, including 1,580 from the proprietary sector, were subject to sanctions. More recently, from 2000 until 2008, four schools were subject to immediate loss, suspension, or termination from the Title IV program due to high default rates, including three from the proprietary sector. According to an Education official, there are several possible explanations for the drop in defaults and, subsequently, for the drop in the number of schools subject to sanctions. For example, the Education official noted that the Department’s efforts to provide schools with default prevention training may have reduced default rates. In addition, he pointed out that many proprietary schools with chronically high default rates lost Title IV eligibility and subsequently went out of business in the early 1990s. When students do not make payments on their federal loans and the loans are in default, the federal government and taxpayers assume nearly all the risk and are left with the costs. For example, in the FFEL program, the federal government and taxpayers pick up 97 percent of the cost on defaulted loans.