High-Risk Series: Student Financial Aid (Letter Report, 02/01/97,
GAO/HR-97-11).

GAO reviewed the Department of Education's management and oversight of
postsecondary student financial aid programs, focusing on the: (1)
Federal Family Education Loan (FFELP) Program; (2) Ford Direct Loan
Program (FDLP); and (3) Federal Pell Grant Program.

GAO found that: (1) in fiscal year 1995, the federal government paid
over $2.5 billion to make good its guarantee on defaulted student loans;
(2) in addition, inadequate Department oversight has contributed to
abuses on the part of some schools participating in federal student aid
programs; (3) Congress addressed many of these problems through
amendments in 1992 and 1993 to title IV of the Higher Education Act of
1965; (4) the Department has acted to address these problems and their
causes; however, these actions have not completely resolved the
underlying problems; (5) partly to help strengthen the Department's
internal controls, the 1992 and 1993 amendments: (a) required that
financial and compliance audits of guaranty agencies be conducted
annually rather than every 2 years; and (b) required that lenders and
guaranty agencies share more of the risk of defaults in FFELP by
reducing the maximum insurance and reimbursement rates on a defaulted
loan from 100 to 98 percent; (6) the Department has generally tried to
address problems in its student aid programs, and some of these efforts
appear to be achieving some results; (7) in July 1996, the Department
had completed actions or had actions in progress or planned to address
186 of 205 recommendations, most made over a 4-year period by the
Department's Office of Inspector General and GAO, to improve its
management of federal student financial aid; (8) although the Department
has shown a commitment to improving its oversight and management of the
student aid programs, the financial risk to U.S. taxpayers remains
substantial; (9) the procedural and structural program elements that are
the root causes of the problems remain; (10) some of these problems
arose from the statutory design of the programs and will persist unless
changed through congressional action; (11) although the Department can
mitigate some of these problems through more effective oversight and
management, many of the Department's initiatives have not been fully
implemented; (12) progress toward their full implementation has been
mixed; (13) the student aid programs employ complex and cumbersome
processes with many participants; (14) each major program has its own
procedures and set of participants; (15) management shortcomings are a
major problem, although in some areas, the Department has improved some
its practices; and (16) the Department has begun planning a major reeng*

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HR-97-11
     TITLE:  High-Risk Series: Student Financial Aid
      DATE:  02/01/97
   SUBJECT:  Government guaranteed loans
             Student loans
             Delinquent loans
             Higher education
             Loan defaults
             Student financial aid
             Internal controls
             Risk management
             Financial management systems
IDENTIFIER:  Pell Grant
             Federal Family Education Loan Program
             William D. Ford Federal Direct Loan Program
             Dept. of Education National Student Loan Data System
             High Risk Series 1997
             
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Cover
================================================================ COVER


High-Risk Series

February 1997

STUDENT FINANCIAL AID

GAO/HR-97-11

Student Financial Aid


Abbreviations
=============================================================== ABBREV

  EASI - Easy Access for Students and Institutions
  EDCAPS - Education's Central Automated Processing System
  FDLP - Ford Direct Loan Program
  FFELP - Federal Family Education Loan Program
  HEA - Higher Education Act
  IPOS - Institutional Participation and Oversight Service
  NSLDS - National Student Loan Data System
  OIG - Office of Inspector General
  OPE - Office of Postsecondary Education
  SPRE - state postsecondary review entity

Letter
=============================================================== LETTER



February 1997

The President of the Senate
The Speaker of the House of Representatives

In 1990, the General Accounting Office began a special effort to
review and report on the federal program areas its work identified as
high risk because of vulnerabilities to waste, fraud, abuse, and
mismanagement.  This effort, which was supported by the Senate
Committee on Governmental Affairs and the House Committee on
Government Reform and Oversight, brought much-needed focus on
problems that were costing the government billions of dollars. 

In December 1992, GAO issued a series of reports on the fundamental
causes of problems in high-risk areas and, in a second series in
February 1995, it reported on the status of efforts to improve those
areas.  This, GAO's third series of reports, provides the current
status of designated high-risk areas. 

This report discusses GAO's continuing concerns about the Department
of Education's management and oversight of postsecondary student
financial aid programs, especially the Federal Family Education Loan,
the Ford Direct Loan, and the Federal Pell Grant Programs.  GAO
commends the Department for its actions over the last few years in
response to many recommendations made by others and GAO.  Many of
these actions have likely played a major role in reducing the number
of student loan defaults and the default rate.  GAO believes,
however, that the Department needs to take further action,
specifically toward improving program management and information
systems. 

Copies of this report series are being sent to the President, the
congressional leadership, all other Members of the Congress, the
Director of the Office of Management and Budget, and the heads of
major departments and agencies. 

James F.  Hinchman
Acting Comptroller General
of the United States


OVERVIEW
=========================================================== Appendix 0

Our previous high-risk reports\1 have identified vulnerabilities in
the Department of Education's student financial aid programs,
specifically the Federal Family Education Loan Program (FFELP)\2 and
the Federal Pell Grant Program.  Although federal student aid
programs have succeeded in giving students access to money for
postsecondary education, the Department has been less successful at
protecting the financial interests of the U.S.  taxpayers, according
to our reviews.  In addition, long-standing management problems, we
believe, could hamper the Department's implementation and
administration of the Ford Direct Loan Program (FDLP).\3

Although the Department has acted to correct many problems and
improve program controls, vulnerabilities remain. 

PROBLEMS

In fiscal year 1995, the federal government paid out over $2.5
billion to make good its guarantee on defaulted student loans.  In
addition, inadequate Department oversight has contributed to abuses
on the part of some schools participating in federal student aid
programs.  These abuses included instances in which schools received
Pell grant funds for students who never applied for the grants nor
enrolled in or attended the schools.  In one instance, a chain of
proprietary schools falsified student records and misrepresented the
quality of its educational programs to increase its revenues from
students receiving Pell grants. 

Underlying problems with the student aid programs' structure and
management, on which we have previously reported, include the
following: 

  -- FFELP's structure was overly complex, and participants had
     little or no incentive to prevent loan defaults. 

  -- Lenders and state agencies that guaranteed the loans against
     default (guaranty agencies) bore little or no financial risk. 
     The federal government bore nearly all the risk. 

  -- Many schools participating in the programs did not meet federal
     standards and requirements, providing poor training to their
     students, whose skills were then insufficient to get the jobs
     required to enable them to repay their loans. 

  -- The Department did not fully implement adequate controls to
     minimize its losses and to correct a number of long-standing
     management problems. 

The Congress addressed many of these problems through amendments in
1992 and 1993 to title IV of the Higher Education Act of 1965, as
amended (HEA).  The Department has acted to address these problems
and their causes; however, these actions have not completely resolved
the underlying problems. 

PROGRESS

Partly to help strengthen the Department's internal controls, the
1992 and 1993 amendments

  -- required that financial and compliance audits of guaranty
     agencies be conducted annually rather than every 2 years;

  -- required that lenders and guaranty agencies share more of the
     risk of defaults in FFELP by reducing the maximum insurance and
     reimbursement rates on a defaulted loan from 100 to 98 percent;

  -- authorized the Department to provisionally certify schools to
     participate in federal student aid programs, allowing the
     Department to limit the length of time a school is approved to
     participate and to more closely monitor and evaluate the
     school's performance; and

  -- authorized the establishment and federal funding of state
     postsecondary review entities (SPRE) responsible for conducting
     or coordinating reviews of schools licensed in their state that
     participate or seek to participate in federal student aid
     programs. 

Except for establishing SPREs, for which funding was not maintained,
the Department implemented each of the amendments' provisions.  In
our 1995 high-risk report, we recognized that the Department had
begun

  -- strengthening gatekeeping\4 by expanding the criteria used to
     select schools for audit and review and increasing the number of
     staff conducting reviews,

  -- improving management practices by reorganizing the Office of
     Postsecondary Education (OPE) to permit it to better administer
     and oversee federal student aid programs,

  -- implementing several new information systems designed to provide
     more accurate and timely information, and

  -- improving financial management by revising the auditing
     requirements for guaranty agencies and lenders and by developing
     and maintaining more detailed financial records. 

The Department has generally tried to address problems in its student
aid programs, and some of these efforts appear to be achieving some
results.  For example, as shown in figure 1, FFELP default claim
payments declined slightly from $2.7 billion in fiscal year 1992 to
$2.5 billion in fiscal year 1995.  Collections on defaulted loans
have increased from $1 billion in fiscal year 1992 to $2 billion in
fiscal year 1995. 

   Figure 1:  FFELP Default Claim
   Payments and Collections, FYs
   1992-95

   (See figure in printed
   edition.)

Moreover, in July 1996, the Department had completed actions or had
actions in progress or planned to address 186 (91 percent) of 205
recommendations--most made over a 4-year period by the Department's
Office of Inspector General (OIG) and us--to improve its management
of federal student financial aid.\5 These actions by the Department
have the potential to further remedy many of the underlying program
problems. 

OUTLOOK FOR THE FUTURE

Although the Department has shown a commitment to improving its
oversight and management of the student aid programs, the financial
risk to U.S.  taxpayers remains substantial.  The procedural and
structural program elements that are the root causes of the problems
remain.  Some of these problems arose from the statutory design of
the programs and will persist unless changed through congressional
action.  Although the Department can mitigate some of these problems
through more effective oversight and management, many of the
Department's initiatives, discussed in our 1995 report, have not been
fully implemented.  Progress toward their full implementation has
been mixed. 

The student aid programs employ complex and cumbersome processes with
many participants.  Each major program--FFELP, FDLP, and Pell
grants--has its own procedures and set of participants.  Overseeing
these processes clearly presents a management challenge to the
Department.  Moreover, the introduction of FDLP has added a new
dimension of complexity.  FDLP was originally authorized to account
for about 60 percent of student loans after a 5-year phase-in period. 
(In 1995-96, FDLP accounted for about 33 percent of loans.) Although
the administration subsequently planned for FDLP to replace FFELP,
the Congress has allowed both programs to operate in competition with
each other, pending any restructuring of the programs during the
reauthorization of HEA scheduled for the 105th Congress. 

The programs' structural flaws remain.  To maximize access to aid
funds, HEA placed nearly all the financial risk of loan defaults on
the federal government.  Since 1980, as the number of borrowers has
increased, so has the number of defaults.  In addition, the number of
students from lower income families who attend proprietary trade and
other nontraditional schools has increased, raising the risk of
programwide defaults.  How FDLP will affect these problems is
unclear:  Loan repayment and default histories are just beginning to
be developed as the first FDLP borrowers complete their education and
begin repaying their loans. 

Management shortcomings are a major problem, although in some areas,
such as gatekeeping, the Department has improved some of its
practices.  In others, many past problems remain.  For example,
Department initiatives to improve information resources management
have not fully succeeded in improving data quality and systems
integration.  This situation also affects the programs' internal
controls as follows: 

  -- Poor quality and unreliable FFELP student loan data remain in
     the Department's systems.  As a result, the Department cannot
     obtain complete, accurate, and reliable FFELP data necessary to
     report on its financial position. 

  -- Inaccurate loan data are being loaded into the National Student
     Loan Data System (NSLDS), the Department's principal student aid
     database intended to help resolve data quality problems. 

The Department has begun planning a major re-engineering effort that
it expects will resolve these problems in the next several years. 
This effort, which is known as Easy Access for Students and
Institutions, or Project EASI, is envisioned as a student-
based, integrated data system through which program management and
control functions will be conducted. 


--------------------
\1 High-Risk Series:  Guaranteed Student Loans (GAO/HR-93-2, Dec. 
1992) and High-Risk Series:  Student Financial Aid (GAO/HR-95-10,
Feb.  1995). 

\2 FFELP was formerly called the Guaranteed and Stafford Student Loan
Programs. 

\3 FDLP was formerly called the Federal Direct Student Loan Program. 

\4 Gatekeeping generally refers to the Department's procedures for
determining which schools may participate--and whether they should
continue participating--in federal student aid programs. 

\5 Department of Education:  Status of Actions to Improve the
Management of Student Financial Aid (GAO/HEHS-96-143, July 12, 1996). 


COMPLICATED PROCESSES, STRUCTURAL
FLAWS, AND MANAGEMENT SHORTCOMINGS
CAUSE STUDENT AID PROGRAM PROBLEMS
=========================================================== Appendix 1

The root causes of FFELP's persistent problems are (1) complicated,
cumbersome processes; (2) structural flaws; and (3) Department
management shortcomings.  In addition, many of FFELP's problems also
plague the other major federal student aid programs such as Pell
grants. 

COMPLICATED, CUMBERSOME PROCESSES
STILL HINDER OPERATION OF FEDERAL
STUDENT AID PROGRAMS

The Department administers and oversees federal student aid programs
authorized by HEA and monitors participants' activities.  It also
determines which schools and lenders can participate and establishes
program requirements. 

These requirements affect millions of students and thousands of
schools, lenders, and other entities.  The three principal entities
are students, schools, and the Department of Education.  Two
additional entities--lenders and guaranty agencies--
also have roles in FFELP. 

Generally, students initiate the student aid process by applying to
the Department to determine their eligibility for aid.  The
Department notifies students of their expected family contribution,
which is used, in part, to determine the type and amount of federal
aid they can receive.  To obtain a Pell grant, students submit this
information to their schools, which must ensure that students (1)
meet federal eligibility requirements for the grant and, (2) if
eligible, are paid the full Pell grant they are eligible to receive. 

Figures 2 and 3 show the two different, complicated processes that
occur in applying for a loan under FFELP and FDLP. 

   Figure 2:  Applying for and
   Repaying an FFELP Loan

   (See figure in printed
   edition.)

At schools participating in FFELP, students apply to a participating
lender for a loan.  The school verifies the student's eligibility and
determines, on the basis of family income and estimated cost of
attendance, the loan amount the student is eligible to receive.  The
student then receives the loan from the lender.  The state-designated
guaranty agency guarantees the loan against default.  The guaranty
agency is the intermediary between the Department and the lender,
insuring the loan against default and making certain that the lender
and school meet program requirements.  For subsidized loans, the
Department pays interest due the lender while the student attends
school.  The student generally begins repaying the loan, including
interest and principal, following a 6-month grace period after
leaving school and has up to 10 years to repay.  The lender is
responsible for servicing and collecting it, and, if the student
defaults on the loan, the lender files a claim with the guaranty
agency for reimbursement of most of its loss.  The Department also
reimburses guaranty agencies for most of their claims paid to lenders
for defaulted loans and for some of their administrative costs. 

   Figure 3:  Applying for and
   Repaying an FDLP Loan

   (See figure in printed
   edition.)

At schools participating in FDLP, students generally apply to the
school for a loan because the school operates as the Department's
agent in this regard.  As it would for FFELP loans, the school
verifies the student's eligibility and determines the loan amount. 
The Department then makes the loan, which the school generally posts
to the student's school account.  As with FFELP loans, the student
generally begins repaying following the 6-month grace period after
leaving school.  But unlike FFELP loans, the student has from 10 to
30 years to repay under several different repayment options.  Under
contract to the Department, a third-party entity services loans and
collects payments from borrowers.  If a borrower defaults, the
servicer refers the loan to the Department for collection. 

The existence of these two competing loan programs adds another
dimension to the already complex delivery of federal student
financial aid.  Until very recently, both loan programs were
administered separately by the Department.  In addition, some loan
terms, such as repayment periods, differ between the two programs. 
Also, the role and responsibilities of schools that participate in
FDLP are different.  This has led to the potential for a fragmented
operating environment in which two different groups of students,
schools, lenders, Department administrators, and other entities
participate in two mostly similar programs. 

PROGRAMS' STRUCTURE REMAINS FLAWED

The structure of the federal student aid programs remains flawed
primarily because the (1) federal government continues to bear a
major portion of the risk for loan losses and (2) loan programs have
shifted away from serving mostly middle-income, traditional 4-year
undergraduate school students.  The programs now serve more students
from low-income families and those attending proprietary schools than
the more traditional students the programs were intended to serve. 
This has contributed to a fundamental tension in both FFELP and FDLP
between their primary goal--providing access to postsecondary
education--and minimizing costs to the U.S.  taxpayer.  The programs'
current structure makes it difficult for the Department to protect
the taxpayers' financial interests.  Although a recent legislative
change has resulted in some risk sharing by lenders and guaranty
agencies for loan defaults, currently, the federal government still
assumes nearly all the risk of financial losses from loan defaults. 
In addition, the number of borrowers from groups at higher risk of
defaulting is increasing. 

At FFELP's outset, the government expected to share the program's
financial risks with state-designated guaranty agencies.  When states
failed to establish such agencies, the Congress enacted several
incentives to increase lender and guaranty agency participation.  In
doing so, it kept the financial risk almost entirely with the federal
government.  Recently, the Congress began shifting some risk back to
the guaranty agencies, as well as lenders, by reducing the maximum
reimbursement and insurance rates on defaulted loans to 98 percent. 
This was intended, in part, to encourage both lenders and guaranty
agencies to work with borrowers to prevent them from defaulting on
their loans. 

The government generally assumes full risk for defaults under FDLP. 
HEA and Department regulations allow the use of various legal
remedies to collect defaults, such as demanding immediate payment of
the full amount due, garnisheeing wages, requesting the Internal
Revenue Service to offset federal income tax refunds, and assessing
collection fees to recover its costs.  Many of these same remedies
are used under FFELP.  But for most FDLP loans, the Department has
additional flexibility because it can let some defaulters use the
income contingent repayment option to determine their monthly loan
payments and resume repayment. 

In addition, students in groups at higher risk of
defaulting--low-income students and students receiving a
nontraditional college education--have increasingly received student
aid.  Loans authorized under title IV were initially targeted to
middle-income students, generally a low-risk group, and Pell grants
were targeted to students from low-income families.  But the loans'
client base has shifted more toward low-income students as the cost
of education has exceeded the amount of grant funds available.  As a
result, low-income students have turned to student loans to help
finance their postsecondary education.  This has placed greater debt
burden on low-income students, who often have little or no means to
repay.  Also, FFELP was originally intended to finance a traditional
college education.  The expansion of the program to include other
education and training schools, such as proprietary (for-profit and
trade) schools, has resulted in grants and loans to students to
attend schools that did not always provide a high-quality education. 

Abusive practices of some proprietary schools, along with plentiful
loans, have contributed to loan defaults and program costs.  For
example, students who attended proprietary schools represented 23
percent of borrowers entering repayment in fiscal year 1993, but they
accounted for 47 percent of those who defaulted in fiscal years 1993
and 1994.  Some proprietary school operators have enriched themselves
at the expense of economically disadvantaged students, while
providing little or no education in return.  Faced with large debts
and no new marketable skills, these students have often defaulted on
their loans.  Lenders and guaranty agencies who have little financial
risk have also contributed to the default problem.  Had sufficient
risk-sharing arrangements been in place, lenders and guaranty
agencies would have had an incentive to monitor the kind of education
their borrowers were receiving and their repayment practices.  With
increased risk to the government from increasing participation in
FDLP, attention to educational quality is much more important now and
in the future. 

DEPARTMENT'S DIFFICULTY IN
MANAGING ITS PROGRAMS PERSISTS

Although it has made many improvements in the last several years, the
Department still has some problems in managing its student aid
programs.  These problems have been the subject of congressional
hearings and investigations, reports by OIG and us, and other studies
and evaluations.  These reviews, for example, have shown that the
Department (1) did not adequately oversee schools that participate in
the programs; (2) relied too heavily on managing each title IV
program through separate administrative structures, with poor or
little communication among programs; (3) used inadequate management
information systems that contained unreliable data; and (4) did not
have sufficient and reliable student loan data to determine the
liability on outstanding loan guarantees. 

Concerns have been raised about the way the Department addresses
management problems.  For example, OIG observed in June 1996 that the
Department takes a piecemeal approach to improving its processes. 
The Advisory Committee on Student Financial Assistance--established
by law to provide advice and counsel to the Congress and the
Department on student financial aid matters--believes that problems
take longer to fix than they should. 

The known inventory of Department management and oversight problems
indicates that the potential for fraud, waste, and abuse in the
student aid programs remains high.  Also, as noted earlier, sound
Department management of the programs must be in place to mitigate
their procedural and structural weaknesses.  Since our 1992 high-risk
report, the Department has taken many actions to address program and
management problems identified by OIG, other organizations, and us. 
Many of these efforts show signs of success, and others, if fully
implemented, could make further improvements.  Actions directed to
four areas in particular are critical for minimizing waste, fraud,
and abuse and require the Department's continuing attention and
improvement:  (1) gatekeeping, (2) program administration, (3)
information resources management, and (4) financial management. 


      GATEKEEPING PROCEDURES
      IMPROVING BUT SIGNIFICANT
      WEAKNESSES REMAIN
------------------------------------------------------- Appendix 1:0.1

In the last several years, the Department has taken the following
steps to improve its gatekeeping procedures for determining which
schools may participate, and whether they may continue participating,
in the federal student aid programs: 

  -- Required all schools to have annual financial and compliance
     audits. 

  -- Increased the number of program reviews and hired additional
     staff to conduct reviews.  The Department has also outlined in
     its program review guide specific indicators of potential
     noncompliance or mismanagement that reviewers should identify. 
     More detailed reviews are called for if these indicators are
     present. 

  -- Began to implement a new database of schools to help Department
     staff monitor schools' performance.  The database will include
     financial and past performance data as well as findings from
     prior reviews and audits and previous program violations. 

  -- Reviewed all federally recognized accrediting agencies to ensure
     that they meet new standards for recognition by the Department. 

Still, the following weaknesses continue to cause concern:  lack of
funds to put SPREs into operation, problems with the school
recertification process, and questions about the implementation of
the "85-15" rule (so named because proprietary schools are required
to obtain no more than 85 percent of their revenue from federal
student aid programs). 


         SPRES NOT FUNDED
----------------------------------------------------- Appendix 1:0.1.1

The 1992 amendments authorized the Department to establish SPREs to
encourage states to play a more active role in gatekeeping.  The role
of SPREs, under an agreement with the Department, was meant to
include coordinating and conducting reviews of schools licensed in
their state.  SPREs would have had authority to determine a school's
eligibility to participate in the student aid programs.  SPREs were
to be funded by the federal government, but because funding was not
maintained, SPREs never materialized.  This effectively blocked the
states from playing a more active role in overseeing schools. 
Moreover, the Department, partly in response to opposition to the
SPREs from the higher education community, decided to limit the role
of the states to a more traditional one, most notably licensing.  The
Department also proposed that information provided by schools on
their programs and performance be distributed to prospective students
through state-supported career centers. 


         SCHOOL RECERTIFICATION
         PROCESS HAS FLAWS
----------------------------------------------------- Appendix 1:0.1.2

Problems with the Department's school recertification process could
increase the likelihood that schools not in compliance with school
eligibility requirements continue to participate in title IV
programs.  The Department considers a school's loss of certification
a risk factor for federal financial losses.  OIG found that the
Department was recertifying schools it probably should not have.  In
a review of a sample of Department recertification actions, 27
percent of schools sampled had violations, such as unpaid liabilities
or failing to meet financial responsibility requirements, that could
be grounds for noncertification.\6 The Department acknowledged that a
few of these recertifications should not have been made but said that
most were justified.  Department officials also stated they were
taking action to ensure that up-to-date financial data on schools
would be made available for future recertification reviews.  The
Department acknowledged to OIG, however, that it would not be able to
complete recertification reviews for all participating schools within
a deadline mandated by the 1992 amendments and generally agreed with
OIG that it should focus on completing reviews for higher risk
schools first. 


--------------------
\6 Subsequent Review to Follow-Up Review on Selected Gatekeeping
Operations, U.S.  Department of Education, OIG, ACN:  11-60004 (June
7, 1996). 


         85-15 RULE NOT PROPERLY
         IMPLEMENTED
----------------------------------------------------- Appendix 1:0.1.3

OIG is concerned that the Department is not implementing the 85-15
rule in a timely fashion.  The 1992 amendments require that
participating proprietary schools receive no more than 85 percent of
their revenues from the student aid programs.  This rule was enacted
to help ensure that schools did not rely entirely on federal student
aid for their operations.  The basis for this is that if schools are
required to raise some of their revenue privately, they will be more
likely to provide students a good education and less likely to close. 
OIG told us that Department guidance on implementing the rule allowed
schools to demonstrate compliance using accounting methods that were
not consistent with sound financial standards.  Although the
Department guidance has been revised, OIG remains concerned that the
guidance is not being properly implemented. 

The Department is also in different stages of implementing two
gatekeeping initiatives designed to focus resources and attention on
higher risk schools.  The first initiative--
experimental sites--was called into question as a result of
congressional oversight activities and is not being expanded.  The
second initiative involves re-engineering the school review process
used by the Department's Institutional Participation and Oversight
Service (IPOS) and is known as the IPOS Challenge. 


         EXPERIMENTAL SITES
         INITIATIVE
----------------------------------------------------- Appendix 1:0.1.4

A provision in the 1992 amendments authorized the Department to grant
schools relief from certain regulatory requirements, or some
flexibility in implementing them, as part of an effort to experiment
with alternative ways to verify student financial aid data.  The
experiments approved by the Department also cover loan entrance and
exit counseling and the 30-day waiting period for disbursing loans to
new borrowers.  Currently, 135 schools are participating in the
experimental sites initiative, and they are required to periodically
report to the Department on the experiments' outcomes and effects. 
The Department also proposed, under the experimental sites authority,
to broadly relax regulation and reviews of schools that have
historically had strong compliance records, while maintaining more
traditional oversight of and requirements for, and increasing reviews
of, schools that have had past compliance problems. 

The Congress, however, raised questions about whether both this
proposal and the approval granted at some of the experimental sites
may have exceeded the authority provided in the 1992 provision.  As a
result, the proposal has not been implemented.  Subsequently,
congressional conferees considering a 1997 appropriations bill did
not object to continuing experiments already approved but directed
the Department to notify the appropriate congressional committees
before approving new ones.\7


--------------------
\7 H.R.  104-863, p.  1061. 


         IPOS CHALLENGE
----------------------------------------------------- Appendix 1:0.1.5

Under the IPOS Challenge, the Department will identify schools for
review on the basis of their risk for noncompliance.  It will
calculate risk using a computer model that analyzes schools' past
performance and Department compliance data.  Department officials
believe this approach will allow review staff to identify risk on the
basis of objective analysis and compare schools on the basis of
similar factors rather than on individual reviewers' judgments as is
the current practice.  They expect that it will take a couple of
years to complete and test the computer model and fully implement the
process.  Also, as part of this initiative, review teams will decide
on the basis of a school's overall compliance record how to structure
school reviews and which compliance and penalty actions to recommend
for violations.  Because the IPOS Challenge is in the initial phase
of implementation, it is too soon to assess its effectiveness. 


      PROGRAM ADMINISTRATION
      IMPROVEMENTS CONTINUE AS NEW
      CONCERNS MUST BE ADDRESSED
------------------------------------------------------- Appendix 1:0.2

The Department has improved program administration in response to a
1991 joint study by the Office of Management and Budget and the
Department.\8 Although the Department has addressed many of the
problems the study identified, further action is needed.  For
example, the Department has administered FDLP and FFELP separately,
and at times it was unclear whether these two programs' offices were
communicating with each other.  This has contributed to a fragmented
operating environment that has complicated the student aid programs
and caused other management and coordination problems. 

The Advisory Committee on Student Financial Assistance reported in
1995 that the Department was giving low priority to reforming FFELP
oversight, largely in anticipation of full transition to FDLP in the
coming years.\9 In June 1996, OIG reported no signs that FFELP reform
was receiving low priority.  OIG also found, however, that the
Department's formation of a separate organization to implement FDLP
reporting directly to the Secretary--the Direct Loan Task
Force--created the perception that Department management viewed FFELP
as less important than FDLP.  Regardless of whether this perception
was valid, OIG believed it somehow affected the Department's
management of the two programs.  But the Department's recent
reintegration of the task force with other OPE units and the
Congress' decision in 1996 to allow both programs to continue to
exist appear to have produced an environment in which both programs
get equal attention. 

In addition to the appearance of competition between FFELP and FDLP
management, other program administration issues remain.  These
include the use of guaranty agency reserves; review of third-party
servicers; lender, servicer, and guaranty agency waivers; and
management of FDLP. 


--------------------
\8 Improving Guaranteed Student Loan Management:  A Blueprint for
Action, Department of Education and the Office of Management and
Budget (Washington, D.C.:  Apr.  1991). 

\9 Integrity and Accountability:  Recommendations for Improving the
Management, Delivery, and Operations of the Federal Student Loan
Programs, Advisory Committee on Student Financial Assistance
(Washington, D.C.:  Aug.  1995). 


         USE OF GUARANTY AGENCY
         RESERVES
----------------------------------------------------- Appendix 1:0.2.1

We have expressed concern that, under certain circumstances, guaranty
agencies might be inclined to spend portions of their reserve funds
on unnecessary expenditures for additional staff; the purchase of
facilities, furniture, computers, and the like; or for higher
salaries.\10 This money, which the federal government has a right to
recover, would then not be available to the federal government or for
covering losses on defaulted loans that cannot be collected.  In
November 1996, the Department issued regulations restricting the
types of expenditures guaranty agencies may make with their reserve
funds.  For example, the reserves cannot be used for entertainment,
lobbying, promoting the image of the guaranty agency, or paying legal
fees arising from violations of the law.  This rule should prevent
some abuses. 


--------------------
\10 Guaranty Agency Finances (GAO/HEHS-96-81R, Mar.  11, 1996). 


         REVIEW OF THIRD-PARTY
         SERVICERS
----------------------------------------------------- Appendix 1:0.2.2

OIG has reported that the Department needs to improve monitoring of
FFELP third-party servicers--organizations that schools, lenders, and
guaranty agencies contract with to originate, service, guarantee, or
collect student loans.\11 OIG was concerned that 20 percent of the
servicers it reviewed may be unable to fully meet their financial
responsibilities.  If servicers went out of business, the financial
viability of FFELP could be jeopardized because some functions, such
as posting of borrower payments and other transactions, may be
delayed.  This would disrupt service to borrowers and possibly lead
some borrowers to stop making their scheduled repayments.  The
Department concurred with OIG's recommendations to improve its
servicer database and establish a process to identify servicers that
show marginal financial responsibility. 


--------------------
\11 ED Needs to Consider Implementing Changes for Monitoring Lenders
and Servicers, Department of Education, OIG, ACN:  05-40005 (Feb. 
15, 1996). 


         LENDER, SERVICER, AND
         GUARANTY AGENCY WAIVERS
----------------------------------------------------- Appendix 1:0.2.3

OIG has also found that the Department lacks a formal or consistent
process for granting lenders and guaranty agencies waivers of its
right to collect loan refunds, penalties, and other fees or costs
owed by them.\12 For example, the Department may assess penalties
when lenders, their servicers, or guaranty agencies fail to follow
Department requirements for making, servicing, and collecting loans. 
The Department can also refuse to make future payments or it can
recover payments already made to lenders and agencies for such things
as interest subsidies and insurance claims.  The law allows the
Department to waive its right to collect these funds at its
discretion.  In an OIG review of a list of such waivers totaling $120
million, neither a definition of nor criteria for granting waivers
was found, nor was sufficient documentation to support waivers that
were granted.  In addition, OPE had not clearly delegated authority
to grant such waivers--OIG considered this a control failure.  Before
the Department relinquishes its right to collect these kinds of
liabilities, OIG believes it needs to be sure that the reasons for
granting waivers are sound and serve a government or public interest. 
The Department has proposed corrective actions to address OIG's
concerns. 


--------------------
\12 OPE Waivers:  The Department Should Establish and Follow a
Process, Department of Education, OIG, ACN:  07-58051 (Feb.  13,
1996). 


         MANAGEMENT OF FDLP
----------------------------------------------------- Appendix 1:0.2.4

In 1995, we reported that the Department allowed schools with FFELP
default rates above those authorized by statutory eligibility
standards to participate in FDLP.\13 At the time, 10 of these schools
were subject to losing eligibility for all student aid programs, and
another 3 schools faced losing eligibility for FFELP.  When the
schools were selected, one of the Department's criterion for
participating in FDLP was that schools must not be prohibited from
participating in FFELP because their default rates exceeded the
statutory limit.  An analysis by the Advisory Committee also found
many schools with high default rates.  A Department official advised
us that, under current requirements, if a school is eligible to
participate in any student aid program authorized by title IV, it is
eligible to participate in FDLP.  In accordance with regulations
issued in December 1995, however, the Department can place schools
into one of several participation classifications to limit the types
of fund transactions they are allowed to carry out. 

In addition, FDLP schools may be able to hide high default rates by
persuading students to repay through the income contingent repayment
option.  Under this option, the student's payment is based on his or
her income.  This is intended to help former students have manageable
loan repayments and, therefore, reduce the chance for default. 
Schools with poor-quality programs--schools that typically have a
high default rate--may possibly do this to lower their default rate. 
This would limit the rate's usefulness to the Department as an
indicator of low quality.  Under FFELP, borrowers do not have access
to the income contingent repayment option, and borrowers who default
in their loan repayment would be counted in calculating their
school's default rate.  Regulations issued in December 1995 require
that borrowers in the income contingent repayment option who attend
proprietary, nondegree-granting schools be counted in the calculation
of such schools' default rate if they are paying less than $15 a
month and these payments are insufficient to cover accrued interest. 


--------------------
\13 Direct Student Loans:  Selected Characteristics of Participating
Schools (GAO/T-HEHS-95-123, Mar.  30, 1995). 


         PROJECT EASI INITIATIVE
----------------------------------------------------- Appendix 1:0.2.5

During the past year, the Department has been developing a major
re-engineering project, Project EASI, to redesign the entire title IV
student aid program delivery system.  Under Project EASI, the
Department plans to redesign over several years its current
management and control systems around a student-based integrated data
system.  The Department envisions that management and control
functions, including accounting, auditing and program reviews, and
quality control procedures, such as computer edit checks and
applicant data matches, will be conducted through this new system. 
Department officials said that Project EASI, although loosely defined
at present, is the Department's major effort to more fully integrate
title IV programs both internally and externally and will address
many student aid delivery problems.  Members of the higher education
community are participating with Department staff in this effort. 

Project EASI has had a tentative start.  The Department did not
commit many full-time staff to it, and top management's commitment to
it has been uncertain.  The project's first steering committee
chairman (a university financial aid administrator) resigned, and
most of the teams established to work on specific projects stopped
meeting regularly.  Department officials acknowledged that activity
had waned in recent months. 

New cochairs for the steering committee were recently appointed, and
we were told that participants are meeting to rededicate themselves
to moving forward.  The project staff anticipates spending the next 9
to 12 months developing plans for the project and more detailed
requirement statements.  The Department has not determined how long
it will be before Project EASI is fully implemented, but it is
expected to be a long-term undertaking. 


      INTEGRATION OF NSLDS WITH
      OTHER RECIPIENT DATABASES
------------------------------------------------------- Appendix 1:0.3

Department information systems and data are currently used to support
a variety of student aid program and financial operations, such as
ensuring that student aid recipients are complying with federal
requirements and monitoring the status of the programs.  Under HEA,
the Department is authorized to establish an NSLDS.  The HEA
Amendments of 1986 authorized the Secretary of Education to implement
NSLDS to ensure (1) accurate information on student loan indebtedness
and institutional lending practices and (2) improved compliance with
the repayment and loan limitation provisions.  The Omnibus Budget
Reconciliation Act of 1989 amended the HEA to allow the Department to
require guaranty agencies to use NSLDS before approving new loans. 
The 1992 HEA amendments required the Department to integrate NSLDS
with Pell grant applicant and recipient databases as of January 1,
1994, and with any other of its databases relating to student aid
program participation. 

In response to this legislative mandate, in January 1993 the
Department awarded a 5-year contract to develop and maintain the
NSLDS database to replace a system in which guaranty agencies would
submit data tapes of their FFELP loan portfolios to the Department. 
NSLDS became partially operational in November 1994 and was expanded
to include FDLP and Pell grant data.  Loan status information for
both FDLP and FFELP is now transmitted to NSLDS by schools, lenders,
guaranty agencies, and the FDLP servicer.  The guaranty agencies
update FFELP data monthly. 

As a result of the NSLDS implementation, in July 1996, the Deputy
Secretary of Education reported that prescreening data matches
identified approximately 125,000 loan applicants who had previously
defaulted among students applying for financial aid.  This prevented
as much as $310 million in future defaults and enabled the Department
to deny about $75 million in Pell grants to ineligible students. 


         USE OF MANY DATA SYSTEMS
         COMPLICATES
         ADMINISTRATION OF STUDENT
         AID PROGRAMS
----------------------------------------------------- Appendix 1:0.3.1

The Department does not yet have an efficient, integrated, nationwide
student loan data system.  During the past 30 years, in addition to
NSLDS, separate data systems--
including the FFELP System for the guaranteed loan programs, Pell
Grant Recipient and Financial Management System, and Direct Loan
Origination System--have been developed to support student aid
programs as they were established.  The Department developed these
systems, but many have incompatible data in nonstandard formats. 
This has contributed to problems with data integrity, system
efficiency, and cost.  According to the Assistant Secretary for
Postsecondary Education, the Department will spend approximately $325
million in fiscal year 1997 to operate these "stovepipe" systems. 

Data integrity and integration problems also remain.  In 1995, we
reported that the Department's use of available student aid data was
generally ineffective for monitoring and enforcing compliance with
requirements.\14 The lack of a fully functional and integrated title
IV-wide recipient database hinders program monitoring and data
quality assurance.  For example, the current system cannot always
identify where a student is enrolled, even after an award is made and
thousands of dollars in student aid disbursed.  As a result, program
managers often lack the accurate, complete, and timely data required
to effectively manage and oversee the student aid programs.  OIG
found, in a sample of 1,072 loans in repayment status in the NSLDS
database, that 93 loans, or about 9 percent, were misclassified.\15
In response to these findings, the Department stated that data
quality was being improved as data were loaded into NSLDS.  It also
stated that about half of these loans have been corrected in NSLDS. 
However, it also recognized that poor-quality data would

remain an issue as long as the Department continued to rely on
guaranty agency databases, some of which were known to have
inaccuracies. 

The Department also seems to lack a sound, integrated information
technology architecture or strategy to manage its portfolio of
information systems supporting student financial aid program
outlays--estimated to be $41 billion for fiscal year 1997.  The lack
of such an architecture may have contributed in part to the
nonstandard development of many systems, contractors, and user
support organizations Departmentwide.  This, in turn, has led to data
interface or exchange problems, confusion, and delays in service. 
For example, a Department consultant showed that a simple address
change for a college financial aid administrator would require a
minimum of 19 manual and automated steps performed by a series of
contractors who would have to enter the change in their respective
systems from printed reports generated by another system.\16 In
addition, redundant data are being submitted by schools, lenders, and
guaranty agencies and stored in many databases.  These procedures and
practices increase the inefficiency of and the overall cost for the
information systems as well as the chance of data errors occurring. 

Another problem with this multiple-system environment is a lack of
common identifiers for schools.  Without these, tracking students and
institutions across systems is difficult.  The 1992 amendments
required the Department to establish, no later than July 1, 1993,
common identifiers for students and schools.  The Department's
current plans, however, do not call for developing and implementing
common identifiers for schools until academic year 1999-2000. 


--------------------
\14 Student Financial Aid:  Data Not Fully Utilized to Identify
Inappropriately Awarded Loans and Grants (GAO/HEHS-95-89,
July 11, 1995). 

\15 The Department Should Continue Its Efforts to Improve the
Accuracy of Its Student Loan Database, Department of Education, OIG,
ACN:  A09-38058 (June 14, 1996). 

\16 Future Title IV Delivery System--Draft Systems Architecture and
Plan of Action, presented to the Advisory Committee on Student
Financial Assistance, Gunnison Consulting Group, Inc.  (Washington,
D.C.:  Mar.  21, 1996). 


         INFORMATION SYSTEMS
         IMPROVEMENT INITIATIVES
----------------------------------------------------- Appendix 1:0.3.2

Although the Department has improved data systems somewhat, major
improvements are still needed.  For example, NSLDS, which is used to
check student loan and grant eligibility, is now partially
operational.  Nonetheless, Department staff and we recognize that
NSLDS can be useful only if the data captured are reliable.  As
reported in 1996, OIG and we believe that the Department has not
adequately tested the accuracy and validity of loan data in NSLDS.\17

Several major initiatives are now under way to improve the
Department's student financial aid delivery systems.  Project EASI is
a long-term reengineering effort being considered by the Department,
that, as envisioned, will improve the current student financial aid
delivery system.  In addition, the following are two other Department
initiatives. 

  -- Integrated Student Aid Management System:  This system is
     designed primarily to help small to medium-sized schools manage
     all student aid data from initial application to reconciliation
     using personal computer-
     based software.  The overall goal is to develop software that
     will allow schools to organize their data by student rather than
     by program. 

  -- Just-in-Time Cash Management:  This is designed to streamline
     the payment process to schools for Pell grants and FDLP loans. 

In addition to these initiatives, the Department has recently
appointed an Acting Chief Information Officer.  We find these and
other initiatives encouraging, although it is too soon to evaluate
the effectiveness of any of them because they have not been fully
implemented. 


--------------------
\17 GAO/HEHS-96-143, July 12, 1996. 


         IMPROVEMENTS THROUGH THE
         CLINGER-COHEN ACT
----------------------------------------------------- Appendix 1:0.3.3

The Clinger-Cohen Act of 1996 (part of which was formerly known as
the Information Technology Management Reform Act of 1996) requires,
among other things, that federal agencies improve the efficiency and
effectiveness of operations through the use of information technology
by

  -- establishing goals to improve the efficiency and effectiveness
     of agency operations, and, as appropriate, the delivery of
     services to the public through the effective use of information
     technology;

  -- preparing an annual report as part of an agency's budget
     submission to the Congress on the progress in achieving agency
     goals; and

  -- ensuring that performance measurements are prescribed for
     information technology used or acquired by an agency and that
     they measure how well the information technology supports agency
     programs. 

The Department could benefit greatly by fully implementing this law. 
Full implementation of the Clinger-Cohen Act would provide another
opportunity to correct many of the Department's student financial aid
system weaknesses.  Because the act is in the early stages of
implementation, however, it is too soon to predict how well the
Department will incorporate the law's provisions into its overall
information technology strategy. 


      FINANCIAL MANAGEMENT
      PROBLEMS CONTINUE
------------------------------------------------------- Appendix 1:0.4

Many FFELP financial management problems previously reported by OIG
and us remain.  Fiscal year 1995 was the first year the Department
prepared--and had audited--
agencywide financial statements.  However, the auditor could not
determine whether the financial statements were fairly presented
because of the insufficient and unreliable FFELP student loan data
underlying the Department's $13 billion in loan guarantee
liabilities.  Furthermore, because guaranty agencies and lenders have
a crucial role in the implementation and ultimate cost of FFELP, the
auditors stressed that the Department complete steps under way for
improving oversight of guaranty agencies and lenders.  Until such
problems are fully resolved, the Department will continue to lack the
financial information necessary to effectively budget for and manage
the program or to accurately estimate the government's liabilities. 

As a result of this audit as well as financial audits of FFELP
conducted by OIG and us, the Department is taking the following
actions: 

  -- It has initiated efforts to develop and implement a
     comprehensive project plan to address NSLDS data integrity
     issues.  These efforts include participation by the guaranty
     agency community and other data providers and users.  Once this
     task is completed, the Department expects NSLDS to provide the
     Department and guaranty agencies with more detailed current and
     useful information to help ensure that more timely and accurate
     information is available on students' loan status and level of
     indebtedness. 

  -- It is developing guidance to be used by external auditors that
     requires specific audit procedures such as testing guaranty
     agencies' billings for default payments. 

  -- It is implementing a process to reconcile the loans receivable
     balances reported by guaranty agencies with such amounts
     reported in the Department's accounting records. 

  -- It is continuing to develop Education's Central Automated
     Processing System (EDCAPS) to provide more accurate financial
     and program management data.  EDCAPS will also upgrade the
     Department's financial management systems; facilitate accounting
     procedures, such as cash reconciliations; and automate manual
     procedures. 

Because the Department has begun corrective actions and has
demonstrated a commitment to resolving financial management problems,
we believe the Department is making progress.  A sustained effort
will be critical, however, to the Department's having sound financial
management and reliable financial information. 


FURTHER ACTION NEEDED
=========================================================== Appendix 2

Federal student financial aid programs remain a high-risk area and
require continued attention.  The root causes we
identified--complicated, cumbersome processes; structural flaws; and
management shortcomings--continue to exist, and the financial
interests of the U.S.  taxpayers are not well served.  Although
further congressional action can change these circumstances,
continued strengthening of Department management and program
oversight is critical.  The need to address problems in the student
financial aid programs becomes more critical as (1) the concurrent
operations of FDLP and FFELP further complicate program processes and
structure, (2) the volume of student loans continues to increase, and
(3) the Department plans to increase the percentage of loans made
directly to students under FDLP. 

Building on congressional and Department actions in response to
recommendations OIG, others, and we have made, the Department must
continue to improve its program management and act promptly to
address problems that could lead to the programs' misuse.  These
actions include

  -- continuing its ongoing efforts to improve gatekeeping--including
     the IPOS Challenge--and act to address the problems we
     identified with school recertification and the 85-15 rule;

  -- ensuring that both FFELP and FDLP are managed at the level
     needed to minimize program abuse and that regulatory and other
     corrective actions are implemented to address the specific
     program administration problems we identified;

  -- integrating its information systems and ensuring the accuracy
     and validity of NSLDS data and data in other systems for it to
     better identify possible program misuse by students, schools,
     and other participants; and

  -- continuing its efforts to improve financial management,
     including improving the accuracy, quality, and reliability of
     the Department's student loan data to ensure that reliable
     financial information is available to agency managers, the
     Congress, and others. 

Because one of Project EASI's goals is to implement a fully
integrated data system that the Department can use to perform its
responsibilities in each of the four management areas we discussed,
we find the project encouraging.  Project EASI is a major
undertaking, but it has had a checkered past.  Its ability to solve
the problems of student aid programs depends on the commitment of the
Department's top management as well as the continued active
participation of those in the education community. 


RELATED GAO PRODUCTS
=========================================================== Appendix 3

Department of Education:  Status of Actions to Improve the Management
of Student Financial Aid (GAO/HEHS-96-143, July 12, 1996). 

Financial Audit:  Federal Family Education Loan Program's Financial
Statements for Fiscal Years 1994 and 1993 (GAO/AIMD-96-22, Feb.  26,
1996). 

Student Financial Aid:  Data Not Fully Utilized to Identify
Inappropriately Awarded Loans and Grants (GAO/T-HEHS-95-199, July 12,
1995). 

Student Financial Aid:  Data Not Fully Utilized to Identify
Inappropriately Awarded Loans and Grants (GAO/HEHS-95-89, July 11,
1995). 

Federal Family Education Loan Information System:  Weak Computer
Controls Increase Risk of Unauthorized Access to Sensitive Data
(GAO/AIMD-95-117, June 12, 1995). 

High-Risk Series:  Student Financial Aid Programs (GAO/HR-95-10, Feb. 
1995). 

Financial Audit:  Federal Family Education Loan Program's Financial
Statements for Fiscal Years 1993 and 1992 (GAO/AIMD-94-131, June 30,
1994). 

Direct Student Loans:  The Department of Education's Implementation
of Direct Lending (GAO/HRD-93-26, June 10, 1994). 

Student Loans:  Millions Loaned Inappropriately to U.S.  Nationals at
Foreign Medical Schools (GAO/HEHS-94-28, Jan.  21, 1994). 

Financial Management:  Education's Student Loan Program Controls Over
Lenders Need Improvement (GAO/AIMD-93-33, Sept.  9, 1993). 

Department of Education:  Long-Standing Management Problems Hamper
Reforms (GAO/HRD-93-47, May 28, 1993). 

Financial Audit:  Guaranteed Student Loan Program's Internal Controls
and Structure Need Improvement (GAO/AFMD-93-20, Mar.  16, 1993). 

Department of Education:  Management Commitment Needed to Improve
Information Resources Management (GAO/IMTEC-92-17, Apr.  20, 1992). 


1997 HIGH-RISK SERIES
=========================================================== Appendix 4

An Overview (GAO/HR-97-1)

Quick Reference Guide (GAO/HR-97-2)

Defense Financial Management (GAO/HR-97-3)

Defense Contract Management (GAO/HR-97-4)

Defense Inventory Management (GAO/HR-97-5)

Defense Weapon Systems Acquisition (GAO/HR-97-6)

Defense Infrastructure (GAO/HR-97-7)

IRS Management (GAO/HR-97-8)

Information Management and Technology (GAO/HR-97-9)

Medicare (GAO/HR-97-10)

Student Financial Aid (GAO/HR-97-11)

Department of Housing and Urban Development (GAO/HR-97-12)

Department of Energy Contract Management (GAO/HR-97-13)

Superfund Program Management (GAO/HR-97-14)

























The entire series of 14 high-risk reports can be ordered by using the
order number GAO/HR-97-20SET. 

*** End of document. ***