Proprietary Schools
Stronger Department of Education Oversight Needed to Help Ensure Only Eligible Students Receive Federal Student Aid Gao ID: GAO-09-600 August 17, 2009For-profit schools-also known as proprietary schools-received over $16 billion in federal loans, grants, and campus-based aid under Title IV of the Higher Education Act in 2007/08. GAO was asked to determine (1) how the student loan default profile of proprietary schools compares with that of other types of schools and (2) the extent to which Education's policies and procedures for monitoring student eligibility requirements for federal aid at proprietary schools protect students and the investment of Title IV funds. To address these objectives, GAO analyzed data and records from Education, examined Education's policies and procedures, reviewed relevant research studies, conducted site visits and undercover investigations at proprietary schools, and interviewed officials from Education, higher education associations, and state oversight agencies.
The Department of Education makes loans available to students to help them pay for higher education at public, private non-profit, and proprietary schools, and the students who attend proprietary schools are most likely to default on these loans, according to analysis of recent student loan data. Students from proprietary schools have higher default rates than students from other schools at 2, 3, and 4 years into repayment. Academic researchers have found that higher default rates at proprietary schools are linked to the characteristics of the students who attend these schools. Specifically, students who come from low income backgrounds and from families who lack higher education are more likely to default on their loans, and data show that students from proprietary schools are more likely to come from low income families and have parents who do not hold a college degree. Borrowers who are not successful in school and drop out also have high default rates. Ultimately, when student loan defaults occur, both taxpayers and the government, which guarantees the loans, are left with the costs. Although students must meet certain eligibility requirements to demonstrate that they have the ability to succeed in school before they receive federal loans, weaknesses in Education's oversight of these requirements place students and federal funds at risk of potential fraud and abuse at proprietary schools. Students are required to pass a test of basic math and English skills or have a high school diploma or GED to qualify for federal student aid. Yet, GAO and others have found violations of these requirements. For example, when GAO analysts posing as prospective students took the basic skills test at a local proprietary school, the independent test administrator gave out answers to some of the test questions. In addition, the analysts' test forms were tampered with-their actual answers were crossed out and changed-to ensure the individuals passed the test. GAO also identified cases in which officials at two proprietary schools helped prospective students obtain invalid high school diplomas from diploma mills in order to gain access to federal loans. GAO's findings do not represent nor imply widespread problems at all proprietary schools. However, GAO's work has identified significant vulnerabilities in Education's oversight. Education's inadequate monitoring of basic skills tests and lack of guidance on valid high school diplomas enables unqualified students to gain access to federal student aid. Unqualified students are at greater risk of dropping out of school, incurring substantial debt, and defaulting on federal loans.
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Report to the Chairman, Subcommittee on Higher Education, Lifelong
Learning and Competitiveness, Committee on Education and Labor, House
of Representatives:
United States Government Accountability Office:
GAO:
August 2009:
Proprietary Schools:
Stronger Department of Education Oversight Needed to Help Ensure Only
Eligible Students Receive Federal Student Aid:
GAO-09-600:
GAO Highlights:
Highlights of GAO-09-600, a report to the Chairman, Subcommittee on
Higher Education, Lifelong Learning, and Competitiveness, Committee on
Education and Labor, House of Representatives.
Why GAO Did This Study:
For-profit schools–also known as proprietary schools–received over $16
billion in federal loans, grants, and campus-based aid under Title IV
of the Higher Education Act in 2007/08. GAO was asked to determine (1)
how the student loan default profile of proprietary schools compares
with that of other types of schools and (2) the extent to which
Education‘s policies and procedures for monitoring student eligibility
requirements for federal aid at proprietary schools protect students
and the investment of Title IV funds. To address these objectives, GAO
analyzed data and records from Education, examined Education‘s policies
and procedures, reviewed relevant research studies, conducted site
visits and undercover investigations at proprietary schools, and
interviewed officials from Education, higher education associations,
and state oversight agencies.
What GAO Found:
The Department of Education makes loans available to students to help
them pay for higher education at public, private non-profit, and
proprietary schools, and the students who attend proprietary schools
are most likely to default on these loans, according to analysis of
recent student loan data. As shown in the graph below, students from
proprietary schools have higher default rates than students from other
schools at 2, 3, and 4 years into repayment. Academic researchers have
found that higher default rates at proprietary schools are linked to
the characteristics of the students who attend these schools.
Specifically, students who come from low income backgrounds and from
families who lack higher education are more likely to default on their
loans, and data show that students from proprietary schools are more
likely to come from low income families and have parents who do not
hold a college degree. Borrowers who are not successful in school and
drop out also have high default rates. Ultimately, when student loan
defaults occur, both taxpayers and the government, which guarantees the
loans, are left with the costs.
Figure: Proprietary Schools Have Higher Default Rates than Public and
Private Non-Profit Schools:
[Refer to PDF for image: vertical bar graph]
Default rate: Two-year rate;
Public: 4.7%;
Private non-profit: 3%;
Proprietary: 8.6%.
Default rate: Three-year rate;
Public: 7.2%;
Private non-profit: 4.7%;
Proprietary: 16.7%.
Default rate: Four-year rate;
Public: 9.5%;
Private non-profit: 6.5%;
Proprietary: 23.3%.
Source: GAO analysis of Education's 2004 cohort data from the National
Student Loan Data System.
Note: Education provided official 2-year default rates and modeled 3-
and 4-year default rates, by sector, using December 2007 student loan
data.
[End of figure]
Although students must meet certain eligibility requirements to
demonstrate that they have the ability to succeed in school before they
receive federal loans, weaknesses in Education‘s oversight of these
requirements place students and federal funds at risk of potential
fraud and abuse at proprietary schools. Students are required to pass a
test of basic math and English skills or have a high school diploma or
GED to qualify for federal student aid. Yet, GAO and others have found
violations of these requirements. For example, when GAO analysts posing
as prospective students took the basic skills test at a local
proprietary school, the independent test administrator gave out answers
to some of the test questions. In addition, the analysts‘ test forms
were tampered with–their actual answers were crossed out and changed–to
ensure the individuals passed the test. GAO also identified cases in
which officials at two proprietary schools helped prospective students
obtain invalid high school diplomas from diploma mills in order to gain
access to federal loans. GAO‘s findings do not represent nor imply
widespread problems at all proprietary schools. However, GAO‘s work has
identified significant vulnerabilities in Education‘s oversight.
Education‘s inadequate monitoring of basic skills tests and lack of
guidance on valid high school diplomas enables unqualified students to
gain access to federal student aid. Unqualified students are at greater
risk of dropping out of school, incurring substantial debt, and
defaulting on federal loans.
What GAO Recommends:
GAO is making three recommendations for Education to strengthen its
monitoring and oversight of federal aid eligibility requirements.
Specifically, GAO recommends Education (1) improve its monitoring of
basic skills tests and target schools for further review; (2) revise
regulations to strengthen controls over basic skills tests; and (3)
provide information and guidance on valid high school diplomas for use
in gaining access to federal student aid. The Department of Education
noted the steps it would take to address GAO‘s recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-09-600] or key
components. For more information, contact George A. Scott at (202) 512-
7215 or scottg@gao.gov.
[End of section]
Contents:
Letter:
Background:
Education's Analysis Shows That Default Rates Are Higher at Proprietary
Schools than at Public and Private Non-Profit Schools and Studies Link
High Default Rates to Borrowers' Characteristics:
Weaknesses in Education's Oversight of Federal Aid Eligibility
Requirements Place Students and Title IV Funds at Risk of Potential
Fraud and Abuse at Proprietary Schools:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the Department of Education:
Appendix III: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Age, Dependency Status, and Gender of Students at Proprietary,
Public, and Private Non-Profit Schools:
Table 2: Family Income and Parental Education of Students at
Proprietary, Public, and Private Non-Profit Schools:
Figures:
Figure 1: School Sectors by Percentage of Enrollments in Different
Program Lengths for the 2007-2008 Academic Year:
Figure 2: Race of Students by School Sector:
Figure 3: ATB Test Process:
Figure 4: Defaults Captured by the 2-year Cohort Default Rate:
Figure 5: Proprietary Schools Have Higher Default Rates Than Public and
Private Non-Profit Schools:
Figure 6: Among 4-year Schools, Proprietary Schools Have Consistently
Higher Default Rates Than Other Schools:
Figure 7: Among 2-year Schools, Proprietary Schools Have Higher Default
Rates Than Other Schools:
Figure 8: Among Less Than 2-year Schools, Private Non-profit and
Proprietary Schools Have Nearly Identical Default Rates:
Abbreviations:
ATB: ability-to-benefit:
CDR: cohort default rate:
FSA: Office of Federal Student Aid:
GED: general equivalency diploma:
IPEDS: Integrated Postsecondary Education Data System:
NCES: National Center for Education Statistics:
NPSAS: National Postsecondary Student Aid Study:
NSLDS: National Student Loan Data System:
OIG: Office of the Inspector General:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
August 17, 2009:
The Honorable Rubén Hinojosa:
Chairman:
Subcommittee on Higher Education, Lifelong Learning and
Competitiveness:
Committee on Education and Labor:
House of Representatives:
Dear Mr. Chairman:
Institutions of higher education, including public colleges, private
non-profit, and private for-profit schools, receive billions of dollars
each year from the Department of Education (Education) to help students
pay for school. In the 2007-2008 school year, private for-profit
schools-also known as proprietary schools-received over $16 billion in
loans, grants, and campus-based aid for disbursement to students under
Title IV of the Higher Education Act. Currently, there are over 2,000
proprietary schools of higher education that participate in Title IV
programs. Title IV funds for the proprietary sector have increased 164
percent since the 2001-2002 school year, and grown at a substantially
faster rate than Title IV funds for the public and private non-profit
sectors.[Footnote 1] Moreover, institutions of higher education,
including proprietary schools, are poised to receive additional Title
IV funds under the American Recovery and Reinvestment Act of 2009.
In recent years, the scale and scope of proprietary schools have
changed considerably. Once comprised of local, sole proprietor
ownership, the nation's proprietary institutions now range from small,
privately-owned schools to profitable publicly traded corporations such
as the Apollo Group, Corinthian Colleges, and Career Education
Corporation. Traditionally focused on certificate and associate
programs ranging from cosmetology to medical assistance and business
administration, proprietary institutions have expanded their offerings
to include bachelors, masters, and doctoral level programs. Both the
certificate and degree programs provide students with training for
careers in a variety of fields. Under current economic conditions, more
students may attend proprietary schools to acquire additional work
skills and training to help them obtain jobs. Proprietary schools also
provide course offerings through online education, and many proprietary
schools have open admissions policies to accept any student who
applies.
Students can only receive Title IV funds, provided in the form of
grants, loans, and campus-based aid, when they attend schools approved
to participate in the Title IV program. The schools must ensure that
the students receiving the funds meet certain eligibility requirements:
generally, students must have a high school diploma, or a general
equivalency diploma (GED), or demonstrate that they are ready for
higher education by passing an independently administered "ability to
benefit" (ATB) test of basic math and English skills or completing 6
credit hours applicable toward a degree or certificate offered at an
institution of higher education. Students who receive loans under the
Title IV program are responsible for repaying the loans, and those who
default increase the cost of the Title IV program to the federal
government and taxpayers.
Given your interest in learning more about proprietary schools, we
examined: (1) how the student loan default profile of proprietary
schools compares with that of other types of schools and (2) the extent
to which Education's policies and procedures for monitoring eligibility
requirements for federal aid at proprietary schools protect students
and the investment of Title IV funds.
To determine how the student loan default profile of proprietary
schools compares with that of other types of schools, we analyzed
Education data on school default rates from the National Student Loan
Data System (NSLDS), reviewed studies on factors that contribute to
student defaults, and conducted interviews with officials from
Education and higher education associations. As part of our analysis of
default rates at proprietary schools, we also looked at information on
student characteristics and outcomes. We analyzed the most recent
student survey data available from the 2004 National Postsecondary
Student Aid Study (NPSAS), data on students during the 2007-2008 school
year from the Integrated Postsecondary Education Data System (IPEDS),
and data on student outcomes from a 6-year study following students
beginning in the 1995-1996 school year conducted by the National Center
for Education Statistics (NCES). To assess the reliability of those
data elements needed for our study, we (1) performed electronic testing
of required data elements, (2) reviewed existing information about the
data and the systems that produced them and (3) interviewed agency
officials knowledgeable about the data. We determined that the data are
sufficiently reliable for the purposes of this report. To determine the
extent to which Education's policies and procedures for monitoring
student eligibility requirements for federal aid at proprietary schools
protect students and the investment of Title IV funds, we reviewed
Education's policies and procedures for monitoring the administration
of ability-to-benefit tests and for enforcing high school diploma
requirements; reviewed relevant program reviews, independent audits,
relevant laws and regulations, and enforcement actions taken against
schools; and interviewed officials from Education, state education
licensing agencies, and higher education associations. We also gathered
information during school site visits conducted in California,
Illinois, New York, and Virginia. We selected these sites for
geographic diversity and a mixture of ownership types (independently-
owned and publicly-traded schools) and degree and certificate programs.
In addition, GAO anonymously tested institution compliance with Title
IV eligibility requirements and sent, on two separate occasions,
analysts posing as prospective students to take and purposely fail ATB
tests at a local proprietary institution. We supplemented this work
with a review of investigations conducted by Education's Office of
Inspector General and the New York Department of Education.
We conducted this performance audit from October 2007 to August 2009,
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives. For additional information
on the methodology used for this review, see appendix I.
Background:
Title IV Programs:
The Department of Education's Office of Federal Student Aid (FSA)
manages and administers student financial assistance programs
authorized under Title IV of the Higher Education Act of 1965, as
amended.[Footnote 2] These programs include, among others, the William
D. Ford Federal Direct Loan Program (Direct Loan program), the Federal
Family Education Loan Program (FFEL program), the Federal Pell Grant
Program (Pell Grant program), and campus-based aid programs.[Footnote
3] In the 2007-2008 school year, Title IV programs provided more than
$85 billion in student aid.
In 1990, we placed Education's student financial aid programs on our
high risk list of programs at risk of fraud, waste, abuse, and
mismanagement. At the time, Education had various problems, including
poor financial management and fragmented and inefficient information
systems. In 2005, we removed these programs from the list due to
improvements made to Education's financial management of federal
student aid programs and better integration of its information systems.
However, we continue to monitor Education's administration and
oversight of federal student aid programs.
Types of Title IV Eligible Institutions:
The Higher Education Act provides that a variety of institutions of
higher education are eligible to participate in Title IV programs,
including:
* Public institutions-Institutions operated and funded by state or
local governments, which include state universities and community
colleges.
* Private non-profit institutions-Institutions owned and operated by
non-profit organizations whose net earnings do not benefit any
shareholder or individual. These institutions are eligible for tax
deductible contributions in accordance with the Internal Revenue code
(26 U.S.C. § 501(c)(3)).
* Proprietary institutions-Institutions that are privately-owned whose
net earnings can benefit a shareholder or individual; that is, for-
profit institutions. These institutions can be further classified by
their program lengths:
* 4-year and above-The program length for colleges and universities.
Such schools typically offer bachelor's degrees and higher-level
degrees. Some 4-year and above schools also offer associate's degrees,
which generally take 2 years to complete.
* 2-year-The program length for many community colleges and other
institutions offering associate's degrees. These schools often also
offer certificate programs.[Footnote 4]
* Less than 2-year-Includes schools, often referred to as "vocational
and technical schools," that offer certificate programs, but typically
do not offer degrees.
Overall, the proprietary sector receives the smallest percentage of
Title IV funds-about 19 percent-compared with the public and private
non-profit sectors, which receive about 48 and 33 percent,
respectively.[Footnote 5] However, the amount of Title IV funding going
to the proprietary sector has risen significantly in recent years and
some of the schools receiving the most Title IV funds are proprietary
schools.
Four-year and above schools account for the majority of enrollments in
the public, private non-profit, and proprietary sectors. Two-year
schools account for a significant percentage of the enrollments in the
public and proprietary sectors, but only about 2 percent of enrollments
in the private non-profit sector. Less than 2-year schools account for
19 percent of the enrollment in the proprietary sector, but are less
than half of 1 percent of the enrollments at both public and private
non-profit sectors. Figure 1 shows school sectors by the percentage of
enrollments in different program length categories.
Figure 1: School Sectors by Percentage of Enrollments in Different
Program Lengths for the 2007-2008 Academic Year:
[Refer to PDF for image: stacked vertical bar graph]
Type of school: Public;
4-year and above: 52%;
2-year: 48%;
Less than 2-year: 0%.
Type of school: Not for-profit;
4-year and above: 98%;
2-year: 2%;
Less than 2-year: 0%.
Type of school: Proprietary;
4-year and above: 57%;
2-year: 24%;
Less than 2-year: 19%.
Source: GAO analysis of IPEDS data.
[End of figure]
Under Title IV of the Higher Education Act, a school can receive
student aid if it offers courses of study such as certificate,
associates, bachelor's, graduate, or professional degree programs.
Vocational and technical training, in which skills related to a
specific trade, vocation or occupation are taught, are generally
offered at community colleges as well as proprietary schools. Relative
to the total number of schools in the Title IV program that award
degrees and certificates, the proprietary sector awards a small
percentage of bachelor's degrees and above, but a substantial
percentage of certificates.
Characteristics of Students Attending Proprietary Schools:
Students who attend proprietary schools generally have characteristics
that differ from students at public and private non-profit schools.
First, over half of the student population at proprietary schools is
comprised of "non-traditional" students, such as students who are 25
years old and older. Second, more students at proprietary schools are
financially independent compared to students at public and private non-
profit schools.[Footnote 6] Third, proprietary schools serve a higher
percentage of women than schools in other sectors. See table 1 for
analysis of Education's data on age, dependency status, and gender of
students in the three school sectors.
Table 1: Age, Dependency Status, and Gender of Students at Proprietary,
Public, and Private Non-Profit Schools:
School sector: Proprietary;
Students age 25 and older (percentage): 56;
Financially independent students (percentage): 76;
Female students (percentage): 63.
School sector: Public;
Students age 25 and older (percentage): 35;
Financially independent students (percentage): 50;
Female students (percentage): 54.
School sector: Private non-profit;
Students age 25 and older (percentage): 38;
Financially independent students (percentage): 39;
Female students (percentage): 56.
Source: GAO analyses of 2007/2008 IPEDS and 2004 NPSAS datasets.
[End of table]
Lastly, proprietary schools have a higher percentage of minority
students, specifically African-American and Hispanic students, than
public and private non-profit schools. However, a higher percentage of
Asian-American students attend both public and private non-profit
schools than proprietary schools. See figure 2 for analysis of
Education's data on student race in the three school sectors.
Figure 2: Race of Students by School Sector:
[Refer to PDF for image: stacked vertical bar graph]
Type of school: Public;
White, non-Hispanic: 66%;
African-American: 13%;
Hispanic: 13%;
Asian/Pacific Islander: 7%;
American Indian/Alaska Native: 1%.
Type of school: Private not-for-profit;
White, non-Hispanic: 70%;
African-American: 12%;
Hispanic: 11%;
Asian/Pacific Islander: 6%;
American Indian/Alaska Native: 1%.
Type of school: Private for-profit;
White, non-Hispanic: 50%;
African-American: 26%;
Hispanic: 19%;
Asian/Pacific Islander: 4%;
American Indian/Alaska Native: 1%.
Source: GAO analysis of 2007/2008 IPEDS dataset.
[End of figure]
Eligibility Criteria for School Participation in the Title IV Program:
In order for students attending a school to receive Title IV funds, a
school must be:
(1) licensed or otherwise legally authorized to provide higher
education in the state in which it is located,
(2) accredited by an agency recognized for that purpose by the
Secretary of the U.S. Department of Education, and:
(3) deemed eligible and certified to participate in federal student aid
programs by Education.
This is commonly referred to as the triad. Under the Higher Education
Act, Education does not determine the quality of higher education
institutions or their programs; rather, it relies on recognized
accrediting agencies to do so. As part of its role in the
administration of federal student aid programs, Education determines
which institutions of higher education are eligible to participate in
Title IV programs. Education is responsible for overseeing school
compliance with Title IV laws and regulations and ensuring that only
eligible students receive federal student aid. As part of its
compliance monitoring, Education relies on department employees and
independent auditors of schools to conduct program reviews and audits
of schools.
ATB Test:
Generally, students without a high school diploma or GED can qualify
for Title IV loans, grants, and campus-based aid if they pass an
independently administered test of basic math and English skills,
called an "ability-to-benefit" or ATB test.[Footnote 7] The intent of
the test is to measure whether students have the basic skills needed to
benefit from higher education and succeed in school. The test must be
approved by the Secretary of Education and administered by an
independent party. Students must pass the test prior to enrolling in
classes and receiving Title IV funds. Since the inception of ATB test
requirements, hundreds of thousands of non-high school graduates have
qualified for Title IV aid by taking these tests.
Under the ATB test program, Education is responsible for overseeing
test publishers, who, in turn, are responsible for certifying and
monitoring test administrators to ensure the independent and proper
administration of ATB tests. Test publishers are required to conduct
and submit to Education an analysis of test scores every 3 years to
identify any test irregularities that would suggest ATB tests are not
administered in accordance with test rules. Certified test
administrators administer ATB tests to prospective students at schools.
Figure 3 describes the ATB test process and how it is carried out.
Figure 3: ATB Test Process:
[Refer to PDF for image: illustration]
Department of Education:
* Approves tests submitted by test publishers for ATB use.
Test Publishers:
* Send test score analysis to Education every 3 years to identify test
score irregularities suggesting improper test administration;
* Certify independent test administrators; decertify test
administrators who improperly administer tests.
Independent test administrators (ITAs):
* Send test answer sheets to test publisher for official scoring;
* Administer ATB test to prospective students at the school.
Prospective students:
* Take ATB test at school.
Sources: GAO analysis; images, Art Explosion.
[End of figure]
Default Rates Calculated for Schools Participating in Title IV Loan
Programs:
Education computes default rates for all schools with students who
receive Title IV loans through the FFEL Program or the Direct Loan
Program. Education calculates default rates each year by tracking
whether borrowers in a cohort-a group of students who begin repaying
their loans in a given fiscal year-at each school default on their
federal student loans over a 2-year period. The resulting calculation
is called the cohort default rate. For example, to calculate the 2-year
default rate for the 2006 cohort, Education divided (1) the number of
borrowers who began their repayment period in fiscal year 2006 and
defaulted before the end of fiscal year 2007 (the numerator) by (2) the
number of borrowers who began their repayment period in fiscal year
2006 (the denominator). The resulting default rate is expressed as a
percentage with a higher percentage indicating more defaults. The
majority of schools now have default rates under 10 percent, which is a
qualifying rate for favorable loan disbursement and delivery terms.
[Footnote 8] These terms allow schools to disburse loans in a single
installment rather than in two or more installments.
Borrowers begin repayment after dropping below half-time enrollment,
graduating, or leaving their program.[Footnote 9] Borrowers generally
default when they do not make any payments on their loan for 270 days
(about 9 months) or more and they have not obtained a temporary
cessation or reduction of payments--referred to as a deferment or
forbearance--for reasons such as economic hardship, disability, or
enrollment in another school that is eligible to participate in the
Title IV program.[Footnote 10]
Starting in January 1991, the Secretary of Education initiated
proceedings for immediate loss, suspension, or termination of schools'
eligibility to participate in Title IV loan programs if their default
rates were above specified thresholds. From 1992, the first year from
which Education data were available on numbers of schools by sector
subject to immediate loss, suspension, or termination from the Title IV
program due to high default rates, until 1999, 1,846 schools, including
1,580 from the proprietary sector, were subject to sanctions. More
recently, from 2000 until 2008, four schools were subject to immediate
loss, suspension, or termination from the Title IV program due to high
default rates, including three from the proprietary sector. According
to an Education official, there are several possible explanations for
the drop in defaults and, subsequently, for the drop in the number of
schools subject to sanctions. For example, the Education official noted
that the Department's efforts to provide schools with default
prevention training may have reduced default rates. In addition, he
pointed out that many proprietary schools with chronically high default
rates lost Title IV eligibility and subsequently went out of business
in the early 1990s.
Consequences of Student Loan Defaults:
When students do not make payments on their federal loans and the loans
are in default, the federal government and taxpayers assume nearly all
the risk and are left with the costs. For example, in the FFEL program,
the federal government and taxpayers pick up 97 percent of the cost on
defaulted loans. In the Direct Loan program, the federal government and
taxpayers pick up 100 percent of the unpaid principle and accrued
interest on defaulted loans.
Though the federal government and taxpayers pick up the majority of the
costs on defaulted loans, students who default are also at risk of
facing a number of personal and financial burdens. For example,
defaulted loans will appear on the student's credit record, which may
make it more difficult for them to obtain an auto loan, mortgage, or
credit card. A negative credit record could also harm the student's
ability to obtain a job or rent an apartment. Students will also be
ineligible for assistance under most federal loan programs and may not
receive any additional Title IV federal student aid until the loan is
repaid in full. Furthermore, the Department of Education can refer
defaulted student loan debts to the Department of the Treasury to
offset any federal and/or state income tax refunds due to the borrower
to repay the defaulted loan. In addition, Education may require
employers who employ individuals who have defaulted on a student loan
to deduct 15 percent of the borrower's disposable pay toward repayment
of the debt. Garnishment may continue until the entire balance of the
outstanding loan is paid.
Education's Analysis Shows That Default Rates Are Higher at Proprietary
Schools than at Public and Private Non-Profit Schools and Studies Link
High Default Rates to Borrowers' Characteristics:
Default Rates of Borrowers from Proprietary Schools Are Higher than
Those of Borrowers from Other Schools and Increase over Time:
Default rates measured 2 years after students begin repaying their
loans show that students from proprietary schools have higher default
rates than students from public and private non-profit schools.
According to Education's calculations from the group, or cohort, of
students who entered repayment in fiscal year 2004, the proprietary
sector's 2-year cohort default rate is 8.6 percent.[Footnote 11] This
rate is higher than the public and private non-profit sectors, which
have rates of 4.7 percent and 3 percent, respectively. Although the
proprietary sector's rate is higher than other sectors, it is still
below the threshold cut-off rates--25 percent for 3 years or 40 percent
for 1 year--used by Education to disqualify schools from Title IV
eligibility.[Footnote 12]
While the cohort default rate is one of the means by which Education
monitors schools' eligibility to participate in Title IV programs, the
rate captures only a small portion of all student loan defaults at
schools. First, any defaults that occur over the life of the loan after
the 2-year period are excluded from schools' cohort rate
calculations.[Footnote 13] Second, during the 2-year period, borrowers
are generally considered in repayment as long as they have made a
payment in the last 270 days, or about 9 months. Third, borrowers who
seek forbearances or deferments on their loans during that 2-year
cohort period are also considered to be in repayment.[Footnote 14]
Figure 4 illustrates the 2-year cohort default rate.
Figure 4: Defaults Captured by the 2-year Cohort Default Rate:
[Refer to PDF for image: illustration]
Cohort:
2-year repayment period;
Cohort period begins: year 0;
Cohort period ends: year 2;
Defaults counted:
Borrowers who do not make payments for 270 days (9 months) before
cohort period ends, while not in forbearance or deferment;
Defaults not counted:
Repayments continue in subsequent years until loan is paid off, which
can take 15 years or more.
Sources: GAO analysis; images, Art Explosion.
[End of figure]
While borrowers from all sectors are defaulting at higher rates after
the 2-year period, Education's default rate calculations of borrower's
repayments in the third and fourth years show that proprietary schools'
default rates increase more than those of public and private non-profit
schools. For example, 4 years after borrowers entered repayment, 23.3
percent of proprietary school borrowers have defaulted, compared to 9.5
percent of borrowers from public schools and 6.5 percent of borrowers
from private non-profit schools, as shown in figure 5.
Figure 5: Proprietary Schools Have Higher Default Rates Than Public and
Private Non-Profit Schools:
[Refer to PDF for image: vertical bar graph]
Default rate: Two-year rate;
Private: 4.7%;
Private non-profit: 3%;
Proprietary: 8.6%.
Default rate: Three-year rate;
Private: 7.2%;
Private non-profit: 4.7%;
Proprietary: 16.7%.
Source: GAO analysis of 2004 cohort data from NSLDS, provided by the
Department of Education of2-year, 3-year, and 4-year default rates by
sector.
Note: Education provided official 2-year default rates and modeled 3-
and 4-year default rates, by sector, using December 2007 student loan
data.
[End of figure]
Generally, higher default rates in the proprietary sector persist for
programs of different lengths. Among 4-year schools, the default rates
at 2, 3, and 4 years into repayment are higher among proprietary
schools than other schools. Further, at 4-year schools, the default
rate 4 years into repayment for proprietary schools is more than twice
the rate of public and private non-profit schools. See figure 6.
Figure 6: Among 4-year Schools, Proprietary Schools Have Consistently
Higher Default Rates Than Other Schools:
[Refer to PDF for image: vertical bar graph]
4-year schools: Two-year rate;
Private: 3.5%;
Private non-profit: 2.8%;
Proprietary: 7.3%.
4-year schools: Three-year rate;
Private: 5.3%;
Private non-profit: 4.5%;
Proprietary: 13.7%.
4-year schools: Four-year rate;
Private: 7.1%;
Private non-profit: 6.2%;
Proprietary: 19.2%.
Source: GAO analysis of 2004 cohort data from NSLDS, provided by the
Department of Education of2-year, 3-year, and 4-year default rates by
sector.
Note: Education provided official 2-year default rates and modeled 3-
and 4-year default rates, by sector, using December 2007 student loan
data.
[End of figure]
Similarly, among 2-year schools, proprietary schools have higher
default rates than other schools. For example, the default rate 4 years
into repayment for proprietary schools is the highest-27.2 percent-of
the three school sectors. See figure 7.
Figure 7: Among 2-year Schools, Proprietary Schools Have Higher Default
Rates Than Other Schools:
[Refer to PDF for image: vertical bar graph]
2-year schools: Two-year rate;
Private: 8.1%;
Private non-profit: 7.4%;
Proprietary: 9.9%.
2-year schools: Three-year rate;
Private: 12.9%;
Private non-profit: 12.2%;
Proprietary: 19.5%.
2-year schools: Four-year rate;
Private: 16.6%;
Private non-profit: 16.2%;
Proprietary: 27.2%.
Source: GAO analysis of 2004 cohort data from NSLDS, provided by the
Department of Education of2-year, 3-year, and 4-year default rates by
sector.
Note: Education provided official 2-year default rates and modeled 3-
and 4-year default rates, by sector, using December 2007 student loan
data.
[End of figure]
Among less than 2-year schools, proprietary schools have higher default
rates than public schools, but nearly identical rates to those of
private non-profit schools.[Footnote 15] See figure 8.
Figure 8: Among Less Than 2-year Schools, Private Non-profit and
Proprietary Schools Have Nearly Identical Default Rates:
[Refer to PDF for image: vertical bar graph]
Less than 2-year schools: Two-year rate;
Private: 5.7%;
Private non-profit: 9%;
Proprietary: 8.9%.
Less than 2-year schools: Three-year rate;
Private: 9.7%;
Private non-profit: 18.7%;
Proprietary: 18.5%.
Less than 2-year schools: Four-year rate;
Private: 14.1%;
Private non-profit: 26.7%;
Proprietary: 26.6%.
Source: GAO analysis of 2004 cohort data from NSLDS, provided by the
Department of Education of2-year, 3-year, and 4-year default rates by
sector.
Note: Education provided official 2-year default rates and modeled 3-
and 4-year default rates, by sector, using December 2007 student loan
data.
[End of figure]
Even though the proprietary sector generally has higher cohort default
rates than the public and private non-profit sectors, many individual
proprietary schools have lower rates than the sector as a whole. Using
a fiscal year 2004 dataset of 3-year cohort default rates for
individual schools, we found that some proprietary schools had among
the lowest default rates of all schools in the country.[Footnote 16]
Our results indicated that 121 proprietary schools, or about 9.3
percent of all proprietary schools for which Education calculated
cohort default rates, had rates under 5 percent.[Footnote 17]
Furthermore, 18 of those schools had no students who defaulted on their
loans over the 3-year period. These proprietary schools with relatively
low default rates represent a variety of ownership types and program
offerings.
Various Student Characteristics Contribute to Higher Default Rates,
according to Research:
Variations in default rates across school sectors may reflect the
characteristics of the students who attend the schools, according to
academic research studies. Although the research linking explanatory
factors to federal student loan defaults is limited, especially in
recent years, we found in 8 of the 11 studies that we reviewed that
there are multiple demographic characteristics of borrowers that
correlate with higher default rates.[Footnote 18]
In several of the studies, two borrower characteristics closely linked
to higher default rates are low family income and parents who lack a
higher education degree. Analysis of Education's data shows that the
annual median family income of students at proprietary schools is
significantly lower than that of students at public and private non-
profit schools. Data analysis also show that a significantly lower
percent of parents of proprietary school students have an associate's
degree or higher, compared to parents of public and private non-profit
school students. See table 2 for data on family income and parental
education of students at proprietary, public, and private non-profit
schools.
Table 2: Family Income and Parental Education of Students at
Proprietary, Public, and Private Non-Profit Schools:
School sector: Proprietary;
Annual median family income: $24,300;
Parents with associate's degree or higher (percentage): 37.
School sector: Public;
Annual median family income: $40,400;
Parents with associate's degree or higher (percentage): 52.
School sector: Private non-profit;
Annual median family income: $49,200;
Parents with associate's degree or higher (percentage): 61.
Source: GAO analysis of 2004 NPSAS dataset.
Note: These numbers are estimates and include both dependent and
independent students.
[End of table]
Student age was also linked to default rates in some of the research
studies, with borrowers who take out student loans at an older age
being more likely to default on their loans. One of the studies that
linked age to default rates suggested that older students may default
at higher rates because they tend to have other obligations besides
paying for college. These obligations may include paying a mortgage or
paying for child care. Our analysis of Education's data shows that
proprietary schools serve a higher percentage of older students than
public and private non-profit schools and the majority of students at
proprietary schools are 25 years old and older.
Research also shows that borrowers' success in school may help predict
whether they will default. We found studies published in national
journals that showed that borrowers who have a low grade point average
and who are not continuously enrolled in school before they leave their
programs are more likely to default. Across the three school sectors
and program lengths, a factor closely associated with increased default
rates was drop-out rates. In six different research studies--three that
examined default rates from national datasets and three that examined
default rates from state-specific datasets--default rates were
positively correlated with drop outs, or students who failed to
complete their programs. A 6-year study by Education's NCES, which
followed students who began higher education in the 1995-1996 school
year, found that a larger estimated percentage of students at 4-year
proprietary schools dropped out than students at private non-profit
schools.[Footnote 19] The same study estimated no statistically
significant difference in drop-out rates between students at 4-year
proprietary and public schools. In addition, the study estimated that 6
years after beginning a 4-year school, a significantly smaller
percentage of proprietary students attained their bachelor's degree
compared to those at public and private non-profit schools. In
contrast, data show that for students who first started at 2-year
proprietary schools, there is a significantly higher percentage who
attained their associate's degrees compared to students at public
schools.[Footnote 20] While program completion was an important factor
in predicting default rates, we reviewed one study that found that
completing associate's and bachelor's degrees were significantly
correlated with lower default rates, but completing a certificate or
license was not.
Characteristics of borrowers' loans and their repayment options may
help predict default rates as well. For example, a factor in predicting
defaults can be the amount that borrowers take out in loans; those who
borrow smaller amounts, according to one study, may have a higher
likelihood of defaulting than those who borrow larger amounts.
Researchers estimated that borrowing larger amounts is correlated with
higher levels of education--such as graduate or professional programs--
which give borrowers an increased earning potential so that they are
better able to repay their loans. In another study that examined
characteristics of borrowers' loans and repayment options, researchers
estimated that those who graduated with a bachelor's degree and used
the forbearance or deferment options after entering repayment were more
than twice as likely to default. Finally, borrowers who had
consolidated loans and income-contingent repayment plans were also more
likely to default than those who had not used those options.[Footnote
21]
Weaknesses in Education's Oversight of Federal Aid Eligibility
Requirements Place Students and Title IV Funds at Risk of Potential
Fraud and Abuse at Proprietary Schools:
Education's Weak Oversight of ATB Test Requirements Allows Ineligible
Students to Receive Federal Aid:
Through separate investigations at proprietary schools, we, along with
other federal and state investigative agencies, found test
administrators or school officials violating rules to ensure
prospective students without high school diplomas passed required tests
and obtained access to Title IV aid. Generally, prospective students
without high school diplomas or GEDs must pass ATB tests to become
eligible to receive federal financial aid, and test administrators are
responsible for administering ATB tests at schools in accordance with
test publisher rules. When we conducted our own investigation of
compliance with ATB requirements, we found improper activities that
compromised the integrity of the test process. For example, in 2008 we
sent two GAO analysts who posed as prospective students to a local
branch of a publicly traded proprietary school to deliberately flunk an
ATB test. Each analyst was sent separately to the school and on both
occasions, the independent test administrator gave them and all the
test takers in the room-about 20 in total-answers to some of the test
questions. We later obtained copies of the analysts' test forms and
found that they had been tampered with-their actual answers had been
crossed out and changed-to ensure the analysts passed and would become
eligible to receive Title IV funds. We turned over the information on
testing violations to Education's Office of Inspector General (OIG),
which then used the information to further investigate the ATB tests at
this school.
Investigators at the OIG and the New York Department of Education have
previously reported finding similar problems. For example, in one case
the OIG found personnel at a proprietary school in Louisiana had
changed the failing test scores of prospective students to allow 80
individuals to pass and inappropriately qualify for federal funding.
[Footnote 22] Likewise, in two separate New York investigations in
which multiple undercover operatives were sent to flunk ATB tests at
local proprietary schools, test answers were changed by either the test
administrator or school officials to ensure all people posing as
students passed and gained access to federal aid.[Footnote 23] In
addition to giving out test answers and falsifying test results, test
administrators and officials at proprietary schools have violated other
ATB test rules, impairing the independence of the testing process and
allowing ineligible students to access federal financial aid.
Regulations governing the test process require test administrators, who
are certified by test publishers to administer ATB tests, to be
independent of the school at which tests are taken and to submit test
answer sheets directly to the test publisher for scoring. However,
Education's Office of Inspector General previously found violations of
the requirement for independent test administration, in which
proprietary school officials inappropriately administered tests. In
another case involving improper testing at a proprietary school, the
Education OIG found that test administrators failed to follow test
rules that govern when students can retake the test on the same form.
As a result, 724 students who passed improper retests received over $3
million in federal financial aid.[Footnote 24] While OIG officials told
us that some of their cases have involved public schools, they reported
that most of their findings regarding abuse of ATB tests have involved
proprietary schools. When ATB tests are not properly administered, a
prospective student's ability to benefit from higher education may not
be accurately assessed. As a result, prospective students who are
academically unqualified are more likely to be admitted to a school and
receive federal student aid. Such students are at greater risk of
dropping out of school, incurring substantial debt, and defaulting on
their federal student loans.
These problems result, in part, from key weaknesses in Education's
oversight of ATB testing, which were previously identified in a 2002
Education Office of Inspector General report.[Footnote 25] As part of
its report, the OIG recommended changes to strengthen Education's
monitoring of test publishers. Education approves the tests for ATB use
and test publishers monitor how tests are administered. However,
Education has done little since then to strengthen its oversight of
test publishers. Although test publishers are required to conduct and
submit to Education test score analyses every 3 years to help identify
test score irregularities, Education has not followed up with test
publishers to ensure that all comply with these requirements. For
example, as of early 2009, one of the four approved test publishers had
yet to submit test score analyses due in April 2005 and in April 2008
for two of its approved tests. Further, the same test publisher had
failed to submit test score analysis also due in April 2008 for another
of its approved tests. Similarly, two of the four test publishers
failed to submit test score analyses due to Education in January 2008.
Education officials told us the employee responsible for test publisher
oversight and review of test submissions retired in 2008. Since that
time and until March 2009, no one at Education had followed up to
obtain unsubmitted test score analyses, increasing the risk of
unidentified test violations and fraudulent access to federal student
aid. In response to our review, Education followed up with test
publishers in the spring of 2009 to obtain missing test score
submissions. In addition to ensuring the timeliness of submissions,
Education should also ensure that the analyses conducted by test
publishers are sufficient to identify improper testing. When we spoke
with OIG and Education officials, they told us that one test publisher
provides thorough analyses that have led to the identification of
possible violations; however, other test publishers provide only
cursory analyses of test scores. According to the Standards for
Internal Controls in the Federal Government, federal agencies need to
have systems in place that ensure timely, effective, and efficient
oversight of government programs and continually monitor programs to
address potential risks.[Footnote 26] Weaknesses in Education's systems
of controls for monitoring test publishers may not adequately guard
against fraud and abuse in the ATB test program.
In addition to problems with Education's monitoring of test publishers,
Education regulations do not allow for timely identification of
improper test administration. Education's regulations only require test
publishers to conduct test score analyses every 3 years. Consequently,
test administrators who improperly administer tests can go undetected
for 3 years before violations are discovered, resulting in an increased
risk of fraud and abuse. As part of the internal control standards for
federal agencies, the evaluation of a program should depend on the
risks associated with the program and should ensure that timely
information is available to allow for effective monitoring.[Footnote
27] Given the risks of potential fraud and abuse associated with the
ATB test program, the analysis of test scores every 3 years may leave
the program vulnerable to violations. Education and test publisher
officials we spoke with suggested that more frequent analyses of test
scores by test publishers could improve the integrity of the testing
process.
Education's regulations also do not specifically require test
publishers to follow up on test score irregularities or report any
corrective actions to Education. While test publishers are required to
identify test score irregularities that raise suggestions that tests
are not being properly administered, there is no requirement that test
publishers further investigate irregularities to determine if actual
violations occurred. In addition, regulations require that test
publishers decertify test administrators who fail to properly
administer tests; however, Education regulations do not require test
publishers to report to Education on the implementation of their
decertification process. Because test publishers are not required to
provide Education with the results of their decertification activities,
Education cannot be assured that test administrators found in violation
of test rules are decertified. Likewise, without further requirements
in regulation for test publishers to provide information on test
administrators, Education has no way to determine whether test
administrators decertified by one publisher are instead administering
tests for other publishers, and therefore cannot protect against the
risk of future violations.
Education's Weak Oversight of High School Diploma Requirements Does Not
Adequately Protect against the Use of Diploma Mills to Obtain Federal
Aid:
During our review, we identified cases in which proprietary schools
helped students obtain high school diplomas from diploma mills-entities
that provide invalid diplomas, usually for a fee and little academic
work-in order to obtain access to federal student loans. Through one of
our site visits and interviews with students and student interest
groups, we learned of cases where recruiters at two separate publicly
traded proprietary schools referred students to diploma mills for
invalid high school diplomas in order to gain access to federal loans
without having to take an ATB test. In one case, a student interest
group told us a student who dropped out of high school in the 9th grade
was guided by the proprietary school to take an online test to receive
a high school diploma. Based on our discussion with a state education
agency, we confirmed that the entity that provided the diploma was a
diploma mill. In another case, a student told us he was flunking out of
high school when a recruiter at the proprietary school directed him to
a place where he could pay a fee to take a test and obtain a high
school diploma. Based on our review of that county's listing of high
schools considered diploma mills, we later determined that the entity
offering the high school diploma was a diploma mill. Although Education
has also identified some cases of high school diploma mills-including
one in which a proprietary school had arrangements with a diploma mill
to secure high school diplomas for 30 students who obtained $76,000 in
federal financial aid-Education regional officials told us that the
problem may be more widespread than is known.
Despite evidence of invalid high school diplomas being used to gain
access to federal student loans, Education has not established clearly
written policies to help ensure high school diploma requirements are
met for Title IV funding. Although senior Education officials told us
that the department's official policy is that high school diplomas from
diploma mills are not acceptable for Title IV eligibility and the
department prosecutes diploma mill cases, Education officials told us
they do not explicitly assert this policy in any written form. Rather,
Education notes in its Federal Student Aid Handbook that a high school
diploma is one that comes from a school recognized by the state in
which the school is located. Internal control standards provide that
federal agencies should employ effective ways to record and communicate
important information to employees and others, such as in policy
manuals, to enable them to carry out their duties and responsibilities.
[Footnote 28] Without a written policy that clearly communicates
Education's position against the use of diploma mills to obtain access
to federal student aid, Education staff and external parties such as
schools and independent auditors-who must comply or monitor compliance
with Title IV rules-lack important information regarding eligibility
requirements. Education officials have acknowledged that the use of
high school diplomas from diploma mills to obtain access to federal
student aid is a problem and that more guidance would be helpful. In
May 2009, Education announced plans to convene public forums to help
inform the development of proposed regulations that would address
matters related to Title IV program integrity, including the definition
of a high school diploma as a condition of receiving federal student
aid.
In addition to weaknesses in its policies governing high school diploma
requirements, Education provides limited guidance and tools that
Education program review staff, schools, and independent auditors can
use to help identify high school diploma mills. Though Education, in
its Federal Student Aid Handbook, advises officials to contact state
education agencies if they question the validity of a high school
diploma, Education officials told us that program review staff have no
other guidance to help them judge whether there is a potential problem.
Further, they acknowledged that in many cases, the identification of an
invalid high school diploma is based on the experience of the program
review staff and whether something appears to be wrong. For example,
when a reviewer finds an unusually large number of students with high
school diplomas coming from the same school located outside the state,
this may prompt the reviewer to look into the origin of the diplomas
further. As we noted earlier, standards for internal controls in the
federal government require federal agencies to communicate relevant and
reliable information to help agency staff and external stakeholders
carry out their responsibilities. Education provides limited
information and resources that would help internal and external
reviewers and schools better monitor compliance with high school
diploma requirements. Education officials told us that a comprehensive
list of recognized high schools could help Education staff and schools
better identify diplomas from diploma mills. Several states already
provide lists of the high schools they recognize and make them
available to the public on their Web sites. However, Education provides
little information on these already available resources that could help
officials identify invalid high school diplomas. In contrast, Education
already maintains information and resources on its Web site to help
individuals identify and avoid higher education diploma mills by
listing colleges and universities that are eligible to participate in
federal student aid programs.[Footnote 29] Education's limited guidance
to help both internal and external parties detect the use of high
school diploma mills for Title IV eligibility may hinder its efforts to
ensure that students receiving federal financial aid have the ability
to succeed in higher education.
Conclusions:
Proprietary schools have become a rapidly growing sector of higher
education in this country and will likely continue to grow with the
availability of additional federal funding and an increased demand for
education and job training. Many of these schools play an important
role in providing a range of students, including non-traditional and
disadvantaged students, with an opportunity to obtain the education
they need to increase their work skills and find jobs. However,
students who attend proprietary schools are more likely to default on
their federal student loans, which can tarnish their credit records,
make it difficult for them to obtain employment, and jeopardize their
long-term financial well-being. Students from lower-income backgrounds
can be particularly hurt when they default on their loans. In addition,
taxpayers and the government, which guarantees the loans, are left with
the cost when students default on their school loans.
To decrease the likelihood that students will default on their loans,
it is critical that Education increase its oversight of federal student
aid eligibility requirements to make sure that only students who have
the ability to benefit receive federal funds to attend college. While
our findings do not represent nor should they be interpreted as
implying widespread problems at all proprietary schools, our work has
identified significant vulnerabilities in Education's oversight that
should be addressed. Without better oversight of the ATB testing
process to ensure more frequent identification of improper testing, and
stronger processes for handling and reporting improper testing, both
the integrity of the testing process and the qualifications of students
who receive federal funding cannot be assured. In addition, without
stronger controls, such as clear guidance from Education banning the
use of high school diploma mills to obtain federal aid and information
on how to identify diploma mills, the government cannot be assured that
its student aid funds are only provided to students who have an ability
to benefit from higher education. Unqualified students who receive
federal financial aid for higher education programs are at greater risk
of dropping out of school, incurring substantial debt, and defaulting
on federal loans. Targeted improvements in these areas would help
provide greater assurance that the federal investment in higher
education and students are adequately protected.
Recommendations for Executive Action:
In order to help ensure the eligibility of Title IV recipients, the
Secretary of Education should strengthen the department's process for
monitoring the ATB program. Education should:
* Conduct regular follow-up of ATB test analyses submissions to ensure
federally approved test publishers provide complete submissions as
required; and:
* Use data provided by test publishers on schools where test
administrators improperly administered tests and were later decertified
to target schools for further review.
In order to help ensure that only eligible students receive Title IV
funds, the Secretary of Education should revise regulations to
strengthen controls over the ATB testing process. For example, under
its authority to regulate the administration of tests, Education could
consider:
* Requiring test publishers to conduct an interim or mid-point analysis-
a supplement to the 3-year test score analysis and submission
requirement-to provide a preliminary review of potential testing
problems, and submit a copy of their results to the Secretary; or:
* Requiring test publishers to have a process to follow-up on
identified test score irregularities, take action to decertify test
administrators if test irregularities suggest improper test
administration, report actions taken as a result of test score analyses
to the Secretary and prohibit test publishers from using ATB test
administrators who have been decertified by any test publisher.
In order to protect against the use of high school diplomas from
diploma mills to obtain Title IV eligibility and help ensure that only
students with the ability to benefit from higher education receive
federal aid, the Secretary of Education should:
* Create guidance, using information gathered from public hearings or
other forums regarding the definition of a high school diploma, to
clearly communicate to Education staff, schools, and independent
auditors the department's position that diplomas from high school
diploma mills cannot be used for Title IV eligibility purposes. For
example, Education could provide this guidance through regulation or
the Federal Student Aid Handbook; and:
* Establish a cost-effective and readily available source of
information that the department's program review staff, schools, and
independent auditors can use to help them determine whether a high
school diploma is from a diploma mill. For example, Education could
obtain existing lists of state-approved high schools and make them
available on the department's student financial aid Web site.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Department of Education for
review and comment. The agency provided written comments, which are
reproduced in appendix II. In its comments, Education noted the steps
it will take to address our recommendations:
In response to our recommendation that Education strengthen its
oversight process for monitoring the ATB program, Education commented
that it is changing its procedures for monitoring ATB test publishers
to ensure that required reports and analyses are submitted in a timely
manner, and program compliance staff are provided the information.
In response to our recommendation that Education strengthen regulations
that govern the ATB test process, Education commented that it is
considering the management of the ATB testing process as a topic to
include in the new round of upcoming negotiated rulemaking sessions.
In response to our recommendation that Education provide guidance and
establish a cost-effective and readily available source of information
to protect against the use of diplomas from high school diploma mills,
Education provided the following comments. With regard to providing
guidance, Education noted that it is considering revising the
regulations regarding high school diplomas through the upcoming
negotiated rulemaking process. Education noted that final regulations
would become effective no sooner than July 1, 2011, as provided under
the Higher Education Act of 1965, as amended. In the interim, Education
will provide additional guidance in the next revision of the Federal
Student Aid Handbook. However, in regards to providing a source of
information to help protect against the use of diplomas from high
school diploma mills, Education commented that there is no centralized
source for information about all high schools and no specific statutory
authority for Education to create and maintain one, making it unlikely
that it will be able to establish a readily available source of such
information. Further, Education stated that it can only expend
appropriated funds for authorized purposes, and this use is not
authorized under the Department of Education Organization Act or other
federal education laws. We acknowledge that there is no centralized
source for information about all high schools and we do not recommend
that Education investigate the status of all high schools. Rather, we
recommend that Education collect readily available information, such as
already existing lists of state-approved high schools, and make them
available on its student financial aid website. Under the Higher
Education Act, as amended, Education is responsible for administering
and overseeing the Title IV student aid programs, including the
eligibility requirements for obtaining Title IV funds. Education's
oversight includes the responsibility to protect against the improper
use of Title IV funds. Given that publishing information on state-
recognized high school diplomas on its Web site will assist Education
in carrying out its oversight responsibilities, in our view,
Education's appropriations are available to fund this effort.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies 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 or your staff have any questions about this report, please
contact me at (202) 512-7215 or scottg@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made major contributions to
this report are listed in appendix III.
Sincerely yours,
Signed by:
George A. Scott, Director:
Education, Workforce, and Income Security Issues:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
This appendix discusses in detail our methodology for addressing two
research questions: (1) How does the student loan default profile of
proprietary schools compare with that of other types of schools? and
(2) To what extent do Education's policies and procedures for
monitoring student eligibility requirements for federal aid at
proprietary schools protect students and the investment of Title IV
funds? To address these questions, we analyzed data and records
obtained from Education; reviewed federal laws, regulations, agency
policies, and relevant research studies and investigations; conducted
interviews with Education officials and with other representatives of
the higher education community; and conducted site visits and
undercover visits to schools. We conducted our work from October 2007
through August 2009 in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform
the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and recommendations based on our audit
objectives.
Analysis of Education Data:
To determine how proprietary schools compare to public and private non-
profit schools in regard to federal student loan default profiles, we
analyzed fiscal year 2004 cohort default rate data that Education
calculated from the National Student Loan Data System (NSLDS). NSLDS
includes data from schools, agencies that guaranty loans, the Direct
Loan program, and other Education programs. We used fiscal year 2004
cohort default rate data to analyze default rates 2, 3, and 4 years
after students entered repayment. These data were drawn from NSLDS in
December 2007. From the dataset of 3-year cohort default rates for
individual schools, we conducted our own analysis to calculate the
numbers of proprietary schools that had default rates of 0 and under 5
percent. We chose 5 percent because it is a qualifying rate for the
most favorable loan disbursement and delivery terms in all school
sectors. In addition, we used Education calculations of Title IV
funding for the various sectors over time from NSLDS for background
information. We began our data analysis of Title IV funding in the
2001/02 award year after learning from a data specialist at Education
that data prior to 2001/02 are considered less accurate because the
Department used different methodologies to identify and calculate Title
IV funding data. To ensure that the Title IV funding and cohort default
rates from NSLDS were accurate for us to report Education's data and
for us to conduct our own analysis, we reviewed information about the
data itself and the NSLDS system and interviewed an Education official
knowledgeable about the data and the system. Additionally, we reviewed
the analyses that Education performed and determined that the data were
accurate and reliable for our purposes.
As part of our analysis of student default rates, we examined data on
student demographics and outcomes. To identify information on
borrowers' dependency status and their parents' education and income
levels, we analyzed the most recent student survey data available from
the 2004 National Postsecondary Student Aid Study (NPSAS). NPSAS is a
nationally representative sample of students in postsecondary education
institutions, including undergraduate and graduate students from all
types of institutions. To provide information on borrowers' age,
gender, enrollment, and racial status, we analyzed the most recent data
available on schools during the 2007/08 school year from the Integrated
Postsecondary Education Database System (IPEDS). IPEDS contains data on
postsecondary institutions such as student demographics, enrollments,
and finances. Finally, to provide information on student outcomes,
specifically degree attainment and drop-out rates, we used data from
the Descriptive Summary of 1995-96 Beginning Postsecondary Students:
Six Years Later study, conducted by the National Center for Education
Statistics (NCES). The NCES study provides information on enrollment,
persistence, and attainment of students from the time they began higher
education for the first time in academic year 1995-1996 until the 2000-
2001 academic year. We tested results from this study for statistical
significance and reported on our findings. The 1995/96 study was the
most recent that included data on bachelor's degree attainment 6 years
from the time that students started school. NCES's study of its most
recent cohort--those who began their postsecondary education in 2003/
04--is now in progress; therefore, 6-year results are not yet
available.
We assessed the reliability of the datasets we used from NPSAS, IPEDS,
and NCES for our study by: (1) performing electronic testing of
required data elements, (2) reviewing existing information about the
data and the system that produced them, and (3) conducting interviews
with a data specialist from Education. Based on these assessments, we
determined that data were sufficiently reliable for the purposes of
reporting.
Analysis of Education Policies and Records:
To determine the extent to which Education's policies and procedures
for monitoring student eligibility requirements for federal aid at
proprietary schools protect students and the investment of Title IV
funds, we reviewed Education's policies and procedures for monitoring
the administration of ability-to-benefit (ATB) tests and high school
diploma requirements. We also reviewed relevant program reviews and
independent audits of schools found to be in violation of ATB test
administration procedures, relevant laws and regulations, and
enforcement actions taken against schools. To assess the number of
schools subjected to sanctions due to their high cohort default rates,
we also examined Education's records from 1992 through the present. We
selected 1992 as it was the first year from which Education data were
available on numbers of schools by sector that were subject to
immediate loss, suspension, or termination from the Title IV program.
Research Studies:
To understand the different factors that are linked to high default
rates, we reviewed 11 academic studies about student defaults. Our
criteria for selecting studies were those that were original research,
peer-reviewed, or performed with a strong methodology and focused on
explanatory factors for default rates. The studies we used were
published from 1994 through 2008. For each of the selected studies that
are used in this report, we determined whether the studies' findings
were generally reliable. We evaluated the methodological soundness of
each study and only reported on those results deemed statistically
significant.
Department of Education and Expert Interviews:
To examine Education's oversight of proprietary schools, we interviewed
officials from Education, 10 state education licensing agencies, ATB
test publishers, and education associations. At Education, we spoke
with officials in Federal Student Aid, field offices, the General
Counsel's office, the Office of Inspector General, and the Office of
Postsecondary Education. The ATB publishers we spoke with were
Wonderlic Inc., ACT, and College Board. We interviewed experts from a
broad range of higher education associations and interest groups
including the American Association of Community Colleges, the Career
College Association, the American Association of Collegiate Registrars
and Admissions Officers, the "I Have a Dream" Foundation, the National
Association for Collegiate Admission Counseling, the National
Association of Student Financial Aid Administrators, and the National
Consumer Law Center.
Site Visits:
To understand schools' administrative, admissions, and financial aid
practices as they relate to Education's policies and procedures for
monitoring Title IV funds, we conducted site visits at proprietary
schools in California, Illinois, New York, and Virginia. We selected
these sites for geographic diversity and chose schools that represented
a mixture of ownership types (independently-owned and publicly-traded
schools), and degree and certificate programs. We also conducted site
visits at community colleges in Maryland and Illinois to provide us
with a perspective of comparable programs in the public sector. We
selected these schools based on geographic diversity and their breadth
of both certificate and degree programs. During all site visits, we
interviewed administrators, faculty, staff, and students to learn about
topics including admissions practices, financial aid disbursement, and
program offerings.
Undercover Visits:
To examine the extent to which Education's policies and procedures for
monitoring student eligibility requirements for federal aid at
proprietary schools protect students and the investment of Title IV
funds, we tested compliance with ATB tests. To do so, GAO analysts,
acting in an undercover capacity, posed as prospective students on two
separate occasions to take and purposely fail ATB tests at a local
proprietary school. We chose this proprietary school chain based on
geographic proximity. We supplemented this work with a review of
investigations conducted by Education's Office of Inspector General and
the New York Department of Education.
[End of section]
Appendix II: Comments from the Department of Education:
Department of Education:
Chief Operating Officer:
830 First St. N.E.
Washington, DC 20202:
[hyperlink, http://www.FederalStudentAid.ed.gov]
1-800-433-3243:
July 27, 2009:
Mr. George A. Scott:
Director, Education, Workforce, and Income Security Issues:
Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Scott:
In accordance with 31 U.S.C. 720, 1 am writing to respond to
recommendations made in the Government Accountability Office (GAO)
report, "Proprietary Schools: Stronger Department of Education
Oversight Needed to Help Ensure Only Eligible Students Receive Federal
Student Aid" (GAO-09-600). The report recommendations focused on
monitoring basic skills tests, or Ability-to-Benefit (ATB) tests,
revising regulations relating to those tests, and providing information
and guidance on valid high school diplomas for use in gaining access to
federal student aid. Below is the Department of Education's
(Department's) response to each recommendation.
Recommendation 1: The Secretary of Education should strengthen the
department's process for monitoring the ATB program, conducting regular
follow up of ATB test analyses submissions to ensure federally approved
test publishers provide complete submissions as required, and using
data provided by test publishers on schools where test administrators
in improperly administered tests and were later decertified to target
schools for further review.
Response: Federal Student Aid is changing its procedures to ensure that
ATB test publishers are submitting required reports and analyses in
timeframes consistent with the regulatory requirements, and will
provide that information to Program Compliance staff.
Recommendation 2: The Secretary of Education should revise regulations
to strengthen controls over the ATE testing process, requiring test
publishers to conduct an interim or midpoint analysis - a supplement to
the 3 -year test score analysis and submission requirement - to provide
a preliminary review of potential testing problems, and submit a copy
of their results to the Secretary; or requiring test publishers to have
a process to follow up on. identified test score irregularities, take
action to decertify test administrators if test irregularities suggest
improper test administration, report actions taken as a result of test
score analyses to the Secretary and prohibit test publishers from using
ATB test administrators who have been decertified by may test
publisher.
Response: The Office of Postsecondary Education (OPE) has begun a new
round of negotiated rulemaking, having conducted public hearings in
Denver, Little Rock, and Philadelphia and received additional public
comments by c-mail. The Department is considering including management
of the ATE testing process as a topic within the upcoming negotiated
rulemaking sessions,
Recommendation 3: The Secretary of Education should create guidance,
using information gathered from public hearings or other forums
regarding the definition of a high school diploma, to clearly
communicate to Education staff schools and independent auditors the
department's position that diplomas from high school diploma mills
cannot be used for Title IV eligibility purposes; and establish a cost
effective and readily available source of it formation that the
department's program review staff; schools, and independent auditors
can use to help them determine whether a high school diploma is from a
diploma mill.
Response: As indicated previously in meetings with GAO staff, the
Department is considering using the negotiated rulemaking process to
make changes to the existing regulatory requirements related to high
school diplomas as a component of eligibility for federal student aid.
Because of the statutory requirements related to negotiated rulemaking,
including the delayed effective date requirements contained in the
master calendar provisions of the Higher Education Act of 1965, as
amended, this process would result in final regulations becoming
effective no sooner than July 1, 2011. In the interim, the Department
will provide additional guidance, based on the current regulatory
requirements, in the next revision to the Federal Student Aid Handbook-
As there is no centralized source for information about all high
schools and no specific statutory authority for the Department to
create and maintain one, it is unlikely that the Department will be
able to establish a readily available source of such information. The
Department can only expend appropriated funds for authorized purposes,
and this use is not authorized under the Department of Education
Organization Act or other federal education laws.
If you or your staff has any questions regarding these responses,
please contact Jeff Baker at 202-377-4009.
Sincerely,
Signed by:
William J. Taggert:
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
George A. Scott (202) 512-7215 or ScottG@gao.gov:
Staff Acknowledgments:
In addition to the contact name above, the following staff members made
important contributions to this report: Melissa Emrey-Arras, Assistant
Director; Kathy Peyman and Claudine Pauselli, Co-Analysts-in-Charge;
Karen Febey; Jessica Mace; and Lauren Mohlie. Also, Jean McSween, John
Mingus, and George Quinn provided guidance on the study's design and
data analysis; Jessica Botsford provided legal advice; Mimi Nguyen and
Cheron Brooks assisted with report graphics; and Ashley McCall provided
library services. In addition, Paul Desaulniers, Kim Perteet, and
Ashanta Williams made contributions to the report. Susan Aschoff and
Charlie Willson advised the team on writing the report and Nagla El-
Hodiri, Carla Craddock and Michelle St. Pierre verified our findings.
[End of section]
Related GAO Products:
Student Loans: Default Rates Need to Be Computed More Appropriately.
[hyperlink, http://www.gao.gov/products/HEHS-99-135]. Washington, D.C.:
July 28, 1999.
Proprietary Schools: Analysis of Comments Received from an Association
of Schools. [hyperlink, http://www.gao.gov/products/HEHS-98-12R].
Washington, D.C.: October 1997.
Proprietary Schools: Poorer Student Outcomes at Schools That Rely More
on Federal Student Aid. [hyperlink,
http://www.gao.gov/products/HEHS-97-103]. Washington, D.C.: June 1997.
Proprietary Schools: Millions Spent to Train Students for Oversupplied
Occupations. [hyperlink, http://www.gao.gov/products/HEHS-97-104].
Washington, D.C.: June 1997.
School Accreditation: Activities of Seven Agencies That Accredit
Proprietary Schools. [hyperlink,
http://www.gao.gov/products/HRD-90-179BR]. Washington, D.C.: September
1990.
Many Proprietary Schools Do Not Comply With Department of Education's
Pell Grant. [hyperlink, http://www.gao.gov/products/HRD-84-17].
Washington, D.C.: August 1984.
[End of section]
Footnotes:
[1] Title IV funding data beginning in the 2001-2002 school year are
more accurate than data from prior years.
[2] 20 U.S.C. 1001 et seq.
[3] The Federal Supplemental Educational Opportunity Grant (FSEOG),
Federal Work-Study (FWS), and Federal Perkins Loan programs are called
campus-based programs and are administered directly by the financial
aid office at each participating school.
[4] Education refers to these schools as "2-3 year schools." Based on
our analysis of the schools included in the 2-3 year category, we refer
to this school group as "2-year schools" as most of them are schools
with programs that are 2 years in length.
[5] For the purposes of this report, we refer to public, private non-
profit and proprietary schools as separate sectors. The NCES uses the
term "sector" differently and defines school sector as a combination of
school control, such as public, private non-profit, and proprietary,
and program length, such as 4-year and above, 2-year and less than 2-
years.
[6] The NCES at the Department of Education classifies all graduate
students and undergraduate students age 24 or older as independent.
Students under the age of 24 can also be classified as independent if
they are married or have dependents, are veterans or active military,
or have been wards of the court.
[7] While eligibility for federal student aid is based on a number of
factors, such as financial need and U.S. citizenship, for the purposes
of our report we focus on whether a student has a high school diploma,
GED or recognized equivalent, or has passed an independently
administered ATB test.
[8] As of fiscal year 2011, the qualifying rate for favorable loan
disbursement and delivery terms will change to 15 percent. Higher
Education Opportunity Act, Pub. L. No. 110-315, § 427(a).
[9] Prior to entering repayment, borrowers who drop below half-time
enrollment, graduate, or leave their program generally have a 6-to 12-
month grace period.
[10] This default definition applies to loans that require repayment on
a monthly basis. Loans that require repayment on a less frequent basis
default when payments are not made for 330 days (about 11 months).
[11] Fiscal year 2004 cohort data were the most recent data available
that allowed us to make comparisons of default rates at 2 years in
2006, 3 years in 2007, and 4 years in 2008. The 2-year default rate was
the official measurement used to track defaults until fiscal year 2009,
when the 3-year default rate became the official default measurement.
Higher Education Opportunity Act, Pub. L. No. 110-315, § 436(e).
[12] In 2008, Congress increased the 3-year maximum default rate
threshold from 25 percent to 30 percent, which will take effect in
2011. Higher Education Opportunity Act, Pub. L. No. 110-315, §
436(a)(1).
[13] Based on recent changes made to the default measurement, any
defaults that occur after a 3-year period will be excluded from a
school's cohort default rate calculation.
[14] A previous GAO report about default rates [hyperlink,
http://www.gao.gov/products/GAO/HEHS-99-135] noted these limitations in
its finding that Education's cohort default rate calculations are
understated because borrowers who are in forbearance or deferment are
considered to be in repayment even though they are not making any loan
payments. Furthermore, these borrowers are not included in any
subsequent cohorts after their period of forbearance or deferment is
over. GAO recommended that Congress consider amending the Higher
Education Act to exclude borrowers from schools' cohort default rate
calculations if the borrowers are in deferment or forbearance. To date,
Congress has not made this change.
[15] According to 2004 cohort data of individual schools for which
Education calculated a 3-year cohort default rate, among programs less
than 2 years in length, there were 556 proprietary schools, but only 86
public schools and 19 non-profit schools.
[16] Education's fiscal year 2004 dataset was the only one available
for individual schools that measured default rates for longer than 2
years.
[17] Across all sectors, schools with cohort default rates of less than
5 percent qualify for the most favorable loan disbursement and delivery
terms. Such schools can disburse student loans in a single payment at
the start of the year for study-abroad students. Further, schools that
have a cohort default rate under 10 percent for the 3 most recent
fiscal years can disburse federal student loans at the start of the
semester and in a single installment if the period of enrollment does
not exceed 1 term or 4 months. 20 U.S.C. §§ 1078-7(a)(3) and (e).
[18] The remaining three studies examined factors other than
demographic characteristics that may correlate with high default rates.
[19] The study presented results for whether students attained a degree
from or were still enrolled at the first institution they attended. For
the purposes of our study, we considered those who had neither a degree
nor where still enrolled as drop-outs.
[20] There is no significant difference in associate's degree
attainment between students at proprietary schools and students at
private non-profit schools.
[21] Income-contingent repayment plans are based on a borrower's
income, family size, and loan amount. Consolidated loans are those that
are generally based on the weighted average of the interest rates on
the loans being consolidated.
[22] Investigation of Moler Beauty College (Department of Education OIG
Investigative Reports: Apr. 12, 2006).
[23] Interboro Institute, Admission Requirements Review (New York State
Education Department: Oct. 5, 2005); Investigative Report:
CaliberTraining Institute (New York State Education Department: Apr.
10, 2007).
[24] Audit of Wonderlic's Ability to Benefit (ATB) Program (Department
of Education OIG Audit Control Number ED-OIG/03-B0022: February 2002).
[25] Audit of FSA's Controls Over ED-Approved ATB Programs (Department
of Education OIG Audit Report ED-OIG/A03-B0001: Aug. 22, 2002).
[26] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: November 1999). Internal control standards and the
definition of internal control in Circular No. A-123 are based on the
aforementioned GAO standards.
[27] GAO, Internal Control Management and Evaluation Tool, [hyperlink,
http://www.gao.gov/products/GAO/01-1008G] (Washington, D.C.: August
2001).
[28] GAO, Internal Control Management and Evaluation Tool, [hyperlink,
http://www.gao.gov/products/GAO-01-1008G] (Washington, D.C.: August
2001).
[29] The Higher Education Opportunity Act, which reauthorized and
amended the Higher Education Act, provides that the Secretary shall
maintain information and resources on the department's Web site to
assist students, families, and employers in understanding what a
college diploma mill is and how to identify and avoid such diploma
mills Pub. L. No. 110-315, § 109.
[End of section]
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