Department of Education
Guaranteed Student Loan Program Vulnerabilities Gao ID: GAO-03-268R November 21, 2002Congress requested that GAO investigate weaknesses in the Department of Education's administration of student loans for postsecondary education under the Federal Family Education Loan (FFEL) Program. As a result of the undercover investigation, GAO exposed vulnerabilities in the administration of the FFEL Program. GAO set up a fictitious school and sought and obtained approval for student loans totaling $55,500 on behalf of three fictitious students purportedly attending the school.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-03-268R, Department of Education: Guaranteed Student Loan Program Vulnerabilities
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United States General Accounting Office:
GAO:
November 21, 2002:
The Honorable Susan M. Collins:
Ranking Minority Member:
Permanent Subcommittee on Investigations:
Committee on Governmental Affairs:
United States Senate:
Subject: Department of Education: Guaranteed Student Loan Program
Vulnerabilities:
Dear Senator Collins:
This report responds to your request and subsequent conversations with
your staff, that we investigate weaknesses in the Department of
Education‘s administration of student loans for postsecondary education
under the Federal Family Education Loan (FFEL) Program. [Footnote 1]
Specifically, you asked that the Office of Special Investigations,
acting in an undercover capacity, examine weaknesses in Education‘s
procedures for certifying foreign schools to participate in the FFEL
Program and to determine whether student loans can be obtained by
fictitious students purportedly attending a foreign school. We briefed
your office on our investigative findings. This report summarizes those
findings and includes documents we referenced in that briefing.
As a result of our undercover investigation, we exposed vulnerabilities
in Education‘s administration of the FFEL Program. With relative ease,
we created Y‘Hica Institute for the Visual Arts, a fictitious graduate-
level foreign school purportedly located in London, England. After
creating Y‘Hica, we obtained certification from Education for the
school to participate in the FFEL Program. Finally, we sought and
obtained approval for student loans totaling $55,500 on behalf of three
fictitious students purportedly attending Y‘Hica. After completing our
investigation, we contacted Education officials and briefed them about
our findings. As set forth below, we are making recommendations aimed
at preventing fictitious foreign schools from participating in the FFEL
Program and preventing fictitious students from obtaining student
loans.
We conducted our investigation from January 25, 2001, through May 8,
2002, in accordance with investigative standards established by the
President‘s Council on Integrity and Efficiency. To assist us in
creating a foreign school and qualifying to participate in the FFEL
Program, we had numerous discussions, in an undercover capacity, with
Education‘s Foreign Schools Team and reviewed the procedures that a
foreign school must follow. We then submitted false and counterfeit
documentation to support our application for institutional eligibility
and certification to participate in the FFEL Program. We also submitted
false and counterfeit documentation in order to obtain student loans
for fictitious students.
Creating Y‘Hica, a Fictitious Foreign School:
Adhering to Education procedures, we successfully created Y‘Hica
Institute for the Visual Arts, a fictitious foreign school purportedly
located in London, England. We first created a consulting firm called
Weinstein & Associates to pose as Y‘Hica‘s U.S. representative and the
principal point of contact with Education. We also created identities
for the President of Y‘Hica and the President and Executive Director of
the consulting firm. In addition, we created Web sites for Y‘Hica and
the consulting firm as well as telephone numbers and addresses for
Y‘Hica and the consulting firm. Finally, we obtained an international
Dun and Bradstreet number and an Education personal identification
number (PIN) on behalf of Y‘Hica. Education then recognized that Y‘Hica
could apply to participate in the FFEL Program.
Obtaining Approval for Participation in the FFEL Program:
Subsequently, we created and provided Education with documents that are
required for approval to participate in the FFEL Program. Specifically,
we provided the following counterfeit documents on behalf of Y‘Hica:
(1) a school catalog purportedly describing Y‘Hica‘s mission (a cover
page of which is reprinted in enc. I), (2) certified financial
statements of Y‘Hica for fiscal years 1998 and 1999, signed by a
fictional accountant residing at a fictional address in London, (3) a
letter indicating that John Moores University”an education entity in
the United Kingdom”validated Y‘Hica‘s academic program, and (4) a
letter from educational authorities in the United Kingdom stating that
Y‘Hica is a nonprofit institution with degree-granting authority. In
response to requests from Education for additional information to
complete the FFEL application, we created false documentation
indicating that Web sites of the British Department for Education and
Employment and the Charity Commission for England and Wales recognize
Y‘Hica as a nonprofit, postsecondary institution. Based on these
documents, Education certified Y‘Hica to participate in the FFEL
Program.
Obtaining Student Loans for Fictitious Students under the FFEL Program:
After requesting and obtaining a federal school code from Education, we
created identities, addresses, and telephone numbers for three
students, one of which was Susan M. Collins, purportedly attending
Y‘Hica. We also accessed Education‘s Free Application for Federal
Student Aid Web site and completed PIN applications for each of the
students. Upon receipt of PINs for the fictitious students, we completed
on-line financial aid applications on their behalf. After obtaining
Student Aid Reports from Education establishing financial aid
eligibility and authorization to proceed with the student loan
application process, we submitted student loan applications to three
lenders on behalf of Ms. Collins and the other two purported students.
Nellie Mae Student Lending, Inc. and Sallie Mae Servicing Corporation,
acting as the guarantor for Nellie Mae, sent letters to the students
(an example of which is reprinted in enc. II) advising them that their
student loans had been approved for $18,500 each (totaling $ 55,500).
[Footnote 2] However, Bank of America, the third lender, did not
approve the loans.
Recommendation for Executive Action:
We recommend that the Secretary of Education implement a verification
process to ensure that a foreign school applying to participate in the
FFEL Program actually exists and is recognized by an appropriate
educational entity. Specifically, we recommend that Education enter
into a relationship with an organization such as the Department of
State, which would verify the existence of a foreign school that
applies for certification to participate in the FFEL Program through
site visits to the school and verification of its accreditation by
local educational authorities. In addition, we recommend that the
Secretary of Education review the process for certifying student loans
and develop controls to prevent fictitious students from obtaining
student loans.
Agency Comments:
We provided a briefing to administrators of Education‘s Foreign Schools
Team who agreed that our investigation disclosed weaknesses in
connection with the certification of foreign schools seeking
participation in the FFEL Program. As a result, Education advised us
that it has taken actions based on our recommendation. In this regard,
the Foreign Schools Team has developed a list of education ministries
in each country in which certified foreign schools purportedly exist
and has verified that each school properly received certification to
participate in the FFEL Program. In addition, the team has implemented
a procedure by which its staff is responsible for contacting the
respective education ministry each time a school applies for
certification or recertification to ensure that the school exists and
has been recognized by the appropriate educational entity as a
nonprofit, degree-granting institution. The Foreign Service Team also
advised us that there are other actions that it plans to take based on
our investigative findings and recommendation. Those actions include,
among others, (1) revising the internal certification checklist so that
the source of the validation is noted and (2) providing technical
assistance to foreign schools on financial aid requirements, such as
certifying loan applications, ensuring students are accepted for
enrollment prior to disbursement, and reporting enrollment status
updates.
As arranged with your office, unless you announce its contents earlier,
we plan no further distribution of this report until 30 days after its
date. At that time, we will send copies of this report to the Secretary
of Education and interested congressional committees. The report will
also be available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov]. If you have questions about the investigation,
please contact Acting Assistant Director Andrew O‘Connell at (202) 512-
7449 or Senior Special Agent Robyn D. Stewart at (202) 512-7475.
Sincerely yours,
Signed by:
Robert J. Cramer:
Managing Director:
Office of Special Investigations:
Enclosures:
[End of section]
Enclosure I:
[See PDF for image]
This figure is an illustration of a brochure cover for the fictitious
Y'Hica Institute for the Visual Arts.
[End of figure]
[End of enclosure]
Enclosure II:
SallieMae Corporation:
Killien, TX.
Nellie Mae, FMBC as Trustee:
Susan M. Collins:
4201 Wilson Blvd.
Arlington, VA 22203-1859:
Account Number: 007-023155-1:
Dear Susan M. Collins:
Congratulations. We are disbursing the funds for your Family Federal
Education Loan according to the accompanying disclosure statement.
Please allow time for the funds to be made available to you at your
school.
Remember that this is a loan that must be repaid. Make sure you have
investigated all other options for financial aid such as grants and
scholarships before you accept these funds. The accompanying Plain
Language Disclosure describes key rights and responsibilities. A
comprehensive list in included in your Master Promissory Note and
Rights and Responsibilities statement.
To assist you in estimating your repayment amount, we are providing a
chart entitled, "Repaying My Loans", or you may use the repayment
calculators featured at www.salliemae.com. You can also check the
status of your loans.
We wish you the best as you continue your education.
Loan Origination Department:
Enclosure:
Interim Disclosure Statement:
Plain Language Disclosure:
Loan Repayment Estimate Chart:
SallieMae Corporation:
Nellie Mae, FMBC as Trustee:
Federal Interim Disclosure Statement:
This is a loan that must be repaid.
This disclosure statement identifies for you the particular terms of
your loan. Laws and regulations governing the program may have changed
since you completed your Promissory Note or since you obtained your
last loan. Any changes appear on the following page of this disclosure
statement and become part of the terms and conditions of your loan.
Date: 02/19/02:
Account Number: 007-023155-1:
Student Name: Susan M. Collins:
Student SSN: 007-02-3155-1:
Interest Rate: 5.390:
School: Y'Hica Institute for the Visual Arts:
Anticipated graduation date: 06/30/04:
Grace Period: 6 months:
Repayment Begin Date: 12/31/04:
For FFLE loan, first payment is due after the final disbursement.
Lender: Nellie Mae, FMBC as Trustee.
Lender ED Code: 829076:
Disbursement Information:
If your funds are disbursed by check, we will send the check(s) to your
school. Your school will notify you when they receive your check(s).
The school will apply your check to your bill at the school and issue a
check to you for any remaining balance on your loan. If you do not want
your funds, do not endorse the check(s), but return it to us
immediately (or have the school return it to us). If your funds are
disbursed by EFT, we will wire the fund to your school. Your school
will deposit the funds into your account at the school and issue a
check to you for any remaining balance on your loan. If you do not want
your funds, notify us or your school immediately.
Loan Program: STAF - UNSUB:
Scheduled Disbursement Date: 02/19/02;
Principal Loan Amount: $9,250.00;
Origination Fee: $277.50;
Guarantee Fee: 0;
Net Disbursement Amount: $8,972.50.
Loan Program: STAF - UNSUB:
Scheduled Disbursement Date: 05/30/02;
Principal Loan Amount: $9,250.00;
Origination Fee: $277.50;
Guarantee Fee: 0;
Net Disbursement Amount: $8,972.50.
Loan Program: Total:
Principal Loan Amount: $18,500.00;
Origination Fee: $555.00;
Guarantee Fee: 0;
Net Disbursement Amount: $17,945.00.
Dates are estimated and subject to your continued eligibility. Interest
begins to accrue on PLUS and unsubsidized Stafford loans on the
disbursement date.
Fees have been subtracted from your principal loan amount.
Unsubsidized Interest Payments:
The estimated interest that will accrue each quarter on your
unsubsidized Stafford loan is listed below. All unpaid interest will be
capitalized (added to the principal) when you begin repayment. If you
wish to pay the interest, write your social security number on your
check, note "unsub interest" on the memo line, and send to our payment
address.
03/31/02: $55.97;
06/30/02: $167.90.
PO B0x 4700
Wilkes-Barre, PA. 18773-4700.
Total Cumulative Debt:
The information below lists your cumulative Federal Stafford
(subsidized and unsubsidized), SLS and PLUS loan debt, including the
total principal loan amount listed above and the outstanding principal
on any previous loans. This summarizes only the loans owned by us and
serviced by the Sallie Mae Servicing Corporation. It does not include
amounts you may owe through other lending institutions.
Loan Program: Stafford, Subsidized:
Loan Principal Amount: $0.
Loan Program: Stafford, Unsubsidized:
Loan Principal Amount: $18,500.00;
Loan Program: SLS:
Loan Principal Amount: $0;
Loan Program: PLUS;
Loan Principal Amount: $0;
Loan Program: Total;
Loan Principal Amount: $18,500.
Please see the following page for important information about your
loan.
[End of enclosure]
Footnotes:
[1] The FFEL program is a loan program for postsecondary students that
the government supports under Title IV of the Higher Education Act.
Previously, GAO identified vulnerabilities in the Guaranteed Student
Loan Program. (See U.S. General Accounting Office, High-Risk Series:
Guaranteed Student Loans, GAO/HR-93-2 (Washington, D.C.: December
1992), and High-Risk Series: Student Financial Aid, GAO/HR-95-10
(Washington, D.C.: February 1995).
[2] We contacted the financial institutions to explain that we had
applied for the loans as a part of our investigation and requested that
the financial institutions stop payment on the disbursement checks.
[End of section]
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