Financial Audit: Guaranteed Student Loan Program's Internal Controls and Structure Need Improvement

In December 1996, Education issued its revised Audit Guide for lenders and lender servicers requiring an independent public accountant to perform an examination-level attestation relative to lenders' and lender servicers' management assertions regarding interest billing statements sent to Education. Reports and opinions regarding interest billing testing are to be in compliance with reporting requirements under the Single Audit Act. In July 1996, Education's Office of the Inspector General (OIG) issued a revised Compliance Supplement for use by auditors of guaranty agencies beginning on or after June 30, 1996. OMB sent the compliance supplement out for comment in March 1997 and will issue it during fiscal year 1998.

Education established the Guarantor and Lender Oversight Service (GLOS) to oversee and direct Education's interest with respect to guarantors (GAs) and lenders participating in student aid programs. GLOS monitors GAs and lenders through onsite reviews and analysis of various reports from GAs and lenders, including monthly and quarterly billings (i.e., Forms 1189, 1130, and 799) to provide early warning of program compliance issues and due diligence problems, and signs of financial instability. GLOS developed a Guaranty Agency Review Procedures Guide and Universal Lender Review Guide, which provide specific comprehensive procedures to conduct reviews of GAs and lenders. These review procedures include the review and testing of GA and lender monthly and quarterly billings (Education Forms 1189, 1130, and 799).

Education instituted a 6-month follow-up period policy for questioned costs and other amounts identified in guaranty agencies and lenders audits. This new policy complies with OMB Circular A-50, Audit Followup, which requires prompt resolution and corrective actions on audit recommendations within a maximum of 6 months after issuance of a final report or, in the case of audits performed by non-federal auditors, 6 months after receipt of the report. To follow up on questioned costs, Education now requires that its Financial Partners Division review audit reports, identify questioned costs and take corrective actions. The policy and actions Education has established, if followed regularly and consistently, will address the recommendation related to questioned costs and will facilitate prompt collection of any monies owed to the Department of Education.

The National Student Loan Data System was implemented in November 1994.

During 1993, the Department developed written procedures detailing the methodology used to derive the estimate of loan guarantee subsidies.

The Office of Postsecondary Education (OPE) developed an interim subsidiary ledger system, which is used to reconcile activity on guaranteed student loans reported by Guaranty Agencies (GAs) to Education on monthly and quarterly billings (Forms 1189 and 1130) to activity recorded in Education's general ledger. This subsidiary ledger system provides support for FFELP balances reported in the general ledger. Also, Education is implementing an enterprise-wide financial system that includes the establishment of subledgers for the student loan programs.

The Office of Postsecondary Education (OPE) reconciled its FFELP loans receivable balance to the general ledger for the periods ended September 30, 1997, and 1998. OPE developed interim procedures for performing these reconciliations and used the guaranty agencies' monthly and quarterly billings (Forms 1189 and 1130) for the reconciliations. Education plans to finalize these procedures when the subsidiary ledger system, part of the enterprise-wide financial management system, is fully implemented. With these reconciliations, Education can improve the accuracy of financial information recorded in its general ledger and reported in the financial statements.

Procedures were established to have the Program Systems Service within OPE identify an independent acceptance testing group for each task order initiated. The testing group is comprised of system users and independent contractor staff. The acceptance testing group is responsible for testing application system changes prior to their implementation.

The Department implemented controls described in the "ADP Technical Controls Handbook" to ensure that all data received from guaranty agencies and lenders are consistent and accurate. The handbook describes database balancing techniques and alternative design control techniques and provides assurance that necessary edits and reasonability checks are in place.

The Department developed procedures to ensure that all guaranteed student loan systems are reviewed and risk assessments performed, as required by regulations. Additionally, it has assigned responsibility for monitoring the implementation of recommended improvements to the Internal Audit and Management Advisory Unit.

The Department has established an improved disaster recovery plan to include having key documents sent directly to its information system contractor for storage and requiring that all key documents be photocopied before being sent to the contractor. Contingency options apply to both the Department's headquarters and regional offices.

In September 1994, the GSLP security administrator completed training on both the operating system and access control software used by the GSLP contractor.

The Higher Education Amendments of 1998 (HEA) revised a number of loan policies in an effort to improve the effectiveness and efficiency of program operations. For guaranty agencies (GAs), the changes included reducing reinsurance payment levels from 98 to 95 percent of new loans, reducing the default collection retention from 30 to 24 percent, introducing voluntary flexible agreements, and establishing a new 1-percent default aversion fee while discontinuing supplemental pre-claims assistance. Also, the HEA included the recall of reserve funds, creation of new loan processing, issuance, and maintenance fees, and elimination of Administrative Cost Allowances. Since GAO's report was issued, the number of GAs has been reduced from 46 to 36.