Federal Student Loans
Audits and Reviews of the Federal Family Education Loan and Federal Direct Loan Programs Gao ID: GAO-09-992R September 30, 2009This letter formally transmits the briefing slides in response to section 1119 of Pub. L. No. 110-315, the Higher Education Opportunity Act. This act mandated GAO study the financial and compliance audits and reviews required or conducted for the Federal Family Education Loan and Federal Direct Loan Programs. On August 6 and 7, 2009, we briefed the staff of congressional committees on the types of audits, reviews, agreed-upon procedures, and reconciliations that are required or conducted for these programs. At congressional request, we have incorporated additional information on the agreed-upon procedures engagements required by the Ensuring Continued Access to Student Loans Act and the reconciliations performed by the Department of Education's Office of Federal Student Aid. In a forthcoming report, we will provide an assessment of whether these audits and reviews as designed provide comparable coverage of the two loan programs. That report will also discuss how the Department of Education ensures that these audits and reviews comply with statutory and regulatory requirements and how the Department uses them to oversee these loan programs.
GAO-09-992R, Federal Student Loans: Audits and Reviews of the Federal Family Education Loan and Federal Direct Loan Programs
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GAO-09-992R:
United States Government Accountability Office:
Washington, DC 20548:
September 30, 2009:
Congressional Committees:
Subject: Federal Student Loans: Audits and Reviews of the Federal
Family Education Loan and Federal Direct Loan Programs:
This letter formally transmits the enclosed briefing slides in response
to section 1119 of:
Pub. L. No. 110-315, the Higher Education Opportunity Act. This act
mandated GAO study the financial and compliance audits and reviews
required or conducted for the Federal Family Education Loan and Federal
Direct Loan Programs. On August 6 and 7, 2009, we briefed the staff of
your respective committees on the types of audits, reviews, agreed-upon
procedures, and reconciliations that are required or conducted for
these programs. At your request, we have incorporated additional
information on the agreed-upon procedures engagements required by the
Ensuring Continued Access to Student Loans Act and the reconciliations
performed by the Department of Education's Office of Federal Student
Aid. We obtained comments from the Department of Education and have
incorporated changes in the enclosed documents, as appropriate. In a
forthcoming report, we will provide an assessment of whether these
audits and reviews as designed provide comparable coverage of the two
loan programs. That report will also discuss how the Department of
Education ensures that these audits and reviews comply with statutory
and regulatory requirements and how the Department uses them to oversee
these loan programs.
We are sending copies of this letter to the appropriate congressional
committees. We are also sending a copy to the Secretary of Education.
The letter will be available at no charge on GAO's Web site at
[hyperlink, http://www.gao.gov]. Should you or your staff have any
questions concerning this letter, please contact me at 202-512-9095 or
at dalykl@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
letter. Key contributors were Jack Warner, Assistant Director; Barry
Grinnell; Chau Dinh; and Jennifer Dent.
Signed by:
Kay L. Daly:
Director:
Financial Management and Assurance:
Enclosure - 1:
List of Committees:
The Honorable Tom Harkin:
Chairman:
The Honorable Michael B. Enzi:
Ranking Member:
Committee on Health, Education, Labor and Pensions:
United States Senate:
The Honorable George Miller:
Chairman:
The Honorable John P. Kline:
Ranking Member:
Committee on Education and Labor:
House of Representatives:
[End of section]
Enclosure:
Federal Student Loans:
Audits and Reviews of the Federal Family Education Loan and Federal
Direct Loan Programs:
Briefing for Staff of the Senate Committee on Health, Education, Labor,
and Pensions and the House Committee on Education and Labor:
Overview:
* Background;
* Objective;
* Scope and Methodology;
* Preliminary Observations;
- Types and Frequency of Audits and Reviews;
- Summary of Department of Education (Education) Audits, Reviews,
Agreed-Upon Procedures, and Reconciliations of the Federal Family
Education Loan (FFEL) and Federal Direct Loan (DL) programs (see
Table 1).
Background:
* The Higher Education Act (HEA) of 1965, as amended, authorizes
Education to provide assistance to postsecondary education students
with programs such as the FFEL and DL programs.
* In fiscal year 2008, Education guaranteed approximately $52.9 billion
in new net loans to about 6 million recipients under the FFEL program
and made approximately $21.8 billion in new net loans to about 3
million recipients under the DL program.
* The Higher Education Opportunity Act of 2008 (HEOA), Pub. L. No. 110-
315, revised and reauthorized HEA programs.
FFEL and DL Program Participants:
* FFEL;
* U.S. Government;
* Schools;
* Lenders;
* Secondary Markets;
* Guaranty Agencies;
* Third-Party Servicers;
* Borrowers.
DL:
* U.S. Government;
* Schools;
* Third-Party Servicers;
* Borrowers.
Figure: Overview of FFEL Program:
[Refer to PDF for image: illustration]
Federal government:
Through guaranty agencies, the federal government guarantees loans that
lenders make to student and parent borrowers (guarantee agencies,
banks);
Private-sector lenders originate and service loans;
Funds go to student and parent borrowers.
Source: GAO.
[End of figure]
Figure: Overview of DL Program:
[Refer to PDF for image: illustration]
The federal government originates and services to student and parent
borrowers through private-sector contractors, using federal capital;
Funds go to student and parent borrowers.
Source: GAO.
[End of figure]
Figure: Loans Outstanding:
[Refer to PDF for image: vertical bar graph]
Date: September 30, 2007;
FEEL: $401.9 billion;
DL: $106.8 billion.
Date: September 30, 2008;
FEEL: $446.5 billion;
DL: $122.6 billion.
Date: June 30, 2009;
FEEL: $480.0 billion;
DL: $141.1 billion.
Source: Department of Education‘s National Student Loan Data System.
Note: Loan totals include accrued interest.
[End of figure]
Objective:
Section 1119 of the HEOA mandated that GAO study the financial and
compliance audits and reviews required or conducted for the federal
student loan programs under parts B (FFEL) and D (DL) of Title IV of
the HEA.
Our objective for this briefing was to identify the types of audits,
reviews, agreed-upon procedures, and reconciliations required or
conducted for the FFEL and DL programs.
Scope and Methodology:
We categorized audits and reviews that are required or conducted
as follows:
* Required audits, reviews, and agreed-upon procedures are those
required by statutes, regulations, or contract terms. These include
audits performed by independent public accountants and reviews
performed by guaranty agency staff.
* Discretionary audits, reviews, and reconciliations are those
conducted but not required by statutes, regulations, or contract terms
that help enforce statutes, regulations, and contract terms. These
include audits and reviews performed by Education‘s Office of Federal
Student Aid (FSA) and Office of Inspector General (OIG).
To identify the types of audits, reviews, agreed-upon procedures, and
reconciliations required or conducted for the FFEL and DL programs, we:
* researched laws and regulations;
* reviewed audit and review guides, including:
- Education FSA Review Guides, Policies, and Procedures;
- OIG Audit Guides;
- Office of Management and Budget (OMB) Circular No. A-133 and
Compliance Supplements; and;
- OIG Ensuring Continued Access to Student Loans Act (ECASLA)
Agreed-Upon Procedures Guides;
* interviewed knowledgeable officials from Education including FSA
and the OIG; and;
* reviewed lists of audit reports from systems used by FSA to track
report filings and audit findings.
We conducted our work from March 2009 to August 2009 in accordance with
all sections of GAO‘s Quality Assurance Framework that are relevant to
our objectives. The framework requires that we plan and perform the
engagement to obtain sufficient and appropriate evidence to meet our
stated objectives and to discuss any limitations in our work. We
believe that the information and data obtained, and the analysis
conducted, provide a reasonable basis for our work.
Types and Frequency of Audits and Reviews:
We identified the following required audits, reviews, and agreed-upon
procedures:
* Financial statement audits performed annually to provide reasonable
assurance that school, guaranty agency, and third party servicer
financial statements are free of material misstatement.
* Compliance audits performed annually to assess school, lender,
secondary market entity, guaranty agency, and third party servicer
compliance with applicable statutes, regulations, and program
requirements.
* ECASLA agreed-upon procedures engagements required to assess
participant compliance with the provisions of the ECASLA programs.
[Footnote 1]
* Special Allowance audits annually performed to assess the accuracy of
lender billings for the 9.5 percent special allowance payments.
[Footnote 2]
* Guaranty agency biennial program reviews of lenders with a high
volume of guarantees and of schools whose students collectively have a
default rate exceeding 20 percent to enforce federal, state, and
guaranty agency requirements.
Education conducts additional discretionary audits and reviews:
* FSA conducts reviews of specific program issues relating to schools,
lenders, secondary market entities, guaranty agencies, and third-party
servicers based on risk assessments and other compelling factors that
may indicate a review is appropriate.
* OIG conducts audits, investigations, and inspections of Education
programs and operations based on risk assessments.
Further, audits and reviews of Education as a whole, though not focused
specifically on FFEL and DL, provide audit and review coverage of these
programs:
* annual financial statement audits under the Chief Financial Officers
(CFO) Act, as amended (31 U.S.C. section 3515),
* annual internal control assessment under OMB Circular No. A-123, and;
* annual information security assessment under the Federal Information
Security Management Act.
In addition to the audits and reviews, FSA performs monthly
reconciliations as part of its continuing oversight of contractors and
schools associated with the DL, FFEL, and ECASLA programs. Per FSA,
these reconciliations are an integral part of Education‘s internal
control activities and help ensure that loan disbursements, receipts,
and transfers are made and recorded in Education and other program
participants‘ records accurately and timely.
See Table 1 for a Summary of Department of Education Audits, Reviews,
Agreed-Upon Procedures, and Reconciliations of the FFEL and DL
Programs.
Table 1: Education Audits, Reviews, Agreed-Upon Procedures, and
Reconciliations of the FFEL and DL Programs as of August 31, 2009:
Schools:
Auditee And Type Of Required Audit/review: Financial statements;
Objective: Provide reasonable assurance that entity financial
statements are free of material misstatement;
Frequency[1]: Annually;
Performed by: Independent Public Accountant (IPA);
Authority: 20 U.S.C. 1094(c)(1)(A) and 34 CFR Section 668.23(b);
FFEL: Required;
DL: Required.
Auditee And Type Of Required Audit/review: Compliance;
Objective: Assess entity compliance with applicable statutes,
regulations, and program requirements;
Frequency[1]: Annually;
Performed by: IPA;
Authority: 20 U.S.C. 1094(c)(1)(A) and 34 CFR Section 668.23(b);
FFEL: Required;
DL: Required.
Auditee And Type Of Required Audit/review: Program reviews;
Objective: Enforce federal, state, and guaranty agency requirements for
schools having a student loan default rate exceeding 20 percent;
Frequency[1]: Biennially;
Performed by: Guaranty Agency (GA);
Authority: 34 CFR 682.410(c);
FFEL: Required;
DL: Not Applicable[2].
Auditee And Type Of Required Audit/review: Direct loan reconciliation;
Objective: Assess whether funds drawn down by each school equal the
amount disbursed to students;
Frequency[1]: Monthly with year-end closeout;
Performed by: Federal Student Aid (FSA);
Authority: 34 CFR 685.102(b) and 20 U.S.C. 1087e;
FFEL: Not Applicable[2];
DL: Required.
Lenders:
Auditee And Type Of Required Audit/review: Compliance;
Objective: Assess: (1) accuracy of origination fee, interest, and
special allowance payments and (2) compliance with applicable statutes,
regulations, and program requirements;
Frequency[1]: Annually;
Performed by: IPA;
Authority: 20 U.S.C. 1078(b)(1)(U) and 34 CFR 682.305(c);
FFEL: Required;
DL: Not Applicable[2].
Auditee And Type Of Required Audit/review: Special allowance audits;
Objective: Assess the accuracy of billings for the 9.5 percent special
allowance payments;
Frequency[1]: Annually;
Performed by: IPA;
Authority: 20 U.S.C. 1078(b)(1)(U);
FFEL: Required;
DL: Not Applicable[2].
Auditee And Type Of Required Audit/review: Program reviews;
Objective: Enforce federal, state, and guaranty agency requirements;
Frequency[1]: Biennially;
Performed by: GA;
Authority: 34 CFR 682.410(c);
FFEL: Required;
DL: Not Applicable[2].
Secondary Markets:
Auditee And Type Of Required Audit/review: Compliance;
Objective: Assess entity compliance with applicable statutes,
regulations, and program requirements;
Frequency[1]: At least once a year;
Performed by: IPA;
Authority: 20 U.S.C.A. 1094(c)(1)(D);
FFEL: Required;
DL: Not Applicable[2].
Lenders and Secondary Markets - Ensuring Continued Access to Student
Loans Act (ECASLA):
Auditee And Type Of Required Audit/review: Agreed-upon procedures
engagements;
Objective: Assess lender and secondary market compliance with the
provisions of the Loan Purchase Commitment Program;
Frequency[1]: Once, for all loans sold each quarter;
Performed by: IPA;
Authority: Section 5 of the Master Loan Sales Agreement;
FFEL: Required;
DL: Not Applicable[2].
Auditee And Type Of Required Audit/review: Agreed-upon procedures
engagements;
Objective: 1) Assess lender and secondary market compliance with the
provisions of the Loan Participation Program;
Frequency[1]: Based on loan volume and error rate[3];
Performed by: IPA;
Authority: Section 8 of the Master Participation Agreement;
FFEL: Required;
DL: Not Applicable[2].
Auditee And Type Of Required Audit/review: Agreed-upon procedures
engagements;
Objective: 2) Assess custodian compliance with the provisions of the
Master Participation Agreement;
Frequency[1]: Annually;
Performed by: IPA;
Authority: Section 8 of the Master Participation Agreement;
FFEL: Required;
DL: Not Applicable[2].
Auditee And Type Of Required Audit/review: Agreed-upon procedures
engagements;
Objective: 1) Assess lender and secondary market compliance with
provisions of the Asset-Backed Commercial Paper Conduit Put Program --
Putability[4] and Eligibility;[5]
Frequency[1]: Once to determine putability[4]; Quarterly for
eligibility[5];
Performed by: IPA;
Authority: Section 20 of the Put Agreement, Section 8 of the Student
Loan Purchase Agreement, and Article 1 of the Funding Note Purchase
Agreement;
FFEL: Required;
DL: Not Applicable[2].
Auditee And Type Of Required Audit/review: Agreed-upon procedures
engagements;
Objective: 2) Assess conduit administrator compliance with provisions
of the Put Agreement;
Frequency[1]: Annually;
Performed by: IPA;
Authority: Section 20 of the Put Agreement;
FFEL: Required;
DL: Not Applicable[2].
Guaranty Agencies:
Auditee And Type Of Required Audit/review: Financial statements;
Objective: Provide reasonable assurance that entity financial
statements are free of material misstatement;
Frequency[1]: Annually;
Performed by: IPA;
Authority: 34 CFR 682.410(b);
FFEL: Required;
DL: Not Applicable[2].
Auditee And Type Of Required Audit/review: Compliance;
Objective: Assess entity compliance with applicable statutes,
regulations, and program requirements;
Frequency[1]: Annually;
Performed by: IPA;
Authority: 34 CFR 682.410(b);
FFEL: Required;
DL: Not Applicable[2].
Third-Party Servicers:
Auditee And Type Of Required Audit/review: Financial statements of
servicers for lenders and guaranty agencies;
Objective: Provide reasonable assurance that entity financial
statements are free of material misstatement;
Frequency[1]: Annually;
Performed by: IPA;
Authority: 34 CFR 668.23(d)(5);
FFEL: Required;
DL: Not Applicable[2].
Auditee And Type Of Required Audit/review: Compliance;
Objective: Assess entity compliance with applicable statutes,
regulations, and program requirements;
Frequency[1]: Annually;
Performed by: IPA;
Authority: FFEL third-party servicers: 20 U.S.C. 1094 (c)(1)(c) and 34
CFR 682.416(e); School third-party servicers: 34 CFR 668.23;
FFEL: Required;
DL: Required.
Type Of Discretionary Audit/review: FSA Reviews;
Objective: Address specific program issues and follow-up on prior audit
findings;
Frequency[1]: Based on risk;
Performed by: FSA;
Authority: Lenders: 34 CFR 682.414(c); Guaranty Agencies: 34 CFR
668.24; Schools: 20 U.S.C. 1099c; and Servicers: 34 CFR 682.416(c);
FFEL: Discretionary;
DL: Discretionary.
Type Of Discretionary Audit/review: OIG audits;
Objective: Audit, investigate, and inspect student loan programs and
operations;
Frequency[1]: Based on risk;
Performed by: OIG;
Authority: Inspector General Act of 1978 and 5 U.S.C. app.
FFEL: Discretionary;
DL: Discretionary.
Reconciliations Of Accounts: Reconciliations;
Objective: Help ensure that loan disbursements, receipts, and transfers
are made and recorded in Education and other program participants'
records accurately and timely;
Frequency[1]: Monthly;
Performed by: FSA;
Authority: OMB Circular A-123, OMB Circular A-136, the CFO Act of 1990,
and ECASLA Agreements;
FFEL: Discretionary;
DL: Discretionary.
Source: GAO Prepared.
[1] Exceptions to these frequencies are based on factors such as loan
volume and the servicer's relationship with program participants.
[2] Certain audits, reviews, and reconciliations are not applicable
because the structure, operations, and participants of the FFEL and DL
programs differ.
[3] Every one, three, or six months. The error rate is the rate of
ineligible loans identified in the previous engagement.
[4] Putability -- Under this program, Education agrees to purchase
loans that meet specific criteria from lenders, at the lender's
discretion. The review is conducted once to ensure that loans are
"putable."
[5] Eligibility -- Under this program, "putable" loans are reviewed
quarterly to ensure that they continue to meet specific criteria.
[End of table]
[End of briefing]
Footnotes:
[1] The three ECASLA programs allow Education to buy certain loans from
lenders to ensure funds are available for the FFEL program. The
frequency of agreed-upon procedure engagements varies among the
programs.
[2] Under the 9.5 percent Special Allowance Program, the federal
government guarantees lenders a 9.5 percent minimum rate of return on
certain FFEL loans. GAO previously reported on these loans in Federal
Family Education Loan Program: Statutory and Regulatory Changes Could
Avert Billions in Unnecessary Federal Subsidy Payments, [hyperlink,
http://www.gao.gov/products/GAO-04-1070] (Washington, D.C.: Sept. 20,
2004).
[End of section]
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