In December, the Department of Education (ED) announced it would greatly increase its oversight of programs participating in Federal Student Aid (FSA) programs, such as the Federal Family Education Loan Program, Perkins Loans, and Pell Grants. This paper seeks to briefly summarize the nature of ED’s oversight of these programs, the changes announced in December, and the likely impact on colleges.

Brief Overview of FSA Oversight

In its oversight of schools that participate in the FSA programs, ED regularly conducts comprehensive compliance reviews (CCRs) to ensure programs are compliant with relevant regulations over how such funds are used. These reviews are designed to ensure that students receive only the grants and loans to which they are entitled (protecting students from taking on more loans than approved in their federal student loan application, the FAFSA), and that schools refund any funds necessary under the law should a student withdraw.

These reviews include verification of a school’s eligibility and certification to participate in FSA programs, as well as regular reviews of independently-prepared audits of FSA programs that each participating school is required to arrange on a regular basis. In FY 2010, ED conducted CCRs of nearly 3,000 schools, constituting nearly half of FSA-eligible institutions.

In addition to audits, ED periodically conducts more thorough program reviews of institutions. Compliance staff select schools for review based on the following Congressionally-mandated criteria:

  • Cohort default rates of 25 percent or higher;
  • Significant fluctuation in loan volume or Pell grant awards between years;
  • Serious deficiencies as reported by state licensing agencies or accreditors;
  • High student withdrawal rates; and
  • A “significant risk” of noncompliance with FSA requirements, as determined by ED.

During program reviews, compliance officials will analyze institutional data and records to identify weaknesses in FSA program administration that may (or did) subject students and/or taxpayers to fraud and abuse. The program review then quantifies the harm resulting from the noncompliance and refers schools for administrative action that may include both fines and recommendations for corrective actions. The scope of these reviews can vary depending on how ED rates the risk of noncompliance.

Increased Scrutiny for Online Programs

At a December event for the Association of Private Sector Colleges and Universities, James Kvaal, deputy undersecretary of ED, announced that the department planned to increase the number of program reviews conducted in FY 2011 to nearly 300, a 50% increase from FY 2010. Kvaal argued that the heightened focus on the budget deficit – punctuated by the election of a Republican-majority House of Representatives that pledged budget cuts – required ED to ensure taxpayers’ dollars were well spent.

Kvaal and other ED officials, however, confirmed that the department will focus its program reviews in FY 2011 primarily on two types of institutions: for-profit schools owned by publicly-traded companies and schools with substantial distance/online education programs. ED officials believe these programs to exhibit the highest risk for waste and abuse of federal dollars and risk to students. Advocates for both categories of schools protest this focus.

ED has also sought to change the way in which it conducts these reviews. Increasingly, ED relies on data shared by other agencies – including the Securities and Exchange Commission, the Federal Trade Commission, the Department of Labor, state agencies, and accreditation agencies – to identify schools where it believes a program review is warranted. ED also modified its hiring practices for the FSA programs to fill more compliance review staff positions with recent college graduates.

Both of these changes have drawn criticism from some circles as increasing the risk that staff inexperience – both with the program review process and with data not generated by education institutions or affiliates themselves – may lead to incorrect conclusions of noncompliance that unfairly penalize schools.

What’s Next

Many of the new round of program reviews are already underway, with some already complete. In late February, ED completed its review of the University of Phoenix, an institution that it previously found noncompliant in past reviews. In this review, however, ED found that the school had made acceptable corrections to its FSA program administration, closing the review with no negative findings.

Colleges and universities should review their current FSA oversight to determine whether they are likely to be subjects of a program review, using the criteria listed above. Such preventative audits by institutions enable schools to identify and address areas of weakness or risk. This is wise for all schools participating in the FSA programs, but given Mr. Kvaal’s statement, it is particularly important for schools providing a substantial amount of programs online whether public, nonprofit, or for-profit.