Federal Student Loan Programs
Opportunities Exist to Improve Audit Requirements and Oversight Procedures Gao ID: GAO-10-668 July 21, 2010The Higher Education Opportunity Act of 2008, Pub. L. No. 110-315, mandated GAO to study the financial and compliance audits and reviews required or conducted for the Federal Family Education Loan (FFEL) program and the Federal Direct Student Loan (DL) program. The Department of Education's (Education) Office of Federal Student Aid is responsible for administering these programs. This report focuses on (1) identifying differences and similarities in audit requirements and oversight procedures for the FFEL and DL programs, including anticipated changes to selected oversight activities and (2) describing how the Office of Federal Student Aid's policies and procedures are designed to monitor audits and reviews. To do so, GAO interviewed Education and inspector general officials and reviewed numerous audit guides, agency procedures, checklists, and audit tracking systems.
GAO identified differences and similarities in audit requirements and oversight procedures for the two programs. Differences include the following: (1) The FFEL and DL programs generally had different audit requirements stemming primarily from divergent program structures. The FFEL program relied on lenders, guaranty agencies--which administer federal government loan guarantees to lenders--and other entities that were subject to statutory and regulatory audit requirements. The DL program did not have as many audit requirements because DL loans are provided by the federal government, and fewer external entities are involved. (2) GAO found differences in audit requirements for nonprofit and for-profit lenders. Certain applicable audit objectives included in Office of Management and Budget (OMB) requirements for compliance audits of nonprofit lenders were not included in the Department of Education Office of Inspector General (OIG) Lender Audit Guide for compliance audits of for-profit lenders. As a result, audits of lenders performed in accordance with the OIG Lender Audit Guide were at risk of omitting compliance testing for a key audit objective. Similarities in audit requirements and oversight procedures include these: (1) Schools were subject to annual financial statement and compliance audits under both programs. (2) The functions performed by the DL servicer, with which Education contracts to administer certain functions of the DL program, were similar to functions performed by lenders, guaranty agencies, and their servicers in the FFEL program. GAO's analysis found that objectives addressed by FFEL participant compliance audits were similar to the objectives addressed through oversight procedures for the DL servicer, such as Education's review of the servicer's monthly performance metrics. The passage of the Health Care and Education Reconciliation Act of 2010 terminated the authority to make new FFEL loans after June 30, 2010. Borrowers who would have been eligible to obtain new FFEL loans could receive loans under the DL program. Regarding Office of Federal Student Aid's monitoring activities, staff were to use financial statement audits to oversee the financial condition of the schools and guaranty agencies that participate in the student loan programs. Compliance audits of schools, lenders, guaranty agencies, and their third-party servicers help Education ensure that these participants comply with applicable statutes, regulations, and program requirements. The Office of Federal Student Aid was required to track findings in these audit reports. GAO found that third-party servicers for lenders in the FFEL program did not submit their audited financial statements to Education as required. Education lacked a policy and specific procedures to ensure receipt and review of these audited financial statements. Without such reviews, the Office of Federal Student Aid might not be informed of a third-party servicer's unfavorable audit opinion or significant reported findings that could affect program operations. GAO recommends that the Education Inspector General update the OIG Lender Audit Guide to include all appropriate regulatory requirements for audits of ongoing FFEL participants. GAO also recommends that the Secretary of Education develop and implement policies and procedures requiring Office of Federal Student Aid review of audited financial statements for lender servicers. The Education Office of Inspector General and Education agreed with GAO's recommendations.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Kay L. Daly Team: Government Accountability Office: Financial Management and Assurance Phone: (202) 512-9312GAO-10-668, Federal Student Loan Programs: Opportunities Exist to Improve Audit Requirements and Oversight Procedures
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
July 2010:
Federal Student Loan Programs:
Opportunities Exist to Improve Audit Requirements and Oversight
Procedures:
GAO-10-668:
GAO Highlights:
Highlights of GAO-10-668, a report to congressional committees.
Why GAO Did This Study:
The Higher Education Opportunity Act of 2008, Pub. L. No. 110-315,
mandated GAO to study the financial and compliance audits and reviews
required or conducted for the Federal Family Education Loan (FFEL)
program and the Federal Direct Student Loan (DL) program. The
Department of Education‘s (Education) Office of Federal Student Aid is
responsible for administering these programs. This report focuses on
(1) identifying differences and similarities in audit requirements and
oversight procedures for the FFEL and DL programs, including
anticipated changes to selected oversight activities and (2)
describing how the Office of Federal Student Aid‘s policies and
procedures are designed to monitor audits and reviews. To do so, GAO
interviewed Education and inspector general officials and reviewed
numerous audit guides, agency procedures, checklists, and audit
tracking systems.
What GAO Found:
GAO identified differences and similarities in audit requirements and
oversight procedures for the two programs. Differences include the
following:
* The FFEL and DL programs generally had different audit requirements
stemming primarily from divergent program structures. The FFEL program
relied on lenders, guaranty agencies”which administer federal
government loan guarantees to lenders”and other entities that were
subject to statutory and regulatory audit requirements. The DL program
did not have as many audit requirements because DL loans are provided
by the federal government, and fewer external entities are involved.
* GAO found differences in audit requirements for nonprofit and for-
profit lenders. Certain applicable audit objectives included in Office
of Management and Budget (OMB) requirements for compliance audits of
nonprofit lenders were not included in the Department of Education
Office of Inspector General (OIG) Lender Audit Guide for compliance
audits of for-profit lenders. As a result, audits of lenders performed
in accordance with the OIG Lender Audit Guide were at risk of omitting
compliance testing for a key audit objective.
Similarities in audit requirements and oversight procedures include
these:
* Schools were subject to annual financial statement and compliance
audits under both programs.
* The functions performed by the DL servicer, with which Education
contracts to administer certain functions of the DL program, were
similar to functions performed by lenders, guaranty agencies, and
their servicers in the FFEL program. GAO‘s analysis found that
objectives addressed by FFEL participant compliance audits were
similar to the objectives addressed through oversight procedures for
the DL servicer, such as Education‘s review of the servicer‘s monthly
performance metrics.
The passage of the Health Care and Education Reconciliation Act of
2010 terminated the authority to make new FFEL loans after June 30,
2010. Borrowers who would have been eligible to obtain new FFEL loans
could receive loans under the DL program.
Regarding Office of Federal Student Aid‘s monitoring activities, staff
were to use financial statement audits to oversee the financial
condition of the schools and guaranty agencies that participate in the
student loan programs. Compliance audits of schools, lenders, guaranty
agencies, and their third-party servicers help Education ensure that
these participants comply with applicable statutes, regulations, and
program requirements. The Office of Federal Student Aid was required
to track findings in these audit reports. GAO found that third-party
servicers for lenders in the FFEL program did not submit their audited
financial statements to Education as required. Education lacked a
policy and specific procedures to ensure receipt and review of these
audited financial statements. Without such reviews, the Office of
Federal Student Aid might not be informed of a third-party servicer‘s
unfavorable audit opinion or significant reported findings that could
affect program operations.
What GAO Recommends:
GAO recommends that the Education Inspector General update the OIG
Lender Audit Guide to include all appropriate regulatory requirements
for audits of ongoing FFEL participants. GAO also recommends that the
Secretary of Education develop and implement policies and procedures
requiring Office of Federal Student Aid review of audited financial
statements for lender servicers. The Education Office of Inspector
General and Education agreed with GAO‘s recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-10-668] or key
components. For more information, contact Kay Daly at (202) 512-9095
or dalykl@gao.gov.
[End of section]
Contents:
Letter:
Background:
FFEL and DL Audit Requirements and Oversight Procedures Generally
Differed with Divergent Program Structures, and Certain Audit Guidance
Was Inconsistent with Regulations:
Federal Student Aid Had Policies and Procedures Designed to Monitor
Audits, but Certain Audit Reports Were Not Required to Be Reviewed:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Summary of FFEL and DL Program Audits and Reviews:
Appendix II: Objectives, Scope, and Methodology:
Appendix III: Comments from the Department of Education Office of
Inspector General:
Appendix IV: Comments from the Department of Education Office of
Federal Student Aid:
Appendix V: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: FFEL Participants during Fiscal Year 2009:
Table 2: DL Participants during Fiscal Year 2009:
Table 3: Education Audits, Reviews, Agreed-Upon Procedures, and
Reconciliations of the Federal Family Education Loan (FFEL) and
William D. Ford Federal Direct Loan (DL) Programs as of August 31,
2009:
Figures:
Figure 1: FFEL and DL Loans Outstanding as of September 30, 2008 and
2009:
Figure 2: Overview of Audit and Review Requirements for the FFEL and
DL Programs:
Figure 3: Program Compliance Office's Oversight Responsibilities for
Audits of the FFEL and DL Programs:
Figure 4: School Eligibility Channel and Financial Partners Processes
for Monitoring Receipt, Acceptability, and Resolving Required Audits:
Abbreviations:
AUP: Agreed-Upon Procedures:
CFO: Chief Financial Officer:
DL: William D. Ford Federal Direct Loan:
ECASLA: Ensuring Continued Access to Student Loans Act:
Education: Department of Education:
FFEL: Federal Family Education Loan:
Financial Partners: Financial Partner Eligibility and Oversight:
FSA: Office of Federal Student Aid:
GA: Guaranty Agency:
GAGAS: Generally Accepted Government Auditing Standards:
HCERA: Health Care and Education Reconciliation Act of 2010:
HEA: Higher Education Act of 1965:
HEOA: Higher Education Opportunity Act of 2008:
IPA: Independent Public Accountant:
IPM: Integrated Partner Management:
NSLDS: National Student Loan Data System:
OIG: Office of Inspector General:
OMB: Office of Management and Budget:
PEPS: Postsecondary Education Participants System:
SAP: Special Allowance Payments:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
July 21, 2010:
Congressional Committees:
In fiscal year 2009, the Department of Education (Education) provided
or oversaw the provision of over $90 billion in federal student loans
to almost 11 million postsecondary students and their families under
the Higher Education Act of 1965 (HEA).[Footnote 1] Of that amount,
Education guaranteed[Footnote 2] $62.5 billion in loans from
nonfederal lenders to 7.7 million borrowers under the Federal Family
Education Loan (FFEL) program and disbursed $23.7 billion in loans to
2.9 million borrowers under the William D. Ford Federal Direct Loan
(DL) program. These two loan programs have different operating
structures that involve various participants.
Education's Office of Federal Student Aid (Federal Student Aid), led
by its Chief Operating Officer, is responsible for overall program
administration and oversight of the FFEL and DL programs. As part of
its oversight, Federal Student Aid is required to review and resolve
audits of entities that participate in the operation of these
programs. Schools, lenders, guaranty agencies,[Footnote 3] and other
program participants are subject to audits and reviews focused on
financial statements, internal controls, and compliance with laws and
program regulations.
In March 2010, the Health Care and Education Reconciliation Act of
2010 (HCERA) terminated the authority to make new FFEL loans after
June 30, 2010.[Footnote 4] Instead, borrowers who would have been
eligible to receive FFEL loans could receive loans made by Education
under the DL program. However, FFEL loans outstanding after that date
will continue under the same structure with Federal Student Aid
oversight for possibly 30 years, depending on the repayment
plan.[Footnote 5] Accordingly, Federal Student Aid officials expect
the audits and reviews of the FFEL program to remain part of that
oversight.
To identify how audits and reviews compare between the programs as
well as how Education uses these audits and reviews, the Higher
Education Opportunity Act (HEOA) of 2008,[Footnote 6] which revised
and reauthorized the HEA programs, mandated that GAO study the
financial statement and compliance audits and reviews required or
conducted[Footnote 7] as part of the management of FFEL and DL
programs. In response to this mandate, on September 30, 2009, we
issued a report[Footnote 8] that identified the audits and reviews for
the FFEL and DL programs. For a summary of this information, see
appendix I. To complete our response to this mandate, this report
focuses on (1) identifying differences and similarities in audit
requirements and oversight procedures[Footnote 9] for the FFEL and DL
programs including anticipated changes to selected Federal Student Aid
oversight activities and (2) describing how Federal Student Aid's
policies and procedures are designed to monitor audits and reviews.
To achieve the first objective, we analyzed audit requirements and
oversight procedures under both programs. For those audits and reviews
applicable to both programs, we compared the relevant audit guides to
assess whether the requirements were similar. We did not evaluate the
quality of the design of audit requirements or oversight procedures or
the extent to which the audit requirements or oversight procedures
were implemented. The scope of our work did not include program
reviews conducted by guaranty agencies and other Federal Student Aid
reviews because the review objectives were unique to each review. To
address our second objective, we analyzed Federal Student Aid's
policies and procedures, observed systems demonstrations, and
interviewed Federal Student Aid officials to obtain an understanding
of the agency's processes for monitoring receipt, acceptability, and
resolution of required audits and reviews. We did not confirm whether
the processes were implemented as designed. See appendix II for
additional information about our scope and methodology.
We conducted this performance audit at Federal Student Aid offices in
Washington, D.C., from August 2009 to July 2010 in accordance with
generally accepted government auditing standards (GAGAS). 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.
Background:
The FFEL and DL programs have substantially different structures but
both provide student loans to help students meet the costs of
obtaining a postsecondary education. FFEL loans are provided by
nonfederal lenders and repayment is guaranteed by the federal
government. Under the DL program, the federal government provides
loans to students and their families, using federal capital. Figure 1
shows the FFEL and DL program loan volume outstanding as of September
30, 2008 and 2009.
Figure 1: FFEL and DL Loans Outstanding as of September 30, 2008 and
2009:
[Refer to PDF for image: vertical bar graph]
Date: September 30, 2008;
FFEL: $447 billion;
DL: $123 billion.
Date: September 30, 2009;
FFEL: $493 billion;
DL: $155 billion.
Source: Department of Education.
Note: Loan totals include accrued interest. GAO presentation of
National Student Loan Data System data, unaudited.
[End of figure]
Overview of the FFEL Program:
In the FFEL program, student loans are made by nonfederal lenders,
which can be for-profit or nonprofit entities. Lenders are protected
against borrower defaults by federal government guarantees that are
administered by guaranty agencies. Guaranty agencies are state or
nonprofit entities that also perform other administrative and
oversight functions under the FFEL program. For example, guaranty
agencies provide counseling to borrowers regarding delinquent loan
repayment and initiate collections on defaulted loans.
Generally, lenders provide the FFEL loan proceeds to a student's
school, which then credits the student's account and disburses the
residual amount,[Footnote 10] if any, to the student. Schools,
lenders, and guaranty agencies often employ third-party servicers to
perform functions related to the administration of the FFEL program.
For example, a lender may hire a servicer to process borrower
payments. Table 1 details the number of FFEL participants.
Table 1: FFEL Participants during Fiscal Year 2009:
Participant: Schools;
Number of participants: 4,555[A].
Participant: Third-party servicers for schools;
Number of participants: 270[B].
Participant: Lenders;
Number of participants: 2,786.
Participant: Secondary markets[C];
Number of participants: 48.
Participant: Guaranty agencies;
Number of participants: 33.
Participant: Third-party servicers for lenders and guaranty agencies;
Number of participants: 38.
Participant: Borrowers with outstanding loans;
Number of participants: 25 million.
Source: Federal Student Aid.
Note: The data are unaudited.
[A] Includes 1,048 schools that participate in both the FFEL and DL
programs.
[B] Includes school servicers that participate in the FFEL and DL
programs.
[C] Originating lenders often sell their student loans to secondary
markets, thereby obtaining additional capital to make new student
loans.
[End of table]
Overview of the DL Program:
In the DL program, student loans are fully funded by the federal
government, which provides the loan proceeds to the student's school.
The school then credits the student's account and disburses any
residual amount to the student. Schools sometimes contract with third-
party servicers to assist in administering the operations of the DL
program. In addition, Education contracts with a servicer (DL
servicer) to administer certain aspects of the DL program, such as
payment processing. The number of participants in the DL program is
detailed in table 2.
Table 2: DL Participants during Fiscal Year 2009:
Participant: Schools;
Number of participants: 2,011[A].
Participant: Third-party servicers for schools;
Number of participants: 270[B].
Participant: DL servicer;
Number of participants: 1.
Participant: Borrowers with outstanding loans;
Number of participants: 9 million.
Source: Federal Student Aid.
Notes: The data are unaudited.
[A] Includes 1,048 schools that participate in both the FFEL and DL
programs.
[B] Includes school servicers that participate in the FFEL and DL
programs.
[End of table]
Under HCERA, no new FFEL loans may be made after June 30, 2010.
Borrowers who may have been eligible to obtain new FFEL loans prior to
the passage of HCERA could receive loans under the DL program.
Accordingly, the number of DL borrowers is expected to increase with
the expansion of the program. Education has awarded contracts to four
additional DL servicers to begin servicing direct loans by August 31,
2010.
Overview of Audit Guidance:
Audits required under FFEL or DL are performed in accordance with
guidance issued by the Office of Management and Budget (OMB) or the
applicable Department of Education Office of Inspector General (OIG)
audit guide. States, local government entities, and nonprofit entities
are generally required to have their audits performed in accordance
with OMB Circular No. A-133, Audits of States, Local Governments, and
Nonprofit Institutions,[Footnote 11] although, if federal student
assistance is the only federal program in which the entity
participates, OMB Circular No. A-133 gives the entity the option of
using the program-specific audit guide issued by the OIG in place of
the guidance produced under the Circular. For-profit entities are
required to have their audits performed in accordance with the
applicable OIG audit guide.
FFEL and DL Audit Requirements and Oversight Procedures Generally
Differed with Divergent Program Structures, and Certain Audit Guidance
Was Inconsistent with Regulations:
The FFEL and DL programs generally have different audit requirements
stemming mainly from different program structures. The FFEL program
relies on lenders, guaranty agencies, and other entities that are
subject to statutory, regulatory, and contractual audit requirements.
The DL program does not have as many of these audit requirements
because DL loans are provided by the federal government, and fewer
external entities are involved. The audit requirements set out under
the FFEL and DL programs are similar with regard to schools and their
servicers, which are participants in both programs. We noted that
certain for-profit lender audit guidance was inconsistent with
regulations. Finally, oversight procedures for the DL servicer were
designed to assess the DL servicer's performance in servicing loans in
the program. Different oversight procedures are planned for four
additional DL servicers expected to begin servicing direct loans by
August 31, 2010.
Audit Requirements Generally Differed for the FFEL and DL Programs:
The FFEL and DL programs have different statutory and regulatory
requirements for audits and program reviews, with more audit
requirements in place for the FFEL program, which involves more
participants external to the government. For instance, because the
FFEL program relies on thousands of nonprofit and for-profit lenders,
there are regulatory requirements for compliance audits and program
reviews of those lenders. Such requirements do not apply to the DL
program, which provides student loans through a single lender--the
federal government. Similarly, required agreed-upon procedures
[Footnote 12] engagements for the Ensuring Continued Access to Student
Loans Act (ECASLA)[Footnote 13] and audits of 9.5% Special Allowance
Payments[Footnote 14] are only applicable to lenders in the FFEL
program. Figure 2 summarizes the audit and review requirements for the
FFEL and DL programs, and appendix I includes more details about these
activities.
Figure 2: Overview of Audit and Review Requirements for the FFEL and
DL Programs:
[Refer to PDF for image: illustrated table]
Required audits and reviews:
Schools:
Annual financial statement audit:
FFEL: [A];
DL: [A].
Annual compliance audit:
FFEL: [A];
DL: [A].
Biennial program review by guaranty agencies:
FFEL: [A];
DL: [B].
Monthly DL reconciliation:
FFEL: [C];
DL: [A].
Third-party servicers for schools:
Annual compliance audit:
FFEL: [A];
DL: [A].
Lenders:
Annual compliance audit:
FFEL: [A];
DL: [D].
Biennial program review by guaranty agencies:
FFEL: [A];
DL: [B].
Annual special allowance payment audit:
FFEL: [A];
DL: [B].
ECASLA agreed-upon procedures engagement:
FFEL: [A];
DL: [B].
Third-party servicers for lenders:
Annual financial statement audit:
FFEL: [A];
DL: [D].
Annual compliance audit:
FFEL: [A];
DL: [D].
Guaranty agencies:
Annual financial statement audit:
FFEL: [A];
DL: [D].
Annual compliance audit:
FFEL: [A];
DL: [D].
Third-party servicers for guaranty agencies:
Annual financial statement audit:
FFEL: [A];
DL: [D].
Annual compliance audit:
FFEL: [A];
DL: [D].
[A] Applicable to the program.
[B] Biennial program reviews of schools and lenders performed by
guaranty agencies do not apply to DL because guaranty agencies
participate only in the FFEL program. Annual special allowance payment
audits and ECASLA agreed-upon procedures engagements for nonfederal
lenders do not apply to DL because these lenders participate only in
the FFEL program.
[C] This reconciliation of funds received from Education for DL
program student loans to amounts it disburses to students does not
apply to the FFEL program because FFEL loans are not funded by the
federal government.
[D] Certain functions performed by the DL servicer for the DL program
are performed for the FFEL program by lenders, guaranty agencies, and
their servicers, which are not participants in the DL program. The DL
servicer is subject to oversight procedures designed to monitor its
performance.
Source: GAO analysis of applicable laws, regulations, and contracts
for the FFEL and DL programs (see appendix I).
Note: Other audits and reviews may be performed for both programs at
the discretion of the Education OIG or Federal Student Aid.
[End of figure]
Both Programs Had Similarities in Audit Requirements for Schools and
Their Servicers:
While our analysis showed audit requirements generally differed,
schools under both programs had similar requirements to have annual
financial statement audits performed by independent public accountants
(IPA).[Footnote 15] School financial statement audits focus on whether
the financial statements are fairly presented in accordance with
generally accepted accounting principles. These financial statement
audits are to be performed in accordance with GAGAS.[Footnote 16]
GAGAS also requires IPAs to report on the results of certain tests
performed on internal controls over financial reporting and compliance
with certain provisions of laws, regulations, and program
requirements. Financial statement audit reports provide Education with
information about the financial condition of participants, any
significant internal control deficiencies,[Footnote 17] and instances
of noncompliance. Third-party servicers employed by schools to aid in
the administration of their federal loans are not generally required
to have financial statement audits under either the FFEL or DL
programs.
Both programs also require schools and school servicers to have annual
compliance audits performed by IPAs.[Footnote 18] The audits focus on
whether these participants comply with applicable statutes,
regulations, and program requirements. For example, school compliance
audits for both programs are designed to test whether schools perform
student eligibility validation.[Footnote 19] These audits are to
determine whether a school has verified that certain student
requirements, such as citizenship and financial need, have been met.
In addition, schools participating in the student loan programs are
required to follow specified criteria for applying loan proceeds to
students' accounts and disbursing residual amounts to students within
established time frames. To illustrate, for students borrowing from
the FFEL or DL programs, schools should not credit a registered
student's account more than 10 days before the first day of classes.
For both programs, compliance with these requirements is monitored
through the annual compliance audit.
If performed properly, the required audits for FFEL and DL
participants should address federal and borrower interests. Audits
address federal fiscal interests if they are designed to help protect
the government from financial loss and address borrower interests if
they are designed to help ensure that qualified individuals (1) have
access to federal student loans and (2) are protected from financial
loss. For instance, auditors assess whether schools that participate
in either program complied with refund requirements.[Footnote 20]
Refund requirements for both programs include the proper return of
program funds in the case of unearned tuition and other charges for a
student who received federal student aid if the student did not
register, dropped out, was expelled, or otherwise failed to complete
the period of enrollment. Proper refunds to the lender or federal
government reduce the outstanding loan amount, thus protecting federal
and borrower interests.
Certain Audit Guidance for FFEL Lenders Did Not Incorporate All
Requirements:
As noted previously, HCERA terminated the authority to make new FFEL
loans after June 30, 2010. However, FFEL loans outstanding after that
date will continue under the same structure with Federal Student Aid
oversight for many years, depending on the repayment plan.
Accordingly, we identified and reviewed audit objectives and related
guidance and found one area where the guidance for compliance audits
of for-profit and nonprofit FFEL lenders differed. FFEL lenders can be
for-profit or nonprofit and, in some cases, can be the schools
themselves.[Footnote 21] For-profit lenders are required to have their
audits performed in accordance with the OIG Lender Audit Guide.
Nonprofit lenders are generally required to have their audits
performed in accordance with OMB Circular No. A-133, although the
Single Audit Act[Footnote 22] and OMB Circular No. A-133 allow lenders
to elect to have their audits performed using the OIG audit guide if
federal student assistance is the only federal program in which the
lender participates.
Certain compliance objectives included in OMB Circular No. A-133 for
nonprofit lenders were not included in the OIG Lender Audit Guide used
to audit for-profit lenders and the nonprofit lenders that elect to
undergo an audit under the OIG guide instead of OMB Circular No. A-
133. These objectives address the compliance testing for regulatory
requirements of the programs. One of these omitted objectives remains
applicable after the passage and implementation of HCERA.
Specifically, the following OMB Circular No. A-133 audit objective was
not in the OIG Lender Audit Guide required for audits of for-profit
lenders, including for-profit schools that make or originate FFEL
loans:
"School lenders proceeds: Determine whether schools that made FFEL
loans use borrower interest payments, Education special allowance
payments, interest subsidies, and any proceeds from the sale of loans
to supplement needs-based grants for its students, as required."
This audit objective is designed to assess whether school lenders
appropriately comply with regulations[Footnote 23] affecting
significant amounts of proceeds from loans. The OIG Lender Audit Guide
has been supplemented with several amendments for specific changes to
audit requirements, but has not been comprehensively updated since
December 1996 and, as amended, did not address this audit objective.
OIG officials told us they plan to update the OIG Lender Audit Guide
to appropriately address this omission.
Education Has Designed Procedures for Oversight of the DL Servicer:
The functions performed by the DL servicer are similar to certain
functions performed by lenders, guaranty agencies, and their servicers
in the FFEL program. The DL servicer is not required to have an
independent auditor perform financial and compliance audits similar to
those required of guaranty agencies, guaranty agency servicers, and
lender servicers in the FFEL program. Instead, Federal Student Aid
directly oversees the DL servicer's performance as a federal
contractor through monthly reviews of performance metrics as well as
other procedures, including monthly reconciliations of loan balances
recorded by the DL servicer to those in Federal Student Aid records.
[Footnote 24] Federal Student Aid officials are to review reports
generated by the Independent Quality Control Unit, a component of the
DL servicer that performs analysis to help ensure that the DL
servicer's performance metrics are correctly calculated and accurately
reported and that corrective actions from prior audits are
implemented. These oversight procedures are designed to assess and
evaluate the DL servicer's performance in servicing loans in the DL
program.[Footnote 25]
Our analysis showed that the objectives of the oversight procedures to
be performed by Federal Student Aid over the DL servicer share some
similarities with the objectives being addressed by audits of FFEL
lenders, guaranty agencies, and their servicers. For example, both
FFEL lenders and the DL servicer are to update student records to
reflect changes in a student's status--such as student enrollment,
which affects the repayment of the loan. For FFEL lenders, the
performance of this function is to be evaluated in the annual
compliance audit of lenders performed by IPAs. For the DL servicer,
this function is to be evaluated through the oversight procedures
performed by Federal Student Aid staff, including monthly reviews of
performance metrics that monitor the DL servicer's performance. For
example, Federal Student Aid is to monitor whether the DL servicer
meets the 2-day standard for completing student status updates and the
98 percent standard for status update accuracy. Other examples of
similar functions monitored by compliance audits in the FFEL program
and by oversight procedures in the DL program include timely and
accurate application of loan payments to borrower accounts and timely
review and processing of loan discharge claims.[Footnote 26]
Different Oversight Procedures Apply to Additional DL Servicers:
In 2009, Federal Student Aid awarded contracts to four additional
servicers to address increased direct loan volume stemming from
changed student loan market conditions and potential further volume
increases.[Footnote 27] HCERA, passed in March of 2010, terminated the
authority to make new FFEL loans after June 30, 2010, which, according
to Federal Student Aid officials, will add substantially to Federal
Student Aid's direct loan volume and DL servicing needs. The new
servicers, expected to begin servicing direct loans by August 31,
2010, are subject to oversight procedures that differ from the current
DL servicer. According to Federal Student Aid's contract monitoring
plan, these activities will include transaction analysis and
reconciliations as well as internal control and program compliance
reviews. For example, according to the contract monitoring plan,
Federal Student Aid staff are expected to perform periodic transaction
analysis at the borrower account level to determine the servicing
accuracy of transactions. Federal Student Aid officials and DL
servicer are to discuss issues identified through transaction analysis
and the status of corrective actions at weekly operational meetings.
In addition, the monitoring plan states that program compliance
reviews are to be conducted as needed, at least annually, to determine
if servicing is in compliance with requirements. According to Federal
Student Aid officials, guidance for some of these oversight procedures
is under development.
The contract monitoring plan also calls for the additional DL
servicers to be subject to internal control examinations performed by
IPAs in accordance with Statement on Auditing Standards No. 70.
[Footnote 28] Each additional DL servicer is to provide Federal
Student Aid with an IPA report on the examination of its operational
controls semiannually and on the examination of its information
technology controls annually. These examinations are in addition to
Education's annual review of internal controls required by OMB
Circular No. A-123.[Footnote 29] In addition, the contracts call for
the additional DL servicers to be subject to performance measures
focused on default prevention and surveys of borrower satisfaction,
school satisfaction, and Federal Student Aid staff satisfaction with
servicer performance. These performance measures are to be used to
compare the additional DL servicers' relative performance as one
factor in determining the allocation of direct loans to them for
servicing. Education officials expect to have these oversight
procedures in place by the time the additional DL servicers begin
servicing direct loans.
Federal Student Aid Had Policies and Procedures Designed to Monitor
Audits, but Certain Audit Reports Were Not Required to Be Reviewed:
FFEL and DL participants submit required audits to Federal Student
Aid. Components of Federal Student Aid's Program Compliance office,
including the School Eligibility Channel and Financial Partner
Eligibility and Oversight (Financial Partners) are responsible for
providing oversight by ensuring that the audits performed comply with
statutory and regulatory requirements. The School Eligibility Channel
is responsible for providing oversight of audits of schools and school
servicers that participate in the FFEL and DL programs. Financial
Partners is responsible for the oversight of audits of lenders,
guaranty agencies, and their servicers participating in the FFEL
program. These activities are to be accomplished through audit
resolution and program review processes. Figure 3 depicts the
respective oversight responsibilities of the School Eligibility
Channel and Financial Partners.
Figure 3: Program Compliance Office's Oversight Responsibilities for
Audits of the FFEL and DL Programs:
[Refer to PDF for image: illustration]
Federal Student Aid entities:
Program Compliance Office:
* School Eligibility Channel: Program oversight of other participants:
- FFEL and DL programs: Schools; Third-party servicers.
* Financial Partners: Program oversight of other participants:
- FFEL program:
-- Guarantee agencies; Third-party servicers;
-- Lenders; Third-party servicers.
Source: GAO analysis of Department of Education data.
Note: The data are from Federal Student Aid process descriptions and
interviews with Education officials.
[End of figure]
The School Eligibility Channel and Financial Partners are responsible
for logging receipt of the audit report, performing an acceptability
review, and taking steps to resolve the audit.[Footnote 30] According
to policies and procedures, Federal Student Aid staff track findings
contained in audit reports and use them to oversee the programs by
monitoring whether corrective actions are taken. Tracking systems used
by the School Eligibility Channel and Financial Partners include the
Postsecondary Education Participants System (PEPS), eZ-Audit, and
various Excel-based tracking sheets.[Footnote 31] Figure 4 depicts the
process used by Federal Student Aid components for reviewing audit
reports.
Figure 4: School Eligibility Channel and Financial Partners Processes
for Monitoring Receipt, Acceptability, and Resolving Required Audits:
[Refer to PDF for image: illustration]
Audit report receipt:
Audit receipt:
Participants (schools, lenders, guaranty agencies, third-party
servicers) submit audit reports;
Notification:
School Eligibility Channel and Financial Partners notify participants
of delinquent audit status if report is not received by deadline
(School Eligibility Channel also notifies participants of impending
deadline);
Report receipt logged:
School Eligibility Channel and Financial Partners log receipt of audit
reports.
Acceptability review:
School Eligibility Channel and Financial Partners staff review reports
for completeness and may request additional information (failure to
provide requested information may lead to administrative action);
Data:
School Eligibility Channel and Financial Partners staff enter results
of review into eZ-Audit, PEPS, and Excel-based tracking systems.
Audit resolution:
Audit resolution:
School Eligibility Channel and Financial Partners staff review audit
reports for findings and evaluate auditees‘ corrective action plans;
Data:
School Eligibility Channel and Financial Partners staff enter audit
resolution data into eZ-Audit, PEPS, and Excel-based tracking systems.
Source: GAO analysis of Department of Education data.
Note: The data are from Education policies and procedures and
interviews with Education officials.
[End of figure]
Some processes described in figure 4 are designed differently
depending on the type of participant. Specifically, according to
Federal Student Aid policies and procedures, schools are required to
submit audit reports--both financial statement and compliance audits--
to Federal Student Aid electronically via the eZ-Audit system. Other
participants, including lenders, guaranty agencies, and their
servicers, are expected to submit reports in paper or electronic form.
For audits performed in accordance with OMB Circular No. A-133,
Federal Student Aid staff are to obtain the audit reports from the
Federal Audit Clearinghouse Web site, a governmentwide audit
information repository. Federal Student Aid staff are to perform
acceptability reviews on the audit reports using checklists that
address issues such as whether all required reporting elements are
included. The School Eligibility Channel uses contractors to assist
with the acceptability review of school audit reports. After the
acceptability review is completed, Federal Student Aid policies and
procedures require staff to review the submitted audit report and
notify the participant that the audit has been accepted or explain
steps required for satisfactory audit resolution. Statutes and
regulations provide authority for Federal Student Aid to perform a
program review[Footnote 32] as a method of program oversight of
participants. Regulations also authorize Federal Student Aid to
initiate administrative hearings that can lead to sanctions, including
the suspension of the participant from the program.[Footnote 33]
Federal Student Aid staff are to enter resolution information into eZ-
Audit or PEPS once an audit is resolved. Similar processes are to be
used for biennial program reviews of schools and lenders performed by
guaranty agencies.[Footnote 34]
Special allowance payment audits and ECASLA agreed-upon procedure
reports, also required from participating lenders, are subject to
similar report review procedures.[Footnote 35] Federal Student Aid
procedures called for using acceptability review checklists and Excel-
based tracking sheets designed specifically for these kinds of reports
to ensure completeness of the reports and to track the status and
ensure the resolution of reported findings. For these reports,
findings resolution could include adjusting special allowance payments
made to lenders or coordinating with the lender to remove ineligible
loans from an ECASLA portfolio.
Financial Partners has acknowledged that inefficiencies exist with the
current tracking system. For example, Financial Partners staff must
manually enter the receipt of the compliance audit reports in Excel-
based tracking sheets, while the receipt of the school audit reports
are automatically logged through eZ-Audit electronic submission.
Further, PEPS does not allow Financial Partners to readily identify
those lenders required to submit annual compliance audits.
Accordingly, Financial Partners staff must analyze database
information to identify these lenders. Further, because PEPS does not
track all audit information that is important to Financial Partners,
staff supplement their use of PEPS with Excel-based tracking sheets.
To address these inefficiencies, Education is in the process of
designing a new system--referred to as Integrated Partner Management
(IPM)--that will replace the existing systems and, among other things,
provide the capability to track audit findings. According to Education
officials, IPM is currently in the requirements phase, which is
expected to be completed in July 2010, with implementation in phases
in 2012.
Gap Noted in Receipt and Review of Certain Audit Reports:
We noted a gap in Education's policies and procedures regarding review
of audited financial statements for lender servicers. Education
regulations[Footnote 36] require lender servicers that participate in
the FFEL program to submit audited financial statements[Footnote 37]
to Education annually. However, our review found that lender servicers
did not submit their audited financial statements to Education.
Federal Student Aid did not have procedures in place to review these
financial statement audit reports and therefore did not conduct any
follow-up to ensure that the audit reports were received and reviewed.
Federal Student Aid officials told us they consider the risk to the
government of not receiving these servicers' audited financial
statements to be low because lenders are ultimately responsible for
the loans and have the responsibility to ensure that their servicers
are financially capable. By not requiring the review of the audited
financial statements of lender servicers, Federal Student Aid runs the
risk of missing significant findings disclosed in these reports. Such
findings could relate to control weaknesses over information security
and financial reporting that may not be addressed in the annual
compliance audits that Federal Student Aid staff review.
Further, Federal Student Aid staff might not be informed if a lender
servicer received other than an unqualified audit opinion. Concerns
such as these might indicate potential problems regarding the
servicer's ability to continue program operations effectively. In
addition, because one servicer may service multiple lenders, the risk
to the government and borrowers increases should one of these
servicers be in violation of any provision of federal regulations.
According to GAO's Internal Control Management and Evaluation Tool,
[Footnote 38] agencies should obtain and report to managers any
relevant external information that may affect the achievement of its
missions, goals, and objectives. Unless Federal Student Aid receives
and reviews these financial statement audit reports, it may not be
fully aware of risks to the government and borrowers, and its ability
to properly oversee the FFEL program could be impaired.
Conclusions:
Significant federal resources are committed to providing loans so that
students' educational goals can be achieved. Effectively overseeing
the FFEL and DL programs is critical to minimize the risks to
taxpayers and borrowers. Although no new FFEL loans will be made after
June 30, 2010, FFEL loans unpaid at that time will remain under
Federal Student Aid's oversight for possibly 30 years. Improvements
are needed in the audit guidance and review procedures for the FFEL
program. The gaps we noted in the OIG Lender Audit Guide used to audit
lenders and in Federal Student Aid's policies and procedures regarding
its review of audited financial statements for lender servicers expose
the program to unnecessary risk. As Education moves forward to
administer the expanded DL program, maintaining and enhancing its
oversight procedures will help ensure that federal and borrower
interests continue to be protected.
Recommendations for Executive Action:
To help address any gaps in the guidance for audits FFEL lenders
perform in accordance with the OIG Lender Audit Guide, we recommend
that the Education Inspector General update the OIG Lender Audit Guide
to include all appropriate regulatory audit requirements.
To ensure that Education properly oversees the ongoing servicing of
outstanding FFEL student loans and mitigates risks related to lender
servicers, we recommend that the Secretary of Education direct the
Chief Operating Officer of the Office of Federal Student Aid to
develop and implement policies and procedures requiring Federal
Student Aid review of audited financial statements for lender
servicers.
Agency Comments and Our Evaluation:
In written comments on a draft of this report, the Education Office of
Inspector General and Federal Student Aid agreed with our
recommendations. These comments are reprinted in their entirety in
appendixes III and IV, respectively. Regarding our recommendation to
update the OIG Lender Audit Guide, the Education Inspector General
concurred that the guide needs to be made current with all compliance
requirements and anticipates updating and issuing a revised guide by
December 2010. Regarding our recommendation to develop and implement
policies and procedures requiring the review of lender servicer
audited financial statements, the Chief Operating Officer of Federal
Student Aid acknowledged the need to update the OIG Lender Audit Guide
and existing processes and procedures to require lender servicers to
prepare and submit audited financial statements, and stated that
Federal Student Aid will review the audited financial statements.
Education also provided technical comments, which we incorporated in
this report, as appropriate.
We are sending copies of this report to the Secretary of Education,
the Inspector General of Education, and other interested parties. In
addition, the report will be available at no charge on GAO's Web site
at [hyperlink, http://www.gao.gov].
Please contact me on (202) 512-9095 if you or your staff have any
questions about this report. Contact points for our Office of
Congressional Relations and Office of Public Affairs can be found on
the last page of this report. Other major contributors to this report
are listed in appendix V.
Signed by:
Kay L. Daly:
Director, Financial Management and Assurance:
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]
Appendix I: Summary of FFEL and DL Program Audits and Reviews:
The following information is from GAO, Federal Student Loans: Audits
and Reviews of the Federal Family Education Loan and Federal Direct
Loan Programs, GAO-09-992R (Washington D.C.: Sept. 30, 2009),
enclosure, p. 16.
Table 3: Education Audits, Reviews, Agreed-Upon Procedures, and
Reconciliations of the Federal Family Education Loan (FFEL) and
William D. Ford Federal Direct Loan (DL) Programs as of August 31,
2009:
Type of Required Audit/Review:
Auditee and Type of Audit/Review: Schools: Financial statements;
Objective: Provide reasonable assurance that entity financial
statements are free of material misstatement;
Frequency[A]: 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 Audit/Review: Schools: Compliance;
Objective: Assess entity compliance with applicable statutes,
regulations, and program requirements;
Frequency[A]: 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 Audit/Review: Schools: Program reviews;
Objective: Enforce federal, state, and guaranty agency requirements
for schools having a student loan default rate exceeding 20 percent;
Frequency[A]: Biennially;
Performed by: Guaranty Agency (GA);
Authority: 34 CFR 682.410(c);
FFEL: Required;
DL: Not Applicable[B].
Auditee and Type of Audit/Review: Schools: Direct loan reconciliation;
Objective: Assess whether funds drawn down by each school equal the
amount disbursed to students;
Frequency[A]: 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[B];
DL: Required.
Auditee and Type of Audit/Review: Lenders: Compliance;
Objective: Assess: (1) accuracy of origination fee, interest, and
special allowance payments and (2) compliance with applicable
statutes, regulations, and program requirements;
Frequency[A]: Annually;
Performed by: IPA;
Authority: 20 U.S.C. 1078(b)(1)(U) and 34 CFR 682.305(c);
FFEL: Required;
DL: Not Applicable[B].
Auditee and Type of Audit/Review: Lenders: Special allowance audits;
Objective: Assess the accuracy of billings for the 9.5 percent special
allowance payments;
Frequency[A]: Annually;
Performed by: IPA;
Authority: 20 U.S.C. 1078(b)(1)(U);
FFEL: Required;
DL: Not Applicable[B].
Auditee and Type of Audit/Review: Lenders: Program reviews;
Objective: Enforce federal, state, and guaranty agency requirements;
Frequency[A]: Biennially;
Performed by: GA;
Authority: 34 CFR 682.410(c);
FFEL: Required;
DL: Not Applicable[B].
Auditee and Type of Audit/Review: Secondary Markets: Compliance;
Objective: Assess entity compliance with applicable statutes,
regulations, and program requirements;
Frequency[A]: At least once a year;
Performed by: IPA;
Authority: 20 U.S.C.A. 1094(c)(1)(D);
FFEL: Required;
DL: Not Applicable[B].
Auditee and Type of Audit/Review: Lenders and Secondary Markets -
Ensuring Continued Access to Student Loans Act (ECASLA): Agreed-upon
procedures engagements;
Objective: Assess lender and secondary market compliance with the
provisions of the Loan Purchase Commitment Program;
Frequency[A]: Once, for all loans sold each quarter;
Performed by: IPA;
Authority: Section 5 of the Master Loan Sales Agreement;
FFEL: Required;
DL: Not Applicable[B].
Auditee and Type of Audit/Review: Lenders and Secondary Markets -
Ensuring Continued Access to Student Loans Act (ECASLA): Agreed-upon
procedures engagements;
Objective: 1) Assess lender and secondary market compliance with the
provisions of the Loan Participation Program;
Frequency[A]: Based on loan volume and error rate[C];
Performed by: IPA;
Authority: Section 8 of the Master Participation Agreement;
FFEL: Required;
DL: Not Applicable[B].
Auditee and Type of Audit/Review: Lenders and Secondary Markets -
Ensuring Continued Access to Student Loans Act (ECASLA): Agreed-upon
procedures engagements;
Objective: 2) Assess custodian compliance with the provisions of the
Master Participation Agreement;
Frequency[A]: Annually;
Performed by: IPA;
Authority: Section 8 of the Master Participation Agreement;
FFEL: Required;
DL: Not Applicable[B].
Auditee and Type of Audit/Review: Lenders and Secondary Markets -
Ensuring Continued Access to Student Loans Act (ECASLA): Agreed-upon
procedures engagements;
Objective: 1) Assess lender and secondary market compliance with
provisions of the Asset-Backed Commercial Paper Conduit Put Program -
Putability[D] and Eligibility[E];
Frequency[A]: Once to determine putability[D]; Quarterly for
eligibility[E];
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[B].
Auditee and Type of Audit/Review: Lenders and Secondary Markets -
Ensuring Continued Access to Student Loans Act (ECASLA): Agreed-upon
procedures engagements;
Objective: 2) Assess conduit administrator compliance with provisions
of the Put Agreement;
Frequency[A]: Annually;
Performed by: IPA;
Authority: Section 20 of the Put Agreement;
FFEL: Required;
DL: Not Applicable[B].
Auditee and Type of Audit/Review: Guaranty Agencies: Financial
statements;
Objective: Provide reasonable assurance that entity financial
statements are free of material misstatement;
Frequency[A]: Annually;
Performed by: IPA;
Authority: 34 CFR 682.410(b);
FFEL: Required;
DL: Not Applicable[B].
Auditee and Type of Audit/Review: Guaranty Agencies: Compliance;
Objective: Assess entity compliance with applicable statutes,
regulations, and program requirements;
Frequency[A]: Annually;
Performed by: IPA;
Authority: 34 CFR 682.410(b);
FFEL: Required;
DL: Not Applicable[B].
Auditee and Type of Audit/Review: Third-Party Servicers: Financial
statements of servicers for lenders and guaranty agencies;
Objective: Provide reasonable assurance that entity financial
statements are free of material misstatement;
Frequency[A]: Annually;
Performed by: IPA;
Authority: 34 CFR 668.23(d)(5);
FFEL: Required;
DL: Not Applicable[B].
Auditee and Type of Audit/Review: Third-Party Servicers: Compliance;
Objective: Assess entity compliance with applicable statutes,
regulations, and program requirements;
Frequency[A]: 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[A]: 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.
Auditee and Type of Audit/Review: OIG audits;
Objective: Audit, investigate, and inspect student loan programs and
operations;
Frequency[A]: Based on risk;
Performed by: OIG;
Authority: Inspector General Act of 1978 and 5 U.S.C. app.;
FFEL: Discretionary;
DL: Discretionary.
Auditee and Type of Audit/Review: 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[A]: 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.
[A] Exceptions to these frequencies are based on factors such as loan
volume and the servicer's relationship with program participants.
[B] Certain audits, reviews, and reconciliations are not applicable
because the structure, operations, and participants of the FFEL and DL
programs differ.
[C] Every one, three, or six months. The error rate is the rate of
ineligible loans identified in the previous engagement.
[D] 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."
[E] Eligibility --Under this program, "putable" loans are reviewed
quarterly to ensure that they continue to meet specific criteria.
[End of table]
[End of section]
Appendix II" Objectives, Scope, and Methodology:
To address the first objective, we reviewed our September 30, 2009,
report[Footnote 39] to determine the extent to which the audit and
review requirements were applicable to both the Federal Family
Education Loan and the William D. Ford Federal Direct Loan (DL)
program participants in order to identify similarities and
differences. We obtained and reviewed relevant audit guides to
determine if the audit objectives addressed statutory and regulatory
requirements to be met by the programs' participants.[Footnote 40] For
the DL program, we also interviewed knowledgeable officials regarding
the Department of Education's (Education) procedures to oversee the
performance of the DL servicer, and we reviewed the relevant oversight
procedures. For nonprofit and for-profit schools and lenders, we
analyzed Office of Management and Budget (OMB) Circular No. A-133 and
the Education Office of Inspector General (OIG) audit guides to
determine if they addressed similar objectives. To assess whether the
audits as designed addressed federal and borrower interests,
respectively, we determined if the audits are designed to help protect
the government from financial loss, and help ensure that qualified
individuals have access to federal student loans and are protected
from financial loss. For example, we determined if the audit guides
focused on determining whether the students and lenders met
eligibility requirements to participate in these programs. We
interviewed officials from Education's Office of Federal Student Aid
(Federal Student Aid) and the OIG, including the Acting Director of
Financial Partner Eligibility and Oversight (Financial Partners), the
General Manager of the School Eligibility Channel, and the Deputy
Assistant Inspector General for Audit, to obtain clarification and
explanations for any discrepancies identified during our review of
documentation. The scope of our audit did not include testing that the
audit guides were used by the auditors as intended. In addition, our
work did not include program reviews conducted by guaranty agencies
and other Federal Student Aid reviews because (1) in some cases, these
reviews had similar objectives to the audits that we did include in
our study and (2) in other cases, the reviews were risk-based and
addressed specific operating conditions, and therefore these
objectives were unique to each review.
To address the second objective, we focused on the design of the
processes Education uses to oversee the programs and to ensure
compliance with statutory and regulatory requirements for the timely
submission of audit reports. We reviewed applicable statutes and
regulations and Federal Student Aid policies and procedures, including
process flow diagrams and audit acceptability checklists.[Footnote 41]
To further our understanding of the design of Education's processes
for overseeing these programs and ensuring compliance, we observed
systems demonstrations that included automated and Excel-based systems
used to track receipt of audits and related findings. During these
demonstrations, we observed actual steps taken by staff in order to
review, and if necessary resolve, the audit. We obtained and reviewed
supporting documentation referenced during these demonstrations, such
as audit acceptability checklists and copies of Excel-based tracking
sheets, used by staff to determine the sufficiency of the audit
report's content and to ensure the timeliness of audit submissions,
respectively. We interviewed officials from Federal Student Aid and
OIG, including the Acting Director of Financial Partners, the General
Manager of the School Eligibility Channel, and the Deputy Assistant
Inspector General for Audit, to obtain clarification and explanations
for any discrepancies identified during our review of documentation
and the demonstrations. We focused on describing the processes
Education has designed to ensure that applicable requirements are
being met. While the scope of our audit did not include testing the
implementation of these processes including controls, as appropriate,
we noted any design deficiencies.
We requested comments on a draft of this report from Education. We
received written comments from the Education Inspector General and the
Chief Operating Officer of Federal Student Aid (reprinted in their
entirety in appendixes III and IV, respectively). We conducted this
performance audit at Federal Student Aid offices in Washington, D.C.,
from August 2009 to July 2010 in accordance with GAGAS. 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.
[End of section]
Appendix III: Comments from the Department of Education Office of
Inspector General:
United States Department Of Education:
Office Of Inspector General:
The Inspector General:
400 Maryland Ave., S.W.
Washington, D.C. 20202-1510:
"Our mission is to ensure equal access to education and to promote
educational excellence throughout the Nation"
July 15, 2010:
Ms. Kay L. Daly:
Director, Financial Management and Assurance:
Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Ms. Daly:
Thank you for giving us the opportunity to comment on the draft report
entitled Federal Student Loan Programs ” Opportunities Exist to
Improve Audit Requirements and Oversight Procedures. Our comments are
limited to the recommendation pertaining to the Office of Inspector
General (OIG).
As stated in the draft report, the current OIG Lender Audit Guide
(Compliance Audits [Attestation Engagements] for Lenders and Lender
Servicers Participating in the Federal Family Education Loan Program
[FFEL]” December 1996) does not incorporate all compliance
requirements. Although we have supplemented the Guide with several
amendments for specific changes to audit requirements, we concur that
it needs to be made current with all compliance requirements. We
anticipate that we will update and issue the revised Guide by December
2010.
Although we are aware of the need for an updated Lender Audit Guide,
over the last several years we have used our limited resources related
to guidance for lenders in the FFEL Program by focusing our work on
emerging areas of risks in that Program. We did issue a special
purpose guide to conduct audits of the 9.5 percent special allowance
payments to assure those billings were allowable. The audits that were
conducted found that nearly 90 percent of all the 9.5 percent special
allowance payments were not eligible.
We also issued seven audit guides covering various aspects of the
Ensuring Access to Student Loans Act (ECASLA) programs. We believed
this to be of primary concern because ECASLA provided financing for
$47.6 billion or 88 percent of the total 2009-10 FFEL Program loans.
If you have any additional questions, please contact Kevin Winicker,
Acting Director for Non-Federal Audits at (202) 245-6982 or
kevin.winicker@ed.gov.
Sincerely,
Signed by:
Kathleen S. Tighe:
Inspector General:
[End of section]
Appendix IV: Comments from the Department of Education Office of
Federal Student Aid:
Department of Education:
Office of Federal Student Aid:
830 First St. N.E.
Washington, DC 20202:
[hyperlink, www.FederalStudentAid.ed.gov]
1-800-4-FED-AID:
July 15, 2010:
Ms. Kay L. Daly:
Director:
Financial Management and Assurance:
United States Government Accountability Office:
Washington, DC 20548:
Dear Ms. Daly:
Thank you for providing the U.S. Department of Education (the
Department) with the opportunity to respond to the recommendation made
in the U.S. Government Accountability Office's (GAO's) draft report
entitled, "Federal Student Loan Programs: Opportunities Exist to
Improve Audit Requirements and Oversight Procedures" (GAO-10-668).
The Higher Education Opportunity Act, P.L. 110-315, included a mandate
for GAO to study the financial and compliance audits and reviews
required or conducted for the Federal Family Education Loan (FFEL) and
William D. Ford Direct Loan (DL) Programs. GAO was asked to provide
(1) an assessment of whether the audits and reviews as designed
provide comparable coverage of the two loan programs, (2) discuss how
the Department ensures that these audits and reviews comply with
statutory and regulatory requirements, and (3) describe how the
Department uses them to oversee these loan programs. The draft report
focuses on (1) identifying differences and similarities in audit
requirements and oversight procedures for the FFEL and DL Programs,
including anticipated changes to selected oversight activities and (2)
describing how Federal Student Aid's (FSA's) policies and procedures
are designed to monitor audits and reviews.
As a result of its study, GAO acknowledges that FSA has designed
procedures for the oversight of the servicers that service loans
originated under the DL Program. GAO also makes two recommendations to
the Department regarding oversight of the FFEL Program. The first
recommendation is that the Department's Office of Inspector General
(OIG) update the OIG Lender Audit Guide to include all appropriate
regulatory requirements for audits of ongoing FFEL participants. The
OIG will address this recommendation in a separate response. The
second recommendation is that FSA develop and implement policies and
procedures requiring FSA review of audited financial statements for
lender servicers. Our response to this recommendation follows. In
addition to this response, we are including, as an appendix to this
letter, clarifications we propose to the draft report.
Recommendation: To ensure that Education properly oversees the ongoing
servicing of outstanding FFEL student loans and mitigates risks
related to lender servicers, we recommend that the Secretary of
Education direct the Chief Operating Officer of the Office of Federal
Student Aid to develop and implement policies and procedures requiring
Federal Student Aid review of audited financial statements for lender
servicers.
We agree with this recommendation. As GAO notes in the draft report,
34 C.F.R. 668.23 (d)(5) requires that third-party servicers that enter
into a contract with a lender to administer any aspect of the lender's
programs must submit annually an audited financial statement. This
regulation also states that the financial statements must be prepared
on an accrual basis in accordance with generally accepted accounting
principles and audited by an independent auditor in accordance with
generally accepted government auditing standards and other guidance
contained in audit guides issued by the 01G. The current OIG Lender
Audit Guide, which also covers lender servicers, does not contain
guidance regarding lender servicer audited financial statements and,
as a result, lender servicers have not been providing audited
financial statements to the Department. FSA will work with the OIG to
update the OIG Lender Audit Guide to include guidance to lender
servicers regarding preparation and submission of audited financial
statements. FSA will incorporate a review of the audited financial
statements into the process and procedures that are currently in place
for the review and resolution of compliance audits.
We appreciate the opportunity to respond to the GAO draft report. If
you have any questions regarding our response, please contact me or
Marge White of my staff at 202-377-3022.
Sincerely,
Signed by:
William J. Taggart:
Chief Operating Officer:
Enclosure:
[End of section]
Appendix V: GAO Contact and Staff Acknowledgments:
GAO Contact:
Kay L. Daly, (202) 512-9095 or dalykl@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, significant contributions to
this report were made by Jack Warner (Assistant Director), Jennifer
Dent, Chau Dinh, P. Barry Grinnell, and Danietta Williams. Francine
DelVecchio and Jason Kirwan also made key contributions.
[End of section]
Footnotes:
[1] Department of Education, Federal Student Aid, FY 2009 Annual
Report, (Washington, D.C., November 2009).
[2] The federal government assumes the responsibility for payment of a
borrower's debt that is owed to a lender in instances of the
borrower's default, death, permanent disability, or in limited
circumstances, bankruptcy.
[3] Guaranty agencies are state or nonprofit entities that perform
certain FFEL program oversight and administrative functions, including
federal government guarantees of FFEL loan repayment to lenders.
[4] Health Care and Education Reconciliation Act of 2010, Pub. L. No.
111-152, title II, § 2201,124 Stat. 1029, 1074 (Mar. 30, 2010).
[5] FFEL and DL borrowers are not required to begin repayment until
graduation or withdrawal from school. The repayment period could range
from 10 to 30 years.
[6] Pub. L. No. 110-315, 122 Stat. 3078 (Aug. 14, 2008).
[7] Required audits and reviews are those required by statutes and
regulations, and, for purposes of this report, include attestation and
agreed-upon procedure engagements. Conducted audits and reviews are
discretionary and not required by statutes and regulations.
[8] GAO, Federal Student Loans: Audits and Reviews of the Federal
Family Education Loan and Federal Direct Loan Programs, [hyperlink,
http://www.gao.gov/products/GAO-09-992R] (Washington D.C.: Sept. 30,
2009).
[9] For the purposes of this report, oversight procedures refer to
Federal Student Aid's monthly review of performance metrics as well as
other procedures, including reconciliations.
[10] The residual amount is the amount of loan proceeds remaining
after the school collects tuition, fees and, if applicable, room and
board.
[11] OMB Circular No. A-133 provides guidance for implementing the
requirements of the Single Audit Act, 31 U.S.C. §§ 7501-7507. The
Single Audit Act requires states, local governments, and nonprofit
organizations expending $500,000 or more in federal awards in a year
to obtain an audit in accordance with the requirements set forth in
the act.
[12] Agreed-upon procedures are engagements in which an auditor is
engaged to issue a report of findings based on specific procedures
that the auditor and parties specified by the auditee agree are
appropriate.
[13] Pub. L. No. 110-227, 122 Stat. 740 (May 7, 2008). ECASLA provided
Education with the authority to purchase or enter into commitments to
purchase FFEL loans from lenders and secondary markets to help ensure
that federally guaranteed loans are available for all eligible
borrowers.
[14] Under the 9.5% Special Allowance Payment authority, the federal
government guarantees lenders a 9.5 percent minimum rate of return to
encourage lenders to make 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, GAO-04-1070 (Washington, D.C.: Sept. 20, 2004).
[15] 34 C.F.R. § 668.23.
[16] Financial statement audits performed under the Single Audit Act
are performed in accordance with GAGAS and guidance issued by the
Office of Management and Budget, and financial statement audits
performed under an OIG-issued audit guide are to be performed in
accordance with GAGAS and generally accepted auditing standards.
[17] A deficiency in internal control exists when the design or
operation of a control does not allow management or employees, in the
normal course of performing their assigned functions, to prevent, or
detect and correct, misstatements on a timely basis. A material
weakness is a deficiency, or combination of deficiencies, in internal
control such that there is a reasonable possibility that a material
misstatement of the entity's financial statements will not be
prevented, or detected and corrected, on a timely basis. A significant
deficiency is a deficiency, or a combination of deficiencies, in
internal control that is less severe than a material weakness, yet
important enough to merit attention by those charged with governance.
[18] 34 C.F.R. § 668.23 requires that school servicers have an annual
compliance audit performed of the servicer's administration of federal
student assistance programs--including both FFEL and DL--of each
school at which the servicer has a contract, unless the servicer
contracts with only one participating school and the audit of that
school's participation involves every aspect of the servicer's
administration of those programs. Compliance audits performed under
the Single Audit Act are performed in accordance with GAGAS and
guidance issued by the Office of Management and Budget, and compliance
audits performed under an OIG-issued audit guide are performed in
accordance with GAGAS and the American Institute of Certified Public
Accountants attestation standards.
[19] These tests are described at Department of Education, Office of
Inspector General, Audits of Federal Student Financial Assistance
Programs at Participating Institutions and Institution Servicers
(January 2000), II-13 and Office of Management and Budget, OMB
Circular No. A-133, Audits of States, Local Governments, and Non-
Profit Organizations Compliance Supplement, Part 5, Student Financial
Assistance Programs (March 2009), 5-3-8.
[20] See 34 C.F.R. § 668.22.
[21] Under the Higher Education Reconciliation Act of 2005, Pub. L.
No. 109-171, title VIII, § 8011, 120 Stat. 4, 165 (Feb. 8, 2006), only
those schools that made FFEL loans prior to
April 1, 2006 are allowed to continue as a school lender.
[22] 31 U.S.C. § 7502.
[23] 34 C.F.R. § 682.601(a).
[24] The Federal Acquisition Regulation and various procurement laws
that it implements, together with the terms and conditions of the DL
servicer contract, set forth the servicer's obligations and Federal
Student Aid's general contract management requirements. For example,
Federal Acquisition Regulation § 37.503 calls for developing
appropriate performance standards so that agency requirements can be
met.
[25] These oversight procedures do not provide the same level of
independent oversight and assurance regarding the DL servicer's
compliance with applicable program requirements as compliance audits
performed by IPAs.
[26] Loans received under the student loan programs can be canceled
under limited circumstances such as a student's death or disability,
or may qualify for discharge under conditions such as school closures
or false certification from the school.
[27] The unit pricing provisions of the contracts allow Federal
Student Aid to be prepared for servicing an indeterminable volume of
direct loans. Each of the contracts provides for payment based on the
number of borrowers processed and has a $5 million minimum award for
the initial 5-year term.
[28] Statement on Auditing Standards No. 70, Service Organizations, is
the authoritative guidance that allows service organizations to
disclose their control activities and processes to their customers and
their customers' auditors in a uniform reporting format. The issuance
of a service auditor's report prepared in accordance with Statement on
Auditing Standards No. 70 signifies that a service organization has
had its control objectives and control activities examined by an
independent accounting and auditing firm. The service auditor's report
includes valuable information regarding the service organization's
controls and the effectiveness of those controls.
[29] Office of Management and Budget, Management's Responsibility for
Internal Control, Circular No. A-123 (Washington, D.C., Dec. 21,
2004). OMB Circular No. A-123 prescribes requirements for executive
agencies to conduct annual assessments of their systems of internal
control and provides specific requirements for the 24 major
departments and agencies covered under the Chief Financial Officers
Act of 1990 to follow in conducting management's annual assessment of
the effectiveness of internal control over financial reporting, which
includes safeguarding of assets and compliance with applicable laws
and regulations. The procedures and systems of the additional DL
servicers will be included in Education's annual assessment of the
effectiveness of its internal control over financial reporting.
[30] Federal Student Aid considers an audit to be resolved when audits
without findings are received or, for audits with findings, corrective
action plans are in place for minor findings and corrective action has
been taken for major findings.
[31] PEPS is a database used by Education to maintain eligibility,
certification, financial, default rate, review, and audit data about
participants. eZ-Audit is a Web-based, paperless system used for
submission of financial statement and compliance audits to the School
Eligibility Channel.
[32] Program reviews conducted by Federal Student Aid of schools,
lenders, guaranty agencies, or third-party servicers are risk-based
and address specific operating conditions. Accordingly, the objectives
and scope may vary from review to review.
[33] See 34 C.F.R. § 668.82(c) (schools and their servicers); 34
C.F.R. § 682.413(c) (guaranty agencies and their servicers); and 34
C.F.R. § 682.705 (lenders and their servicers).
[34] Guaranty agencies perform biennial program reviews of FFEL
schools and lenders. These program reviews supplement the program
oversight provided by the annual compliance audits, which have similar
objectives.
[35] Secondary markets that participate in the ECASLA program have the
same reporting requirements as lenders.
[36] 34 C.F.R. § 668.23(d)(5).
[37] Audited financial statements include an independent auditor's
opinion which presents the results of the audit, including findings
and conclusions.
[38] GAO, Internal Control Management and Evaluation Tool, [hyperlink,
http://www.gao.gov/products/GAO-01-1008G] (Washington, D.C.: August
2001).
[39] GAO, Federal Student Loans: Audits and Reviews of the Federal
Family Education Loan and Federal Direct Loan Programs, [hyperlink,
http://www.gao.gov/products/GAO-09-992R] (Washington D.C.: Sept. 30,
2009).
[40] Key audit guides that we reviewed included Department of
Education, Office of Inspector General, Audits of Federal Student
Financial Assistance Programs at Participating Institutions and
Institution Servicers (January 2000) and amendments (August 30, 2007
and September 27, 2007); Department of Education, Office of Inspector
General, Compliance Audits (Attestation Engagements) for Lenders and
Lender Servicers Participating in the Federal Family Education Loan
Program (December 1996) and amendment (March 27, 2008); Department of
Education, Office of Inspector General, Audits of Guaranty Agency
Servicers Participating in the Federal Family Education Loan Program
(March 2000); Office of Management and Budget, OMB Circular No. A-133,
Audits of States, Local Governments, and Non-Profit Organizations
Compliance Supplement, Part 4, Department of Education (March 2009);
and Office of Management and Budget, OMB Circular No. A-133, Audits of
States, Local Governments, and Non-Profit Organizations Compliance
Supplement, Part 5, Student Financial Assistance Programs (March 2009).
[41] Department of Education, Federal Student Aid, Compliance Audit
Procedures (March 2009); Department of Education, Federal Student Aid,
Compliance Audit Procedures (August 2008); Department of Education,
Federal Student Aid, Financial Analysis Procedures (August 2008);
Department of Education, Federal Student Aid, eZ-Audit Compliance
Audit Analysis: A-133 Submissions (May 2008); Department of Education,
Federal Student Aid, eZ-Audit Compliance Audit Analysis: Proprietary
School-SFA Audit Guide Submissions (May 2008); Department of
Education, Federal Student Aid, Step-by-Step Guide to Using eZ-Audit
Financial Statement Analysis: A-133 Submissions (May 2008); and
Department of Education, Federal Student Aid, Step-by-Step Guide to
Using eZ-Audit Financial Statement Analysis: Proprietary Submissions
(May 2008).
[End of section]
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