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The Honorable Claiborne Pell, U.S.S.
Page Two

September 20, 1973

The above list does not include a number of other institutions which in the past fifteen months have been issued Show Cause letters resulting in hearings about their financial stability and administration of the Guaranteed Student Loan Program. In some cases, initial orders of suspension or revocation were issued but subsequently vacated, either on appeal or upon showing substantial remediation of the previous situation. In most cases, this has resulted in substantial amounts of refunds of tuition to either students or lending institutions which has substantially reduced the amount of delinquency or default claims subject to the Federal Insurance of the program.

To accomplish these decisive actions expeditiously but with full observance of "due process", we found it necessary to amend the By-laws of the Corporation, provide for the establishment of a Review Board, amend the Criteria of the Accrediting Commission, send teams of field auditors to visit the institutions, hold formal hearings before the full Commission with an opportunity for the institution to appear, establish a Review Board, appoint members to serve on it, and to hold timely hearings for the appeals. All of this has been accomplished in approximately fifteen months. It began with information about the loan program brought to our attention by officials of the USOE. We think our activities illustrate that when provided with definitive data, this Agency can respond with alacrity and efficacy to the situation. Parenthetically, I would note that thus far there has been no court action brought against us with any claim of lack of due process with the procedures which we have instituted and under which the withdrawal of accreditation from 21 institutions was accomplished.

Of course, accreditation is only an element of eligibility for one or more of the Federal programs. Accreditation is not synonymous with eligibility. For example, the Congress wisely provided in Section 435 of the Insured Loan Program that among the other elements of an "eligible institution" there should be legal authorization by the state to the institution to provide the program of postsecondary education. Hence, in determining institutional eligibility, the USOE Commissioner should be able to rely upon two independent sources for evaluation of the institution. This would include state licensing and voluntary national accreditation.

It has been my experience in watching developments under the Insured Loan Program that where there has been a long history of constructive state legislation, licensing, or regulation of proprietary schools, combined with voluntary national accreditation, there has been few, if any, problems in the administration of the Guaranteed Student Loan Program. Absent either element, I think problems have been and can be readily identified. For example, in New York there was at

one time a list published by the New York Loan Guaranty Agency of institutions, the students of which had a high default or delinquency rate. Disregarding the regionally accredited collegiate institutions which were predominantly black, the proprietary vocational schools listed were not nationally accredited but were declared eligible institutions as an exception to the requirement of accreditation. A similar situation might be identified in California. On the other hand, only recently has state licensing of proprietary schools come to Texas, Louisiana, Mississippi, and Alabama. It is here that we found the problem institutions to which our attention was directed some fifteen months ago by the

USOE.

The Honorable Claiborne Pell, U.S.S.
Page Three

September 20, 1973

Possibly, in the future, the USOE will be in a position to utilize the statutory authority given the Commissioner by the Congress in Section 438 of the Education Amendment of 1972. As you know, since June of 1972, the Commissioner has had the authority to issue regulations providing for the fiscal audit of an eligible institution, to establish reasonable standards of financial responsibility and appropriate institutional capability, and further, to provide for the limitation, suspension, or termination of the eligibility of an otherwise eligible institution. In other words, even if an institution continues to have state authority to operate, and continues to be accredited, the Commissioner may step in under the Insured Loan Program and limit or suspend the eligibility of the institution. We understand that proposed regulations implementing this authority may be forthcoming this fall.

As you will remember, we vigorously supported this statutory authority for the Commissioner to publish such regulations and to exercise his discretion. We would further urge that such authority be extended to all student aid programs, rather than being limited merely to the GSLP. The implementation of this statutory authority should, in our opinion, provide the needed third leg in a firm tripod arrangement which can result in a shared responsibility between voluntary accreditation, state licensure, and federal utilization of these judgments.

As Holmes once said, "A page of history is worth a volume of logic". The Insured Loan Program was enacted in 1965 at a time when debate and interest in the tax-credit-for-tuition bill was rather heated and intense. At that time, the student loan program was styled as being "loans of convenience for middle-class students". Such a description of the program as being for middle-class students continued through 1971. Suddenly, the program began to be styled as loans of necessity; and, as you will remember, in 1972 the needs test was introduced into the program.

Despite this claim of being a program designed for loans of convenience for middle-class students, it should be noted that in the record of the hearings on the Higher Education Act of 1965, there appears the statement of Dr. Kenneth B. Hoyt, then President of the American Personnel and Guidance Association. He was discussing, beginning at page 1082 in Part III of the Hearings on S.600, of his studies on thousands of students in proprietary business, trade, and technical schools. Dr. Hoyt told the Committee that:

both from the trade-technical come from families of a lower income, (page 1083)

"Our data show that most of them
and the business schools
socio-economic background.

One was

As finally enacted that year, there were two insured loan programs. for middle-class students in the Higher Education Act and which was styled as the loans of convenience. The other was a separate vocational insured loan program which was, at that time, the only program of student financial aid for vocational students, as distinguished from college students. Thus, for a number of years, the Insured Loan Program was made to do many things for vocational students in need, which was not required of middle-class college students. Students with varying social and ethnic backgrounds, with no history of credit participation, were recruited by vocational schools with the encouragement of USOE officials.

41-997 O-75-29

The Honorable Claiborne Pell, U.S.S.
Page Four

September 20, 1973

Over the past few years, a number of schools have closed. Sometimes, this has been the final result of the loss of institutional accreditation. In other situations, it has been the result of a liquidity problem stemming from an overreliance upon the Insured Loan Program as being the only student aid program available to vocational students. The imposition of the needs test and the paper work involved is just one example of the effect of a change in program or a change in stated purpose of the program from loans of convenience to loans of necessity, which can result in institutional disorientation. Fortunately, in most cases, there has been ample evidence of transfer without additional cost to the student to nearby accredited institutions when, for one reason or another, an institution has been forced to close because of financial instability or other problems. In most cases, this Agency has worked very closely with the state and Federal officials to accomplish these student transfers at no additional cost to the student.

As addenda to this letter, I enclose old and new copies of our By-laws, Operating Criteria, and the Supplement to the Criteria, illustrating the amendments and revisions which we have incorporated to accomplish the actions we have taken in the past year. Our new By-laws have the blue cover; the old ones have the green cover. At page 17, beginning at line 8, you will find a detailed procedure governing the withdrawal of accreditation, provision for due process, and the establishment of a Review Board. Although such authority was implicit under the old By-laws, it was not detailed.

In the new Operating Criteria, beginning at page 26, is a most explicit exposition of our definitions of negative actions and the nature of the withdrawal process for either suspension or revocation. On page 31, begins Chapter 6 dealing with the operation of the Review Board for Appeals. This material in the bluecovered book, you may wish to contrast with the language in the red-covered book, beginning at page 9. In my opinion, our old procedures insufficiently distinguished between appeals concerning the denial of accreditation to an applicant institution and actions by the Commission to withdraw accreditation from an institution currently in accredited status. Parenthetically, I would hope that you would read the preamble to our procedures at page 18. I feel that the actions taken by the Commission in the past year exemplify the affirmations of the preamble.

Out of these unhappy negative actions in the past year, we have learned some important lessons. One of the major problems has been in the area of substantial institutional changes. We have incorporated a separate chapter in the new Criteria, beginning at page 23, concerning new educational programs, changes of institutional name or location, and most importantly, changes in ownership control. This latter section, 2-3-104, at page 24 is, in my opinion, the most significant development incorporated into our Criteria. It is my feeling that the adoption of this provision for the immediate discontinuation of accreditation upon any change of ownership control will obviate substantially the unhappy situations which we have been forced to review in the past fifteen months. In effect, the provision operates much like licensing by the FCC. In other words, accreditation is given to a particular institution of acknowledged ownership control. When that control changes, the accreditation automatically discontinues in a self-executing manner. Previously,

The Honorable Claiborne Pell, U.S.S.
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September 20, 1973

procedures had to be initiated with notice and hearing to withdraw the accreditation. Now, the burden of proof and the burden of coming forward is on the administration to secure a reinstatement of the accreditation. We understand that this language and this concept has the approbation of the Accreditation and Institutional Eligibility Staff of the USOE.

In summary, we suggest that:

1.

2.

The Insured Loan Program has been subject to redefinition in
its stated purposes, its philosophy of administration, and the
vagaries of the money market all of which have contributed to
institutional difficulties in the administration of the program,
and accommodation to students with marked socio-economic back-
grounds that are devoid of experience in dealing with long-term
credit relationships.

The Accrediting Commission of AICS, when provided with definitive
data by the USOE justifying concerns about the GSLP at any partic-
ular institution, can act responsively, with alacrity, and with
efficacy. This is illustrated by our actions in the past year
resulting in withdrawal of accreditation from 21 institutions.

3. There remains a need for comprehensive body of definitive date
which can be utilized by federal and state governments along with
voluntary private accrediting agencies to strengthen the operation
of all student aid programs by approrpiate amendments when justified.
There may be, perhaps, merit in comparing data on student defaults
and delinquencies under the NDSL program with similar figures under
the FISL program. There may be practices and habits unique to
certain types of student populations, certain types of institutions,
and certain types of lenders which can be identified by the study
and comparison of NDSL and FISL loan delinquency and default data.

In conclusion, we would hope that the Committee would not be inclined to take any precipitous action which would result in loss of access to the Insured Loan Program or any other student aid program for students in vocational schools. We say this for several reasons. They include:

1. An opportunity to see if the amendments, revisions, and reforms we have incorporated into our By-laws, Criteria, and Procedures have achieved at least substantially the desired effect;

2.

To give the USOE an opportunity to implement the June 1972 statutory authority to establish by regulation standards for institutional fiscal stability and administrative capability along with the authority of the Commissioner to deeligiblize an otherwise eligible institution; and

The Honorable Claiborne Pell, U.S.S.
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September 20, 1973

3. The availability for comparative purposes of comprehensive definitive data on all student borrowers in all institutions under both the NDSL and the FISL Loan Programs.

If there is other information which you or the Committee feel we can supply, we will be happy to respond.

Respectfully submitted,

Richard C. Futter

Richard A. Fulton

Executive Director and

General Counsel

RAF/atd
Enclosures

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