Financial Audit:

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

AFMD-93-20: Published: Mar 16, 1993. Publicly Released: Mar 16, 1993.

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GAO reviewed the Department of Education's internal accounting controls over the Guaranteed Student Loan Program (GSLP), focusing on: (1) GSLP internal control weaknesses that have resulted in ineffective accounting, controlling, and reporting of operating results; (2) the role of guaranty agencies within the GSLP structure; and (3) the effectiveness of Education's program oversight and implementation of corrective actions.

GAO found that: (1) Education lacked sufficient controls and procedures that ensured that financial information provided by guaranty agencies and lenders was reliable and adequate to effectively manage GSLP; (2) internal control weaknesses that reduced GSLP accountability included late receipt of billing information, unreconciled reports, and untimely resolutions of reported problems; (3) Education's future cost estimates for outstanding guaranteed loans were erroneous and based on untimely and unreliable data, unreasonable assumptions regarding the program and the economy, an inadequately documented methodology, and significant unreconciled differences between its general ledger information, subsidiary systems, and Department of the Treasury reports; (4) weaknesses within GSLP information systems included inadequate testing of GSLP application software changes and inadequate personnel; (5) Education has assisted financially troubled independent guaranty agencies to maintain lender participation and ensure student access to guaranteed loans; (6) Education lacked the authority to improve guaranty agency operations that affect GSLP operations and costs and prevent guaranty agencies from engaging in activities that create conflicts of interest and affect loan stewardship; and (7) Education needs to intensify reviews of guaranty agencies and lenders, increase accountability by improving ledger reconciliation, and address the role of guaranty agencies.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: No congressional action has been taken on amending the Higher Education Act to require that originating lenders pay loan origination fees even if the loan is subsequently sold to another lender. However, the Department of Education supports legislation to require that originating lenders pay loan origination fees even if the loan is subsequently sold to another lender. On November 30, 1994, federal regulations were amended to include that the originating lender remains liable to the Secretary of Education for the payment of origination fees.

    Matter: Congress should amend the Higher Education Act to require that originating lenders pay loan origination fees even if the loan is subsequently sold to another lender.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: 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.

    Recommendation: The Secretary of Education should direct the Assistant Secretary for Postsecondary Education to require that guaranty agencies and lenders annually provide Education an independent public accountant's positive attestation on the claims for payment submitted to the federal government, and the basis for such attestation, including an opinion on the adequacy of internal controls over such claims.

    Agency Affected: Department of Education

  2. Status: Closed - Implemented

    Comments: 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).

    Recommendation: The Secretary of Education should direct the Assistant Secretary for Postsecondary Education to test billings from guaranty agencies and lenders as part of its internal reviews.

    Agency Affected: Department of Education

  3. Status: Closed - Implemented

    Comments: 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.

    Recommendation: The Secretary of Education should direct the Assistant Secretary for Postsecondary Education to require staff to follow up on questioned costs and other amounts owed based on reviews of guaranty agencies and lenders within a designated period of time from the time findings are reported.

    Agency Affected: Department of Education

  4. Status: Closed - Not Implemented

    Comments: The Department concurred with the goal of this recommendation. However, it believes that, because some guaranty agencies are departments within state governments and must follow state accounting procedures, to require the guaranty agencies to use a standard loan accounting system would not be feasible. In addition, with the number of guaranty agencies, this recommendation is not practical. However, if the number of guaranty agencies were to be reduced to a manageable level, the Department would pursue the implementation of standardized accounting systems.

    Recommendation: The Secretary of Education should direct the Assistant Secretary for Postsecondary Education to study the feasibility of requiring guaranty agencies to standardize their GSLP loan accounting systems.

    Agency Affected: Department of Education

  5. Status: Closed - Implemented

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

    Recommendation: The Secretary of Education should direct the Assistant Secretary for Postsecondary Education to reassess and, if appropriate, adjust the National Student Loan Data System implementation date after completion of a detailed system design.

    Agency Affected: Department of Education

  6. Status: Closed - Implemented

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

    Recommendation: The Secretary of Education should direct the Assistant Secretary for Management and Budget/Chief Financial Officer (CFO) to develop written procedures detailing the methodology to be used to derive the estimate of loan guarantee subsidies and requiring that each year's estimate be fully documented and approved by the Department's CFO office.

    Agency Affected: Department of Education

  7. Status: Closed - Implemented

    Comments: 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.

    Recommendation: The Secretary of Education should direct the Assistant Secretary for Postsecondary Education to establish and maintain subsidiary ledgers for GSLP.

    Agency Affected: Department of Education

  8. Status: Closed - Implemented

    Comments: 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.

    Recommendation: The Secretary of Education should direct the Assistant Secretary for Management and Budget/Chief Financial Officer and the Assistant Secretary for Postsecondary Education to jointly develop procedures to ensure that the general ledger is periodically reconciled to subsidiary records maintained by Office of Postsecondary Education.

    Agency Affected: Department of Education

  9. Status: Closed - Implemented

    Comments: 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.

    Recommendation: The Secretary of Education should direct the Assistant Secretary for Postsecondary Education to establish an acceptance testing group responsible for independently testing GSLP application system changes prior to implementation.

    Agency Affected: Department of Education

  10. Status: Closed - Implemented

    Comments: 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.

    Recommendation: The Secretary of Education should direct the Assistant Secretary for Postsecondary Education to implement controls described in the Department's ADP Technical Controls Handbook to ensure that all data received from guaranty agencies and lenders is consistent and accurate.

    Agency Affected: Department of Education

  11. Status: Closed - Implemented

    Comments: 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.

    Recommendation: The Secretary of Education should direct the Assistant Secretary for Postsecondary Education to implement procedures to ensure that internal control reviews and risk assessments of the GSLP information systems are performed periodically as required by OMB Circulars A-123, Internal Control Systems, A-127, Financial Management Systems, and A-130, Management of Federal Information Resources.

    Agency Affected: Department of Education

  12. Status: Closed - Implemented

    Comments: 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.

    Recommendation: The Secretary of Education should direct the Assistant Secretary for Postsecondary Education to enhance the existing computer disaster recovery plan to include contingency options at Education headquarters and regional offices regarding key original documents.

    Agency Affected: Department of Education

  13. Status: Closed - Implemented

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

    Recommendation: The Secretary of Education should direct the Assistant Secretary for Postsecondary Education to require that the Security Administrator and appropriate supporting technical staff have formal training in the specific operating systems and access control software used by the GSLP contractor.

    Agency Affected: Department of Education

  14. Status: Closed - Implemented

    Comments: 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.

    Recommendation: As part of the study of the role of guaranty agencies in GSLP required by the 1992 Amendments, the Secretary of Education should direct the Assistant Secretary for Postsecondary Education to develop a comprehensive plan for revising the role of guaranty agencies and the manner in which they are compensated. This plan should provide a clear explanation of the structure of guaranty agencies in relation to Education and recommendations as to where changes or modifications are needed. It should also include clear limitations and restrictions on the terms and conditions of any business activities that the guaranty agencies may undertake. In addition, this plan should address and where possible include recommendations on: (1) revising the formula for reimbursing guaranty agencies from one that stresses the collection of defaulted loans to one that provides more effective incentives for prevention of defaults; (2) the need and benefits of the current number of guaranty agencies versus the benefits of consolidating the guaranty agencies; (3) the role of guaranty agencies in a direct loan program, if any; and (4) changes to current legislation that will allow Education to implement the plan and oversee the program effectively.

    Agency Affected: Department of Education

 

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