U. S. Department of Education Office of Inspector General Semiannual Report to Congress: N



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U.S. Department of Education

Office of Inspector General

Semiannual Report to Congress: No. 48

October 1, 2003 - March 31, 2004

April 29, 2004

Dear Mr. Secretary:

I am pleased to submit to you, in accordance with the Inspector General Act of 1978 (Public Law 95-

452, as amended, section 5(b)), this semiannual report on the activities of the Department's Office of

Inspector General (OIG) for the six-month period ending March 31, 2004.

This report highlights our most significant work from the last six months. This work reflects our

strong commitment and valuable role in assisting the Department in improving its programs and

ensuring their integrity. We look forward to continuing to work with you toward these goals.

The Inspector General Act requires you to transmit this report within 30 days to the appropriate

congressional committees and subcommittees, together with a report containing any comments you

wish to make. Your report should also include the statistical tables specified in section 5(b)(2) and

(3), and a statement with respect to audit reports on which management decisions have been made,

but final action has not been taken, as specified in section 5(b)(4).

Sincerely,

John P. Higgins, Jr.

Enclosure

400 MARYLAND AVE., S.W. WASHINGTON, D.C. 20202-1510



Our mission is to ensure equal access to education and to promote educational excellence throughout the nation.

UNITED STATES DEPARTMENT OF EDUCATION

OFFICE OF INSPECTOR GENERAL

THE INSPECTOR GENERAL



Contents

MESSAGE TO CONGRESS

ACTIVITIES AND ACCOMPLISHMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

STUDENT AID PROGRAMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Identity theft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Cohort default rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Pell Grant administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Monitoring private collection agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Monitoring providers of collection services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Title IV eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Title IV eligibility fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Fraud by school officials and program participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

BUDGET AND PERFORMANCE INTEGRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Data reliability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Management controls for scoring state assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

ELEMENTARY AND SECONDARY EDUCATION PROGRAMS . . . . . . . . . . . . . . . . . . . 5

Charter schools' access to and use of federal funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Puerto Rico Department of Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Administra-tion of 21st Century Community Learning Center grants . . . . . . . . . . . . . . . . . . 7

Talent Search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Eligibility for GEAR UP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Administra-tion of TRIO programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Controls over information on alternative teacher certification . . . . . . . . . . . . . . . . . . . . . . . . 9

Fraud in other education programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

FINANCIAL MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Financial statement audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Internal control weaknesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

EXPANDED ELECTRONIC GOVERNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Electronic signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10



STRATEGIC MANAGEMENT OF HUMAN CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

One-ED strategic investment process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Human capital action items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

OTHER ACTIVITIES AND ACCOMPLISHMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Nonfederal audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Intergovernmental single audit project. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Reporting Requirements of the Inspector General Act, as amended . . . . . . . . . . . . . . . . . . 13

Table 1: Recommendations Described in Previous Semiannual Reports on

Which Corrective Action Has Not Been Completed . . . . . . . . . . . . . . . . . . . . . . . . 14



Table 2: ED/OIG Audit Services Reports on Education Department Programs and Activities

(October 1, 2003 to March 31, 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15



Table 3: Other ED/OIG Reports on Education Department Programs and Activities

(October 1, 2003 to March 31, 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19



Table 4: Inspector General Issued Audit Reports with Questioned Costs . . . . . . . . . . . . . . . . . 20

Table 5: Inspector General Issued Audit Reports with Recommendations For

Better Use of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21



Table 6: Unresolved Reports Issued Prior to October 1, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Table 7: Investigation Services Cumulative Actions (October 1, 2003 to March 31, 2004) . . . 27

Table 8: Statistical Profile: October 1, 2003 to March 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . 32

INSPECTOR GENERAL’S

MESSAGE TO CONGRESS

We are pleased to provide this semiannual report on the accomplishments of the Office of

Inspector General (OIG), U.S. Department of Education (Department), from October 1, 2003

through March 31, 2004. During this period, we issued 71 audit and inspection reports and

memoranda and closed 94 investigations. We provided Congress with an analysis of issues for

consideration in its reauthorization of the Higher Education Act and conducted several briefings

on our proposals for congressional staff.

Our March 2003 audit of Educational Credit Management Corporation identified the need for the

Department to recall $103 million of excess funds. At the time of our final audit, the Department

concurred with our recommendation. In February 2004, the Department recalled the funds,

resulting in the return of $103 million to the U.S. Treasury.

We continue our campaign to raise public awareness about the threat of identity theft among

students and other participants in the Department's student financial assistance programs. OIG

special agents gave identity theft presentations at major Federal Student Aid national conferences

and at regional conferences for financial aid administrators. We submitted articles about our

identity theft efforts that were published in a number of publications, including the Federal

Bureau of Investigation Bulletin and Fraud Busters, publications of the FBI and the Federal Trade

Commission, respectively. We provided identity theft prevention tips to many campus security

websites and in many publications and websites for student financial assistance participants. Our

special agents also continued to pursue cases in which identity thieves attempted to rob students

of their financial aid.

In response to the importance of maintaining the security and integrity of the Department's

information systems, we established a new unit that combines audit, investigative, and computer

evidence recovery resources. This unit will work to identify risks to the Department's systems, to

analyze computer data to determine fraud indicators, and to investigate and prevent computer

hacking.


Our independent oversight and recommendations are essential to the Department's mission and

goals and to helping ensure that education dollars reach the intended recipients. We look forward

to continuing to work with the Secretary and the Congress in improving the Department's

programs and operations.



John P. Higgins, Jr.

Inspector General

1

Activities and Accomplishments

The Office of Inspector General (OIG) for the period October 1, 2003 through March 31,

2004, continued its work to improve the programs and operations of the Department of

Education (Department) and to protect their integrity. Detailed information is available on

our website at http://www.ed.gov/about/offices/list/oig.

STUDENT AID PROGRAMS

The Department's student financial assistance programs award over $65 billion annually.

The Department also oversees a loan portfolio approaching $300 billion. Because they are

structurally risky and continue to be on the General Accounting Office's high risk list, we

direct a significant portion of our investigative and audit work to these programs. We

continue to find fraud and abuse by program participants as well as weaknesses in program

administration.

IDENTITY THEFT OIG special agents aggressively pursue individuals who attempt to steal federal education

dollars by robbing students of their identity. In cooperation with Federal Student Aid

(FSA), we have launched an intensive outreach campaign to alert college students and

graduates about how to prevent identity theft. At the forefront of this effort is a web

resource with information about preventing and reporting identity theft involving federal

education dollars, www.ed.gov/misused. The site recorded more than 50,000 hits between

October 2003 and March 2004.

In collaboration with FSA, we are

providing identity theft

prevention information in

monthly billing statements to

millions of direct loan borrowers,

in publications for schools and

students, and on many campus

security websites. Secretary of

Education Rod Paige announced

this effort at a press conference at

Howard University with Inspector

General John P. Higgins, Jr.,

University President H. Patrick

Swygert, and FSA Chief

Operating Officer Theresa S.

Shaw.

We recognized the need to alert



students and others about identity theft based on the increasing number of identity theft

cases in the nation. Our investigative work demonstrated that Department funds are also

targets of identity thieves. Some examples of our cases follow:

Howard University President H. Patrick Swygert, Secretary Rod Paige, FSA

Chief Operating Officer Theresa S. Shaw, Inspector General John P.

Higgins, Jr. and Howard University students.

Semiannual Report To Congress: #48

2

Two individuals whose arrest we reported in our previous

semiannual report have pled guilty. One individual used

more than 50 different identities, typically those of inmates

serving long prison terms, to obtain more than $300,000 in

student aid. Another individual whose arrest we reported

previously, pled guilty after he received approximately

$160,000 in student loans by claiming that he and his brother

were graduate students. Under a plea agreement, this

individual has agreed to pay full restitution.

Our investigation of one individual resulted in his guilty plea

after he used his son's Social Security number to obtain more

than $90,000 in student aid. This joint investigation with the

National Center for Missing and Exploited Children, the

Social Security Administration OIG, and the Federal Bureau

of Investigation developed evidence that this individual kidnapped his one-month old son

and used his son's identity to receive federal student aid. After nearly 21 years, the son

was reunited with his birth mother and siblings in November 2003.

An individual in Chicago received a six-month sentence and was ordered to pay more than

$40,000 restitution after she stole and used the identity of her son's father to obtain

financial aid for her son. Our joint investigation with the Social Security Administration

OIG resulted in a guilty plea by another individual who fraudulently used someone else's

Social Security number to obtain student loans after defaulting on loans she received using

her own name and Social Security number. In another case, an individual in Arizona was

indicted by a federal grand jury after allegedly using two different Social Security numbers

to obtain more than $40,000 in student aid.



COHORT DEFAULT

RATES

Although cohort default rates provide the information required under the Higher Education

Act (HEA), they do not appear to provide decision-makers with sufficient information on

defaults in the Title IV loan programs. We analyzed data for borrowers in the 1996

through 1999 cohorts and found that cohort default rates do not appear to reflect general

trends in defaults in the year following the two-year cohort period. The Higher Education

Amendments of 1998 changed the definition of default for loans from a 180-day

delinquency to a 270-day delinquency.

We found that the definition's change may have resulted in the 1998 and 1999 cohort

default rates being materially lower than they would have been. We also found that the

percentage of borrowers in deferment or forbearance more than doubled between the 1996

and 1999 cohorts. If these borrowers were excluded from the calculation because they

could not default, the effect would be a material increase in cohort default rates.

We recommended that the Department support amendments to the HEA to revise the

calculation of cohort default rates to address our findings, and that it calculate and publish

a life-of-cohort default rate for each cohort. We also recommended that defaults that were

excluded as a result of the definitional changes contained in the 1998 amendments be

included in the cohort default calculation. In addition, we recommended that borrowers

who are in forbearance or deferment status should be excluded from the calculation until

they are subject to a risk of default on their loans. Implementing these recommendations

Fraudulent applications for student

aid seized by OIG special agents.

Semiannual Report To Congress: #48

3

would help ensure that cohort default rates provide more comprehensive, complete,

accurate information to reflect general trends in defaults. The Department did not disagree

with our findings, but noted concerns with our recommendations. ("Audit to Determine if

Cohort Default Rates Provide Sufficient Information on Defaults in the Title IV Loan

Programs," ED-OIG/A03-C0017; December 22, 2003)



PELL GRANT

ADMINISTRATION

At the Alexander Institute in Minnesota, we identified serious deficiencies in the school’s

administration of the Pell Grant program. We found that the school lacked an adequate

system to account for its Pell funds or to document students' eligibility to receive them,

and lacked written polices and procedures for administering the program. Although the

school asserted that these deficiencies had been corrected, our audit disclosed that they had

not been.

We recommended that the Department instruct Alexander Institute to document each

disbursement made during the audit period or refund approximately $1.7 million, the

entire amount it received in Pell funds between September 28, 2000 and June 30, 2003, if it

is unable to document disbursements. The Department imposed an emergency action and

initiated a termination action against the school, based on the school's loss of accreditation

subsequent to our audit. ("Audit of the Administration of the Federal Pell Grant Program

by The Alexander Institute, St. Paul, Minnesota, during the period September 28, 2000,

through June 30, 2003," ED-OIG/A05-D0020; December 11, 2003)

MONITORING

PRIVATE

COLLECTION

AGENCIES

Our audit of the Department's monitoring of private collection agencies (PCAs) it

contracts with for collection and resolution of defaulted student loans found that the

Department needs to improve monitoring of its PCA contractors. We found ineffective

monitoring by the Department in five areas. Specifically, staff did not effectively track

complaints, perform desk audits, conduct site visits for technical assistance and training,

review deliverables, or maintain contract files. As a result of inadequate monitoring, the

Department may not be able to effectively support its position in contract disputes,

litigation, or Congressional inquiries. FSA generally agreed with our recommendations

and stated that it is implementing steps to improve monitoring and oversight of PCAs.

("Audit of the Department of Education's (Department) Monitoring of Private Collection

Agency Contractors," ED-OIG/A19-D0002; December 23, 2003)



MONITORING

PROVIDERS OF

COLLECTION

SERVICES

We audited the New Jersey Higher Education Student Assistance Authority's (HESAA)

monitoring of the ten special counsels providing collection services to it to determine if

HESAA's procedures were adequate to monitor the special counsels. We noted several

areas needing improvement including inadequate monitoring to ensure compliance with

laws and regulations. We also found that all collections were not remitted to HESAA on a

timely basis. HESAA agreed with most of our findings and recommendations. ("Audit of

the New Jersey Higher Education Student Assistance Authority's (HESAA) Monitoring of

Law Firms (Special Counsels) Providing Collection Services to HESAA," ED-OIG/A07-

C0032; March 3, 2004)



TITLE IV

ELIGIBILITY

Our audit at the National Education Center - Spartan School of Aeronautics (NEC) found

that NEC disbursed approximately $312,000 in Title IV aid to students enrolled in

ineligible programs. We recommended that the Department require NEC to ensure that

funds are not disbursed to students until program eligibility is established. We also

Semiannual Report To Congress: #48



4

recommended that it refund about $268,000 to lenders and approximately $45,000 to the

Department. NEC did not concur with our finding or recommendations. ("National

Education Center - Spartan School of Aeronautics' Compliance with Student Financial

Assistance Program Eligibility Requirements," ED-OIG/A06-D0016; February 19, 2004)

TITLE IV

ELIGIBILITY

FRAUD

Our investigation involving seventeen defendants who fraudulently applied for

approximately $285,000 in Stafford loans resulted in a thirty-one count indictment. Two

of these individuals assisted fifteen people in preparing false documents misrepresenting

themselves as graduate students to enable them to obtain loans they were not eligible to

receive. Six defendants have pled guilty in this case as of March 31, 2004.

A teacher who was president of the school board in a local district in Illinois was found

guilty by a jury after submitting fraudulent financial aid applications enabling her son to

receive more than $10,000 in grants he was not eligible to receive. Her son has pled guilty

in this case.



FRAUD BY

SCHOOL

OFFICIALS AND

PROGRAM

PARTICIPANTS

OIG special agents investigate fraud by school officials and other individuals who seek to

obtain student aid illegally. Our investigation of the owner of a debt collection agency in

Arizona who allegedly conspired with his employees in submitting fraudulent applications

for consolidated student loans resulted in a federal grand jury indictment. The indictment

states that this scheme illegally generated more than $1 million in commissions and caused

a $1.4 million loss to the Department.

A former accountant at LeMoyne Owen College in Tennessee was sentenced to 12 months

incarceration and ordered to pay more than $227,000 as a result of our investigation

revealing that she issued approximately $230,000 in checks to friends and relatives who

then paid kickbacks to her. Eight other individuals in this case have pled guilty, received

jail sentences, and been ordered to pay restitution for their roles in this scheme. A former

college comptroller in the Marshall Islands was sentenced to 10 years incarceration and

ordered to pay nearly $400,000 restitution after using his position to write and negotiate

checks for cash.

BUDGET AND PERFORMANCE INTEGRATION

Accurate and reliable data are essential to the goal of linking program performance and

budget decisions. Our audits of state educational agencies have found that some lack

adequate controls to ensure that the performance data reported to the Department are

accurate, reliable, and complete.

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