ABUSES IN FEDERAL STUDENT GRANT PROGRAMS THURSDAY, OCTOBER 28, 1993 U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, The Subcommittee met, pursuant to notice, at 9:10 a.m., in room SD-342, Dirksen Senate Office Building, Hon. Sam Nunn, Chairman of the Subcommittee, presiding. Present: Senators Nunn, Roth, and Cohen. Staff Present: John F. Sopko, Deputy Chief Counsel; Mary D. Robertson, Chief Clerk; Alan Edelman, Counsel; Eleni P. Kalisch, Counsel; David B. Buckley, Chief Investigator; Harold B. Lippman, Investigator; R. Mark Webster, Investigator; Scott E. Newton, Investigator; Cynthia Comstock, Executive Assistant to Chief Counsel; Declan Čashman, Staff Assistant; Daniel F. Rinzel, Minority Chief Counsel; Stephen H. Levin, Minority Counsel; Carla J. Martin, Minority Assistant Chief Clerk; Mike Maloney (Senior Auditor, GAO Detail); John Forbes, Investigator (Customs Detail); Gene Richardson, Investigator (AID Detail); Betty Ann Soiefer (Senator Glenn); Paul Feeney (Senator McCain); Kelly Metcalf (Senator Cohen); Paulina Collins (Senator Cohen); Doris Dixon (Senator Cochran); Sean Parkin (Senator Bennett); and Steven Burns (Senator Sasser). OPENING STATEMENT OF CHAIRMAN NUNN Chairman NUNN. The Subcommittee will come to order. This morning the Senate Permanent Subcommittee on Investigations begins our second day of hearings on fraud, abuse, and other problems in the Pell Grant program. This student financial assistance program, currently the largest direct Federal student aid program, uses public funds to help millions of people obtain the education they otherwise would not be able to afford. The Government is helping many people who otherwise would not be able to secure education without this assistance, and I think we have to keep that in mind. The Department of Education is preparing to implement the direct student loan program, which will use Federal money to also originate student loans, replacing lenders and the private capital currently used for the Guaranteed Student Loan Program. Önce this is accomplished, that outlay of Federal funds for student aid will certainly be substantially more than, and in fact dwarf, this $6 billion program. This major change in the student loan program makes these Pell Grant hearings, I think, particularly timely and relevant because the Pell Grant program appears to be the model the Department is using for the direct lending program. Maybe I am wrong on that, but I would like to hear from our witnesses this morning on that. And as we heard yesterday, the Government relies on the same gatekeeping and school oversight mechanisms for both the grant and the loan programs. We know, based on this investigation and previous hearings we have held, that the Department of Education has historically had a very bad track record in managing and overseeing these multibillion dollar programs. I have to add Congress deserves no blue ribbons here either. Congress has not given the proper oversight to this program, nor until 1992 have we given the Department of Education the direction in terms of where we think the program ought to be going. And I would say even today I do not believe the Department of Education has the tools in terms of the skilled, trained people to be able to properly administer the program. But we will hear more directly from more knowledgeable people on that subject this morning. Yesterday we heard testimony from Senator Claiborne Pell, whose name this worthy program bears. He knows how important this program is, and he made it absolutely clear yesterday that no one is more interested in having it straightened out and run in an efficient way than Senator Pell himself. And I am sure the others who helped originate the program feel the same way. These hearings are not about stopping the Pell Grant program. We want to assure that this necessary student aid program is properly managed, however, has clear objectives, and is accountable to the public whose money is used to fund it. And I certainly expect our witnesses this morning to tell us if we have clear objectives, and the objectives, of course, are objectives that have to be set down in law by the Congress in a broad sense. So if those objectives are not clear, then I think it's up to the executive branch to let us know that because clearly we are in a position to make some changes in that and should and have a duty to if the objectives are not clear and if you do not have the tools to run the program properly. We have also heard from the U.S. General Accounting Office as well as the Subcommittee staff as they detailed the results of their investigations of abuse and apparent fraud in this program. Because of budget constraints, the Pell Grant program is not fully funded. Accordingly, every instance of fraud, every instance of abuse results in a direct reduction in the amount of aid available to the truly worthy students attending truly eligible and productive institutions. This morning, the Department of Education will respond to the issues raised during this investigation, and the Inspector General of the Department will give his perspective of the program and the highlights as he sees them. I will ask Mr. Longanecker, you and Mr. Thomas and Mr. Wurtz, all to please stand and take the oath. We swear in all the witnesses before this Subcommittee. Do you swear the testimony you give before the Subcommittee will be the truth, the whole truth, and nothing but the truth, so help you God? Mr. THOMAS. I do. Mr. LONGANECKER. I do. Mr. WURTZ. I do. Chairman NUNN. Thank you. This morning, the Department's Inspector General Jim Thomas will provide his perspective on this major source of student aid, the Pell program, which during the last 21 years has provided over $59 billion to students. Mr. Thomas has been the Department's Inspector General since 1980 and has testified before this Subcommittee in 1990 during our investigation of the student loan programs. After Mr. Thomas' testimony, we will hear from Dr. David Longanecker, the Assistant Secretary for Postsecondary Education. Dr. Longanecker, who assumed his current position in June of this year, came to the Department from the Colorado Commission on Higher Education where he was the executive director. As the Assistant Secretary for Postsecondary Education, Dr. Longanecker has purview over many programs, including the Federal student aid program. Mr. Longanecker is joined by Mr. Donald Wurtz, Assistant Secretary and Chief Financial Officer for the Department of Education. Mr. Wurtz recently joined the Department as well-when was that, Mr. Wurtz? When did you come to the Department? Mr. WURTZ. I came with the Department just a month ago. Chairman NUNN. About a month ago, having spent much of his career at the General Accounting Office. Mr. Longanecker, I made it clear yesterday in my statement that I felt that the new Secretary of Education and his team, including you, are dedicated to getting this program back on track. And I wanted to make sure you understood that was part of what I said. Mr. LONGANECKER. I certainly did. Chairman NUNN. I do believe you have a long way to go, and we will get into that this morning. But we are here to hear from you, and, Mr. Thomas, we will ask you to lead off this morning. TESTIMONY OF JAMES B. THOMAS, JR.,1 INSPECTOR Mr. THOMAS. Thank you, Mr. Chairman and members of the Subcommittee. Thank you for inviting me here to share with you the perspective of the Office of Inspector General— Chairman NUNN. If you could pull those mikes up. You really have to talk directly into them, and pull it up as close as you can to you. Mr. THOMAS. All right, sir. Thank you. Thank you for inviting me to share with you the perspective of the Office of Inspector General on fraud and abuse in the Federal Pell Grant program. If I may, Mr. Chairman, I would like to summarize my statement and submit the entire statement for the record. The prepared statement of Mr. Thomas appears on page 212. Many of the same abuses that this Subcommittee highlighted in its 1991 report on the loan programs also plague the Pell program: poor or inadequate gatekeeping practices, financial controls, data systems, and oversight of participating schools. However, the same level of attention, up until now, has not been directed to the Pell program because Pell is a silent program. There are no visible or vocal victims to cry out as in the loan programs. An obvious victim-the Federal taxpayer-does not know when these grant funds have been wasted. The areas I would like to discuss regarding the program are: the status of improvements to the gatekeeping process since the 1990 hearings; opportunities to improve controls over grant authorizations and payments to schools; opportunities to improve the oversight of the Department's contracts for administration of key aspects of the Pell system; and opportunities to improve the Department's oversight of institutions of higher education responsible for the day-to-day administration of the Pell program. Also, an additional characteristic of the Pell program that fosters fraud and abuse is that there are no clear outcome performance measures for the program. There is no limit on the total amount of funding a student can receive or the number of years a student can receive a grant, nor is there a clear understanding of outcomes expected for different types of education. We recently issued a Management Improvement Report that recommended that funding for vocational training be rethought, with an emphasis on investing limited Federal education funds on what works best in terms of helping the recipients of the training get jobs. We suggested that labor market needs of employers and the success rates of schools in placing graduates be considered in studying different funding approaches for students enrolled in vocational training programs. However, we need to take this idea further and make some hard decisions as to what the outcomes we as a Nation should be demanding from all participants-institutions, students, and others. Gatekeeping is the process used by the Department to determine which schools are allowed to participate in both the SFA grant and loan programs. During 1989 and 1991, we issued audit reports which concluded that the Department's gatekeeping process was ineffective in preventing problem schools from participating in the SFA programs. Although the Department has made significant strides to improve gatekeeping, our followup review disclosed that there are important issues in accreditation and financial responsibility that need additional attention. In addition, the Department still has problems with missing files as well as inaccurate management information. Thus, gatekeeping is still not as effective as it could be. Our followup work disclosed that the Department has implemented many of our recommendations for corrective action regarding the planning for and performing of its reviews of accrediting agencies. These actions should ultimately result in the accrediting agencies being held accountable for their accrediting decisions. However, until the National Advisory Committee is reactivated and the Department has had the opportunity to present its finding be fore the NAC, we are not able to assess the effectiveness of the Department's corrective actions. Our follow-up work determined that the financial certification process is not consistently providing adequate protection for the students and taxpayers. We found that the Department certified new schools that did not meet the requirements. For participating schools that did not meet the requirements for financial responsibility, it required sureties at a minimum of 25 percent of annual SFA funding, a standard that we found was not consistently applied. For a sample of 13 schools that failed the financial responsibility test, the Department required sureties of less than 25 percent for 6 of those schools. Because of problems identified by audits and investigations, and because of the large amount of funding appropriated for the Pell program, we initiated an audit of the Pell financial aid delivery system. Chairman NUNN. When did you start that, Mr. Thomas? Mr. THOMAS. We started it this year. It is in process at the present time. Although this audit is still in process, our initial work has disclosed several control weaknesses and abuses for which we anticipate providing the Department with recommendations for improvement on several areas of concern. One concern is authorization and payments to schools. The large amount of advance funding made available to a school exposes the program to potential abuse by unscrupulous school owners at the very beginning of the Pell delivery process. The Pell Grant funding process relies very heavily on the integrity of schools and their timely reporting to two different management systems within the Department. These two reporting systems are not designed to be easily reconciled. Once a school receives its Pell authorization, it can simply draw down money directly from a Federal account using the same type of PIN number you use at an ATM machine to draw money out of your personal bank account. There is no requirement that a particular student for whom money is drawn down be identified prior to the money being drawn down by the school. Our audits and investigations, as well as program reviews, show a history of schools failing to report student withdrawals and no-shows, resulting in their drawing down cash in excess of their needs. In May of 1992, one school had signed a repayment agreement to repay approximately $300,000 covering excess Pell funds received by the school as of March 31, 1992. The OIG audit report identified that the school had almost $400,000 in additional excess cash as of December 31, 1992. Chairman NUNN. Mr. Thomas, do you think that is an exception? Is this just something that slipped through the cracks, or could there be hundreds of schools out there with this kind of excess? Mr. THOMAS. I believe a little later in my testimony I have some numbers that would show that it is not an isolated case, Mr. Chair man. Chairman NUNN. So we could have schools all over this country with several hundred thousand dollars of excess Pell Grants as far as the Department of Education knows? I mean, there is nothing, |