Contract costs have also increased at a dramatic rate during this five-year period. In 1989, the portion of the contract costs associated with Pell application processing were $3.4 million. By 1993, the Department paid over $18.1 million, an increase of approximately 432%, although the applications processed only increased by 23%.

While we have not yet completed our audit of the Department's oversight of the Pell Grant contracts, we already have a number of major concerns in these areas. The first of these concerns is that there appears to be inadequate certification of claims by contractors regarding the number of applications they processed. Because payments to contractors are based on these workload figures, lack of effective verification results in payments to contractors based on the "honor system.” For example, during fiscal year 1993, MDE contractors reported to the Department that they processed 8.6 million applications for student financial assistance. We estimate that the portion related to the Federal Pell Grant program was about $11 million.

Department program staff do not verify the number of applications processed; instead, they simply pay the contractors_the_amount shown on their invoices without any assurance as to their accuracy. Further, we are concerned that the Department's on-site review of contractors is not adequate to ensure that contractors are performing their duties as required.

The potential impact of inadequate contractor oversight goes beyond the cost incurred by the Department for services rendered. To the extent that contractor performance is deficient, few aspects of the Pell delivery system can be expected to function absent abuse and potentially even fraud.

OVERSIGHT OF PARTICIPATING SCHOOLS

Each participating institution is responsible for the day-to-day administration of the Pell Grant program on its campus. As part of an agreement entered into with the Secretary of Education, each school is responsible for ensuring that the program is administered according to Departmental policies and regulations and any provisions of the agreement signed with the Secretary. The specific regulations which these institutions are committed to, include determining student eligibility, calculating and disbursing grant funds, enforcing academic progress standards, maintaining student attendance records, and calculating and making refunds.

Over the years, we have uncovered numerous irregularities in the administration of the Pell program by specific schools, as well as indicators of systemic problems. Our audits, investigations and inspections have consistently found problems with institutions' administration of the Federal Pell Grant and the other student financial assistance programs which have led to significant questioned costs, and frequently the closing of the institutions involved.

We have found schools that have disbursed Pell funds to ineligible students. Among the violations identified by us and by the General Accounting Office are admission requirements not being enforced, students receiving Federal Pell Grants even though they have not signed required documents, and academic progress standards that are not being enforced or that are inadequate or lacking. In some instances, schools have been engaged directly in fraudulent and abusive practices. One area that has consistently been identified as a problem is that of Federal Pell Grant overpayments resulting from overstated cost of attendance.

I believe our work discussed in the preceding sections will help the Department in its improvement of the Federal Pell Grant delivery process, and we plan to make several substantive recommendations to improve areas in which we continue to see risk to the students and the taxpayer. Recognizing the need for an effective Department monitoring and oversight program of schools currently participating in the SFA programs, we believe that it is important for us to review the Department's school program review process. We are currently completing audit work to evaluate the Department's performance in this area and will be providing the Department with specific recommendations identifying opportunities for improving the actual conduct of on-site program reviews as well as the administrative procedures and information systems that support the program review function. Student Application Errors

An area in which we have consistently seen evidence of weakness is the student application process, which is estimated to account for hundreds of millions of wasted Federal dollars each year. A recent report entitled, "Quality in Student Financial Aid programs," summarized the results of various studies showing estimated student error, institutional error, and total error in Pell Grant awards. Although the report noted that these studies varied in nature and sampling methodology, the report concluded that there is little doubt that the errors in awards are considerable. The latest report covering Pell Grant awards for 1988-1989 reported that 28% of Pell Grant recipients received over- and underawards totaling $481 million

(overawards—$379 million; underawards-$102 million) due to application errors. We asked Pell program officials what actions they had taken to correct the 28% error rate on student applications. Although some corrective actions have been taken, we found that internal control weaknesses are still evident in the application process. For example, we recently completed an investigation of a private contractor who was falsifying family income on student applications in order to qualify those students for Federal Pell Grants. Of the 75 schools coast to coast that received these falsified applications, only 3 detected the errors. This is particularly troubling since each school is required to verify key elements of the student records for up to 30% of its applicants.

Investigators' discussions with officials from some of the schools that did not detect the errors disclosed that some schools do not verify the applications as required. The results of the Department's 1992 program reviews substantiated this issue, as about 400 of the 700 program reviews identified instances where verification procedures were not followed or documented. About 1,000 of the 6,400 audit reports issued by the OIG in 1992 also identified this as a deficiency.

As we work with the Department to resolve issues in the application process, we all must focus on identifying and changing procedures in the process that seem to generate errors.

CONCLUSION

The Federal Pell Grant program is, by its very design, vulnerable to fraud and abuse. This $6.2 billion per year program operates essentially on an "honor system." Significant problems have been identified both in the gatekeeping function, which permits institutions to participate, and in the monitoring of those institutions' participation. Our current work is showing problems with the system for authorization, reporting and reconciliation of drawdowns, which can be easily abused by unscrupulous participants. It is showing opportunities to improve oversight of contracts for administration of key aspects of the Pell program and of higher education institutions responsible for day-to-day administration of the program. Most important, the Pell program, like the loan programs, has no clear outcome performance measures. A focus on this program is particularly important when it is being looked to as a model for the new direct lending program.

Mr. Chairman, I thank you for the opportunity to report on some of our efforts in the student aid area. I would be happy to answer any questions you and other Subcommittee members may have.

PREPARED STATEMENT OF DAVID A. LONGANECKER

Mr. Chairman and Members of the Subcommittee:

I welcome this opportunity to discuss with you today the Federal Pell Grant Program. Over the past 20 years, the Federal Pell Grant Program has been an immensely important program for improving college access for low-income individuals. Unfortunately, the program has also had its share of problems, including abuse by program participants, poor management, and inadequate standards for measuring program outcomes. Correcting these problems will restore integrity to the Federal Pell Grant Program and increase its effectiveness in helping low-income students achieve success in postsecondary education.

In my testimony, I will first highlight the significant successes of the Federal Pell Grant Program. I will then discuss three areas that demand our immediate attention. We know that some currently participating schools should never have been approved for the program, so I want to discuss our "gatekeeping" responsibilities. We know that our monitoring efforts sometimes fail to uncover instances of mismanagement and abuse, so I want to share with you our revised strategies for improved institutional monitoring. Finally, we know that the program needs clearer performance goals and standards, and I look forward to working with you to clarify and improve these standards.

We are committed to solving these problems. The program is simply too important to ignore its management shortcomings or allow it to be abused by those who would exploit the program and its participants for purposes contrary to the program's in

tent.

ACCOMPLISHMENTS OF THE PELL GRANT PROGRAM

This program has enabled millions of students to attend our Nation's colleges, universities, and trade schools. Since its enactment in 1972, the Federal Pell Grant Program has made 55.7 million awards totaling $64.2 billion to students. Today,

more than 4 million students-almost 25 percent of all students attending our postsecondary institutions-receive Pell Grants. Most importantly, this program has enabled millions of low-income students to attend college who otherwise would have been unable to afford a postsecondary education. It has been the critical cornerstone of our Federal commitment to provide access. It has helped reduce the gap between the percentage of low-income and high-income students attending postsecondary institutions. Total enrollment in higher education grew from about nine million students in 1972 to more than 14 million students today. Although this increase in students is reflected across all income ranges, the increase for students from low-income families is significantly higher than the increase for other income groups. In addition, this program has helped to expand the options available to these students. The percentage of high school seniors from low-income families attending their first choice college increased from one-third in 1972 to almost one-half just 10 years later.

To achieve fully our goals for the Nation's students, we need to promote not only access but also program completion and graduation. While we have a long way to go to improve retention rates at the postsecondary level, the effect of Federal Pell Grants on the retention rate for low-income students is striking.

A low-income student who receives a Pell Grant is twice as likely to earn a baccalaureate degree as a low-income student who does not receive a Pell Grant. When you consider that this improved attainment occurred at a time when the graduation rate was declining, the turnabout in the data for low-income students who received Pell Grants is even more remarkable.

However, as the Pell Grant program has grown and established this remarkable track record, the number of those who would exploit the system has also grown. I am here today to affirm our commitment to make this program work even better and to frustrate the efforts of those who would abuse it.

GATEKEEPING

We know that some schools have been allowed to participate in the Federal Pell Grant Program that should never have been approved for participation. Since the Department last testified before this Committee on the student loan program, we have worked with the Congress to improve the process by which we approve schools to participate in the Title IV student aid programs, including strengthening our eligibility and certification procedures, enhancing the State role in licensing and reviewing_postsecondary institutions, and improving the accreditation process. The Higher Education Amendments of 1992 strengthened and complemented the numerous steps we took prior to reauthorization to tighten our monitoring and gatekeeping processes and requirements.

Perhaps the most important tool included in the 1992 Amendments is the ability to certify schools provisionally to participate. Through provisional certification the Department can limit the length of time and conditions under which a new school is allowed to participate. When a school has no history of administrative capability or financial responsibility, the majority of which are new schools or schools that have changed ownership, we can provisionally certify a school for a period of time that allows us to monitor its performance closely. Further, such schools agree to the Department's right to revoke their provisional certification with a simple notice that gives schools ten days to demonstrate that the decision is wrong. Thus, we can now take action to remove quickly from the student aid programs new institutional participants that fail to perform adequately. In fiscal year 1993, we certified provisionally 166 schools, including 47 new schools and 67 schools that changed ownership. We have begun performing certification reviews for Title IV program participation of all institutions adding one or more locations. Next year, we will begin to review the eligibility and certification of all participating schools. To do this, we will establish a priority ranking of all 7,300 participating schools based on indicators of potential problems and funding levels. We expect to review about 1,500 schools in the first year and will concentrate on those institutions that pose the greatest risks for Federal funds. Of course, we will also review schools that are of lesser risk, as well as initial applications, applications for changes in ownership, and other routine actions affecting participation. We believe that this plan will allow us to meet the statutory requirement that all institutions have their eligibility and certification reviewed within the next five years.

We have consciously improved our coordination with States and guaranty agencies with respect to actions relating to closed institutions. When a school closes all entities with oversight responsibilities are promptly notified in order to cease the flow of Federal funds and initiate efforts to recover already expended funds. Additionally, now that we have more experience in compiling default statistics for insti

tutions, we are focusing greater attention in our certification efforts on institutions that have high cohort default rates in the Federal Family Education Loan Program. Accordingly, it is imperative for the Congress to act favorably on our legislative proposal to close the loophole that has permitted some institutions to escape the consequences of a high default rate through litigation. Finally, the level of surety has been increased as required where necessary to protect the federal government and students. Currently, 232 participating institutions have posted surety totaling $58 million. Also, we are converting, as needed, the type of surety required from performance bonds to letters of credit, which are more readily collectible by the Secretary.

Our efforts to improve gatekeeping activities have also been aided by several new authorities in the 1992 Amendments relating to State oversight and accreditation. Our partnership with the States in the oversight of postsecondary institutions is significantly strengthened by the State Postsecondary Review Program. Under this new authority, the States will develop standards approved by the Department to use in conducting reviews of institutions referred to the State by the Department. As originally recommended by this Committee, the Secretary now has statutory authority to provide reimbursements to States for the cost of their efforts. Although no fiscal year 1993 funds were appropriated for this activity, $5.3 million was reprogrammed within the student financial assistance account to initiate the program and nearly all states applied for funding to support start-up activities. The fiscal year 1994 appropriation for the Department provides $21.25 million for this activity, permitting States to begin reviewing their postsecondary institutions and to establish consumer complaint and information systems.

The accreditation process has also been strengthened. Proposed regulations for recognizing accrediting agencies, which the Department will soon publish, will make it clear that the accrediting agencies are accountable for the schools they accredit. As required by the 1992 Amendments, accrediting agencies must be separate and independent, both administratively and financially, from any related or affiliated trade association or membership organization. This requirement will eliminate the danger of trade associations exerting, or being perceived to exert, pressure on accrediting agencies to keep their accrediting standards low.

Also, as required by the 1992 Amendments, accrediting agencies will be required to have meaningful standards for assessing an institution's fiscal and administrative capabilities, recruiting and admissions practices, measures of program length and student achievement, and program completion, job placement, and default rates. In the case of non-baccalaureate vocational education, where the Department and your Committee have uncovered many problems, the regulations we are developing would require State agencies to establish standards for such measures of student achievement as completion rates, job placement rates, and pass rates on State licensing exams. These regulations would also require accrediting agencies to take follow-up action when a school fails to meet the accreditor's standards.

Further, the 1992 Amendments have helped us target common areas of abuse for correction. For example, the Secretary will no longer recognize the accreditation of any institution that is in the process of changing from one accrediting agency to another unless there is a strong demonstration of reasonable cause. Further, each institution must designate one accreditor for purposes of program eligibility to prevent accreditation "shopping."

MONITORING AND OTHER MANAGEMENT ISSUES

The Department has taken a number of significant steps in improving the administration of the student financial aid programs. Because students apply directly to the Federal Government for their Pell Grants, we have been able to use this national data base to implement a number of very productive controls. For example, in January 1991, we began matching Pell Grant applicants with our file of defaulted student loans that had been assigned to the Department for collection. In July, 1992, we expanded this activity by matching applicants with the default files of guaranty agencies. This effort has been helpful in ensuring that ineligible students do not receive Pell Grants. So far this year, we have identified over 95,000 applicants through these data matches.

In January, 1994, we will begin to match the social security numbers of all student aid applicants with the master file maintained by the Social Security Administration. Previously our efforts to incorporate data base matching schemes were blocked by various statutory provisions, including outright prohibitions. This new statutory authority to verify social security numbers gives the Department a powerful tool to weed out additional fraud and abuse.

Another management improvement that benefits both institutions and students is our strategy of streamlining the Pell Grant process by actively promoting the use of electronic processing. Today, about five of every six student payment transactions originated by participating institutions are accomplished electronically. Our goal is 100 percent.

We plan to use our regional staff to help review high-risk schools on site, as part of their ongoing monitoring responsibilities. We will also coordinate with States, guaranty agencies, and accrediting bodies to maximize our combined on-site review capacity. These steps will enable us to employ our resources even more effectively. We also have reorganized the Office of Postsecondary Education to strengthen our monitoring and oversight efforts and to enhance our efficiency. In the student financial assistance programs we have now consolidated all offices with monitoring and gatekeeping responsibilities, where before they were scattered among various units. Placing all of these functions in one unit provides better coordination and permits more effective program management.

Data verify the impact of our monitoring and management improvements. As a result of our program reviews, assessed institutional liabilities for fiscal year 1993 ($337 million) were up substantially from the previous year ($226 million). This is largely due to a policy decision made in 1991 to emphasize the quality of reviews over the quantity of reviews. Our reviews are now longer and conducted by two specialists, rather than one. In addition, enforcement actions increased markedly during fiscal year 1993 over the previous year:

• 163 institutions were terminated, an increase of 40 percent;

• 59 emergency actions were taken, an increase of 97 percent; and

⚫ 56 debarment actions were taken against individuals, an increase of 51 per

cent.

DEVELOPING CONSENSUS ON PROGRAM GOALS AND PERFORMANCE STANDARDS

We need to work with you and your colleagues in the Congress to develop a clearer consensus on the standards that are needed to assess the Federal Pell Grant Program's performance. Regrettably, we have not always had consensus even within the Congress on such standards, leading, sometimes, to circumstances that many find untenable. For example, some students have received Pell Grants for a longer period of time than reasonably necessary to complete an undergraduate degree program, including one student who received Pell Grants for 18 consecutive years. Eurrently, there is no limit on the number of years a student can receive a Pell Grant. The restriction, added to the statute in 1986, on the number of years in which a student could receive a grant was removed by the Congress in the 1992 Amendments, over the Department's strong objections. You should note that we have not always received support from the Congress for our efforts to strengthen program integrity when our measures were perceived as reducing access to the program. The Department is working on plans to measure the success of the Pell Grant program against specific standards. If we are to have new and meaningful standards, we need a shared understanding of the aims of the Pell Grant program. To this end, we have begun meeting with representatives of the postsecondary education community, Congressional staff, and our colleagues at the Department of Labor to discuss the goals of the student financial aid programs and what measures should be used to assess and improve the extent to which these goals are met.

CONCLUSION

In conclusion, we are pleased with the accomplishments that the Federal Pell Grant Program has made in providing access to postsecondary education. We are aware, however, that the program has had its share of problems and we are committed to making the necessary reforms in our gatekeeping and monitoring processes. While we will be vigilant to seek out and take action against those who defraud or abuse the program, I hope you understand that I cannot promise you that we will eliminate greed and corruption. Creative crooks will find new ways to steal from the Federal treasury, and large programs like the Federal Pell Grant Program seem to attract them in increasing numbers.

We are also committed to work with you to develop clearer performance standards for measuring the outcomes of the Federal Pell Grant Program, so that there will be greater certainty about program purposes and, consequently, more confidence in the program's integrity and management. Developing an adequate consensus on the program's objectives is especially important in a time of limited resources. We will need your help in considering further legislative changes including, for example, closing the cohort default rate loophole, and accepting the Department's proposed technical amendments to the Higher Education Act. It is important that all work