Student Loans and Foreign Schools: Assessing Risks Could Help	 
Education Reduce Program Vulnerability (25-JUL-03, GAO-03-647).  
                                                                 
Recent events have increased concerns about the potential for	 
fraud in Education's student loan programs related to loans for  
U.S. residents attending foreign schools. In 2002, GAO's Office  
of Special Investigations created a fictitious foreign school	 
that Education subsequently certified as eligible to participate 
in the student loan program. GAO investigators subsequently	 
successfully obtained approval for student loans totaling $55,000
on behalf of three fictitious students. Over the past decade,	 
Education's Inspector General has investigated many instances of 
suspected student loan fraud involving individuals applying for  
loans for purported attendance at foreign schools. The conference
report accompanying the 2001 Labor, Health and Human Services,	 
and Education Appropriations Act mandated that GAO examine and	 
report on fraud, waste, and abuse with respect to student loans  
for Americans attending foreign schools.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-647 					        
    ACCNO:   A07717						        
  TITLE:     Student Loans and Foreign Schools: Assessing Risks Could 
Help Education Reduce Program Vulnerability			 
     DATE:   07/25/2003 
  SUBJECT:   Eligibility determinations 			 
	     Fraud						 
	     Internal controls					 
	     Program abuses					 
	     Strategic planning 				 
	     Student financial aid				 
	     Student loans					 
	     Program evaluation 				 
	     Americans studying abroad				 
	     Dept. of Education Federal Family			 
	     Education Loan Program				 
                                                                 

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GAO-03-647

Report to Congressional Addressees

United States General Accounting Office

GAO

July 2003 STUDENT LOANS AND FOREIGN SCHOOLS

Assessing Risks Could Help Education Reduce Program Vulnerability

GAO- 03- 647

Foreign schools offer unique educational opportunities for Americans and
help ensure that U. S. students have a wide range of options in pursuing
postsecondary education. Almost 70 percent of all U. S. residents
receiving Federal Family Education Loan Program (FFELP) funds to attend
foreign schools are in medical school and they account for three- quarters
of the total loan volume. While some foreign schools participating in the
FFELP enroll large numbers of U. S. residents, others enroll only a few,
as seen in the table below, which also indicates the countries wherein
FFELP loan volume is highest.

Countries with Highest FFELP Loan Volume for Americans Attending Foreign
Schools, Academic Year 2000- 01

Country Number of schools

Average number of students per school Loan volume

Dominica 1 1776 $35,235,509 Grenada 1 1528 $30,666,842 Mexico 11 138
$27,003,357 England 182 9 $25,405,722 Dominican Republic 6 177 $20,653,159
Source: GAO analysis of FSA data.

We found that FFELP is vulnerable to fraud, waste, and abuse in several
ways. For instance, many foreign schools do not submit required audited
financial statements and program compliance audit reports, which would
allow Education to monitor for and detect significant fraud or other
illegal acts. For fiscal year 2001, about 57 percent of foreign schools
failed to

submit audited financial statements, while the vast majority of foreign
schools failed to submit program compliance audit reports. Education has
taken limited steps to address instances of vulnerabilities to fraud,
waste, and abuse. For example, Education has issued a reference guide and

conducted training for foreign school officials. However, a number of
foreign school officials reported that they had not received training
prior to administering FFELP funds. In addition, we found that some
foreign school officials are not properly determining and documenting
student eligibility for loans; as a result FFELP funds may be provided to
students who should not be receiving them. We also found that the on- line
training to which Education refers foreign school officials presents
information in some cases that is contrary to how foreign schools are to
administer FFELP. Education could take additional action to reduce the
potential for fraud, waste, and abuse, but will have to address the trade-
offs that arise from its actions that may affect student access and burden
for various program participants. A comprehensive risk assessment is one
method that Education could employ to determine how to balance an
appropriate level of oversight with the desire to provide American
students access to foreign educational opportunities. Recent events have
increased concerns about the potential for fraud in Education*s student
loan

programs related to loans for U. S. residents attending foreign schools.
In 2002, GAO*s Office of Special Investigations created a fictitious
foreign school that Education subsequently certified as eligible to
participate in the student loan program. GAO investigators subsequently
successfully obtained approval for student loans totaling

$55,000 on behalf of three fictitious students. Over the past decade,
Education*s Inspector General has investigated many instances of suspected
student loan fraud

involving individuals applying for loans for purported attendance at
foreign schools. The conference report accompanying the 2001 Labor, Health
and Human Services, and Education Appropriations Act mandated that GAO
examine and report on fraud, waste, and abuse with respect to student
loans for Americans attending foreign schools.

GAO recommends that Education  develop on- line training

resources specifically designed for foreign school officials and 
undertake a risk assessment to determine how best to ensure

accountability while considering costs, burden to schools and students,
and access to foreign schools. Education agreed with our

recommendations.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 647. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact Cornelia M. Ashby at (202) 512- 8403 or ashbyc@ gao.
gov. Highlights of GAO- 03- 647, a report to

Congressional Addressees July 2003

STUDENT LOANS AND FOREIGN SCHOOLS

Assessing Risks Could Help Education Reduce Program Vulnerability

Page i GAO- 03- 647 Student Loans and Foreign Schools Letter 1 Results in
Brief 3 Background 5 FFELP is Vulnerable to Fraud, Waste, and Abuse in
Several Ways

with Respect to U. S. Residents Attending Foreign Schools 12 Education Has
Taken Limited Steps to Reduce the Vulnerability of FFELP to Fraud, Waste,
and Abuse but FFELP Remains Vulnerable 18 Additional Actions to Reduce
Program Vulnerability Will Require

Balancing Competing Goals 23 Conclusions 27 Recommendations for Executive
Action 28 Agency Comments 28 Appendix I Characteristics of Foreign Schools
Participating in FFELP, by Country 30

Appendix II Comments from the Department of Education 32

Tables

Table 1: Education Oversight Components for Foreign Schools 10 Table 2:
Status of Foreign Schools* Submission of Audited Financial Statements for
Fiscal Year 2001 16 Table 3: Status of Foreign Schools* Submission of
Program Compliance Audit Reports for Fiscal Year 2001 17 Table 4:
Information in COACH Not Applicable to Foreign Schools 21 Figure

Figure 1: Countries with Schools Eligible to Participate in FFELP and Top
10 Foreign Schools by Loan Volume for Academic Year 2000- 01 8 Contents

Page ii GAO- 03- 647 Student Loans and Foreign Schools Abbreviations

CPS Central Processing System COACH Computer- Based Orientation and How-
tos FAFSA Free Application for Federal Student Aid FFELP Federal Family
Education Loan Program FSA Federal Student Aid GAAP Generally Accepted
Accounting Principles HEA Higher Education Act of 1965 ISIR Institutional
Student Information Report MPN Master Promissory Note NSLDS National
Student Loan Database System

OIG Office of Inspector General PEPS Postsecondary Education Participants
System PPA Program Participation Agreement SAIG Student Aid Internet
Gateway SAR Student Aid Report SSCR Student Status Confirmation Report

This is a work of the U. S. Government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. It may contain
copyrighted graphics, images or other materials. Permission from the
copyright holder may be necessary should you wish to reproduce copyrighted
materials separately from GAO*s product.

Page 1 GAO- 03- 647 Student Loans and Foreign Schools

July 25, 2003 Congressional Addressees Recent events have increased
concerns about the potential for fraud in the Department of Education*s
student loan programs, especially as it relates to U. S. citizens and
permanent residents (hereafter referred to as U. S. residents) attending
foreign schools. 1 The Federal Family Education Loan Program (FFELP),
which provided about $23 billion in loans to students in fiscal year 2000,
is the only federal student financial aid program in which foreign schools
participate; about $226 million in FFELP loans were disbursed to U. S.
residents attending 407 foreign schools in the 2000- 01 academic year.
Many of these foreign schools enroll only a small number of U. S.
residents who receive FFELP funds, but a few schools enroll large numbers.

The conference report accompanying the 2001 Labor, Health and Human
Services, and Education Appropriations Act directed that we examine and
report on the problem of fraud, waste, and abuse related to loans for U.
S. residents attending foreign schools. Accordingly, our specific
objectives were to determine (1) ways in which FFELP is vulnerable to
fraud, waste, and abuse with respect to loans for U. S. residents
attending foreign schools; (2) what Education has done to reduce FFELP*s
vulnerability; and (3) additional actions that might reduce program
vulnerability to fraud, waste, and abuse.

To address our objectives, we discussed the vulnerability of FFELP and
actions that Education has taken or could take to address such

1 A foreign school is a school that is located outside of the United
States of America, its territories, the Commonwealth of Puerto Rico, the
Freely Associated States of Micronesia, the Republic of the Marshall
Islands, and the Republic of Palau. Students attending foreign schools are
eligible for loans only under the Federal Family Education Loan Program.
The program consists of subsidized and unsubsidized Stafford Loans,
Federal PLUS loans, and Federal Consolidation loans. Subsidized Stafford
Loans are provided to students who have

demonstrated financial need and the federal government pays the interest
costs on the loan while the student is in school. Unsubsidized Stafford
Loans are provided to students regardless of financial need, but the
federal government does not pay the interest costs on the loans while the
student is in school. Students are therefore responsible for all interest
costs. PLUS loans are loans made to parents of dependent undergraduate
students; borrowers are responsible for paying all interest on the loan.
Consolidation loans allow

borrowers to combine one or more of their U. S. education loans into one
new loan.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 03- 647 Student Loans and Foreign Schools

vulnerability with officials from Education*s Office of Federal Student
Aid (FSA) and Office of Inspector General (OIG), school administrators and
representatives of lenders and guaranty agencies that help to administer
FFELP and guarantee payment to lenders if students fail to repay loans. We
also reviewed relevant documents published by Education, such as

The Student Guide, The Student Financial Aid Handbook for Foreign Schools
2001- 2002, and FSA*s on- line training tutorial. We also reviewed the
Higher Education Act (HEA) and related Education regulations. To further
address the first objective, we reviewed GAO and OIG reports on fraud
investigations. 2 In addition, to assess selected foreign schools* ability
to manage FFELP and their roles in reducing program vulnerability, we
conducted site visits to the administrative offices of four schools,
conducted telephone interviews with the administrators of an additional
eight schools, and reviewed student files at eight schools. 3 We selected
these schools to reflect a variety of foreign schools in terms of degree
programs offered, school type (private for- profit, private nonprofit, and
public), U. S. resident student enrollment, and whether they had
electronic access to Education*s information systems. In reviewing student
files at those schools with fewer than 25 students receiving FFELP funds,
we reviewed the files of all such students to determine whether school
officials had ensured students* eligibility for loans. In reviewing
student files at those schools with more than 25 students receiving FFELP
funds, we reviewed the files for those students for whom Education
informed schools, following its initial review of eligibility for student
aid, that additional information was needed to determine that students
qualified for loans. We also obtained information from Education*s
Postsecondary Education Participants System (PEPS) to determine whether
schools were meeting the requirements for participation in FFELP. To
further address the second and third objectives, we interviewed others
involved in the FFELP process, such as school administrators and lending
and guaranty agency officials, and reviewed relevant documents provided by
those officials.

We conducted our work between July 2002 and May 2003 in accordance with
generally accepted government auditing standards.

2 See U. S. General Accounting Office, Department of Education: Guaranteed
Loan Program Vulnerabilities, GAO- 03- 268R (Washington, D. C.: Nov. 21,
2002). 3 In addition to reviewing the files at the four schools we
visited, we also reviewed the files of four additional foreign schools;
administrators mailed the relevant materials to us.

Page 3 GAO- 03- 647 Student Loans and Foreign Schools

FFELP is vulnerable to fraud, waste, and abuse with respect to loans for
U. S. residents attending foreign schools in several ways. Some school
officials are improperly determining and documenting student eligibility
for loans and are unaware of the proper procedures for doing so. Also,
because of budget constraints, Education has not conducted on- site
program reviews at a foreign school since November 2000, even though its
earlier on- site reviews of foreign schools revealed that some schools
were inappropriately approving loans. In addition, certain features of the
program increase the potential for fraud, waste, and abuse. Unlike
students attending domestic schools, U. S. residents attending foreign
schools may choose to receive loan proceeds directly from the lender
rather than through their schools and may receive one lump sum for the
entire academic year rather than multiple disbursements for each semester
or other academic year division, thereby exacerbating the U. S.
government*s exposure to potential loss due to fraud, waste, and abuse.
Further, many foreign schools do not submit to Education required audited
financial statements and program compliance audit reports, which can
provide important information that could allow Education to, among other
things, identify vulnerability to fraud, waste, and abuse and detect
actual instances of such activities. For fiscal year 2001, about 57
percent of foreign schools failed to submit audited financial statements,
while the vast majority of foreign schools failed to submit program
compliance audit reports. Finally, an investigation completed by our
Office of Special Investigations revealed vulnerability in Education*s
process for

determining the eligibility of foreign schools to participate in FFELP.
Education approved a fictitious foreign school that our undercover
investigators created* a step that allowed our investigators to obtain
approval for FFELP loans for fictitious students.

Education has taken limited steps* since the beginning of 2002 and
throughout the course of our audit work* to reduce FFELP vulnerability to
fraud, waste, and abuse but FFELP remains vulnerable. For example, in
January 2002, Education issued a reference guide for foreign schools
designed to explain their legal requirements as participants in FFELP and
conducted training sessions for foreign schools officials to supplement
the reference guide in several countries. However, interviews with
officials at foreign schools suggest that some officials remain unfamiliar
with

program procedures, such as how to properly determine and document
students* eligibility for FFELP loans. As a result, FFELP funds may be
provided to students who should not be receiving them. A number of school
officials also reported that they had not received training prior to
administering FFELP funds. Education*s on- line training tutorial for
FFELP administrators, to which Education refers foreign school officials
Results in Brief

Page 4 GAO- 03- 647 Student Loans and Foreign Schools

for training, does not include information specific to foreign schools and
even presents information that is contrary to how foreign schools are to
administer FFELP. In addition, although in December 2002 Education
requested that all foreign schools submit overdue audited financial
statements and that schools that have certified $500,000 or more in FFELP
loans submit program compliance audit reports, it has not decided on the
consequences for schools that do not comply with the request. Further, in
response to our prior investigation during which Education granted

approval to a fictitious foreign school that our undercover investigators
created, Education has retrained its staff to verify school existence with
in- country officials, required documentation of the verification, and
performed verification of the existence of all currently participating
schools. However, Education*s process does not include conducting onsite
visits to verify the existence of foreign schools nor has it reached a
final decision on how it will verify the existence of new foreign schools.
As a result, no new foreign schools have been approved for participation
in FFELP since the summer of 2002, even though applications have been
received from 19 schools.

Education could take additional action to reduce the vulnerability of
FFELP to fraud, waste, and abuse with respect to loans for U. S. residents
attending foreign schools, such as more strictly enforcing audit
requirements or providing electronic access to information systems to help
school officials more easily determine students* eligibility for FFELP
loans. However, any steps that Education takes will likely involve
tradeoffs that may affect access, accountability, and burden for various
participants in FFELP. For example, Education could aggressively enforce
foreign schools* audit reporting requirements for annual audited financial
statements and program compliance audit reports, but doing so may lead

to unintended consequences, such as foreign schools withdrawing from
FFELP, potentially limiting students* access to such institutions. Several
foreign school officials told us that the audit reporting requirements
provide a disincentive to participate in FFELP because of the
administrative and financial burdens associated with the requirements,
especially when few U. S. residents attend their schools. Changing loan
disbursement procedures may also minimize the potential for fraud, waste,

and abuse of FFELP funds, but these changes might entail some burden on
the part of schools and students. Some schools, in fact, are unaccustomed
to handling student financial aid because such systems do not exist in
their own countries for their own students. While providing foreign
schools electronic access to Education*s databases would assist foreign
school administrators in fulfilling their responsibilities, doing so may
increase information security risk. To help agencies balance how best to

Page 5 GAO- 03- 647 Student Loans and Foreign Schools

achieve important program goals while safeguarding assets from fraud,
waste, and abuse, we have issued standards for internal controls that
provide a framework for identifying areas at greatest risk. In addition,
we have issued various reports that are useful tools to assist agencies in
evaluating internal controls and addressing improper payments resulting
from fraud, waste, and abuse. Among other things, these reports highlight
the importance of conducting risk assessments* comprehensive reviews and
analyses of program operations to determine the nature and extent of
program risks* and identifying cost- effective control activities to
address identified risks.

In this report, we make recommendations to the Secretary of Education to
develop on- line training resources specifically designed for foreign
school officials and conduct a risk assessment to determine how best to
ensure program integrity while helping to provide U. S. residents with
access to foreign schools.

We provided Education with a copy of our draft report for review and
comment. In written comments on our draft report, Education agreed with
our reported findings and recommendations. Education*s written

comments appear in appendix II. Education also provided technical
clarification, which we incorporated where appropriate.

Foreign schools can offer unique educational opportunities for U. S.
residents, such as improved language proficiency and knowledge of other
cultures, and help ensure that U. S. residents have a wide range of
options in pursuing postsecondary education. The number of loans certified
for

U. S. residents attending foreign schools has risen from just under 4,600
in the 1993- 94 academic year to over 13, 000 in the 2000- 01 academic
year. Over 500 schools in 44 foreign countries are currently eligible to
participate. About 9,000 of these students attend foreign medical schools
and account for about three- quarters of the total loan volume. 4 By
country, the highest volume of FFELP loans* over $35 million* are for
students attending school in Dominica; its sole eligible institution is a
private, forprofit medical school. England, ranked fourth in loan volume,
and Canada, seventh, have the largest number of institutions eligible to
participate in the FFELP* 182 and 108, respectively. Those countries
participating in the

4 From fiscal years 1999- 2002, 51 percent of loans to students attending
foreign schools were subsidized Stafford Loans, 47 percent were
unsubsidized Stafford Loans, and less than 2 percent were PLUS loans.
Background

Page 6 GAO- 03- 647 Student Loans and Foreign Schools

FFELP and the top 10 foreign schools in loan volume for the 2000- 01
academic year are indicated in figure 1. While a few foreign schools
enroll large numbers of U. S. residents who receive FFELP funds, the
majority of foreign schools enroll only a small number. For example,
Queen*s College at the University of Oxford had just 3 students receiving
FFELP funds in 2001. For more information on the ranges for numbers of U.
S. residents receiving FFELP funds for attendance at schools in different
countries, see appendix I.

Page 7 GAO- 03- 647 Student Loans and Foreign Schools

Page 8 GAO- 03- 647 Student Loans and Foreign Schools

Figure 1: Countries with Schools Eligible to Participate in FFELP and Top
10 Foreign Schools by Loan Volume for Academic Year 2000- 01

McGill U.

Canada

U. Iberoamericana

Dominican Republic

U. Central del Este Dominican Republic

American U. of the Caribbean School of Medicine

St. Maarten

Ross U. School of Veterinary Medicine

St. Kitts

Ross U. School of Medicine

Dominica

St. George's U. School of Medicine

Grenada

U. Autonoma de Guadalajara

Mexico

Participating countries Source: GAO analysis of FSA data.

Page 9 GAO- 03- 647 Student Loans and Foreign Schools

In order to participate in FFELP, foreign schools must submit a variety of
documents, such as an application and a copy of the most recent course

Tel Aviv U. Sackler School of Medicine

Israel

U. of LondonLondon School of Economics and Political Science

England

Page 10 GAO- 03- 647 Student Loans and Foreign Schools

catalog. Once Education initially certifies the school for participation,
the school enters into a Program Participation Agreement (PPA) with
Education that requires it to comply with the laws, regulations, and
policies governing FFELP. PPAs vary, but some may be valid for up to 6
years. To maintain its ability to participate, the foreign school must
demonstrate that it is administratively capable of providing the education
promised and of properly managing the program, and that it is financially
responsible. Schools must submit program compliance audits and audited
financial statement reports to Education on an annual basis. Program
compliance audit reports are intended to demonstrate schools* ability to
administer FFELP in compliance with HEA and related Education regulations,
while audited financial statements serve as evidence of schools* financial
responsibility. Schools must submit recertification materials to Education
for continued participation in FFELP before the expiration of their
current PPA.

Education evaluates the application and accompanying documentation to
determine whether a school is eligible to participate. Education*s Foreign
Schools Team, consisting of eight staff members and one director, is

responsible for assisting and overseeing foreign schools. Some of the ways
in which the team oversees foreign schools, which are similar to the way
Education oversees domestic schools, are presented in table 1. Education
also has responsibility for maintaining information systems involved in
the

loan process, which is discussed more fully below.

Table 1: Education Oversight Components for Foreign Schools Oversight
component Purpose

Audited financial statements Provides Education with information to
evaluate a school*s financial condition.

Program compliance audit reports Provides information about schools*
compliance with HEA and related Education regulations.

On- site program reviews Assesses schools* ability to administer FFELP.
Initial certification and recertification process After Education
certifies a school as eligible to participate

in FFELP, the school and Education enter into a program participation
agreement that requires a school to adhere to all applicable laws and
program regulations.

Source: Education.

While Education and the foreign schools each have specific
responsibilities, other parties are involved in the student loan process,
including students, lenders, and guaranty agencies. Students are
responsible for filing certain loan application materials, while lenders

Page 11 GAO- 03- 647 Student Loans and Foreign Schools

make loans, and guaranty agencies repay lenders the loan funds if the
borrower defaults.

Regardless of whether a student plans to attend a foreign or domestic
school, a student applying for a FFELP loan is required to first submit a
Free Application for Federal Student Aid (FAFSA). The student must also
sign the Master Promissory Note (MPN), which outlines the students*
responsibilities for repaying the loan. The information provided by the
student on the FAFSA is checked by Education against various information
systems, including Social Security Administration databases and the
National Student Loan Database System (NSLDS), to test the accuracy of
information and to assess the student*s loan history.

The administrators of the school the student plans to attend must certify
the student*s eligibility for loans and the loan amount based on the
output from the FAFSA. 5 This output will indicate whether there are any
issues

with the student*s eligibility based on the information provided by the
student and the edit checks against the various databases. For example,
the output would indicate if the check against SSA*s databases revealed
that the social security number provided did not match the name provided
by the student, or if the check against Education*s NSLDS revealed that
the student was in default on previous loans. In addition, the output
includes the Expected Family Contribution, which is the amount the student
and his family are expected to contribute to educational expenses. The
administrators determine the student*s financial need based on this
information, the cost of attendance, and the amount of financial aid other
than FFELP funds that the student is expected to receive.

Once the school has certified the student*s eligibility and loan amount
and the student has signed the MPN, the lender can disburse the loan.
Although lenders disburse loans for students attending domestic schools to
the school, a chief difference for students attending foreign schools is
that lenders may disburse loans either directly to students or to the
foreign school the student is attending. The guaranty agency then sends to
the

student*s school a student status confirmation report (SSCR), which lists
all students for whom loans were guaranteed for attendance at the school.

5 Alternatively, according to Education, it allows guaranty agencies to
perform this function on behalf of foreign school administrators;
Education notes that, in particular, the guaranty agencies for
Massachusetts and Nebraska engage in this practice.

Page 12 GAO- 03- 647 Student Loans and Foreign Schools

School officials must indicate the enrollment status of these students and
return the form to the guaranty agency.

FFELP is vulnerable to fraud, waste, and abuse in several ways. Some
school officials who do not have electronic access to Education*s
information systems are improperly documenting and determining student
eligibility for loans and are unaware of the proper procedures to do so,
which could result in ineligible students receiving federal funds. In
addition, Education has not conducted any on- site reviews to assess
schools* ability to administer FFELP since November 2000. Moreover,
exposure to fraud, waste, and abuse is increased because students
attending foreign schools, unlike students attending domestic schools, can
choose to receive loans directly and in one lump sum for the entire
academic year. Further, foreign schools do not submit required audited
financial statements and program compliance audit reports, which

compromises Education*s ability to monitor for and detect significant
fraud or other illegal acts. Also, an investigation by our Office of
Special Investigations revealed vulnerability in Education*s process for
determining the eligibility of foreign schools to participate in FFELP.

Interviews with foreign school officials and our review of school files
revealed that some officials are not properly determining and documenting
students* eligibility for FFELP loans. As a result, FFELP funds may be
provided to students who should not be receiving them. In particular, we
found that several schools were using incorrect versions of documents
Education generated to alert school officials to information that might
indicate a student is ineligible for FFELP loans. We identified this
problem among those schools that did not have electronic access to
Education*s information systems that contain data needed to determine
students* eligibility for loans. Of the over 500 foreign schools
participating in FFELP, only 32 can electronically access these
information systems. However, these 32 schools certified about 70 percent
of the total foreign school FFELP loan volume for fiscal year 2001.

Electronic access to Education*s information systems can help ensure that
schools use the correct information to determine whether students should
be receiving FFELP loans. In accessing Education*s information systems,
schools can obtain Institutional Student Information Reports (ISIR), which
Education generates to help schools determine whether students are
eligible for loans. ISIRs contain summary information provided on
students* FAFSAs as well as the results of various computer matches that
FFELP is Vulnerable

to Fraud, Waste, and Abuse in Several Ways with Respect to U. S. Residents
Attending Foreign Schools

Some Foreign School Officials Are Not Properly Determining and Documenting
Student Eligibility for Loans

Page 13 GAO- 03- 647 Student Loans and Foreign Schools

Education conducts. ISIRs indicate, among other things, whether an
applicant*s social security number reported on the FAFSA is valid, whether
a loan applicant has ever defaulted on a student loan, and how much an
applicant has previously borrowed. Electronic access to Education*s
information systems under its existing procedures will not be granted
unless a foreign school has among its staff a person who possesses a U. S.
social security number. Few foreign schools meet this requirement. In the
absence of obtaining ISIRs, foreign school officials must rely on and
obtain from students a special eight- page version of the Student Aid
Report (SAR), which is also generated by Education and contains
information similar to that found in the ISIR. Education typically
provides students with only an abbreviated two- page SAR, which

summarizes information students submit on the FAFSA, but does not contain
all of the information foreign school officials need to determine whether
a student is eligible for a loan. Students must specifically request the
special eight- page version from Education. Rather than documenting

and determining student eligibility based on the eight- page SAR, we found
that certain foreign school officials were improperly basing their student
eligibility determinations on the two- page SAR.

In reviewing files to determine if schools were properly determining and
documenting students* eligibility for FFELP loans, we found that the 2
schools with electronic access to Education*s information systems had
copies of ISIRs for every student file we reviewed. Each of these schools

had certified in excess of $30 million in FFELP loans and together
certified about 30 percent of the total FFELP loan volume for fiscal year
2001. However, 5 of the 6 schools without access to Education*s
information systems, which collectively certified over $3 million in FFELP
loans for fiscal year 2001, did not have copies of ISIRs or eight- page
SARs on file indicating that schools may have approved loans without
obtaining the information necessary for determining student eligibility.
Some school officials, in fact, told us that they verified students*
eligibility for loans based of the two- page SAR and were unaware that
without the eight- page SAR or ISIR, students* eligibility for loans could
not be properly verified and documented.

The inability of foreign school officials to electronically access
Education*s information systems also creates the potential for delays in
schools confirming and reporting student enrollment. Schools must confirm
the enrollment of students who have borrowed FFELP funds through the use
of a SSCR. Without timely and accurate reporting of student enrollment,
detecting an individual who receives an FFELP loan but never enrolls in a
foreign school is made more difficult. Schools that

Page 14 GAO- 03- 647 Student Loans and Foreign Schools

have electronic access to Education*s information systems can enter these
data directly into Education*s information systems. Guaranty agencies can
then retrieve data through these information systems and monitor whether
students whose loans the agency has guaranteed are in fact enrolled in the
foreign school. Schools that do not have electronic access to Education*s
information systems, however, rely on guaranty agencies to send them
SSCRs, which they then must return to guaranty agencies via postal mail.

Several school officials told us that the inefficiency and lack of
dependability of postal mail interfered with their timely submission of
SSCRs.

Education has not conducted an on- site program review* which is intended
to assess, promote, and improve schools* compliance with laws and
regulations and help ensure program integrity* at a foreign school since
November 2000. Program reviews can supplement the information provided to
Education through the required annual audit reports and also help
Education to monitor for fraud. Between March 1999 and November 2000,
Education conducted six such program reviews at foreign schools (or the U.
S. administrative office of the foreign school). As a result of these
reviews, Education identified problems with how schools were administering
FFELP. For example, the reviews revealed that some foreign school
administrators had certified FFELP loans for students in

excess of allowable loan limits and certified loans without verifying
students* eligibility for FFELP loans. However, a senior FSA official
stated that because of budget constraints, on- site visits at foreign
schools may not be a feasible use of Education*s funds at this time.

Exposure to potential loss through instances of fraud, waste, and abuse is
exacerbated by the fact that students attending foreign schools, unlike
those attending domestic schools, may choose to receive loans directly
from the lender rather than through their schools and may receive all loan
proceeds in one lump sum for the entire academic year rather than receive
the proceeds in multiple disbursements during the academic year. For
example, Education*s OIG investigated a case in which a single individual
submitted about 50 fraudulent loan applications for over $900,000 by

falsely claiming enrollment at foreign medical schools. About 26 of the
loans, totaling about $400,000 in FFELP funds, were disbursed to the
individual before the fraud was detected. Such cases of fraud underscore
the importance of foreign schools confirming and reporting student
enrollment information to guaranty agencies. Over the past decade,
Education*s OIG has investigated 90 cases of suspected FFELP fraud, many
of which involved individuals requesting to receive loan proceeds directly
and posing as foreign school students. During this same time Education Has
Not

Recently Conducted OnSite Program Reviews, Which Could Help Ensure Program
Integrity

Loan Disbursement Processes for Foreign Schools May Exacerbate Potential
Loss of FFELP Funds

Page 15 GAO- 03- 647 Student Loans and Foreign Schools

period, according to an Inspector General official, the OIG recouped about
$2.75 million in restitution from the successful prosecution of cases and
prevented an additional $1.2 million from being disbursed. Many foreign
schools have not submitted required annual audited financial statement and
program compliance audit reports, which enable Education to monitor
whether schools are using correct procedures to award, disburse, and
account for the use of federal funds as well as help Education monitor for
and detect significant fraud or other illegal acts. According to
Education*s OIG Foreign School Audit Guide, the annual audit reports are
the primary tools used by Education program managers

to meet their stewardship responsibilities in overseeing FFELP. For fiscal
year 2001, about 57 percent of foreign schools failed to submit audited
financial statements. 6 Collectively, these schools certified about $38
million in FFELP loans, about 17 percent of the total foreign school loan
volume during the period. Further, Education regulations require foreign
schools that certify $500,000 or more in FFELP loans during a fiscal year
to have audited financial statements presented in U. S. Generally Accepted
Accounting Principles (GAAP). For fiscal year 2001, nearly onethird of the
foreign schools that certified $500,000 or more in FFELP loans failed to
submit audited financial statements. Moreover, of those schools that
certified $500,000 or more in FFELP loans and submitted audited financial
statements for the period, over half did not submit statements presented
into U. S. GAAP as required. (See table 2.)

6 While we verified submission of audited financial statements for schools
receiving over $500,000 in FFELP funds, we relied on spreadsheets
summarizing data from PEPS regarding the submission of audited financial
statements from schools receiving less than $500,000. Many Foreign Schools
Fail

to Submit Required Annual Audit Reports That Could Help Education Monitor
for and Detect Fraud, Waste, and Abuse

Page 16 GAO- 03- 647 Student Loans and Foreign Schools

Table 2: Status of Foreign Schools* Submission of Audited Financial
Statements for Fiscal Year 2001

FFELP loan volume

Number of schools

Number of schools that did not submit audited

financial statements

Volume of FFELP loans certified by

schools not submitting audited financial statements

Number of schools submitting audited

financial statements in

U. S. GAAP

$0- 249,999 419 257 $11.9 million Not applicable $250,000- 499,999 39 19
6.2 million Not applicable $500,000 + 52 16 20.1 million 16

Total 510 292 $38.2 million

Source: GAO analysis of FSA data.

In addition to submitting audited financial statements, all foreign
schools are required to submit program compliance audit reports on an
annual basis. These reports address schools* compliance with the laws and
regulations that are applicable to FFELP. In fiscal year 2001, however,
only 7 percent of all foreign schools submitted such reports. Of schools
that certified $500,000 or more in FFELP loans, over 40 percent failed to
submit program compliance audit reports. The vast majority of those
schools that certified less than $500,000 in FFELP loans also failed to
submit such reports. While those schools that submitted program compliance
audit reports collectively certified about 75 percent of the total FFELP
loan volume for fiscal year 2001, the remaining schools certified about
$59 million in FFELP loans. (See table 3.)

Page 17 GAO- 03- 647 Student Loans and Foreign Schools

Table 3: Status of Foreign Schools* Submission of Program Compliance Audit
Reports for Fiscal Year 2001 Dollars in millions FFELP loan

volume Number of schools

Number of schools that did not submit

program compliance audit

reports Volume of FFELP loans

certified by schools not submitting program compliance audit reports

$0- 249,999 419 419 $21.6 $250,000- 499,999 39 34 11.8 $500,000 + 52 23
25.9

Total 510 476 $59.3

Source: GAO analysis of FSA data.

Interviews with foreign school officials and our review of school files
revealed that some foreign schools do not provide loan counseling. Despite
that default rates for foreign schools as a whole are relatively low, loan
counseling is important because new students often have little or no
experience with repaying and managing debt. Such counseling can help
borrowers avoid defaulting on their loans, which can, in turn, help
prevent waste from occurring in FFELP. Two of the schools we visited,
which are also the schools with electronic access to Education*s
information systems, had staff available to provide loan counseling and
school officials reported doing so both prior to students* arrival on
campus and after students* registration on campus. Other school officials,
who had certified loan volumes ranging from $100,000 to about $1 million,
stated that loan

counseling was not provided as required by regulations. Education*s
current eligibility certification process does not include conducting on-
site visits to verify the existence of foreign schools. As we reported in
November 2002, due in part to this weakness, Education granted approval to
a fictitious foreign school that our undercover investigators created and
which enabled our investigators to obtain approval for FFELP loans for
fictitious students. To obtain approval to participate in FFELP, our
investigators created various false documents required to be submitted
with its PPA, including a course catalog, audited financial statements,
and a letter purporting to be from United Kingdom government authorities
acknowledging the school as a nonprofit, degreegranting institution.
Education did not verify the existence of the school with foreign
government officials or other parties or sources before certifying the
school as eligible to participate in FFELP. After receiving Some Foreign
Schools Do

Not Provide Loan Counseling for Student Borrowers

No On- Site Visits Conducted to Verify Existence of Foreign Schools

Page 18 GAO- 03- 647 Student Loans and Foreign Schools

approval of their fictitious school, our investigators also requested and
obtained information necessary for the school to certify student
eligibility for loans. Our investigators then sought FFELP loans by filing
FAFSAs using three different fictitious student identities and applying
for loans from three different lenders. Our investigators created false
school certifications of these students* eligibility for loans and also
created false student enrollment reports. Two of the three lenders to whom
our investigators submitted applications approved loans totaling, in the
aggregate, $55,000, at which point we completed the investigation. Based
on the results of our investigation, we recommended that Education

implement a process, including conducting on- site visits, to ensure that
a foreign school applying to participate in FFELP actually exists.

Education has taken limited steps* since the beginning of 2002 and
throughout the course of our audit work* to reduce the vulnerability of
FFELP to fraud, waste, and abuse; however, its actions in some cases have
been limited or have achieved limited results. In an effort to share more
information with foreign school officials to help them comply with HEA and
Education requirements, Education has increased the technical assistance
it provides to foreign schools by publishing a reference guide and holding
a series of training sessions. In addition, to assist foreign schools in
complying with audit requirements, Education*s OIG issued a Foreign School
Audit Guide in September 2002. However, interviews with foreign school
officials and review of school files revealed that these efforts may not
be sufficient to ensure that FFELP is being properly administered by the
schools. Our review also found that the on- line training tutorial made
available to foreign school officials on Education*s Web site does not
contain information specific to foreign schools and even has information
contrary to how foreign schools are to administer FFELP. Moreover, while
Education requested that all foreign schools with overdue audited
financial statements and certain schools with overdue program compliance
audit reports submit them, it has not decided on the consequences for
schools that do not comply with the request. Finally, in response to our
fraud investigation, Education established new

procedures for staff to use in certifying schools* eligibility to
participate in FFELP and provided its staff training on the new procedures
yet no new foreign schools have been approved for participation in FFELP
since the summer of 2002. Education Has Taken

Limited Steps to Reduce the Vulnerability of FFELP to Fraud, Waste, and
Abuse but FFELP Remains Vulnerable

Page 19 GAO- 03- 647 Student Loans and Foreign Schools

Education has provided a reference handbook and training to foreign school
officials; however, our interviews with several school officials and our
review of schools* files revealed that they remain unaware of how to

properly administer FFELP, which may increase the risk of fraud, waste,
and abuse occurring. In January 2002, Education issued the Student
Financial Aid Handbook for Foreign Schools: 2001- 2002. The Handbook was
designed to help participating foreign schools achieve manageable,
student- friendly administration of FFELP and to ensure that schools are

aware of the legal requirements of participating in FFELP. According to
FSA, the Handbook was mailed to all foreign schools participating in FFELP
and it is currently posted to Education*s Web site. Education also held a
series of training sessions for foreign school officials during 2002 in
several locations, including Canada, Australia, England, Scotland, and
Puerto Rico. Also, in September 2002, Education*s OIG issued a Foreign

School Audit Guide, which assists foreign school officials in complying
with the audited financial statement and program compliance audit
requirements. To supplement this information, Education offers an on- line
training tutorial, FSA COACH, 7 for school officials* use, although it was
not specifically designed for foreign school officials.

However, Education*s efforts to improve FFELP administration through
training may have fallen short because knowledge of the training materials
available was not widespread among the school officials we spoke to during
our review. For instance, two foreign school administrators indicated that
they had not received the Handbook from Education. In addition, as
previously discussed, some foreign school officials were unaware of how to
properly document and determine student eligibility for FFELP loans.
Furthermore, although HEA regulations require training for officials at
schools newly certified to participate in FFELP, Education officials did
not provide information about training requirements or opportunities to
our undercover investigators when we created the fictitious foreign
school. An FSA official said that Education does not require foreign
school officials to travel to the United States to attend available
training before certifying a schools* eligibility to participate in FFELP
because of concerns about the financial burden on foreign schools.
Instead, FSA provides training materials, along with information about

how to use FSA COACH, to school officials. However, some administrators
remain unaware of any on- line information, and when we interviewed
foreign school officials at schools that have been participating

7 Computer- Based Orientation to Aid Concepts and How- tos. Reference
Handbook and Training Provided to

Foreign School Officials, Yet Some Officials Remain Unaware of How to
Properly Administer FFELP

Page 20 GAO- 03- 647 Student Loans and Foreign Schools

in FFELP for a number of years, several indicated that they had not
received training prior to administering FFELP.

Even when training materials did reach FFELP administrators, these
materials may have been insufficient to assist school officials. While
some officials told us that they found the information and training
useful, other officials told us that they did not. For example, several
foreign school officials we spoke with indicated that the training
sessions were very useful and indicated that holding such trainings more
frequently would be valuable. One school official, however, commented that
his peers found the regulatory and legislative information contained in
the Handbook beyond their grasp, and that some of the information was
confusing,

especially for those school officials in countries where student financial
aid is administered in an entirely different fashion than in the United
States. Many other school officials commented on the need for better
online information. Some found Education*s Web page difficult to navigate
and some reported being unable to find needed information. Finally, while
reviewing COACH, we found that much of the information contained within it
was not applicable to foreign schools and, in some instances, it presents
information that is contrary to how foreign schools operate. (See table
4.)

Page 21 GAO- 03- 647 Student Loans and Foreign Schools

Table 4: Information in COACH Not Applicable to Foreign Schools Type of
information COACH statement Reason not applicable to foreign schools FAFSA
verification process A major financial aid office responsibility

is the verification of application data for students whose applications
have been selected by Education*s Central Processing System (CPS).

Education regulations exempt foreign schools from verifying information
that students report on the FAFSA.

Electronic systems Schools must enroll in the Student Aid Internet Gateway
(SAIG), which is Education*s electronic vehicle for transmitting
application data to and from schools. Schools must receive ISIRs through
SAIG for every student to whom they award Title IV funds.

The CPS transmits ISIRs to schools electronically. ISIRs are designed to
provide all the data that a school needs to determine a student*s
eligibility for federal student aid. Corrections to ISIR information can
be made by schools electronically.

All schools are required to have on- line access to the NSLDS Internet Web
site for financial aid professionals. To enroll in SAIG the school must
have at least one

staff member with a U. S. social security number, which most foreign
schools do not have. Therefore, most foreign schools are not enrolled in
SAIG, and they do not receive the ISIRs.

NSLDS is accessed through SAIG. Loan disbursement procedures The school is
also responsible for

receiving FFELP funds disbursed by the lender (or the guaranty agency on
the lender*s behalf) and delivering these funds to the student.

Students attending foreign schools may opt to receive loan disbursements
directly from lenders. In addition, single rather than multiple
disbursements are allowed for students attending foreign schools. These
alternatives are not explained in Coach.

SSCR information received online Schools must complete and return SSCRs to
Education*s NSLDS. Most foreign schools do not have access to NSLDS

(to obtain access they must be enrolled in SAIG). Guaranty agencies are
responsible for sending such schools a paper copy of the SSCR. Schools
indicate enrollment information on the SSCR and return it to

the guaranty agency, which then uses the information to update NSLDS.

Source: FSA University Web site; COACH tutorial.

While COACH was not designed specifically for foreign schools, Education
directs foreign school officials to COACH for training materials upon
certification, and the COACH tutorial states that it is a comprehensive
introductory course on school requirements for administering FFELP and
other student financial aid programs.

Page 22 GAO- 03- 647 Student Loans and Foreign Schools

In December 2002, during the course of our review, Education sent letters
to all foreign schools requesting that they submit overdue audited
financial statement reports. They also requested schools that certify
$500,000 or more in FFELP loans to submit program compliance audit reports
for the 4 most recent fiscal years. Education told the schools that
failure to submit the requested documents within 45 days would result in
consequences. Education is now considering revoking or denying schools*
certification to participate in FFELP if it did not receive overdue
audited financial statement and program compliance audit reports.

According to Education officials, FSA revised internal procedures for
verifying schools* legitimacy, and its foreign schools* team was
retrained. The retraining covered school eligibility requirements with an
emphasis on

the importance of validating with the appropriate foreign education office
that a school is legitimate. To help staff verify that a school is
legitimate, Education modified an internal checklist to include space for
documenting the source and date of validation in the school*s file. Since
learning of our investigation, Education verified the existence of all
schools that are participating in FFELP, by either checking that the
school is approved on an official Web site, or by corresponding or
speaking with country education offices and ministries. Additionally, with
respect to new applications from schools that have not previously
participated in FFELP, Education no longer accepts a post office box
address as the official location of a school or a third party servicer
that administers FFELP for the school.

Education has not yet implemented some planned changes in its procedures
for determining FFELP eligibility of new foreign school applicants.
Consequently, no new foreign schools have been certified to participate in
FFELP since Education became aware of the school we created in May 2002,
even though applications have been received from 19 schools. Education is
currently considering implementing a process similar to that used when a
domestic school applies for participation. This process would entail
circulating the name of the school and its owners among a number of
officials in FSA and other Education offices to determine whether staff
have any information or knowledge that would affect a decision to certify
the school*s eligibility to participate in FFELP. Education*s
International Affairs staff, who coordinate the agency*s various
international programs, would be among those to whom such information
would circulate. If any staff were to raise concerns about the Education
Has Requested

Foreign Schools to Submit Overdue Audited Financial Statement and Program
Compliance Audit Reports but Has Not Decided on Consequences for Schools
That Fail to Do So

In Response to Our Investigation, Education Has Taken Steps to Address
Deficiencies Identified in Creating a Fictitious Foreign School, but Some
Changes Have Not Yet Been Implemented

Page 23 GAO- 03- 647 Student Loans and Foreign Schools

school or its owners, Education would consider conducting an on- site
program review.

Education could take additional action to address the goal of reducing the
vulnerability of FFELP to fraud, waste, and abuse, such as more strictly
enforcing school audit requirements or providing electronic access to
information systems to help school officials more easily determine
students* eligibility for FFELP loans. However, any steps that Education
takes will likely involve trade- offs that may affect access,
accountability, and burden for various participants in FFELP. For example,
Education could aggressively enforce foreign schools* audit reporting
requirements, but this may lead to unintended consequences, including
limiting students* access to such institutions if foreign schools withdraw
from FFELP as a result. Other potential steps include changing
disbursement procedures to help limit the federal government*s exposure to
loss, but doing so may increase burdens for schools and students. In
addition, providing foreign school officials with electronic access to
information may help them properly determine student eligibility for FFELP
loans, but may increase security risks. Additionally, we have developed
tools that could help Education determine how to balance the objectives of
providing U. S. residents with access to foreign schools while protecting
the taxpayers* investment that is intended to help provide that access.

Education could more strictly enforce school audit report requirements,
but doing so may limit U. S. residents* access to foreign schools. FSA
officials have stated that while Education is committed to maintaining the
integrity of the FFELP program, it is also committed to providing access
to

international education opportunities for U. S. resident students and does
not want to create barriers to those opportunities. As previously
discussed, a large number of foreign schools have failed to submit
required audited financial statement and compliance audit reports to
Education in a timely manner. FSA officials told us that balancing
enforcement of these statutory and regulatory provisions with providing
students access to foreign schools is challenging. In their opinion, the
current compliance audit requirements may place an undue burden and result
in excessive costs for foreign schools that enroll few U. S. residents.
Several foreign school officials we spoke to also told us that they found
such audits to be costly, considering that students receiving FFELP loans
constituted very small proportions of their student bodies. According to
these officials, these audit requirements provide a disincentive to
participate in FFELP in order to avoid what they perceive as an
administrative and financial burden. Education officials are now
Additional Actions to

Reduce Program Vulnerability Will Require Balancing Competing Goals
Stricter Enforcement of

School Audit Requirements Would Provide Education More Data to Assess
Vulnerability, but May Reduce Student Access

Page 24 GAO- 03- 647 Student Loans and Foreign Schools

considering whether to issue letters to foreign schools that certify less
than $500,000 annually in FFELP loans requesting program compliance audit
reports and whether an alternative approach to overseeing these schools
should be taken. In addition to requiring foreign schools to submit
audited financial

statements and compliance reports, another potential step Education is
considering relates to the requirement that certain schools submit audited
financial statements under U. S. GAAP. Several school administrators and
government officials in the United Kingdom told us that they found the
requirement for schools to submit audited financial statements presented
in U. S. GAAP to be burdensome, in light of the audit requirements of
their home country. They stated that they believed that the United
Kingdom*s accounting standards are sufficiently comparable to U. S. GAAP
that Education should accept their statements for purposes of meeting
FFELP statutory and regulatory requirements. Doing so, according to these

officials, would reduce the administrative and financial burden associated
with the requirement. Further, because Education*s regulation requiring
that audited financial statements be presented under U. S. GAAP applies
only to foreign schools that certify $500,000 or more in FFELP loans,
these officials told us that foreign schools have an incentive to limit
enrollment of students receiving FFELP loans so that they do not exceed
this threshold.

Education is currently considering whether to allow exemptions for foreign
schools located in Canada and the United Kingdom* which collectively
accounted for 314, or about 62 percent of the total foreign schools
participating in the FFELP during academic year 2000- 01* to its
regulations requiring audited financial statements be presented into U. S.
GAAP. According to an FSA official, the justification for such an
exemption is based on the results of a comparison of several foreign
countries* auditing standards contained in Education*s policies and
procedures manual, developed in consultation with a private accounting
firm. While the purpose of the manual is to provide a methodology for FSA
staff to use in assessing the financial health of foreign schools
certifying less than $500,000 in FFELP loans, the manual does contain a
limited analysis comparing the selected foreign countries* accounting
standards with U. S. GAAP and the potential effects of Education relying
on foreign standards on the results of its analyses.

Page 25 GAO- 03- 647 Student Loans and Foreign Schools

Education could seek statutory, and consider regulatory, changes to loan
disbursement procedures to address the potential for fraud, waste, and
abuse; however, such changes could have a significant impact on schools
and students. In our discussions with FFELP lenders and school officials,
we found that disbursement methods and preferences vary among both

lenders and schools. For example, representatives of one large FFELP
lender told us that it is their standard operating procedure to disburse
student loan proceeds directly to student borrowers by sending them
checks. In contrast, a representative of another large FFELP lender, which

specializes in making FFELP loans to students attending foreign medical
schools, told us that it only (1) issues checks that are payable to both
the student borrower and the foreign school and (2) sends these checks, or
electronically transfers loan proceeds, to foreign schools, requiring
student borrowers to obtain their funds through the schools. Some foreign
school officials encourage students to receive their loan proceeds in this
manner, as it helps the school maintain control of the funds. According to
a guaranty agency official, a school official, and an FSA official some

schools do not have financial aid offices or routinely carry out such
functions at their institutions and therefore do not have the resources to
be an intermediary between lenders and students. Other school officials
told us that they are prohibited by local regulations from taking out
student fees from loan checks and remitting the difference to students.

In addition to receiving loan proceeds directly from lenders, students
attending foreign schools may also receive loan proceeds in one lump sum
rather than in multiple disbursements. According to many of the lenders
and foreign school officials we spoke to, students frequently elect to
receive their loan proceeds in this way, particularly students who are
enrolled in 1- year graduate programs. Yet, several school officials told
us that they prefer multiple disbursements for their students as the
school is on a semester or trimester calendar and multiple disbursements
provide them more assurance that expenses will be paid. One lending
official, however, told us of an instance in which a student had trouble
entering a country because she did not have sufficient proof that she had
enough funds for the academic year. Thus, allowing students to receive
loan proceeds in one lump sum might help students in such situations.

Education is considering taking additional steps with respect to current
disbursement procedures. As previously discussed and as documented by
prior OIG investigations, the disbursement procedures used to provide loan
proceeds to U. S. residents attending foreign schools exposes the federal
government to increased risk for potential losses. Education is
considering encouraging or requiring lenders to take steps prior to
Changing Loan

Disbursement Procedures Would Reduce Exposure to Fraud, Waste, and Abuse,
but Decrease Lender, School, and Student Flexibility

Page 26 GAO- 03- 647 Student Loans and Foreign Schools

disbursing loan funds to students attending foreign schools. These steps
could include (1) confirming that schools are eligible to participate in
FFELP, (2) verifying that students are accepted for enrollment at foreign
schools prior to disbursing funds, and (3) continuing to notify foreign

schools when loan disbursements are made to student borrowers. Providing
electronic access to Education*s information systems needed to determine
student eligibility may help improve schools* administrative capacity but
may also increase information security risk. The lack of electronic access
decreases schools* administrative capacity, as foreign school officials
have difficulty obtaining the documentation necessary to determine student
eligibility and impedes the exchange of SSCRs with guaranty agencies.
Education is currently working to address these issues and is considering
providing foreign school officials with an alternative to requiring that
someone on their staff possess a U. S. social security number to access
its information systems. However, poor information security is a high-
risk area across the federal government with potentially devastating
consequences. 8 Threats to the security of any data system may include
attempts to access private information by unauthorized users, user error,

as well as pranks and malicious acts. Potential damage arising from such
threats could include, among other things, the disclosure of sensitive
information, disruption of critical services, the interruption of services
and benefits, and the corruption of federal data and reports. Therefore,

Education needs to carefully weigh the benefits and risks of providing
such access to foreign school administrators.

We have found that conducting a risk assessment is one of several critical
steps that agencies need to undertake to identify and address major
performance challenges and areas that are at risk for fraud, waste, and
abuse. We have also developed tools to assist agencies in undertaking such
assessments. These tools provide a framework for identifying areas at
greatest risk as well as various reports which can assist agencies in
evaluating internal controls and addressing improper payments resulting

8 U. S. General Accounting Office, Major Management Challenges and Program
Risks: A Governmentwide Perspective, GAO- 03- 95 (Washington, D. C.: Jan.
2003). Providing Schools

Electronic Access to Education Data Could Improve Eligibility
Determinations but Increases Information Security Risks

Risk Assessments Can Help Agencies Balance Competing Goals Inherent in
Addressing Program Vulnerability

Page 27 GAO- 03- 647 Student Loans and Foreign Schools

from fraud, waste, and abuse. 9 These tools could be useful to Education
in weighing the advantages and disadvantages of various ways of overseeing
and assisting foreign schools. Among other things, these tools highlight
the importance of conducting risk assessments* comprehensive reviews and
analyses of program operations to determine the nature and extent of
program risks* and identifying cost- effective control activities to
address identified risks.

Foreign schools* ability to participate in FFELP supports wide- ranging
educational opportunities for U. S. residents and ensures that these
students have a variety of options in pursuing postsecondary education. In
light of recent events highlighting the vulnerability of FFELP with
respect

to U. S. residents attending foreign schools, Education has taken some
important steps, and could take additional steps, both immediate and
longer term, to decrease the vulnerability of the program. Ensuring that
foreign school officials know how to properly administer the program,
especially what steps they need to take to ensure that students are
eligible to receive federal funds, is critical to reducing the program*s
vulnerability

to fraud, waste, and abuse. Education has taken steps to provide school
officials with additional information concerning their responsibilities
yet as we have shown, foreign school officials may need more information.
Training that is convenient and specifically designed for foreign school
officials could help bridge this information gap. Education is also
considering what regulatory flexibilities it might extend to some foreign
schools while also considering stricter enforcement of current statutory
and regulatory provisions. The use of a risk assessment could help ensure
that Education appropriately identifies the risks involved in the program
and how best to balance the objectives of providing U. S. residents with
access to foreign schools while protecting the taxpayers* investment
intended to help provide that access. In taking such actions, Education
might identify alternative regulatory and oversight methods that would
strike such a balance.

9 U. S. General Accounting Office, Standards for Internal Control in the
Federal Government, GAO/ AIMD- 00- 21. 3.1 (Washington, D. C.: Nov. 1999),
Strategies to Manage Improper Payments: Learning from Public and Private
Sector Organizations,

GAO- 02- 69G (Washington, D. C.: Oct. 2001); and Internal Control
Management and Evaluation Tool, GAO- 01- 1008G (Washington, D. C.: Aug.
2001). Conclusions

Page 28 GAO- 03- 647 Student Loans and Foreign Schools

To help ensure that foreign school officials have the knowledge necessary
to properly administer FFELP, we recommend that the Secretary of Education
develop on- line training resources specifically designed for foreign
school officials.

To better ensure that Education is adequately overseeing foreign schools
participating in FFELP, we recommend that the Secretary of Education
undertake a risk assessment to determine how best to ensure accountability
while considering costs, burden to schools and students, and the desire to
maintain student access to a variety of postsecondary educational
opportunities. Further, after completing the risk assessment, if Education
determines that legislative and/ or regulatory changes are justified, we
recommend that the Secretary seek any necessary legislative authority and/
or implement any necessary regulatory changes. In written comments on our
draft report, Education agreed with our

reported findings and recommendations and, among other things, said that
it has begun to reengineer its process for determining the eligibility of
foreign schools to participate in FFELP. Education also provided technical
clarification, which we incorporated where appropriate. Education*s
written comments appear in appendix II.

We are sending copies of this report to the Secretary of Education,
appropriate congressional committees, and other interested parties. In
addition, the report will also be available at no charge on GAO*s Web site
at http:// www. gao. gov.

If you or your staffs have any questions about his report, please contact
me on (202) 512- 8403 or Jeff Appel on (202) 512- 9915. Gillian Martin and
Cara Jackson made significant contributions to this report.

Cornelia M. Ashby Director, Education, Workforce

and Income Security Issues Recommendations for

Executive Action Agency Comments

Page 29 GAO- 03- 647 Student Loans and Foreign Schools List of
Congressional Addressees The Honorable Judd Gregg, Chairman

The Honorable Edward M. Kennedy, Ranking Minority Member Committee on
Health, Education, Labor and Pensions United States Senate

The Honorable Arlen Specter, Chairman The Honorable Tom Harkin, Ranking
Minority Member Subcommittee on Labor, Health and Human Services,

and Education Committee on Appropriations United States Senate

The Honorable Ralph Regula, Chairman The Honorable David Obey, Ranking
Minority Member Subcommittee on Labor, Health and Human Services,

and Education, and Related Agencies Committee on Appropriations House of
Representatives

The Honorable John Boehner, Chairman The Honorable George Miller, Ranking
Minority Member Committee on Education and the Workforce House of
Representatives

The Honorable Jeff Sessions United States Senate

Appendix I: Characteristics of Foreign Schools Participating in FFELP, by
Country Page 30 GAO- 03- 647 Student Loans and Foreign Schools

Country Number of schools FFELP loan volume academic year 2000- 01 Number
of students participating in FFELP across schools a

Australia 35 $5,021,718 0 to 49 Austria 2 $122,872 0 to 12 Belgium 3
$243,650 0 to 18 Bulgaria 1 $0 0 Canada 108 $15,825,894 0 to 356 Chile 1
$0 0 China 1 $0 0 Colombia 1 $0 0 Costa Rica 3 $541,437 0 to 34 Czech
Republic 6 $424,969 0 to 12 Denmark 4 $65,000 0 to 6 Dom. Republic 6
$20,653,159 1 to 469 Dominica 1 $35,235,509 1776 Egypt 1 $450,133 33
England 182 $25,405,722 0 to 191 Finland 3 $110,000 0 to 5 France 13
$1,234,416 0 to 82 Grenada 1 $30,666,842 1528 Hungary 5 $3,035,655 3 to 92
India 2 $354,125 1 to 21 Ireland 9 $5,868,032 0 to 105 Israel 12
$7,176,498 0 to 214 Italy 5 $820,092 1 to 23 Japan 3 $67,598 0 to 3 Korea
1 $29,000 1 Lebanon 1 $37,000 2 Liechtenstein 1 $16,500 2 Mexico 11
$27,003,357 0 to 1214 Netherlands 12 $1,249,679 0 to 46 N. Zealand 6
$279,130 0 to 8 Nicaragua 1 $0 0 N. Ireland 2 $222,165 7 to 10 Norway 5
$56,125 0 to 2 Philippines 4 $311,666 0 to 13 Poland 8 $5,429,140 0 to 106
Scotland 14 $4,183,953 0 to 90

Appendix I: Characteristics of Foreign Schools Participating in FFELP, by
Country

Appendix I: Characteristics of Foreign Schools Participating in FFELP, by
Country Page 31 GAO- 03- 647 Student Loans and Foreign Schools

Country Number of schools FFELP loan volume academic year 2000- 01 Number
of students participating in FFELP across schools a

S. Africa 2 $76,000 0 to 5 Spain 6 $483,308 0 to 17 St. Kitts 2
$14,086,736 91 to 609 St. Maarten 1 $16,500,071 774 Sweden 5 $152,800 0 to
7 Switzerland 6 $701,103 1 to 39 Vatican 3 $202,646 3 to 10 Wales 8
$654,187 0 to 18 Source: GAO analysis of FSA data.

a Foreign schools may be eligible to participate in FFELP but not enroll
U. S. residents in a given year and thus report zero enrollments.

Appendix II: Comments from the Department of Education

Page 32 GAO- 03- 647 Student Loans and Foreign Schools

Appendix II: Comments from the Department of Education

Appendix II: Comments from the Department of Education

Page 33 GAO- 03- 647 Student Loans and Foreign Schools (130149)

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