Schools, lenders, and guaranty agencies  often employ third-party servicers to perform functions related to the  administration of the FFEL program. In  addition, Education contracts with a servicer (DL servicer) to administer  certain aspects of the DL program, such as payment processing. Borrowers who may have been eligible to obtain new FFEL loans prior to  the passage of HCERA could receive loans under the DL program. Overview of Audit Guidance

Audits required under FFEL or DL are performed in accordance with  guidance issued by the Office of Management and Budget (OMB) or the  applicable Department of Education Office of Inspector General (OIG)  audit guide. The FFEL program  relies on lenders, guaranty agencies, and other entities that are subject to  statutory, regulatory, and contractual audit requirements. The DL program  does not have as many of these audit requirements because DL loans are  provided by the federal government, and fewer external entities are  involved. Audit Requirements Generally Differed for the FFEL and DL Programs

The FFEL and DL programs have different statutory and regulatory  requirements for audits and program reviews, with more audit  requirements in place for the FFEL program, which involves more  participants external to the government. The audits focus on whether these  participants comply with applicable statutes, regulations, and program  requirements. For both programs, compliance with these requirements is  monitored through the annual compliance audit. Certain Audit Guidance for FFEL Lenders Did Not Incorporate All Requirements

As noted previously, HCERA terminated the authority to make new FFEL  loans after June 30, 2010. Education Has Designed Procedures for Oversight of the DL Servicer

The functions performed by the DL servicer are similar to certain  functions performed by lenders, guaranty agencies, and their servicers in  the FFEL program. Financial Partners is  responsible for the oversight of audits of lenders, guaranty agencies, and  their servicers participating in the FFEL program. Gap Noted in Receipt and Review of Certain Audit Reports

We noted a gap in Education’s policies and procedures regarding review of  audited financial statements for lender servicers. However, our review  found that lender servicers did not submit their audited financial  statements to Education. Recommendations for Executive Action

To help address any gaps in the guidance for audits FFEL lenders perform  in accordance with the OIG Lender Audit Guide, we recommend that the  Education Inspector General update the OIG Lender Audit Guide to  include all appropriate regulatory audit requirements. To ensure that Education properly oversees the ongoing servicing of  outstanding FFEL student loans and mitigates risks related to lender  servicers, we recommend that the Secretary of Education direct the Chief  Operating Officer of the Office of Federal Student Aid to develop and  implement policies and procedures requiring Federal Student Aid review  of audited financial statements for lender servicers. Agency Comments and Our Evaluation

In written comments on a draft of this report, the Education Office of  Inspector General and Federal Student Aid agreed with our  recommendations. Regarding our recommendation to develop and  implement policies and procedures requiring the review of lender servicer  audited financial statements, the Chief Operating Officer of Federal  Student Aid acknowledged the need to update the OIG Lender Audit  Guide and existing processes and procedures to require lender servicers  to prepare and submit audited financial statements, and stated that  Federal Student Aid will review the audited financial statements. Appendix II: Objectives, Scope, and Methodology

To address the first objective, we reviewed our September 30, 2009, report  to determine the extent to which the audit and review requirements were  applicable to both the Federal Family Education Loan and the William D.  Ford Federal Direct Loan (DL) program participants in order to identify  similarities and differences. For nonprofit and for-profit schools and lenders, we analyzed  Office of Management and Budget (OMB) Circular No. We interviewed officials from Education’s Office of Federal  Student Aid (Federal Student Aid) and the OIG, including the Acting  Director of Financial Partner Eligibility and Oversight (Financial  Partners), the General Manager of the School Eligibility Channel, and the  Deputy Assistant Inspector General for Audit, to obtain clarification and  explanations for any discrepancies identified during our review of  documentation. The scope of our audit did not include testing that the  audit guides were used by the auditors as intended.
Why GAO Did This Study

The Higher Education Opportunity Act of 2008, Pub. L. No. 110-315, mandated GAO to study the financial and compliance audits and reviews required or conducted for the Federal Family Education Loan (FFEL) program and the Federal Direct Student Loan (DL) program. The Department of Education's (Education) Office of Federal Student Aid is responsible for administering these programs. This report focuses on (1) identifying differences and similarities in audit requirements and oversight procedures for the FFEL and DL programs, including anticipated changes to selected oversight activities and (2) describing how the Office of Federal Student Aid's policies and procedures are designed to monitor audits and reviews. To do so, GAO interviewed Education and inspector general officials and reviewed numerous audit guides, agency procedures, checklists, and audit tracking systems.

What GAO Found

GAO identified differences and similarities in audit requirements and oversight procedures for the two programs. Differences include the following: (1) The FFEL and DL programs generally had different audit requirements stemming primarily from divergent program structures. The FFEL program relied on lenders, guaranty agencies--which administer federal government loan guarantees to lenders--and other entities that were subject to statutory and regulatory audit requirements. The DL program did not have as many audit requirements because DL loans are provided by the federal government, and fewer external entities are involved. (2) GAO found differences in audit requirements for nonprofit and for-profit lenders. Certain applicable audit objectives included in Office of Management and Budget (OMB) requirements for compliance audits of nonprofit lenders were not included in the Department of Education Office of Inspector General (OIG) Lender Audit Guide for compliance audits of for-profit lenders. As a result, audits of lenders performed in accordance with the OIG Lender Audit Guide were at risk of omitting compliance testing for a key audit objective. Similarities in audit requirements and oversight procedures include these: (1) Schools were subject to annual financial statement and compliance audits under both programs. (2) The functions performed by the DL servicer, with which Education contracts to administer certain functions of the DL program, were similar to functions performed by lenders, guaranty agencies, and their servicers in the FFEL program. GAO's analysis found that objectives addressed by FFEL participant compliance audits were similar to the objectives addressed through oversight procedures for the DL servicer, such as Education's review of the servicer's monthly performance metrics. The passage of the Health Care and Education Reconciliation Act of 2010 terminated the authority to make new FFEL loans after June 30, 2010. Borrowers who would have been eligible to obtain new FFEL loans could receive loans under the DL program. Regarding Office of Federal Student Aid's monitoring activities, staff were to use financial statement audits to oversee the financial condition of the schools and guaranty agencies that participate in the student loan programs. Compliance audits of schools, lenders, guaranty agencies, and their third-party servicers help Education ensure that these participants comply with applicable statutes, regulations, and program requirements. The Office of Federal Student Aid was required to track findings in these audit reports. GAO found that third-party servicers for lenders in the FFEL program did not submit their audited financial statements to Education as required. Education lacked a policy and specific procedures to ensure receipt and review of these audited financial statements. Without such reviews, the Office of Federal Student Aid might not be informed of a third-party servicer's unfavorable audit opinion or significant reported findings that could affect program operations.

What GAO Recommends

GAO recommends that the Education Inspector General update the OIG Lender Audit Guide to include all appropriate regulatory requirements for audits of ongoing FFEL participants. GAO also recommends that the Secretary of Education develop and implement policies and procedures requiring Office of Federal Student Aid review of audited financial statements for lender servicers. The Education Office of Inspector General and Education agreed with GAO's recommendations.