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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 Educationís 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 Educationís 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 GAOís 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 Educationís internal 
control activities and help ensure that loan disbursements, receipts, 
and transfers are made and recorded in Education and other program
participantsí 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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