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Final Audit Report ED-OIG/A07L0001 Page 15 of 83 To communicate the new requirements to schools, the Department
• issued a Dear Colleague Letter, “Students with an Unusual Enrollment History Flag—‘C’ code on the ISIR,” which describes how schools must resolve students flagged with unusual enrollment histories (GEN–13–09, March 8, 2013);
• issued a Dear Colleague Letter, “2013–2014 Award Year: FAFSA Information to be Verified and Acceptable Documentation,” which required selected applicants to verify their high school completion status and identity and resubmit a statement of educational purpose (GEN–12–11, July 17, 2012); and
• issued a Dear Colleague Letter, “Fraud in Postsecondary Distance Education Programs—URGENT CALL TO ACTION,” which called on schools to do more to prevent, identify, and report suspected distance education fraud in the Title IV programs (GEN–11–17, October 20, 2011).
Finally, the Department announced its intention to conduct negotiated rulemaking to develop proposed regulations designed to prevent fraud and ensure proper use of Title IV funds within the context of distance education (77 Federal Register 25658, May 1, 2012).
Despite the Department’s efforts, further actions are needed to protect the integrity of the Title IV programs.
Finding No. 1 – Regulations Related to Verifying Student Identity and Disbursing Title IV Funds Should Be Strengthened Current requirements related to verifying the identities of and disbursing Title IV funds to students enrolled in distance education programs are not sufficient to mitigate the risks of fraud and abuse. As a result, fraud rings are targeting distance education programs to illegally obtain Title IV funds. The fraud rings enroll straw students, which are students who do not intend to complete a distance education course or program but who still receive Title IV funds. Both the ringleader and the straw student receive a portion of any Title IV credit balance disbursed in the straw student’s name.
Accrediting Agencies and Schools Need to Be Diligent in Verifying Student Identity Because distance education students do not physically attend classes, the processes to ensure that students are who they claim to be and the person enrolled in school is the one attending classes are inherently more difficult and potentially less effective at schools offering distance education than at schools offering traditional, campus-based education. School personnel do not interact in person with distance education students. This lack of face-to-face interaction makes distance education programs attractive to fraud rings, which see the programs as providing an opportunity for an easy theft, requiring limited work with minimal risk of getting caught.
Accrediting agencies must require schools that offer distance education to have processes in place through which the accredited school establishes that the student who registers in a distance education course or program is the same person who participates in and completes the course or program and receives the academic credit (section 496(a)(4)(B) of the HEA).
Final Audit Report ED-OIG/A07L0001 Page 16 of 83 According to the Department’s current regulation (34 C.F.R. § 602.17(g)), schools can comply with this requirement using methods such as secure logins and passcodes, proctored examinations, and new or other technologies and practices that are effective in verifying student identity. All nine of the accrediting agencies that we visited required their accredited schools to establish processes to ensure that the student who registers in a distance education course or program is the same person who participates in and completes the course or program and receives the academic credit.
This requirement is not sufficient to protect Title IV funds. All eight schools that we reviewed required distance education students to have secure logins and passcodes. However, none of the eight schools had a specific process to verify student identity as part of the enrollment process.
By themselves, logins and passcodes do not confirm the student’s identity. The reliability of logins and passcodes depends on the processes that schools use to verify identity before issuing the logins and passcodes and on students’ care in safekeeping such credentials. As a result, logins and passcodes cannot detect individuals logging on with multiple identities and straw students involved with fraud rings. A login and passcode ensure only that someone logging in to a course is using the same login and passcode assigned to the person who enrolled. Without effective enrollment processes at a school, a login and passcode do not ensure that the person is enrolling under a valid name and intending to obtain an education.
Additional requirements are needed to ensure that schools verify a student’s identity as part of the enrollment process. Requiring the student to provide proof of name, high school diploma, educational transcripts, or college admission test scores would help corroborate identity and ensure the student intends to obtain an education.
Required Accrediting Agency Review of Schools’ Processes Is Too Infrequent to Be Effective According to 34 C.F.R. § 602.19(a) and (b), accrediting agencies must reevaluate, at regularly established intervals, the schools or programs they have accredited or preaccredited. This reevaluation includes confirming that schools have processes in place to ensure that the student who registers in a distance education course or program is the same person who participates in and completes the course or program and receives the academic credit. However, the primary purpose of accrediting agencies is to ensure the quality of education or training offered by accredited schools, not to evaluate identity verification processes or assess whether a school’s system of internal control over administration of Title IV programs is operating as intended. In addition, the accrediting agencies that we reviewed evaluated schools’ compliance with agency standards and reaccredited schools on cycles that ranged from 3 to 10 years. As a result, a school’s system of internal control as it relates to student identity verification could be ineffective and not be timely detected by an accrediting agency’s review.
A better way of ensuring, on an ongoing basis, that a school has implemented effective processes for verifying students’ identities would be to have the independent public accountant verify, as part of the annual compliance audit, that the school has implemented student identity verification procedures and those procedures are operating as intended. Schools participating in the Title IV programs are required to have annual compliance audits conducted by an independent public Final Audit Report ED-OIG/A07L0001 Page 17 of 83 accountant. 9 The purpose of the annual compliance audit is to provide the Department with reasonable assurance that the school is complying with the Title IV requirements. Part of the audit process is to ensure that the school is complying with Title IV requirements by testing the school’s processes. Therefore, the independent public accountant already is required to verify that the school has implemented Title IV-related processes and confirm that those procedures are operating as intended.
Stronger Regulations Needed to Reduce Title IV Disbursements to Students Who Enroll Without an Educational Purpose Current Title IV regulations are not sufficient to mitigate the risk of Title IV funds being paid to students who do not intend to complete a course or program. Students are eligible to receive Title IV funds if they are regular students enrolled or accepted for enrollment in an eligible program at an eligible school (34 C.F.R. § 668.32 (a)(1)(i)). According to 34 C.F.R. § 600.2, a regular student is a student who is enrolled for the purpose of obtaining a degree, certificate, or other recognized credential that the school offers.
Once a school deems a student eligible, the school awards Title IV funds to the student. The Department transfers the awarded amount of funds to the school. Then, a school disburses the funds to the student by crediting the student’s account or by paying the student directly. The earliest that a school may disburse the funds is 10 days before the first day of classes (34 C.F.R.
§ 668.164(f)(1)). When a school disburses Title IV funds to a student by crediting a student’s account, it may do so only for allowable charges. Allowable charges include tuition, institutional fees, and room and board. Any amount remaining on the student’s account is called a “credit balance” and may be given directly to the student or held by the school to pay future, allowable charges during the school year. A school may hold the credit balance only with the student’s permission (34 C.F.R. § 668.164(d) and (e) and 668.165(b)).
Assuming that a school appropriately applies Title IV disbursements and institutional charges to a student’s account before the start of classes, the student could have a credit balance on his or her account before classes even begin. If a credit balance exists and the student has not authorized the school to hold it, the school is required to pay the credit balance to the student no later than 14 days after the start of the first class (34 C.F.R. § 668.165(b)(1)(ii) and 34 C.F.R.
When completing a FAFSA, a student must certify that Title IV funds will be used only for the cost of attending a school (that is, the student must file a statement of educational intent in accordance with instructions of the Secretary; see 34 C.F.R. § 668.32(h)). A student is defrauding the government if he or she enrolls in school to obtain Title IV funds for noneducational purposes and then stops attending school after receiving Title IV funds. Such students enroll in school, attend only as long as necessary to receive their excess Title IV funds (credit balance), and then drop out. These students usually target schools with low tuition costs, such as community colleges, because the credit balance paid directly to the student would be larger than a school with higher tuition costs.
An audit conducted in accordance with Office of Management and Budget Circular A-133, “Audits of States, Local Governments, and Non-Profit Organizations,” or the audit guides developed by the Department’s Inspector General, whichever is applicable.
Final Audit Report ED-OIG/A07L0001 Page 18 of 83 Four of the eight schools that we reviewed as part of this audit had tuition charges that were high enough to decrease their risk of being targeted by people intent on defrauding the Title IV programs. In addition, one of the eight schools disbursed Title IV funds for distance education students by module (subterm), not by payment period. When schools disburse Title IV funds by module, a student would have to attend every module in which he or she was enrolled during the payment period to receive the full award for the payment period and corresponding Title IV credit balances. Such a disbursement procedure decreases the risk of unscrupulous people targeting the school. Even though these five schools had a lower risk of being targeted by people intent on defrauding the Title IV programs, OIG still identified a fraud ring at one of the schools.
The three other schools that we reviewed had tuition charges low enough to put them at a higher risk of being targeted by fraud rings. OIG has identified fraud rings at two of the three schools.
The Department could reduce the likelihood of fraud schemes being successful by revising the regulations and requiring schools to use smaller, more frequent disbursements. In addition, payment periods and periods of enrollment could be better defined to coincide with actual patterns of enrollment and billing. The smaller, more frequent disbursements could closely match the timing of institutional charges and living expenses (for example, monthly child or dependent care and Internet expenses) and would reduce the amount of a student’s credit balance immediately available at the beginning of the payment period. Currently, the Department has told schools only that they have the authority to implement such preventive measures (Dear Colleague Letter GEN 11-17, “Fraud in Postsecondary Distance Education Programs— URGENT CALL TO ACTION,” October 20, 2011). To be effective, such preventive measures should be required, not recommended.
Schools currently have the authority to delay disbursement of Title IV funds until a student has participated in the distance education program for a longer and more substantiated period (for example, until an exam has been given, completed, and graded, or until a paper has been submitted). Schools also may make more frequent disbursements of Title IV funds so that they do not disburse the payment period’s entire award at the beginning of the payment period.
However, of the eight schools that we reviewed as part of this audit, only one made more frequent disbursements. With today’s technology, schools could modify their disbursement procedures to include multiple disbursements, eliminating unnecessarily large credit balances paid to students at the start of the payment period.
Recommendations We recommend that the Acting Assistant Secretary for Postsecondary Education, in collaboration with the Chief Operating Officer for FSA—
1.1 Develop regulations in 34 C.F.R. Part 668 specifically requiring schools that offer distance education to establish processes to verify the student’s identity as part of the enrollment process. Acceptable student identity verification items might include a high school diploma, educational transcripts, or college admission test scores. Such verification should occur before a school issues a student a secure login and passcode.
1.3 Revise the regulations to require more frequent disbursements of Title IV funds. The disbursements should coincide with the timing of institutional charges and other educational expenses, such as monthly child or dependent care and Internet expenses.
Department Response The Department agreed in principle with the finding and agreed with all three recommendations.
The Department stated that OPE will develop a decision memo for the Secretary’s Executive Team. The decision memo will address whether or not to modify the appropriate regulations related to confirmation of student identity and the timing of disbursements of Title IV funds.