Department of Education: Guaranteed Student Loan Program	 
Vulnerabilities (21-NOV-02, GAO-03-268R).			 
                                                                 
Congress requested that GAO investigate weaknesses in the	 
Department of Education's administration of student loans for	 
postsecondary education under the Federal Family Education Loan  
(FFEL) Program. As a result of the undercover investigation, GAO 
exposed vulnerabilities in the administration of the FFEL	 
Program. GAO set up a fictitious school and sought and obtained  
approval for student loans totaling $55,500 on behalf of three	 
fictitious students purportedly attending the school.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-268R					        
    ACCNO:   A05571						        
  TITLE:     Department of Education: Guaranteed Student Loan Program 
Vulnerabilities 						 
     DATE:   11/21/2002 
  SUBJECT:   Educational facilities				 
	     Eligibility criteria				 
	     Fraud						 
	     Student financial aid				 
	     Student loans					 
	     Students						 
	     Aid for education					 
	     Education program evaluation			 
	     Program management 				 
	     Internal controls					 
	     Federal Family Education Loan Program		 

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GAO-03-268R

GAO- 03- 268R Guaranteed Student Loan Vulnerabilities United States
General Accounting Office

Washington, DC 20548

November 21, 2002 The Honorable Susan M. Collins Ranking Minority Member
Permanent Subcommittee on Investigations Committee on Governmental Affairs
United States Senate

Subject: Department of Education: Guaranteed Student Loan Program
Vulnerabilities

Dear Senator Collins: This report responds to your request and subsequent
conversations with your staff, that we investigate weaknesses in the
Department of Education*s administration of student loans for
postsecondary education under the Federal Family Education Loan (FFEL)
Program. 1 Specifically, you asked that the Office of Special
Investigations, acting in an undercover capacity, examine weaknesses in
Education*s procedures for certifying foreign schools to participate in
the FFEL Program and to determine whether student loans can be obtained by
fictitious students purportedly attending a foreign school. We briefed
your office on our investigative findings. This report summarizes those
findings and includes documents we referenced in that briefing.

As a result of our undercover investigation, we exposed vulnerabilities in
Education*s administration of the FFEL Program. With relative ease, we
created Y*Hica Institute for the Visual Arts, a fictitious graduate- level
foreign school purportedly located in London, England. After creating
Y*Hica, we obtained certification from Education for the school to
participate in the FFEL Program. Finally, we sought and obtained approval
for student loans totaling $55,500 on behalf of three fictitious students
purportedly attending Y*Hica. After completing our investigation, we
contacted Education officials and briefed them about our findings. As set
forth below, we are making recommendations aimed at preventing fictitious
foreign schools from participating in the FFEL Program and preventing
fictitious students from obtaining student loans.

1 The FFEL program is a loan program for postsecondary students that the
government supports under Title IV of the Higher Education Act.
Previously, GAO identified vulnerabilities in the Guaranteed Student Loan
Program. (See U. S. General Accounting Office, High- Risk Series:
Guaranteed Student Loans, GAO/ HR- 93- 2 (Washington, D. C.: December
1992), and High- Risk Series: Student Financial Aid, GAO/ HR- 95- 10
(Washington, D. C.: February 1995).

GAO- 03- 268R Guaranteed Student Loan Vulnerabilities Page 2 We conducted
our investigation from January 25, 2001, through May 8, 2002, in

accordance with investigative standards established by the President*s
Council on Integrity and Efficiency. To assist us in creating a foreign
school and qualifying to participate in the FFEL Program, we had numerous
discussions, in an undercover capacity, with Education*s Foreign Schools
Team and reviewed the procedures that a foreign school must follow. We
then submitted false and counterfeit documentation to support our
application for institutional eligibility and certification to participate
in the FFEL Program. We also submitted false and counterfeit documentation
in order to obtain student loans for fictitious students.

Creating Y*Hica, a Fictitious Foreign School

Adhering to Education procedures, we successfully created Y*Hica Institute
for the Visual Arts, a fictitious foreign school purportedly located in
London, England. We first created a consulting firm called Weinstein &
Associates to pose as Y*Hica*s U. S. representative and the principal
point of contact with Education. We also created identities for the
President of Y*Hica and the President and Executive Director of the
consulting firm. In addition, we created Web sites for Y*Hica and the
consulting firm as well as telephone numbers and addresses for Y*Hica and
the consulting firm. Finally, we obtained an international Dun and
Bradstreet number and an Education personal identification number (PIN) on
behalf of Y*Hica. Education then recognized that Y*Hica could apply to
participate in the FFEL Program.

Obtaining Approval for Participation in the FFEL Program

Subsequently, we created and provided Education with documents that are
required for approval to participate in the FFEL Program. Specifically, we
provided the following counterfeit documents on behalf of Y*Hica: (1) a
school catalog purportedly describing Y*Hica*s mission (a cover page of
which is reprinted in enc. I), (2) certified financial statements of
Y*Hica for fiscal years 1998 and 1999, signed by a fictional accountant
residing at a fictional address in London, (3) a letter indicating that
John Moores University* an education entity in the United Kingdom*
validated Y*Hica*s academic program, and (4) a letter from educational
authorities in the United Kingdom stating that Y*Hica is a nonprofit
institution with degree- granting authority. In response to requests from
Education for additional information to complete the FFEL application, we
created false documentation indicating that Web sites of the British
Department for Education and Employment and the Charity Commission for
England and Wales recognize Y*Hica as a nonprofit, postsecondary
institution. Based on these documents, Education certified Y*Hica to
participate in the FFEL Program.

Obtaining Student Loans for Fictitious Students under the FFEL Program

After requesting and obtaining a federal school code from Education, we
created identities, addresses, and telephone numbers for three students,
one of which was Susan M. Collins, purportedly attending Y*Hica. We also
accessed Education*s Free Application for Federal Student Aid Web site and
completed PIN applications for each of the students. Upon receipt of PINs
for the fictitious students, we completed on- line financial aid
applications on their behalf. After obtaining Student Aid Reports from
Education establishing financial aid eligibility and authorization to
proceed with the student loan application process, we submitted student
loan applications to three

GAO- 03- 268R Guaranteed Student Loan Vulnerabilities Page 3 lenders on
behalf of Ms. Collins and the other two purported students. Nellie Mae

Student Lending, Inc. and Sallie Mae Servicing Corporation, acting as the
guarantor for Nellie Mae, sent letters to the students (an example of
which is reprinted in enc. II) advising them that their student loans had
been approved for $18,500 each (totaling $ 55,500). 2 However, Bank of
America, the third lender, did not approve the loans.

Recommendation for Executive Action

We recommend that the Secretary of Education implement a verification
process to ensure that a foreign school applying to participate in the
FFEL Program actually exists and is recognized by an appropriate
educational entity. Specifically, we recommend that Education enter into a
relationship with an organization such as the Department of State, which
would verify the existence of a foreign school that applies for
certification to participate in the FFEL Program through site visits to
the school and verification of its accreditation by local educational
authorities. In addition, we recommend that the Secretary of Education
review the process for certifying student loans and develop controls to
prevent fictitious students from obtaining student loans.

Agency Comments

We provided a briefing to administrators of Education*s Foreign Schools
Team who agreed that our investigation disclosed weaknesses in connection
with the certification of foreign schools seeking participation in the
FFEL Program. As a result, Education advised us that it has taken actions
based on our recommendation. In this regard, the Foreign Schools Team has
developed a list of education ministries in each country in which
certified foreign schools purportedly exist and has verified that each
school properly received certification to participate in the FFEL Program.
In addition, the team has implemented a procedure by which its staff is
responsible for contacting the respective education ministry each time a
school applies for certification or recertification to ensure that the
school exists and has been recognized by the appropriate educational
entity as a nonprofit, degree- granting institution. The Foreign Service
Team also advised us that there are other actions that it plans to take
based on our investigative findings and recommendation. Those actions
include, among others, (1) revising the internal certification checklist
so that the source of the validation is noted and (2) providing technical
assistance to foreign schools on financial aid requirements, such as
certifying loan applications, ensuring students are accepted for
enrollment prior to disbursement, and reporting enrollment status updates.

---- As arranged with your office, unless you announce its contents
earlier, we plan no further distribution of this report until 30 days
after its date. At that time, we will send copies of this report to the
Secretary of Education and interested congressional

2 We contacted the financial institutions to explain that we had applied
for the loans as a part of our investigation and requested that the
financial institutions stop payment on the disbursement checks.

GAO- 03- 268R Guaranteed Student Loan Vulnerabilities Page 4 committees.
The report will also be available at no charge on the GAO Web site at

http:// www. gao. gov. If you have questions about the investigation,
please contact Acting Assistant Director Andrew O*Connell at (202) 512-
7449 or Senior Special Agent Robyn D. Stewart at (202) 512- 7475.

Sincerely yours, Robert J. Cramer Managing Director Office of Special
Investigations

Enclosures

GAO- 03- 268R Guaranteed Student Loan Vulnerabilities Page 5 Enclosure I

GAO- 03- 268R Guaranteed Student Loan Vulnerabilities Page 6 Enclosure II

GAO- 03- 268R Guaranteed Student Loan Vulnerabilities Page 7 Enclosure II

(601088)
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