Capital Financing:

Department Management Improvements Could Enhance Education's Loan Program for Historically Black Colleges and Universities

GAO-07-64: Published: Oct 18, 2006. Publicly Released: Nov 17, 2006.

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Cornelia M. Ashby
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Historically Black Colleges and Universities (HBCU), which number around 100, undertake capital projects to provide appropriate settings for learning, but many face challenges in doing so. In 1992, Congress created the HBCU Capital Financing Program to help HBCUs fund capital projects by offering loans with interest rates near the government's cost of borrowing. We reviewed the program by considering (1) HBCU capital project needs and program utilization, (2) program advantages compared to other sources of funds and schools' views on loan terms, (3) the Department of Education's (Education) program management, and (4) certain schools' perspectives on and Education's plan to implement loan provisions specifically authorized by Congress in June 2006 to assist in hurricane recovery efforts. To conduct our work, we reviewed applicable laws and program materials and interviewed officials from federal agencies and 34 HBCUs.

HBCU officials we interviewed reported extensive and diverse capital project needs, yet just over half of available loan capital ($375 million) has ever been borrowed. About 23 HBCUs have taken steps to participate in the program, and 14 have become borrowers. Education has collected and reported limited data on the program's utilization and has not established performance measures or goals to gauge program effectiveness, though Education officials noted they are developing measures and goals. The HBCU loan program provides access to low-cost capital financing and flexibilities not always available elsewhere, but some loan terms and conditions discourage participation, though school officials said they remain interested in the program. The low interest rate and 30-year repayment period were regarded favorably by participants and nonparticipants alike, and the program makes funds available for a broader range of needs than some federal grant programs. However, the requirement to place in a pooled escrow 5 percent of loan proceeds--an insurance mechanism that reduces federal program costs due to any program borrower's potential delinquency or default--monthly payments versus semiannual ones traditionally available from private sources of loans, and the extent to which some loans have been collateralized could discourage participation. While Education has taken steps to improve the program, significant weaknesses in its management control could compromise the program's effectiveness and efficiency. Education has recently provided schools with both fixed and variable interest rate options, allowed for larger loans, and afforded more opportunities to negotiate loan terms. Also, Education has increased its marketing efforts for the program. However, Education has not established effective management control to ensure that it is (1) communicating with schools in a useful and timely manner, (2) complying with statutory requirements to meet twice each year with an advisory board composed of HBCU experts and properly account for the cost of the program, and (3) monitoring the performance of the program's contractor. Officials from 4 HBCUs in Louisiana and Mississippi told us that in light of the extensive 2005 hurricane damage to their campuses, they were pleased with certain emergency loan provisions but concerned that there would not be sufficient time to take advantage of Education's authority to waive or modify the program provisions. School officials from the 4 schools noted that their institutions had incurred extensive physical damage that was caused by water, wind, and, in one case, fire, and that the full financial impact of the hurricanes may remain unknown for years. Although Education officials told us that they have not yet determined the extent to which the authority under the emergency legislation to waive or modify program provisions for hurricane-affected institutions would be used, the department would be prepared to provide loans to hurricane-affected HBCUs.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Education agreed with our recommendation to regularly convene and consult with the Historically Black Colleges and Universities (HBCU) Advisory Board and noted that the department would leverage the Board's knowledge and expertise to improve program operations and that the department had scheduled a board meeting for October 27, 2006. Other meetings have been regularly scheduled and convened, with the most recent meeting taking place in July 2010, although biannual meetings have not always been possible to hold and is largely dependent on the availability of funds to lend to schools. Since 2007, the Board has generated a number of recommendations for the Secretary's consideration.

    Recommendation: To ensure that it obtains the relevant, reliable, and timely communication that could help ensure that program objectives are being met efficiently and effectively, and to meet statutory requirements, the Secretary of Education should regularly convene and consult with the HBCU Advisory Board. The Advisory Board could assist Education in its efforts to develop program performance goals and measures, thereby enabling the department and the board to advise Congress on the program's progress. Additionally, Education and the Advisory Board could consider whether alternatives to the escrow arrangement are feasible that both address schools' concerns and the need to keep federal costs at a minimum. If Education determines that statutory changes are needed to implement more effective alternatives, it should seek such changes from Congress.

    Agency Affected: Department of Education

  2. Status: Closed - Implemented

    Comments: In its efforts to improve communications with Historically Black Colleges and Universities (HBCUs) seeking to participate in the program, Education conducted a survey of program participants in 2007 to gauge their current needs. The department also took steps to enhance both the quantity and quality of guidance offered at its website. Additionally, Education's designated bonding authority (DBA) also provides information at its website including case studies of program participants as well as a timeline to manage schools' expectations with its application process. The website also provide answers to frequently asked questions related to steps schools can take to expedite the processing of applications. The DBA also periodically issues a newsletter documenting the program and its projects. Although, GAO did not find evidence of documents that track the status of ongoing applications, we did note that Education now provides information on loans originated through 2011.

    Recommendation: To ensure program effectiveness and efficiency, the Secretary of Education should enhance communication with HBCU program participants by (1) developing guidance for HBCUs, based on other schools' experiences with the program, on steps that applicants can take to expedite loan processing and receipt of loan proceeds, and (2) regularly informing program applicants of the status of their loan applications and department decisions.

    Agency Affected: Department of Education

  3. Status: Closed - Not Implemented

    Comments: Education, during its 2010 meeting with the Advisory Board, reiterated its disagreement with this recommendation and said it would be imprudent to implement the recommendation at this time because of the potential for default as well as the exposure from a default by a current program participant. GAO considered these issues in developing this recommendation and continues to believe that the credit evaluation performed by the designated bonding authority (DBA), the funds set aside by borrowers held in escrow, and the security pledged by borrowers provide important and sufficient measures to safeguard taxpayers against potential delinquencies and default. Further, while not noted in our draft report reviewed by the department, the law requires that borrowers make payments to the DBA at least 60 days prior to the date for which payment on the bonds is expected to be needed. In addition, borrowers have been required to submit, on an annual basis, audited financial reports and 3-year projections of income and expenses to the DBA. These measures provide additional safeguards as well as a mechanism to alert the department of potential problems.

    Recommendation: In light of the program's existing credit requirements for borrowers and the funds placed in escrow by borrowers to protect against loan delinquency and default, the Secretary of Education should change its requirement that borrowers make monthly payments to a semiannual payment requirement consistent with the designated bonding authority's (DBA) requirement to make semiannual payments to the Federal Financing Bank (FFB).

    Agency Affected: Department of Education

  4. Status: Closed - Implemented

    Comments: Education agreed with our recommendation to improve its budget estimates for the program, indicating that it would work with OMB and Treasury to do so. Additionally, the department conducted an audit of the designated bonding authority's handling of loan funds and associated fees, as we recommended, and these funds were returned to the Department of the Treasury's program financing account.

    Recommendation: To improve its estimates of the budgetary costs of the program, and to comply with the requirements of the Federal Credit Reform Act, the Secretary of Education should ensure that the program subsidy cost estimation process include as a cash flow to the government the surcharge assessed by the FFB and paid by HBCU borrowers and pay such amount to the program's financing account. Additionally, the Secretary of Education should audit the funds held by the DBA generated by this surcharge and ensure the funds are returned to the Department of the Treasury and paid to the program's financing account.

    Agency Affected: Department of Education

  5. Status: Closed - Implemented

    Comments: The Higher Education Opportunity Act of 2008 now requires the department to monitor the performance of the DBA every 3 years. After our report was issued in 2007, the department stated that it would require the designated bonding authority to submit quarterly reports on program participation and financing, identify and locate missing loan documentation, and maintain these efforts for each subsequent loan disbursal. The current designated bonding authority (DBA), Rice Capital Access, was selected in 2009 and its first review should take place in 2012.

    Recommendation: To ensure adequate management control and efficient program operations, the Secretary of Education should increase its monitoring of the DBA to ensure its compliance with contractual requirements, including record keeping, and that the DBA is properly marketing the program to all potentially eligible HBCUs.

    Agency Affected: Department of Education


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