Federal Student Loan Programs:
Opportunities Exist to Improve Audit Requirements and Oversight Procedures
GAO-10-668: Published: Jul 21, 2010. Publicly Released: Jul 21, 2010.
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The Higher Education Opportunity Act of 2008, Pub. L. No. 110-315, mandated GAO to study the financial and compliance audits and reviews required or conducted for the Federal Family Education Loan (FFEL) program and the Federal Direct Student Loan (DL) program. The Department of Education's (Education) Office of Federal Student Aid is responsible for administering these programs. This report focuses on (1) identifying differences and similarities in audit requirements and oversight procedures for the FFEL and DL programs, including anticipated changes to selected oversight activities and (2) describing how the Office of Federal Student Aid's policies and procedures are designed to monitor audits and reviews. To do so, GAO interviewed Education and inspector general officials and reviewed numerous audit guides, agency procedures, checklists, and audit tracking systems.
GAO identified differences and similarities in audit requirements and oversight procedures for the two programs. Differences include the following: (1) The FFEL and DL programs generally had different audit requirements stemming primarily from divergent program structures. The FFEL program relied on lenders, guaranty agencies--which administer federal government loan guarantees to lenders--and other entities that were subject to statutory and regulatory audit requirements. The DL program did not have as many audit requirements because DL loans are provided by the federal government, and fewer external entities are involved. (2) GAO found differences in audit requirements for nonprofit and for-profit lenders. Certain applicable audit objectives included in Office of Management and Budget (OMB) requirements for compliance audits of nonprofit lenders were not included in the Department of Education Office of Inspector General (OIG) Lender Audit Guide for compliance audits of for-profit lenders. As a result, audits of lenders performed in accordance with the OIG Lender Audit Guide were at risk of omitting compliance testing for a key audit objective. Similarities in audit requirements and oversight procedures include these: (1) Schools were subject to annual financial statement and compliance audits under both programs. (2) The functions performed by the DL servicer, with which Education contracts to administer certain functions of the DL program, were similar to functions performed by lenders, guaranty agencies, and their servicers in the FFEL program. GAO's analysis found that objectives addressed by FFEL participant compliance audits were similar to the objectives addressed through oversight procedures for the DL servicer, such as Education's review of the servicer's monthly performance metrics. The passage of the Health Care and Education Reconciliation Act of 2010 terminated the authority to make new FFEL loans after June 30, 2010. Borrowers who would have been eligible to obtain new FFEL loans could receive loans under the DL program. Regarding Office of Federal Student Aid's monitoring activities, staff were to use financial statement audits to oversee the financial condition of the schools and guaranty agencies that participate in the student loan programs. Compliance audits of schools, lenders, guaranty agencies, and their third-party servicers help Education ensure that these participants comply with applicable statutes, regulations, and program requirements. The Office of Federal Student Aid was required to track findings in these audit reports. GAO found that third-party servicers for lenders in the FFEL program did not submit their audited financial statements to Education as required. Education lacked a policy and specific procedures to ensure receipt and review of these audited financial statements. Without such reviews, the Office of Federal Student Aid might not be informed of a third-party servicer's unfavorable audit opinion or significant reported findings that could affect program operations. GAO recommends that the Education Inspector General update the OIG Lender Audit Guide to include all appropriate regulatory requirements for audits of ongoing FFEL participants. GAO also recommends that the Secretary of Education develop and implement policies and procedures requiring Office of Federal Student Aid review of audited financial statements for lender servicers. The Education Office of Inspector General and Education agreed with GAO's recommendations.
Recommendations for Executive Action
Status: Closed - Implemented
Comments: In July 2010, we reported on a study of audits and reviews of the Federal Family Education Loan (FFEL) and the Federal Direct Loan (DL) programs. During our study of these Department of Education (Education) programs, we noted that certain compliance audit objectives included in OMB Circular No. A-133 for nonprofit lenders were not included in the Education Office of Inspector General (OIG) Lender Audit Guide, used to audit for-profit lenders and the nonprofit lenders that elect to undergo an audit under the OIG guide instead of OMB Circular No. A-133. Specifically, the Education OIG Lender Audit Guide omitted an audit objective for audits of for-profit lenders, including for-profit schools that make or originate FFEL loans. This requirement calls for auditors to determine whether schools that made FFEL loans use borrower interest payments, Education special allowance payments, interest subsidies, and any proceeds from the sale of loans to supplement needs-based grants for their students, as required. This audit objective is designed to assess whether school lenders appropriately comply with regulations affecting significant amounts of proceeds from school loans. By omitting this audit objective, a gap existed in providing the oversight required by regulations. Accordingly, we recommended that the Education Inspector General update the OIG Lender Audit Guide to include all appropriate regulatory audit requirements. On January 31, 2011, the Education OIG issued two new audit guides, Lender Compliance Attestation Engagement Guide for Lenders Holding Federal Family Education Loan Program Loans and Lender Servicer Financial Statement Audit Guide and Compliance Attestation Guide for Lender Servicers that Service Federal Family Education Loan Program Loans. The guides include procedures regarding the compliance objectives about for-profit schools? use of their proceeds from loans. The updated guides, if fully and effectively implemented, should help ensure that auditors assess whether school lenders comply with regulations affecting the use of these significant proceeds from loans, and consequently help improve Education?s oversight of the student loan program.
Recommendation: To help address any gaps in the guidance for audits FFEL lenders perform in accordance with the OIG Lender Audit Guide, the Education Inspector General should update the OIG Lender Audit Guide to include all appropriate regulatory audit requirements.
Agency Affected: Department of Education: Office of Inspector General
Status: Closed - Implemented
Comments: The Department of Education agreed with our recommendation. In response to our recommendation, Education implemented procedures which require the review of lender servicer financial statements and an accompanying financial statement review checklist. In September 2013, Education finalized a spreadsheet which it uses to track important information, such as the due dates of financial statements and the financial statement review results.
Recommendation: To ensure that Education properly oversees the ongoing servicing of outstanding FFEL student loans and mitigates risks related to lender servicers, the Secretary of Education should direct the Chief Operating Officer of the Office of Federal Student Aid to develop and implement policies and procedures requiring Federal Student Aid review of audited financial statements for lender servicers.
Agency Affected: Department of Education