AMERICAN EDUCATIONAL RESEARCH ASSOCIATION, INC. et al v. PUBLIC.RESOURCE.ORG, INC.

Filing 70

LARGE ADDITIONAL ATTACHMENT(S) Index of Consolidated Exhibits In Support of Public.Resource.Org's Motion for Summary Judgment and Opposition to Plaintiffs' Motion for Summary Judgment and Permanent Injunction by PUBLIC.RESOURCE.ORG, INC. #69 MOTION for Summary Judgment and Opposition to Plaintiffs' Motion for Summary Judgment and Permanent Injunction filed by PUBLIC.RESOURCE.ORG, INC.. (Attachments: #1 Exhibit 1, #2 Exhibit 2 [Sealed], #3 Exhibit 3 [Sealed], #4 Exhibit 4 [Sealed], #5 Exhibit 5 [Sealed], #6 Exhibit 6 [Sealed], #7 Exhibit 7, #8 Exhibit 8 [Sealed], #9 Exhibit 9, #10 Exhibit 10, #11 Exhibit 11 [Sealed], #12 Exhibit 12 [Sealed], #13 Exhibit 13 [Sealed], #14 Exhibit 14 [Sealed], #15 Exhibit 15 [Sealed], #16 Exhibit 17 [Sealed], #17 Exhibit 18 [Sealed], #18 Exhibit 19 [Sealed], #19 Exhibit 20 [Sealed], #20 Exhibit 21 [Sealed], #21 Exhibit 22 [Sealed], #22 Exhibit 23 [Sealed], #23 Exhibit 24 [Sealed], #24 Exhibit 25 [Sealed], #25 Exhibit 26 [Sealed], #26 Exhibit 27 [Sealed], #27 Exhibit 28 [Sealed], #28 Exhibit 29 [Sealed], #29 Exhibit 30 [Sealed], #30 Exhibit 31, #31 Exhibit 32 [Sealed], #32 Exhibit 33 [Sealed], #33 Exhibit 34 [Sealed], #34 Exhibit 35, #35 Exhibit 36, #36 Exhibit 37, #37 Exhibit 38 [Sealed], #38 Exhibit 39, #39 Exhibit 40, #40 Exhibit 41 [Sealed], #41 Exhibit 42 [Sealed], #42 Exhibit 43 [Sealed], #43 Exhibit 44, #44 Exhibit 45, #45 Exhibit 46, #46 Exhibit 47, #47 Exhibit 48, #48 Exhibit 49, #49 Exhibit 50 [Sealed], #50 Exhibit 51, #51 Exhibit 52, #52 Exhibit 53, #53 Exhibit 54, #54 Exhibit 55, #55 Exhibit 56, #56 Exhibit 57, #57 Exhibit 58, #58 Exhibit 59, #59 Exhibit 60, #60 Exhibit 61, #61 Exhibit 62, #62 Exhibit 63, #63 Exhibit 64 [Sealed], #64 Exhibit 65, #65 Exhibit 66, #66 Exhibit 67, #67 Exhibit 68, #68 Exhibit 69, #69 Exhibit 70, #70 Exhibit 71, #71 Exhibit 72, #72 Exhibit 73, #73 Exhibit 74)(Bridges, Andrew)

EXHIBIT 71

United States Government Accountability Office

GAO

Report to the Chairman, Subcommittee
on Higher Education, Lifelong Learning
and Competitiveness, Committee on
Education and Labor, House of
Representatives

August 2009

PROPRIETARY
SCHOOLS
Stronger Department
of Education
Oversight Needed to
Help Ensure Only
Eligible Students
Receive Federal
Student Aid

GAO-09-600

August 2009

PROPRIETARY SCHOOLS
Accountability Integrity Reliability

Highlights
Highlights of GAO-09-600, a report to the
Chairman, Subcommittee on Higher
Education, Lifelong Learning, and
Competitiveness, Committee on Education
and Labor, House of Representatives

Stronger Department of Education Oversight Needed
to Help Ensure Only Eligible Students Receive
Federal Student Aid

Why GAO Did This Study

What GAO Found

For-profit schools–also known as
proprietary schools–received over
$16 billion in federal loans, grants,
and campus-based aid under Title
IV of the Higher Education Act in
2007/08. GAO was asked to
determine (1) how the student loan
default profile of proprietary
schools compares with that of
other types of schools and (2) the
extent to which Education’s
policies and procedures for
monitoring student eligibility
requirements for federal aid at
proprietary schools protect
students and the investment of
Title IV funds. To address these
objectives, GAO analyzed data and
records from Education, examined
Education’s policies and
procedures, reviewed relevant
research studies, conducted site
visits and undercover
investigations at proprietary
schools, and interviewed officials
from Education, higher education
associations, and state oversight
agencies.

The Department of Education makes loans available to students to help them pay
for higher education at public, private non-profit, and proprietary schools, and the
students who attend proprietary schools are most likely to default on these loans,
according to analysis of recent student loan data. As shown in the graph below,
students from proprietary schools have higher default rates than students from
other schools at 2, 3, and 4 years into repayment. Academic researchers have
found that higher default rates at proprietary schools are linked to the
characteristics of the students who attend these schools. Specifically, students
who come from low income backgrounds and from families who lack higher
education are more likely to default on their loans, and data show that students
from proprietary schools are more likely to come from low income families and
have parents who do not hold a college degree. Borrowers who are not successful
in school and drop out also have high default rates. Ultimately, when student loan
defaults occur, both taxpayers and the government, which guarantees the loans,
are left with the costs.
Proprietary Schools Have Higher Default Rates than Public and Private Non-Profit Schools
Percentage of defaults
25
20
15

Public

10

Private non-profit
Proprietary

5
0

What GAO Recommends
GAO is making three
recommendations for Education to
strengthen its monitoring and
oversight of federal aid eligibility
requirements. Specifically, GAO
recommends Education (1)
improve its monitoring of basic
skills tests and target schools for
further review; (2) revise
regulations to strengthen controls
over basic skills tests; and (3)
provide information and guidance
on valid high school diplomas for
use in gaining access to federal
student aid. The Department of
Education noted the steps it would
take to address GAO’s
recommendations.

View GAO-09-600 or key components.
For more information, contact George A.
Scott at [phone] or [e-mail].

2-year
rate

3-year
rate

4-year
rate

Source: GAO analysis of Education's 2004 cohort data from the National Student Loan Data System.

Note: Education provided official 2-year default rates and modeled 3- and 4-year default rates, by
sector, using December 2007 student loan data.

Although students must meet certain eligibility requirements to demonstrate that
they have the ability to succeed in school before they receive federal loans,
weaknesses in Education’s oversight of these requirements place students and
federal funds at risk of potential fraud and abuse at proprietary schools. Students
are required to pass a test of basic math and English skills or have a high school
diploma or GED to qualify for federal student aid. Yet, GAO and others have
found violations of these requirements. For example, when GAO analysts posing
as prospective students took the basic skills test at a local proprietary school, the
independent test administrator gave out answers to some of the test questions. In
addition, the analysts’ test forms were tampered with–their actual answers were
crossed out and changed–to ensure the individuals passed the test. GAO also
identified cases in which officials at two proprietary schools helped prospective
students obtain invalid high school diplomas from diploma mills in order to gain
access to federal loans. GAO’s findings do not represent nor imply widespread
problems at all proprietary schools. However, GAO’s work has identified
significant vulnerabilities in Education’s oversight. Education’s inadequate
monitoring of basic skills tests and lack of guidance on valid high school diplomas
enables unqualified students to gain access to federal student aid. Unqualified
students are at greater risk of dropping out of school, incurring substantial debt,
and defaulting on federal loans.

United States Government Accountability Office

Contents

Letter

1
Background
Education’s Analysis Shows That Default Rates Are Higher at
Proprietary Schools than at Public and Private Non-Profit
Schools and Studies Link High Default Rates to Borrowers’
Characteristics
Weaknesses in Education’s Oversight of Federal Aid Eligibility
Requirements Place Students and Title IV Funds at Risk of
Potential Fraud and Abuse at Proprietary Schools
Conclusions
Recommendations for Executive Action
Agency Comments and Our Evaluation

22
28
29
30

Appendix I

Objectives, Scope, and Methodology

33

Appendix II

Comments from the Department of Education

37

Appendix III

GAO Contact and Staff Acknowledgments

39

Related GAO Products

3

13

40

Tables
Table 1: Age, Dependency Status, and Gender of Students at
Proprietary, Public, and Private Non-Profit Schools
Table 2: Family Income and Parental Education of Students at
Proprietary, Public, and Private Non-Profit Schools

20

Figure 1: School Sectors by Percentage of Enrollments in Different
Program Lengths for the 2007-2008 Academic Year
Figure 2: Race of Students by School Sector
Figure 3: ATB Test Process
Figure 4: Defaults Captured by the 2-year Cohort Default Rate

6
8
10
14

7

Figures

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GAO-09-600 Proprietary Schools

Figure 5: Proprietary Schools Have Higher Default Rates Than
Public and Private Non-Profit Schools
Figure 6: Among 4-year Schools, Proprietary Schools Have
Consistently Higher Default Rates Than Other Schools
Figure 7: Among 2-year Schools, Proprietary Schools Have Higher
Default Rates Than Other Schools
Figure 8: Among Less Than 2-year Schools, Private Non-profit and
Proprietary Schools Have Nearly Identical Default Rates

15
16
17
18

Abbreviations
ATB
CDR
FSA
GED
IPEDS
NCES
NPSAS
NSLDS
OIG

ability-to-benefit
cohort default rate
Office of Federal Student Aid
general equivalency diploma
Integrated Postsecondary Education Data System
National Center for Education Statistics
National Postsecondary Student Aid Study
National Student Loan Data System
Office of the Inspector General

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Page ii

GAO-09-600 Proprietary Schools

United States Government Accountability Office
Washington, DC 20548

August 17, 2009
The Honorable Rubén Hinojosa
Chairman
Subcommittee on Higher Education, Lifelong Learning
and Competitiveness
Committee on Education and Labor
House of Representatives
Dear Mr. Chairman:
Institutions of higher education, including public colleges, private nonprofit, and private for-profit schools, receive billions of dollars each year
from the Department of Education (Education) to help students pay for
school. In the 2007-2008 school year, private for-profit schools–also known
as proprietary schools–received over $16 billion in loans, grants, and
campus-based aid for disbursement to students under Title IV of the
Higher Education Act. Currently, there are over 2,000 proprietary schools
of higher education that participate in Title IV programs. Title IV funds for
the proprietary sector have increased 164 percent since the 2001-2002
school year, and grown at a substantially faster rate than Title IV funds for
the public and private non-profit sectors. 1 Moreover, institutions of higher
education, including proprietary schools, are poised to receive additional
Title IV funds under the American Recovery and Reinvestment Act of 2009.
In recent years, the scale and scope of proprietary schools have changed
considerably. Once comprised of local, sole proprietor ownership, the
nation’s proprietary institutions now range from small, privately-owned
schools to profitable publicly traded corporations such as the Apollo
Group, Corinthian Colleges, and Career Education Corporation.
Traditionally focused on certificate and associate programs ranging from
cosmetology to medical assistance and business administration,
proprietary institutions have expanded their offerings to include
bachelors, masters, and doctoral level programs. Both the certificate and
degree programs provide students with training for careers in a variety of
fields. Under current economic conditions, more students may attend
proprietary schools to acquire additional work skills and training to help

1

Title IV funding data beginning in the 2001-2002 school year are more accurate than data
from prior years.

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GAO-09-600 Proprietary Schools

them obtain jobs. Proprietary schools also provide course offerings
through online education, and many proprietary schools have open
admissions policies to accept any student who applies.
Students can only receive Title IV funds, provided in the form of grants,
loans, and campus-based aid, when they attend schools approved to
participate in the Title IV program. The schools must ensure that the
students receiving the funds meet certain eligibility requirements:
generally, students must have a high school diploma, or a general
equivalency diploma (GED), or demonstrate that they are ready for higher
education by passing an independently administered “ability to benefit”
(ATB) test of basic math and English skills or completing 6 credit hours
applicable toward a degree or certificate offered at an institution of higher
education. Students who receive loans under the Title IV program are
responsible for repaying the loans, and those who default increase the cost
of the Title IV program to the federal government and taxpayers.
Given your interest in learning more about proprietary schools, we
examined: (1) how the student loan default profile of proprietary schools
compares with that of other types of schools and (2) the extent to which
Education’s policies and procedures for monitoring eligibility
requirements for federal aid at proprietary schools protect students and
the investment of Title IV funds.
To determine how the student loan default profile of proprietary schools
compares with that of other types of schools, we analyzed Education data
on school default rates from the National Student Loan Data System
(NSLDS), reviewed studies on factors that contribute to student defaults,
and conducted interviews with officials from Education and higher
education associations. As part of our analysis of default rates at
proprietary schools, we also looked at information on student
characteristics and outcomes. We analyzed the most recent student survey
data available from the 2004 National Postsecondary Student Aid Study
(NPSAS), data on students during the 2007-2008 school year from the
Integrated Postsecondary Education Data System (IPEDS), and data on
student outcomes from a 6-year study following students beginning in the
1995-1996 school year conducted by the National Center for Education
Statistics (NCES). To assess the reliability of those data elements needed
for our study, we (1) performed electronic testing of required data
elements, (2) reviewed existing information about the data and the
systems that produced them and (3) interviewed agency officials
knowledgeable about the data. We determined that the data are
sufficiently reliable for the purposes of this report. To determine the

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GAO-09-600 Proprietary Schools

extent to which Education’s policies and procedures for monitoring
student eligibility requirements for federal aid at proprietary schools
protect students and the investment of Title IV funds, we reviewed
Education’s policies and procedures for monitoring the administration of
ability-to-benefit tests and for enforcing high school diploma requirements;
reviewed relevant program reviews, independent audits, relevant laws and
regulations, and enforcement actions taken against schools; and
interviewed officials from Education, state education licensing agencies,
and higher education associations. We also gathered information during
school site visits conducted in California, Illinois, New York, and Virginia.
We selected these sites for geographic diversity and a mixture of
ownership types (independently-owned and publicly-traded schools) and
degree and certificate programs. In addition, GAO anonymously tested
institution compliance with Title IV eligibility requirements and sent, on
two separate occasions, analysts posing as prospective students to take
and purposely fail ATB tests at a local proprietary institution. We
supplemented this work with a review of investigations conducted by
Education’s Office of Inspector General and the New York Department of
Education.
We conducted this performance audit from October 2007 to August 2009,
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives. For additional information on
the methodology used for this review, see appendix I.

Background
Title IV Programs

The Department of Education’s Office of Federal Student Aid (FSA)
manages and administers student financial assistance programs authorized
under Title IV of the Higher Education Act of 1965, as amended. 2 These
programs include, among others, the William D. Ford Federal Direct Loan
Program (Direct Loan program), the Federal Family Education Loan
Program (FFEL program), the Federal Pell Grant Program (Pell Grant

2

20 U.S.C. 1001 et seq.

Page 3

GAO-09-600 Proprietary Schools

program), and campus-based aid programs. 3 In the 2007-2008 school year,
Title IV programs provided more than $85 billion in student aid.
In 1990, we placed Education’s student financial aid programs on our high
risk list of programs at risk of fraud, waste, abuse, and mismanagement. At
the time, Education had various problems, including poor financial
management and fragmented and inefficient information systems. In 2005,
we removed these programs from the list due to improvements made to
Education’s financial management of federal student aid programs and
better integration of its information systems. However, we continue to
monitor Education’s administration and oversight of federal student aid
programs.

Types of Title IV Eligible
Institutions

The Higher Education Act provides that a variety of institutions of higher
education are eligible to participate in Title IV programs, including:
•

Public institutions–Institutions operated and funded by state or local
governments, which include state universities and community colleges.

•

Private non-profit institutions–Institutions owned and operated by nonprofit organizations whose net earnings do not benefit any shareholder or
individual. These institutions are eligible for tax deductible contributions
in accordance with the Internal Revenue code (26 U.S.C. § 501(c)(3)).

•

Proprietary institutions–Institutions that are privately-owned whose net
earnings can benefit a shareholder or individual; that is, for-profit
institutions.
These institutions can be further classified by their program lengths:

•

4-year and above–The program length for colleges and universities. Such
schools typically offer bachelor’s degrees and higher-level degrees. Some
4-year and above schools also offer associate’s degrees, which generally
take 2 years to complete.

3
The Federal Supplemental Educational Opportunity Grant (FSEOG), Federal Work-Study
(FWS), and Federal Perkins Loan programs are called campus-based programs and are
administered directly by the financial aid office at each participating school.

Page 4

GAO-09-600 Proprietary Schools

•

2-year–The program length for many community colleges and other
institutions offering associate’s degrees. These schools often also offer
certificate programs. 4

•

Less than 2-year–Includes schools, often referred to as “vocational and
technical schools,” that offer certificate programs, but typically do not
offer degrees.
Overall, the proprietary sector receives the smallest percentage of Title IV
funds–about 19 percent–compared with the public and private non-profit
sectors, which receive about 48 and 33 percent, respectively. 5 However,
the amount of Title IV funding going to the proprietary sector has risen
significantly in recent years and some of the schools receiving the most
Title IV funds are proprietary schools.
Four-year and above schools account for the majority of enrollments in
the public, private non-profit, and proprietary sectors. Two-year schools
account for a significant percentage of the enrollments in the public and
proprietary sectors, but only about 2 percent of enrollments in the private
non-profit sector. Less than 2-year schools account for 19 percent of the
enrollment in the proprietary sector, but are less than half of 1 percent of
the enrollments at both public and private non-profit sectors. Figure 1
shows school sectors by the percentage of enrollments in different
program length categories.

4

Education refers to these schools as “2-3 year schools.” Based on our analysis of the
schools included in the 2-3 year category, we refer to this school group as “2-year schools”
as most of them are schools with programs that are 2 years in length.

5

For the purposes of this report, we refer to public, private non-profit and proprietary
schools as separate sectors. The NCES uses the term “sector” differently and defines
school sector as a combination of school control, such as public, private non-profit, and
proprietary, and program length, such as 4-year and above, 2-year and less than 2-years.

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GAO-09-600 Proprietary Schools

Figure 1: School Sectors by Percentage of Enrollments in Different Program
Lengths for the 2007-2008 Academic Year
Percentage
0

0

2

19

100

80

48
24

60
98
40
57

52
20

y
Pr
op

rie

tar

t
rof
i
n-p
No

Pu

bli
c

0

Type of school
Less than 2-year
2-year
4-year and above
Source: GAO analysis of IPEDS data.

Under Title IV of the Higher Education Act, a school can receive student
aid if it offers courses of study such as certificate, associates, bachelor’s,
graduate, or professional degree programs. Vocational and technical
training, in which skills related to a specific trade, vocation or occupation
are taught, are generally offered at community colleges as well as
proprietary schools. Relative to the total number of schools in the Title IV
program that award degrees and certificates, the proprietary sector
awards a small percentage of bachelor’s degrees and above, but a
substantial percentage of certificates.

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GAO-09-600 Proprietary Schools

Characteristics of Students
Attending Proprietary
Schools

Students who attend proprietary schools generally have characteristics
that differ from students at public and private non-profit schools. First,
over half of the student population at proprietary schools is comprised of
“non-traditional” students, such as students who are 25 years old and
older. Second, more students at proprietary schools are financially
independent compared to students at public and private non-profit
schools. 6 Third, proprietary schools serve a higher percentage of women
than schools in other sectors. See table 1 for analysis of Education’s data
on age, dependency status, and gender of students in the three school
sectors.
Table 1: Age, Dependency Status, and Gender of Students at Proprietary, Public,
and Private Non-Profit Schools

School sector
Proprietary

Students age 25
and older
(percentage)

Financially
independent
students
(percentage)

Female students
(percentage)

56

76

63

Public

35

50

54

Private non-profit

38

39

56

Source: GAO analyses of 2007/2008 IPEDS and 2004 NPSAS datasets.

Lastly, proprietary schools have a higher percentage of minority students,
specifically African-American and Hispanic students, than public and
private non-profit schools. However, a higher percentage of AsianAmerican students attend both public and private non-profit schools than
proprietary schools. See figure 2 for analysis of Education’s data on
student race in the three school sectors.

6

The NCES at the Department of Education classifies all graduate students and
undergraduate students age 24 or older as independent. Students under the age of 24 can
also be classified as independent if they are married or have dependents, are veterans or
active military, or have been wards of the court.

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GAO-09-600 Proprietary Schools

Figure 2: Race of Students by School Sector
Percentage of students by race
1

1

7

6

1
4

13

100

11

19

90
80
13

70

American Indian/Alaska Native

12

Asian/Pacific Islander
26

60

Hispanic

50

66

African-American

70

40

White, non-Hispanic
50

30
20
10

y
tar
rie
Pr
op

P
no riva
n - p te
rof
it

Pu

bli
c

0

Source: GAO analysis of 2007/2008 IPEDS dataset.

Eligibility Criteria for
School Participation in the
Title IV Program

In order for students attending a school to receive Title IV funds, a school
must be:
(1) licensed or otherwise legally authorized to provide higher education in
the state in which it is located,
(2) accredited by an agency recognized for that purpose by the Secretary
of the U.S. Department of Education, and
(3) deemed eligible and certified to participate in federal student aid
programs by Education.
This is commonly referred to as the triad. Under the Higher Education Act,
Education does not determine the quality of higher education institutions
or their programs; rather, it relies on recognized accrediting agencies to do
so. As part of its role in the administration of federal student aid programs,
Education determines which institutions of higher education are eligible to
participate in Title IV programs. Education is responsible for overseeing
school compliance with Title IV laws and regulations and ensuring that
only eligible students receive federal student aid. As part of its compliance

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GAO-09-600 Proprietary Schools

monitoring, Education relies on department employees and independent
auditors of schools to conduct program reviews and audits of schools.

ATB Test

Generally, students without a high school diploma or GED can qualify for
Title IV loans, grants, and campus-based aid if they pass an independently
administered test of basic math and English skills, called an “ability-tobenefit” or ATB test. 7 The intent of the test is to measure whether students
have the basic skills needed to benefit from higher education and succeed
in school. The test must be approved by the Secretary of Education and
administered by an independent party. Students must pass the test prior to
enrolling in classes and receiving Title IV funds. Since the inception of
ATB test requirements, hundreds of thousands of non-high school
graduates have qualified for Title IV aid by taking these tests.
Under the ATB test program, Education is responsible for overseeing test
publishers, who, in turn, are responsible for certifying and monitoring test
administrators to ensure the independent and proper administration of
ATB tests. Test publishers are required to conduct and submit to
Education an analysis of test scores every 3 years to identify any test
irregularities that would suggest ATB tests are not administered in
accordance with test rules. Certified test administrators administer ATB
tests to prospective students at schools. Figure 3 describes the ATB test
process and how it is carried out.

7

While eligibility for federal student aid is based on a number of factors, such as financial
need and U.S. citizenship, for the purposes of our report we focus on whether a student has
a high school diploma, GED or recognized equivalent, or has passed an independently
administered ATB test.

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GAO-09-600 Proprietary Schools

Figure 3: ATB Test Process

Department of Education
Approves tests submitted by
test publishers for ATB use

Test publishers
Send test score
analysis to Education
every 3 years to
identify test score
irregularities
suggesting improper
test administration

Certify independent test
administrators; decertify
test administrators who
improperly administer tests

Independent test administrators (ITAs)
Send test answer sheets
to test publisher for
official scoring

Administer ATB test to
prospective students at
the school

Prospective students
Take ATB test
at school

School
Sources: GAO analysis; images, Art Explosion.

Default Rates Calculated
for Schools Participating in
Title IV Loan Programs

Education computes default rates for all schools with students who
receive Title IV loans through the FFEL Program or the Direct Loan
Program. Education calculates default rates each year by tracking whether
borrowers in a cohort–a group of students who begin repaying their loans
in a given fiscal year–at each school default on their federal student loans
over a 2-year period. The resulting calculation is called the cohort default
rate. For example, to calculate the 2-year default rate for the 2006 cohort,
Education divided (1) the number of borrowers who began their
repayment period in fiscal year 2006 and defaulted before the end of fiscal
year 2007 (the numerator) by (2) the number of borrowers who began
their repayment period in fiscal year 2006 (the denominator). The resulting
default rate is expressed as a percentage with a higher percentage
indicating more defaults. The majority of schools now have default rates
under 10 percent, which is a qualifying rate for favorable loan

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GAO-09-600 Proprietary Schools

disbursement and delivery terms. 8 These terms allow schools to disburse
loans in a single installment rather than in two or more installments.
Borrowers begin repayment after dropping below half-time enrollment,
graduating, or leaving their program. 9 Borrowers generally default when
they do not make any payments on their loan for 270 days (about 9
months) or more and they have not obtained a temporary cessation or
reduction of payments—referred to as a deferment or forbearance—for
reasons such as economic hardship, disability, or enrollment in another
school that is eligible to participate in the Title IV program. 10
Starting in January 1991, the Secretary of Education initiated proceedings
for immediate loss, suspension, or termination of schools’ eligibility to
participate in Title IV loan programs if their default rates were above
specified thresholds. From 1992, the first year from which Education data
were available on numbers of schools by sector subject to immediate loss,
suspension, or termination from the Title IV program due to high default
rates, until 1999, 1,846 schools, including 1,580 from the proprietary sector,
were subject to sanctions. More recently, from 2000 until 2008, four
schools were subject to immediate loss, suspension, or termination from
the Title IV program due to high default rates, including three from the
proprietary sector. According to an Education official, there are several
possible explanations for the drop in defaults and, subsequently, for the
drop in the number of schools subject to sanctions. For example, the
Education official noted that the Department’s efforts to provide schools
with default prevention training may have reduced default rates. In
addition, he pointed out that many proprietary schools with chronically
high default rates lost Title IV eligibility and subsequently went out of
business in the early 1990s.

8

As of fiscal year 2011, the qualifying rate for favorable loan disbursement and delivery
terms will change to 15 percent. Higher Education Opportunity Act, Pub. L. No. 110-315, §
427(a).
9

Prior to entering repayment, borrowers who drop below half-time enrollment, graduate, or
leave their program generally have a 6- to 12-month grace period.
10
This default definition applies to loans that require repayment on a monthly basis. Loans
that require repayment on a less frequent basis default when payments are not made for
330 days (about 11 months).

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GAO-09-600 Proprietary Schools

Consequences of Student
Loan Defaults

When students do not make payments on their federal loans and the loans
are in default, the federal government and taxpayers assume nearly all the
risk and are left with the costs. For example, in the FFEL program, the
federal government and taxpayers pick up 97 percent of the cost on
defaulted loans. In the Direct Loan program, the federal government and
taxpayers pick up 100 percent of the unpaid principle and accrued interest
on defaulted loans.
Though the federal government and taxpayers pick up the majority of the
costs on defaulted loans, students who default are also at risk of facing a
number of personal and financial burdens. For example, defaulted loans
will appear on the student’s credit record, which may make it more
difficult for them to obtain an auto loan, mortgage, or credit card. A
negative credit record could also harm the student’s ability to obtain a job
or rent an apartment. Students will also be ineligible for assistance under
most federal loan programs and may not receive any additional Title IV
federal student aid until the loan is repaid in full. Furthermore, the
Department of Education can refer defaulted student loan debts to the
Department of the Treasury to offset any federal and/or state income tax
refunds due to the borrower to repay the defaulted loan. In addition,
Education may require employers who employ individuals who have
defaulted on a student loan to deduct 15 percent of the borrower’s
disposable pay toward repayment of the debt. Garnishment may continue
until the entire balance of the outstanding loan is paid.

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GAO-09-600 Proprietary Schools

Education’s Analysis
Shows That Default
Rates Are Higher at
Proprietary Schools
than at Public and
Private Non-Profit
Schools and Studies
Link High Default
Rates to Borrowers’
Characteristics
Default Rates of
Borrowers from
Proprietary Schools Are
Higher than Those of
Borrowers from Other
Schools and Increase over
Time

Default rates measured 2 years after students begin repaying their loans
show that students from proprietary schools have higher default rates than
students from public and private non-profit schools. According to
Education’s calculations from the group, or cohort, of students who
entered repayment in fiscal year 2004, the proprietary sector’s 2-year
cohort default rate is 8.6 percent. 11 This rate is higher than the public and
private non-profit sectors, which have rates of 4.7 percent and 3 percent,
respectively. Although the proprietary sector’s rate is higher than other
sectors, it is still below the threshold cut-off rates—25 percent for 3 years
or 40 percent for 1 year—used by Education to disqualify schools from
Title IV eligibility. 12
While the cohort default rate is one of the means by which Education
monitors schools’ eligibility to participate in Title IV programs, the rate
captures only a small portion of all student loan defaults at schools. First,
any defaults that occur over the life of the loan after the 2-year period are

11

Fiscal year 2004 cohort data were the most recent data available that allowed us to make
comparisons of default rates at 2 years in 2006, 3 years in 2007, and 4 years in 2008. The 2year default rate was the official measurement used to track defaults until fiscal year 2009,
when the 3-year default rate became the official default measurement. Higher Education
Opportunity Act, Pub. L. No. 110-315, § 436(e).

12

In 2008, Congress increased the 3-year maximum default rate threshold from 25 percent
to 30 percent, which will take effect in 2011. Higher Education Opportunity Act, Pub. L. No.
110-315, § 436(a)(1).

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GAO-09-600 Proprietary Schools

excluded from schools’ cohort rate calculations. 13 Second, during the 2year period, borrowers are generally considered in repayment as long as
they have made a payment in the last 270 days, or about 9 months. Third,
borrowers who seek forbearances or deferments on their loans during that
2-year cohort period are also considered to be in repayment. 14 Figure 4
illustrates the 2-year cohort default rate.
Figure 4: Defaults Captured by the 2-year Cohort Default Rate

AR
CALEND
AR
CALEND
AR
CALEND
AR
CALEND
AR
CALEND

AR
CALEND
AR
CALEND

Repayments continue in subsequent years
until loan is paid off, which can take
15 years or more

2 year
repayment
period

Defaults
counted

Defaults
not
counted

Borrowers who do
not make payments
for 270 days (9
months) before
cohort period ends,
while not in
forbearance or
deferment

Cohort

Cohort
period
begins
Year

Cohort
period
ends

0

2

5

10

15

Sources: GAO analysis; images, Art Explosion.

While borrowers from all sectors are defaulting at higher rates after the 2year period, Education’s default rate calculations of borrower’s
repayments in the third and fourth years show that proprietary schools’

13

Based on recent changes made to the default measurement, any defaults that occur after a
3-year period will be excluded from a school’s cohort default rate calculation.

14

A previous GAO report about default rates (GAO/HEHS-99-135) noted these limitations in
its finding that Education’s cohort default rate calculations are understated because
borrowers who are in forbearance or deferment are considered to be in repayment even
though they are not making any loan payments. Furthermore, these borrowers are not
included in any subsequent cohorts after their period of forbearance or deferment is over.
GAO recommended that Congress consider amending the Higher Education Act to exclude
borrowers from schools’ cohort default rate calculations if the borrowers are in deferment
or forbearance. To date, Congress has not made this change.

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GAO-09-600 Proprietary Schools

default rates increase more than those of public and private non-profit
schools. For example, 4 years after borrowers entered repayment, 23.3
percent of proprietary school borrowers have defaulted, compared to 9.5
percent of borrowers from public schools and 6.5 percent of borrowers
from private non-profit schools, as shown in figure 5.
Figure 5: Proprietary Schools Have Higher Default Rates Than Public and Private
Non-Profit Schools
Percentage of defaults
25
23.3
22
20
17

16.7

15
12
9.5

10

8.6
7.2

7
5

4.7

6.5
4.7

3
2
0
2-year rate

3-year rate

4-year rate

Public
Private non-profit
Proprietary
Source: GAO analysis of 2004 cohort data from NSLDS, provided by the Department of Education of
2-year, 3-year, and 4-year default rates by sector.

Note: Education provided official 2-year default rates and modeled 3- and 4-year default rates, by
sector, using December 2007 student loan data.

Generally, higher default rates in the proprietary sector persist for
programs of different lengths. Among 4-year schools, the default rates at 2,
3, and 4 years into repayment are higher among proprietary schools than
other schools. Further, at 4-year schools, the default rate 4 years into
repayment for proprietary schools is more than twice the rate of public
and private non-profit schools. See figure 6.

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GAO-09-600 Proprietary Schools

Figure 6: Among 4-year Schools, Proprietary Schools Have Consistently Higher
Default Rates Than Other Schools
Percentage of defaults
20

19.2

18
16
13.7

14
12
10
8

7.3

7.1
6.2

6

5.3
4.5

4

3.5
2.8

2
0
2-year rate

3-year rate

4-year rate

4-year schools
Public
Non-profit
Proprietary
Source: GAO analysis of 2004 cohort data from NSLDS, provided by the Department of Education of
2-year, 3-year, and 4-year default rates by sector.

Note: Education provided official 2-year default rates and modeled 3- and 4-year default rates, by
sector, using December 2007 student loan data.

Similarly, among 2-year schools, proprietary schools have higher default
rates than other schools. For example, the default rate 4 years into
repayment for proprietary schools is the highest–27.2 percent–of the three
school sectors. See figure 7.

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GAO-09-600 Proprietary Schools

Figure 7: Among 2-year Schools, Proprietary Schools Have Higher Default Rates
Than Other Schools
Percentage of defaults
30
27.2
25

19.5

20

16.6 16.2
15

10

12.9

12.2

9.9
8.1

7.4

5

0
2-year rate

3-year rate

4-year rate

2-year schools
Public
Private non-profit
Proprietary
Source: GAO analysis of 2004 cohort data from NSLDS, provided by the Department of Education of
2-year, 3-year, and 4-year default rates by sector.

Note: Education provided official 2-year default rates and modeled 3- and 4-year default rates, by
sector, using December 2007 student loan data.

Among less than 2-year schools, proprietary schools have higher default
rates than public schools, but nearly identical rates to those of private nonprofit schools. 15 See figure 8.

15

According to 2004 cohort data of individual schools for which Education calculated a 3year cohort default rate, among programs less than 2 years in length, there were 556
proprietary schools, but only 86 public schools and 19 non-profit schools.

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GAO-09-600 Proprietary Schools

Figure 8: Among Less Than 2-year Schools, Private Non-profit and Proprietary
Schools Have Nearly Identical Default Rates
Percentage of defaults
30
26.7 26.6
25

21
18.7

18.5

17
14.1
12
9

8.9

9.7

8
5.7
4

0
2-year rate

3-year rate

4-year rate

Less than 2-year schools
Public
Private non-profit
Proprietary
Source: GAO analysis of 2004 cohort data from NSLDS, provided by the Department of Education of
2-year, 3-year, and 4-year default rates by sector.

Note: Education provided official 2-year default rates and modeled 3- and 4-year default rates, by
sector, using December 2007 student loan data.

Even though the proprietary sector generally has higher cohort default
rates than the public and private non-profit sectors, many individual
proprietary schools have lower rates than the sector as a whole. Using a
fiscal year 2004 dataset of 3-year cohort default rates for individual
schools, we found that some proprietary schools had among the lowest
default rates of all schools in the country. 16 Our results indicated that 121
proprietary schools, or about 9.3 percent of all proprietary schools for
which Education calculated cohort default rates, had rates under 5

16

Education’s fiscal year 2004 dataset was the only one available for individual schools that
measured default rates for longer than 2 years.

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GAO-09-600 Proprietary Schools

percent. 17 Furthermore, 18 of those schools had no students who defaulted
on their loans over the 3-year period. These proprietary schools with
relatively low default rates represent a variety of ownership types and
program offerings.

Various Student
Characteristics Contribute
to Higher Default Rates,
according to Research

Variations in default rates across school sectors may reflect the
characteristics of the students who attend the schools, according to
academic research studies. Although the research linking explanatory
factors to federal student loan defaults is limited, especially in recent
years, we found in 8 of the 11 studies that we reviewed that there are
multiple demographic characteristics of borrowers that correlate with
higher default rates. 18
In several of the studies, two borrower characteristics closely linked to
higher default rates are low family income and parents who lack a higher
education degree. Analysis of Education’s data shows that the annual
median family income of students at proprietary schools is significantly
lower than that of students at public and private non-profit schools. Data
analysis also show that a significantly lower percent of parents of
proprietary school students have an associate’s degree or higher,
compared to parents of public and private non-profit school students. See
table 2 for data on family income and parental education of students at
proprietary, public, and private non-profit schools.

17

Across all sectors, schools with cohort default rates of less than 5 percent qualify for the
most favorable loan disbursement and delivery terms. Such schools can disburse student
loans in a single payment at the start of the year for study-abroad students. Further,
schools that have a cohort default rate under 10 percent for the 3 most recent fiscal years
can disburse federal student loans at the start of the semester and in a single installment if
the period of enrollment does not exceed 1 term or 4 months. 20 U.S.C. §§ 1078-7(a)(3) and
(e).

18

The remaining three studies examined factors other than demographic characteristics
that may correlate with high default rates.

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GAO-09-600 Proprietary Schools

Table 2: Family Income and Parental Education of Students at Proprietary, Public,
and Private Non-Profit Schools
Annual median
family income

Parents with associate’s
degree or higher (percentage)

$24,300

37

Public

40,400

52

Private non-profit

49,200

61

School sector
Proprietary

Source: GAO analysis of 2004 NPSAS dataset.

Note: These numbers are estimates and include both dependent and independent students.

Student age was also linked to default rates in some of the research
studies, with borrowers who take out student loans at an older age being
more likely to default on their loans. One of the studies that linked age to
default rates suggested that older students may default at higher rates
because they tend to have other obligations besides paying for college.
These obligations may include paying a mortgage or paying for child care.
Our analysis of Education’s data shows that proprietary schools serve a
higher percentage of older students than public and private non-profit
schools and the majority of students at proprietary schools are 25 years
old and older.
Research also shows that borrowers’ success in school may help predict
whether they will default. We found studies published in national journals
that showed that borrowers who have a low grade point average and who
are not continuously enrolled in school before they leave their programs
are more likely to default. Across the three school sectors and program
lengths, a factor closely associated with increased default rates was dropout rates. In six different research studies—three that examined default
rates from national datasets and three that examined default rates from
state-specific datasets—default rates were positively correlated with drop
outs, or students who failed to complete their programs. A 6-year study by
Education’s NCES, which followed students who began higher education
in the 1995-1996 school year, found that a larger estimated percentage of
students at 4-year proprietary schools dropped out than students at private
non-profit schools. 19 The same study estimated no statistically significant
difference in drop-out rates between students at 4-year proprietary and

19
The study presented results for whether students attained a degree from or were still
enrolled at the first institution they attended. For the purposes of our study, we considered
those who had neither a degree nor where still enrolled as drop-outs.

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GAO-09-600 Proprietary Schools

public schools. In addition, the study estimated that 6 years after
beginning a 4-year school, a significantly smaller percentage of proprietary
students attained their bachelor’s degree compared to those at public and
private non-profit schools. In contrast, data show that for students who
first started at 2-year proprietary schools, there is a significantly higher
percentage who attained their associate’s degrees compared to students at
public schools. 20 While program completion was an important factor in
predicting default rates, we reviewed one study that found that completing
associate’s and bachelor’s degrees were significantly correlated with lower
default rates, but completing a certificate or license was not.
Characteristics of borrowers’ loans and their repayment options may help
predict default rates as well. For example, a factor in predicting defaults
can be the amount that borrowers take out in loans; those who borrow
smaller amounts, according to one study, may have a higher likelihood of
defaulting than those who borrow larger amounts. Researchers estimated
that borrowing larger amounts is correlated with higher levels of
education—such as graduate or professional programs—which give
borrowers an increased earning potential so that they are better able to
repay their loans. In another study that examined characteristics of
borrowers’ loans and repayment options, researchers estimated that those
who graduated with a bachelor’s degree and used the forbearance or
deferment options after entering repayment were more than twice as likely
to default. Finally, borrowers who had consolidated loans and incomecontingent repayment plans were also more likely to default than those
who had not used those options. 21

20

There is no significant difference in associate’s degree attainment between students at
proprietary schools and students at private non-profit schools.

21

Income-contingent repayment plans are based on a borrower’s income, family size, and
loan amount. Consolidated loans are those that are generally based on the weighted
average of the interest rates on the loans being consolidated.

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GAO-09-600 Proprietary Schools

Weaknesses in
Education’s Oversight
of Federal Aid
Eligibility
Requirements Place
Students and Title IV
Funds at Risk of
Potential Fraud and
Abuse at Proprietary
Schools
Education’s Weak
Oversight of ATB Test
Requirements Allows
Ineligible Students to
Receive Federal Aid

Through separate investigations at proprietary schools, we, along with
other federal and state investigative agencies, found test administrators or
school officials violating rules to ensure prospective students without high
school diplomas passed required tests and obtained access to Title IV aid.
Generally, prospective students without high school diplomas or GEDs
must pass ATB tests to become eligible to receive federal financial aid, and
test administrators are responsible for administering ATB tests at schools
in accordance with test publisher rules. When we conducted our own
investigation of compliance with ATB requirements, we found improper
activities that compromised the integrity of the test process. For example,
in 2008 we sent two GAO analysts who posed as prospective students to a
local branch of a publicly traded proprietary school to deliberately flunk
an ATB test. Each analyst was sent separately to the school and on both
occasions, the independent test administrator gave them and all the test
takers in the room–about 20 in total–answers to some of the test
questions. We later obtained copies of the analysts’ test forms and found
that they had been tampered with–their actual answers had been crossed
out and changed–to ensure the analysts passed and would become eligible
to receive Title IV funds. We turned over the information on testing
violations to Education’s Office of Inspector General (OIG), which then
used the information to further investigate the ATB tests at this school.
Investigators at the OIG and the New York Department of Education have
previously reported finding similar problems. For example, in one case the

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GAO-09-600 Proprietary Schools

OIG found personnel at a proprietary school in Louisiana had changed the
failing test scores of prospective students to allow 80 individuals to pass
and inappropriately qualify for federal funding. 22 Likewise, in two separate
New York investigations in which multiple undercover operatives were
sent to flunk ATB tests at local proprietary schools, test answers were
changed by either the test administrator or school officials to ensure all
people posing as students passed and gained access to federal aid. 23 In
addition to giving out test answers and falsifying test results, test
administrators and officials at proprietary schools have violated other ATB
test rules, impairing the independence of the testing process and allowing
ineligible students to access federal financial aid. Regulations governing
the test process require test administrators, who are certified by test
publishers to administer ATB tests, to be independent of the school at
which tests are taken and to submit test answer sheets directly to the test
publisher for scoring. However, Education’s Office of Inspector General
previously found violations of the requirement for independent test
administration, in which proprietary school officials inappropriately
administered tests. In another case involving improper testing at a
proprietary school, the Education OIG found that test administrators failed
to follow test rules that govern when students can retake the test on the
same form. As a result, 724 students who passed improper retests received
over $3 million in federal financial aid. 24 While OIG officials told us that
some of their cases have involved public schools, they reported that most
of their findings regarding abuse of ATB tests have involved proprietary
schools. When ATB tests are not properly administered, a prospective
student’s ability to benefit from higher education may not be accurately
assessed. As a result, prospective students who are academically
unqualified are more likely to be admitted to a school and receive federal
student aid. Such students are at greater risk of dropping out of school,
incurring substantial debt, and defaulting on their federal student loans.
These problems result, in part, from key weaknesses in Education’s
oversight of ATB testing, which were previously identified in a 2002

22

Investigation of Moler Beauty College (Department of Education OIG Investigative
Reports: Apr. 12, 2006).
23

Interboro Institute, Admission Requirements Review (New York State Education
Department: Oct. 5, 2005); Investigative Report: CaliberTraining Institute (New York
State Education Department: Apr. 10, 2007).

24

Audit of Wonderlic’s Ability to Benefit (ATB) Program (Department of Education OIG
Audit Control Number ED-OIG/03-B0022: February 2002).

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GAO-09-600 Proprietary Schools

Education Office of Inspector General report. 25 As part of its report, the
OIG recommended changes to strengthen Education’s monitoring of test
publishers. Education approves the tests for ATB use and test publishers
monitor how tests are administered. However, Education has done little
since then to strengthen its oversight of test publishers. Although test
publishers are required to conduct and submit to Education test score
analyses every 3 years to help identify test score irregularities, Education
has not followed up with test publishers to ensure that all comply with
these requirements. For example, as of early 2009, one of the four
approved test publishers had yet to submit test score analyses due in April
2005 and in April 2008 for two of its approved tests. Further, the same test
publisher had failed to submit test score analysis also due in April 2008 for
another of its approved tests. Similarly, two of the four test publishers
failed to submit test score analyses due to Education in January 2008.
Education officials told us the employee responsible for test publisher
oversight and review of test submissions retired in 2008. Since that time
and until March 2009, no one at Education had followed up to obtain
unsubmitted test score analyses, increasing the risk of unidentified test
violations and fraudulent access to federal student aid. In response to our
review, Education followed up with test publishers in the spring of 2009 to
obtain missing test score submissions. In addition to ensuring the
timeliness of submissions, Education should also ensure that the analyses
conducted by test publishers are sufficient to identify improper testing.
When we spoke with OIG and Education officials, they told us that one
test publisher provides thorough analyses that have led to the
identification of possible violations; however, other test publishers
provide only cursory analyses of test scores. According to the Standards
for Internal Controls in the Federal Government, federal agencies need to
have systems in place that ensure timely, effective, and efficient oversight
of government programs and continually monitor programs to address
potential risks. 26 Weaknesses in Education’s systems of controls for
monitoring test publishers may not adequately guard against fraud and
abuse in the ATB test program.

25

Audit of FSA’s Controls Over ED-Approved ATB Programs (Department of Education
OIG Audit Report ED-OIG/A03-B0001: Aug. 22, 2002).
26

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1
(Washington, D.C.: November 1999). Internal control standards and the definition of
internal control in Circular No. A-123 are based on the aforementioned GAO standards.

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GAO-09-600 Proprietary Schools

In addition to problems with Education’s monitoring of test publishers,
Education regulations do not allow for timely identification of improper
test administration. Education’s regulations only require test publishers to
conduct test score analyses every 3 years. Consequently, test
administrators who improperly administer tests can go undetected for 3
years before violations are discovered, resulting in an increased risk of
fraud and abuse. As part of the internal control standards for federal
agencies, the evaluation of a program should depend on the risks
associated with the program and should ensure that timely information is
available to allow for effective monitoring. 27 Given the risks of potential
fraud and abuse associated with the ATB test program, the analysis of test
scores every 3 years may leave the program vulnerable to violations.
Education and test publisher officials we spoke with suggested that more
frequent analyses of test scores by test publishers could improve the
integrity of the testing process.
Education’s regulations also do not specifically require test publishers to
follow up on test score irregularities or report any corrective actions to
Education. While test publishers are required to identify test score
irregularities that raise suggestions that tests are not being properly
administered, there is no requirement that test publishers further
investigate irregularities to determine if actual violations occurred. In
addition, regulations require that test publishers decertify test
administrators who fail to properly administer tests; however, Education
regulations do not require test publishers to report to Education on the
implementation of their decertification process. Because test publishers
are not required to provide Education with the results of their
decertification activities, Education cannot be assured that test
administrators found in violation of test rules are decertified. Likewise,
without further requirements in regulation for test publishers to provide
information on test administrators, Education has no way to determine
whether test administrators decertified by one publisher are instead
administering tests for other publishers, and therefore cannot protect
against the risk of future violations.

27

GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington,
D.C.: August 2001).

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GAO-09-600 Proprietary Schools

Education’s Weak
Oversight of High School
Diploma Requirements
Does Not Adequately
Protect against the Use of
Diploma Mills to Obtain
Federal Aid

During our review, we identified cases in which proprietary schools
helped students obtain high school diplomas from diploma mills–entities
that provide invalid diplomas, usually for a fee and little academic work–in
order to obtain access to federal student loans. Through one of our site
visits and interviews with students and student interest groups, we learned
of cases where recruiters at two separate publicly traded proprietary
schools referred students to diploma mills for invalid high school diplomas
in order to gain access to federal loans without having to take an ATB test.
In one case, a student interest group told us a student who dropped out of
high school in the 9th grade was guided by the proprietary school to take
an online test to receive a high school diploma. Based on our discussion
with a state education agency, we confirmed that the entity that provided
the diploma was a diploma mill. In another case, a student told us he was
flunking out of high school when a recruiter at the proprietary school
directed him to a place where he could pay a fee to take a test and obtain a
high school diploma. Based on our review of that county’s listing of high
schools considered diploma mills, we later determined that the entity
offering the high school diploma was a diploma mill. Although Education
has also identified some cases of high school diploma mills–including one
in which a proprietary school had arrangements with a diploma mill to
secure high school diplomas for 30 students who obtained $76,000 in
federal financial aid–Education regional officials told us that the problem
may be more widespread than is known.
Despite evidence of invalid high school diplomas being used to gain access
to federal student loans, Education has not established clearly written
policies to help ensure high school diploma requirements are met for Title
IV funding. Although senior Education officials told us that the
department’s official policy is that high school diplomas from diploma
mills are not acceptable for Title IV eligibility and the department
prosecutes diploma mill cases, Education officials told us they do not
explicitly assert this policy in any written form. Rather, Education notes in
its Federal Student Aid Handbook that a high school diploma is one that
comes from a school recognized by the state in which the school is
located. Internal control standards provide that federal agencies should
employ effective ways to record and communicate important information
to employees and others, such as in policy manuals, to enable them to
carry out their duties and responsibilities. 28 Without a written policy that

28

GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington,
D.C.: August 2001).

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GAO-09-600 Proprietary Schools

clearly communicates Education’s position against the use of diploma
mills to obtain access to federal student aid, Education staff and external
parties such as schools and independent auditors–who must comply or
monitor compliance with Title IV rules–lack important information
regarding eligibility requirements. Education officials have acknowledged
that the use of high school diplomas from diploma mills to obtain access
to federal student aid is a problem and that more guidance would be
helpful. In May 2009, Education announced plans to convene public
forums to help inform the development of proposed regulations that
would address matters related to Title IV program integrity, including the
definition of a high school diploma as a condition of receiving federal
student aid.
In addition to weaknesses in its policies governing high school diploma
requirements, Education provides limited guidance and tools that
Education program review staff, schools, and independent auditors can
use to help identify high school diploma mills. Though Education, in its
Federal Student Aid Handbook, advises officials to contact state education
agencies if they question the validity of a high school diploma, Education
officials told us that program review staff have no other guidance to help
them judge whether there is a potential problem. Further, they
acknowledged that in many cases, the identification of an invalid high
school diploma is based on the experience of the program review staff and
whether something appears to be wrong. For example, when a reviewer
finds an unusually large number of students with high school diplomas
coming from the same school located outside the state, this may prompt
the reviewer to look into the origin of the diplomas further. As we noted
earlier, standards for internal controls in the federal government require
federal agencies to communicate relevant and reliable information to help
agency staff and external stakeholders carry out their responsibilities.
Education provides limited information and resources that would help
internal and external reviewers and schools better monitor compliance
with high school diploma requirements. Education officials told us that a
comprehensive list of recognized high schools could help Education staff
and schools better identify diplomas from diploma mills. Several states
already provide lists of the high schools they recognize and make them
available to the public on their Web sites. However, Education provides
little information on these already available resources that could help
officials identify invalid high school diplomas. In contrast, Education
already maintains information and resources on its Web site to help

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GAO-09-600 Proprietary Schools

individuals identify and avoid higher education diploma mills by listing
colleges and universities that are eligible to participate in federal student
aid programs. 29 Education’s limited guidance to help both internal and
external parties detect the use of high school diploma mills for Title IV
eligibility may hinder its efforts to ensure that students receiving federal
financial aid have the ability to succeed in higher education.

Conclusions

Proprietary schools have become a rapidly growing sector of higher
education in this country and will likely continue to grow with the
availability of additional federal funding and an increased demand for
education and job training. Many of these schools play an important role in
providing a range of students, including non-traditional and disadvantaged
students, with an opportunity to obtain the education they need to
increase their work skills and find jobs. However, students who attend
proprietary schools are more likely to default on their federal student
loans, which can tarnish their credit records, make it difficult for them to
obtain employment, and jeopardize their long-term financial well-being.
Students from lower-income backgrounds can be particularly hurt when
they default on their loans. In addition, taxpayers and the government,
which guarantees the loans, are left with the cost when students default on
their school loans.
To decrease the likelihood that students will default on their loans, it is
critical that Education increase its oversight of federal student aid
eligibility requirements to make sure that only students who have the
ability to benefit receive federal funds to attend college. While our findings
do not represent nor should they be interpreted as implying widespread
problems at all proprietary schools, our work has identified significant
vulnerabilities in Education’s oversight that should be addressed. Without
better oversight of the ATB testing process to ensure more frequent
identification of improper testing, and stronger processes for handling and
reporting improper testing, both the integrity of the testing process and the
qualifications of students who receive federal funding cannot be assured.
In addition, without stronger controls, such as clear guidance from
Education banning the use of high school diploma mills to obtain federal

29
The Higher Education Opportunity Act, which reauthorized and amended the Higher
Education Act, provides that the Secretary shall maintain information and resources on the
department’s Web site to assist students, families, and employers in understanding what a
college diploma mill is and how to identify and avoid such diploma mills Pub. L. No. 110315, § 109.

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GAO-09-600 Proprietary Schools

aid and information on how to identify diploma mills, the government
cannot be assured that its student aid funds are only provided to students
who have an ability to benefit from higher education. Unqualified students
who receive federal financial aid for higher education programs are at
greater risk of dropping out of school, incurring substantial debt, and
defaulting on federal loans. Targeted improvements in these areas would
help provide greater assurance that the federal investment in higher
education and students are adequately protected.

Recommendations for
Executive Action

In order to help ensure the eligibility of Title IV recipients, the Secretary of
Education should strengthen the department’s process for monitoring the
ATB program. Education should:
•

Conduct regular follow-up of ATB test analyses submissions to ensure
federally approved test publishers provide complete submissions as
required; and

•

Use data provided by test publishers on schools where test
administrators improperly administered tests and were later
decertified to target schools for further review.

In order to help ensure that only eligible students receive Title IV funds,
the Secretary of Education should revise regulations to strengthen
controls over the ATB testing process. For example, under its authority to
regulate the administration of tests, Education could consider:
•

Requiring test publishers to conduct an interim or mid-point analysis–a
supplement to the 3-year test score analysis and submission
requirement–to provide a preliminary review of potential testing
problems, and submit a copy of their results to the Secretary; or

•

Requiring test publishers to have a process to follow-up on identified
test score irregularities, take action to decertify test administrators if
test irregularities suggest improper test administration, report actions
taken as a result of test score analyses to the Secretary and prohibit
test publishers from using ATB test administrators who have been
decertified by any test publisher.

In order to protect against the use of high school diplomas from diploma
mills to obtain Title IV eligibility and help ensure that only students with

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the ability to benefit from higher education receive federal aid, the
Secretary of Education should:
•

•

Agency Comments
and Our Evaluation

Create guidance, using information gathered from public hearings or other
forums regarding the definition of a high school diploma, to clearly
communicate to Education staff, schools, and independent auditors the
department’s position that diplomas from high school diploma mills
cannot be used for Title IV eligibility purposes. For example, Education
could provide this guidance through regulation or the Federal Student Aid
Handbook; and
Establish a cost-effective and readily available source of information that
the department’s program review staff, schools, and independent auditors
can use to help them determine whether a high school diploma is from a
diploma mill. For example, Education could obtain existing lists of stateapproved high schools and make them available on the department’s
student financial aid Web site.
We provided a draft of this report to the Department of Education for
review and comment. The agency provided written comments, which are
reproduced in appendix II. In its comments, Education noted the steps it
will take to address our recommendations:
In response to our recommendation that Education strengthen its
oversight process for monitoring the ATB program, Education commented
that it is changing its procedures for monitoring ATB test publishers to
ensure that required reports and analyses are submitted in a timely
manner, and program compliance staff are provided the information.
In response to our recommendation that Education strengthen regulations
that govern the ATB test process, Education commented that it is
considering the management of the ATB testing process as a topic to
include in the new round of upcoming negotiated rulemaking sessions.
In response to our recommendation that Education provide guidance and
establish a cost-effective and readily available source of information to
protect against the use of diplomas from high school diploma mills,
Education provided the following comments. With regard to providing
guidance, Education noted that it is considering revising the regulations
regarding high school diplomas through the upcoming negotiated
rulemaking process. Education noted that final regulations would become
effective no sooner than July 1, 2011, as provided under the Higher
Education Act of 1965, as amended. In the interim, Education will provide

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additional guidance in the next revision of the Federal Student Aid
Handbook. However, in regards to providing a source of information to
help protect against the use of diplomas from high school diploma mills,
Education commented that there is no centralized source for information
about all high schools and no specific statutory authority for Education to
create and maintain one, making it unlikely that it will be able to establish
a readily available source of such information. Further, Education stated
that it can only expend appropriated funds for authorized purposes, and
this use is not authorized under the Department of Education Organization
Act or other federal education laws. We acknowledge that there is no
centralized source for information about all high schools and we do not
recommend that Education investigate the status of all high schools.
Rather, we recommend that Education collect readily available
information, such as already existing lists of state-approved high schools,
and make them available on its student financial aid website. Under the
Higher Education Act, as amended, Education is responsible for
administering and overseeing the Title IV student aid programs, including
the eligibility requirements for obtaining Title IV funds. Education's
oversight includes the responsibility to protect against the improper use of
Title IV funds. Given that publishing information on state-recognized high
school diplomas on its Web site will assist Education in carrying out its
oversight responsibilities, in our view, Education's appropriations are
available to fund this effort.

As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
report date. At that time, we will send copies to the Secretary of
Education and interested congressional committees. The report will also
be available at no charge on the GAO Web site at www.gao.gov.

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GAO-09-600 Proprietary Schools

If you or your staff have any questions about this report, please contact me
at [phone] or [e-mail]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who made major contributions to this report are
listed in appendix III.
Sincerely yours,

George A. Scott, Director
Education, Workforce, and Income Security Issues

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Appendix I: Objectives, Scope, and
Methodology

Appendix I: Objectives, Scope, and
Methodology
This appendix discusses in detail our methodology for addressing two
research questions: (1) How does the student loan default profile of
proprietary schools compare with that of other types of schools? and (2)
To what extent do Education’s policies and procedures for monitoring
student eligibility requirements for federal aid at proprietary schools
protect students and the investment of Title IV funds? To address these
questions, we analyzed data and records obtained from Education;
reviewed federal laws, regulations, agency policies, and relevant research
studies and investigations; conducted interviews with Education officials
and with other representatives of the higher education community; and
conducted site visits and undercover visits to schools. We conducted our
work from October 2007 through August 2009 in accordance with
generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions
based on our audit objectives. We believe that the evidence obtained
provides a reasonable basis for our findings and recommendations based
on our audit objectives.

Analysis of Education
Data

To determine how proprietary schools compare to public and private nonprofit schools in regard to federal student loan default profiles, we
analyzed fiscal year 2004 cohort default rate data that Education
calculated from the National Student Loan Data System (NSLDS). NSLDS
includes data from schools, agencies that guaranty loans, the Direct Loan
program, and other Education programs. We used fiscal year 2004 cohort
default rate data to analyze default rates 2, 3, and 4 years after students
entered repayment. These data were drawn from NSLDS in December
2007. From the dataset of 3-year cohort default rates for individual
schools, we conducted our own analysis to calculate the numbers of
proprietary schools that had default rates of 0 and under 5 percent. We
chose 5 percent because it is a qualifying rate for the most favorable loan
disbursement and delivery terms in all school sectors. In addition, we used
Education calculations of Title IV funding for the various sectors over time
from NSLDS for background information. We began our data analysis of
Title IV funding in the 2001/02 award year after learning from a data
specialist at Education that data prior to 2001/02 are considered less
accurate because the Department used different methodologies to identify
and calculate Title IV funding data. To ensure that the Title IV funding and
cohort default rates from NSLDS were accurate for us to report
Education’s data and for us to conduct our own analysis, we reviewed
information about the data itself and the NSLDS system and interviewed
an Education official knowledgeable about the data and the system.

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Appendix I: Objectives, Scope, and
Methodology

Additionally, we reviewed the analyses that Education performed and
determined that the data were accurate and reliable for our purposes.
As part of our analysis of student default rates, we examined data on
student demographics and outcomes. To identify information on
borrowers’ dependency status and their parents’ education and income
levels, we analyzed the most recent student survey data available from the
2004 National Postsecondary Student Aid Study (NPSAS). NPSAS is a
nationally representative sample of students in postsecondary education
institutions, including undergraduate and graduate students from all types
of institutions. To provide information on borrowers’ age, gender,
enrollment, and racial status, we analyzed the most recent data available
on schools during the 2007/08 school year from the Integrated
Postsecondary Education Database System (IPEDS). IPEDS contains data
on postsecondary institutions such as student demographics, enrollments,
and finances. Finally, to provide information on student outcomes,
specifically degree attainment and drop-out rates, we used data from the
Descriptive Summary of 1995-96 Beginning Postsecondary Students:
Six Years Later study, conducted by the National Center for Education
Statistics (NCES). The NCES study provides information on enrollment,
persistence, and attainment of students from the time they began higher
education for the first time in academic year 1995-1996 until the 2000-2001
academic year. We tested results from this study for statistical significance
and reported on our findings. The 1995/96 study was the most recent that
included data on bachelor’s degree attainment 6 years from the time that
students started school. NCES’s study of its most recent cohort—those
who began their postsecondary education in 2003/04—is now in progress;
therefore, 6-year results are not yet available.
We assessed the reliability of the datasets we used from NPSAS, IPEDS,
and NCES for our study by: (1) performing electronic testing of required
data elements, (2) reviewing existing information about the data and the
system that produced them, and (3) conducting interviews with a data
specialist from Education. Based on these assessments, we determined
that data were sufficiently reliable for the purposes of reporting.

Analysis of Education
Policies and Records

To determine the extent to which Education’s policies and procedures for
monitoring student eligibility requirements for federal aid at proprietary
schools protect students and the investment of Title IV funds, we reviewed
Education’s policies and procedures for monitoring the administration of
ability-to-benefit (ATB) tests and high school diploma requirements. We
also reviewed relevant program reviews and independent audits of schools

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Appendix I: Objectives, Scope, and
Methodology

found to be in violation of ATB test administration procedures, relevant
laws and regulations, and enforcement actions taken against schools. To
assess the number of schools subjected to sanctions due to their high
cohort default rates, we also examined Education’s records from 1992
through the present. We selected 1992 as it was the first year from which
Education data were available on numbers of schools by sector that were
subject to immediate loss, suspension, or termination from the Title IV
program.

Research Studies

To understand the different factors that are linked to high default rates, we
reviewed 11 academic studies about student defaults. Our criteria for
selecting studies were those that were original research, peer-reviewed, or
performed with a strong methodology and focused on explanatory factors
for default rates. The studies we used were published from 1994 through
2008. For each of the selected studies that are used in this report, we
determined whether the studies’ findings were generally reliable. We
evaluated the methodological soundness of each study and only reported
on those results deemed statistically significant.

Department of
Education and Expert
Interviews

To examine Education’s oversight of proprietary schools, we interviewed
officials from Education, 10 state education licensing agencies, ATB test
publishers, and education associations. At Education, we spoke with
officials in Federal Student Aid, field offices, the General Counsel’s office,
the Office of Inspector General, and the Office of Postsecondary
Education. The ATB publishers we spoke with were Wonderlic Inc., ACT,
and College Board. We interviewed experts from a broad range of higher
education associations and interest groups including the American
Association of Community Colleges, the Career College Association, the
American Association of Collegiate Registrars and Admissions Officers,
the “I Have a Dream” Foundation, the National Association for Collegiate
Admission Counseling, the National Association of Student Financial Aid
Administrators, and the National Consumer Law Center.

Site Visits

To understand schools’ administrative, admissions, and financial aid
practices as they relate to Education’s policies and procedures for
monitoring Title IV funds, we conducted site visits at proprietary schools
in California, Illinois, New York, and Virginia. We selected these sites for
geographic diversity and chose schools that represented a mixture of
ownership types (independently-owned and publicly-traded schools), and
degree and certificate programs. We also conducted site visits at

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Appendix I: Objectives, Scope, and
Methodology

community colleges in Maryland and Illinois to provide us with a
perspective of comparable programs in the public sector. We selected
these schools based on geographic diversity and their breadth of both
certificate and degree programs. During all site visits, we interviewed
administrators, faculty, staff, and students to learn about topics including
admissions practices, financial aid disbursement, and program offerings.

Undercover Visits

To examine the extent to which Education’s policies and procedures for
monitoring student eligibility requirements for federal aid at proprietary
schools protect students and the investment of Title IV funds, we tested
compliance with ATB tests. To do so, GAO analysts, acting in an
undercover capacity, posed as prospective students on two separate
occasions to take and purposely fail ATB tests at a local proprietary
school. We chose this proprietary school chain based on geographic
proximity. We supplemented this work with a review of investigations
conducted by Education’s Office of Inspector General and the New York
Department of Education.

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GAO-09-600 Proprietary Schools

Appendix II: Comments from the Department
of Education

Appendix II: Comments from the Department
of Education

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GAO-09-600 Proprietary Schools

Appendix II: Comments from the Department
of Education

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GAO-09-600 Proprietary Schools

Appendix III: GAO Contact and Staff
Acknowledgments

Appendix III: GAO Contact and Staff
Acknowledgments
GAO Contact

George A. Scott [phone] or [e-mail]

Staff
Acknowledgments

In addition to the contact name above, the following staff members made
important contributions to this report: Melissa Emrey-Arras, Assistant
Director; Kathy Peyman and Claudine Pauselli, Co-Analysts-in-Charge;
Karen Febey; Jessica Mace; and Lauren Mohlie. Also, Jean McSween, John
Mingus, and George Quinn provided guidance on the study’s design and
data analysis; Jessica Botsford provided legal advice; Mimi Nguyen and
Cheron Brooks assisted with report graphics; and Ashley McCall provided
library services. In addition, Paul Desaulniers, Kim Perteet, and Ashanta
Williams made contributions to the report. Susan Aschoff and Charlie
Willson advised the team on writing the report and Nagla El-Hodiri, Carla
Craddock and Michelle St. Pierre verified our findings.

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GAO-09-600 Proprietary Schools

Related GAO Products

Related GAO Products

Student Loans: Default Rates Need to Be Computed More Appropriately.
HEHS-99-135. Washington, D.C.: July 28, 1999.
Proprietary Schools: Analysis of Comments Received from an
Association of Schools. HEHS-98-12R. Washington, D.C.: October 1997.
Proprietary Schools: Poorer Student Outcomes at Schools That Rely More
on Federal Student Aid. HEHS-97-103. Washington, D.C.: June 1997.
Proprietary Schools: Millions Spent to Train Students for Oversupplied
Occupations. HEHS-97-104. Washington, D.C.: June 1997.
School Accreditation: Activities of Seven Agencies That Accredit
Proprietary Schools. HRD-90-179BR. Washington, D.C.: September 1990.
Many Proprietary Schools Do Not Comply With Department of
Education’s Pell Grant. HRD-84-17. Washington, D.C.: August 1984.

(130811)

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GAO-09-600 Proprietary Schools

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