The objectives of our inspection were to describe (1) the involvement of the Department in transactions among Education Management Corporation, Dream Center Education Holdings, LLC (Dream Center), Education Principle Foundation, and Studio Enterprise Manager, LLC, and the steps the Department took to protect students and taxpayers; (2) how the Department drew down and applied surety funds from letters of credit for Education Management Corporation and Dream Center and how the Department ensured that the surety funds were used in accordance with the terms of the provisional program participation agreements and any other requirements; and (3) how the Department ensured that Dream Center complied with requirements for drawing down and disbursing Title IV of the Higher Education Act of 1965, as amended, program funds (Title IV).
Although it identified significant financial risks associated with the purchase, the Department deviated from FSA’s financial analysis procedures, reduced the letter of credit amount, and issued temporary provisional program participation agreements to schools. It also approved temporary nonprofit status for two of the institutions retroactive to the date of the ownership change, even though it had not decided on whether the institutions satisfied all aspects of the regulatory definition of a nonprofit institution. Lastly, its oversight was not rigorous enough to ensure that Dream Center complied with requirements for drawing down and disbursing Federal student aid funds. In addition, we found the Principal Deputy Under Secretary signed agreements and authorizations that are operational activities delegated to and the responsibility of the Chief Operating Office for FSA.
We made five recommendations, including that (1) the Chief Operating Officer for FSA ensure that records of decisions regarding changes in ownership, changes in accreditation status, percentage of required letters of credit, or Title IV cash monitoring that deviates from the regulations or FSA policy are created and retained; (2) design and implement policies and procedures for reviewing and approving schools’ applications for conversions from for-profit to nonprofit status; and (3) ensure that FSA creates and retains records explaining its decisions to deviate from prescribed policy for letter of credit requirements and temporary provisional program participation agreement extensions during a change in ownership and records explaining how the interests of students and taxpayers are adequately protected.
Oversight and Monitoring—Student Financial Assistance Programs
See other OIG reports on Federal Student Aid.