1993, annual Federal payments to honor default claims increased over 400 percent.

Annually, about 1 million students enroll in about 5,000 proprietary schools. These schools account for about half of all postsecondary institutions and make an important contribution by providing skilled training to the non-college-bound. However, the actions of some proprietary schools have been at the core of concerns about the integrity of title IV programs. Today, we will discuss our observations of proprietary schools resulting from ongoing work that we are doing for the subcommittee.

Most proprietary schools have fewer than 100 students and offer occupational training of 2 years or less in fields ranging from interior design to computer programming. Compared with nonprofit institutions, proprietary schools enroll higher percentages of women, minorities, and low-income students. Fewer proprietary schools participate in title IV programs now than 5 years ago, a trend that reflects the decreased number of schools accredited by the six primary accrediting agencies.

Proprietary schools receive a much smaller share of title IV aid dollars now than in the past. For example, nearly 35 percent of all subsidized Stafford loan dollars went to students attending proprietary schools in the 1986-87 school year. But by the 1992-93 school year, the percentage had declined to 10 percent.

The proportion of proprietary school students receiving title IV aid has also been declining. The proportion receiving aid fell from nearly 80 percent in the 1986-87 school year to about 67 percent in the 1992-93 school year. The proportion of students receiving aid in nonprofit schools remain steady.

While the default rates for proprietary school students are still far above those associated with nonprofit schools, the rates have declined 12 percentage points over the past few years, whereas default rates for other sectors have remained essentially the same.

One of the title IV eligibility provisions adopted in the 1992 Higher Education Act amendments, the 85-15 rule, went into effect last July. Proprietary schools that do not receive at least 15 percent of their revenue from sources other than title IV programs must report this to the Department. Or they lose their eligibility for such programs.

Schools that meet the 15-percent standard must include a statement attesting to that fact in their audited financial statements. Thus far, only four proprietary schools have notified the Department that they did not meet the standard. Further, according to the Department, about 25 percent of the 830 proprietary schools that submitted financial statements during the past 2 months have not properly documented whether they met the standard.

Although we're not sure what underlying conditions nonreporting reflects, there is a bigger issue. At the chairman's request, we recently initiated a study to address the core issue. Is there a clear relationship between reliance on title IV revenues and school performance?

One final observation. Students enrolled in occupational training programs, who obtain grants and incur debt, often risk being unable to find work because they have been trained for fields in

which insufficient job demand exists. At the chairman's request, we have also initiated a study to address this issue.

In summary, to try to resolve longstanding concerns, the Congress sought to strengthen title IV oversight by amending the Higher Education Act in 1992. Recent trend data shows some signs of progress. Fewer proprietary schools are credited. Proprietary schools' share of title IV funding has declined. And the default rate for proprietary school students is falling.

The trends, however, do not eliminate concern about the quality of proprietary schools. While proprietary school students' default rates have declined, they remain substantially higher than those for their peers who attend nonprofit schools.

Mr. Chairman, this concludes our prepared remarks. We're happy to answer any questions you have.

[The prepared statement of Ms. Blanchette follows:]

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to assist the Subcommittee in its oversight responsibilities for the Department of Education. The Department administers an array of student financial aid programs under Title IV of the Higher Education Act (HEA) of 1965, as amended.' These programs provide grants, loans, and work-study support to students pursuing postsecondary education. In fiscal year 1995, under Title IV, the federal government made about $35.2 billion available to about 7 million postsecondary students with $5.4 billion (15 percent) for Pell grants and $14.3 billion (41 percent) for subsidized Stafford loans--two of the three largest Title IV programs.

A considerable history of concern exists about the integrity of Title IV programs, particularly the federal student loan programs. Since the late 1980s, the Department's Office of Inspector General, the Congress, and GAO have all concluded after completing several investigations that extensive fraud and abuse exist in student aid programs. Between fiscal years 1983 and 1993, annual federal payments to honor default claims increased over 400 percent, from $445 million to $2.4 billion.'

Annually, almost 1 million students enroll in about 5,000 proprietary (private for-profit) schools that represent about 50 percent of all postsecondary institutions. As a sector of the postsecondary education community, proprietary institutions make an important contribution to the nation's economic competitiveness by providing occupational training to those who are not college-bound. However, the actions of some proprietary school owners have been at the core of program concerns given past findings. For example, some proprietary school operators have enriched themselves at the expense of economically disadvantaged students while providing little or no education in return. Faced with large debts and no new marketable skills, these students often defaulted on their loans. In fact, default rates for proprietary school students peaked at around 41 percent in 1990 at a time when the student loan default rate for all postsecondary students averaged about 22 percent.

Title IV established financial aid programs for students attending institutions of higher education and vocational schools and includes the Federal Family Educational Loan Program and the Federal Direct Student Loan Program. Both offer subsidized and unsubsidized Stafford loans and Parent Loans for Undergraduate Students. Title IV also established the Federal Pell Grant Program and the Federal Perkins Loan Program.

'At the time of our review, the Department of Education did not maintain data disaggregated by type of institution on federal payments for default claims.

In recent years, the Congress has enacted legislation to address the problems plaguing Title IV programs. The Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508) established a process for terminating institutions with unacceptably high default rates from participation in the federal loan program. The act set a default rate threshold of 35 percent for fiscal years 1991 and 1992, and 30 percent for fiscal year 1993. Under the act, institutions that meet or exceed the threshold for 3 consecutive years are ineligible to participate in the program. The Higher Education Amendments of 1992 (P.L. 102-325) further tightened eligibility requirements by lowering the threshold to 25 percent for subsequent fiscal years.

You requested that today we talk about several issues related to "gatekeeping"--the process of ensuring that only schools providing quality education and training access Title IV funds. First, we will provide a broad overview of the regulatory framework for Title IV programs, outlining the roles and responsibilities of the principal actors. Second, we will discuss some of our preliminary observations on proprietary schools from ongoing work for the Subcommittee, describing trends in some quantitative measures, such as default rates, and laying out the framework for (1) examining the legislative provision limiting Title IV participation to schools receiving at least 15 percent of their revenues from non-Title IV sources and (2) determining the extent to which Title IV funds pay to train students for jobs in no- or low-demand occupations.

The information we present today is based on a review of the legislative history of the 1992 amendments to HEA, discussions with Department of Education officials responsible for examining accrediting agencies, and discussions with six nationally recognized accrediting agencies that cover 95 percent of all proprietary schools that participate in Title IV programs. In addition, we developed trend information on proprietary school students and Title IV programs using data from the Department.

In summary, to address long-standing concerns, the Congress sought to strengthen Title IV oversight by amending HEA in 1992. Recent trend data show mixed results. Some signs of modest progress exist: The six accrediting agencies that cover 95 percent of proprietary schools participating in Title IV accredit from 3 to 26 percent fewer schools than in 1992; proprietary schools' share of Title IV funding has declined; and the default rate for proprietary school students has fallen 12 percentage points, from 36 percent in 1991 to 24 percent in 1993. These trends, however, do not abate concern about program quality. For example, while proprietary school students' default rates have been reduced, their rates remain substantially higher than those for their peers who attend nonprofit institutions--about 14 percent for students attending 2-year nonprofits and about 7 percent for those attending 4-year nonprofits. In addition, questions remain about (1) whether

proprietary schools that overwhelmingly rely on federal student aid for revenue should be allowed to continue participating in Title IV and (2) to what extent proprietary schools are training students for jobs that do not exist.

BACKGROUND

Vast sums of money funnel into America's higher education system each year through student financial aid programs authorized by Title IV of HEA, as amended. In 1995, about $35.2 billion in aid was made available to almost 7 million students to attend postsecondary institutions, with aid available projected to reach $40 billion in 1997.

In

As funding for Title IV programs has increased, so have losses to the federal government from honoring its guarantee on student loans. In 1968, the government paid $2 million to cover loan defaults; in 1987, default payments exceeded $1 billion; and by 1991, default claim payments reached a staggering $3.2 billion. 1992, GAO listed the student loan program as 1 of 17 high-risk federal program areas especially vulnerable to waste, fraud, abuse, and mismanagement. More specifically, we found, among other things, that (1) schools used the program as a source of easy income with little regard for students' educational prospects or the likelihood of their repaying loans and (2) management weaknesses plagued the Department that prevented it from keeping on top of these problems.' The proprietary school sector has been associated with some of the worst examples of program abuse.

In the United States, 5,235 proprietary schools represent about 50 percent of all postsecondary institutions. Most are small, enrolling fewer than 100 students, and offer occupational training of 2 years or less in fields ranging from interior design to computer programming. Proprietary schools enrolled more than 1 million students in fall 1993--about 10 percent of all undergraduates. Compared with nonprofit institutions, proprietary schools enroll higher percentages of women, minorities, and lowincome students. About 67 percent of proprietary school students receive federal student aid under Title IV.

While average default rates for all postsecondary institutions reached an all-time high of 22 percent in 1990, the default rate for proprietary schools exceeded 41 percent. This disparity has triggered numerous investigations. Congressional investigations, for example, discovered evidence of fraud and abuse by proprietary school owners. The Congress found that some proprietary schools focused their efforts on enrolling educationally disadvantaged students and obtaining federal funds rather than on providing meaningful training or education. The Congress also concluded that

'See Guaranteed Student Loans (GAO/HR-93-2, Dec. 1992).