Bulletin ID
DLB - 98 - 2
| PublicationDate: 2/1/98 BulletinID: DLB - 98 - 2 February 1998 DLB-98-2 Summary: THIS BULLETIN PRESENTS THE RESULTS OF THE RECENT OFFICE OF INSPECTOR GENERAL'S OVERVIEW AUDIT OF DIRECT LOAN SCHOOLS Dear Colleague: We would like to take this opportunity to share with you the results of the Office of Inspector General's (OIG) audit report entitled "Administration of the William D. Ford Federal Direct Loan Program by Schools," dated October 1997. The report summarizes issues raised in sixteen audits of schools participating in the William D. Ford Federal Direct Loan (Direct Loan) Program covering the period July 1, 1995 through March 31, 1996. The objectives of the OIG audits were to determine whether schools have properly administered the Direct Loan Program and accounted for and expended funds in accordance with program requirements. To accomplish these objectives, the auditors reviewed and evaluated the schools' internal control systems in the areas of (1) cash management; (2) transfer of funds; (3) adjustments and cancellations; (4) reconciliations; (5) recordkeeping and reporting; and (6) electronic data processing. While the OIG found that schools generally expended and accounted for the funds properly and administered the program in accordance with program requirements, the overview report discussed problems common to many of the Direct Loan schools audited. The audit period was relatively early in the life of the Direct Loan Program and we know schools have made great strides in strengthening their Direct Loan processing. Nevertheless, the audit results indicate some weaknesses in school-level internal controls that need to be addressed to ensure that program requirements are met and that data integrity is maintained. For this reason, we are sharing the information with all Direct Loan schools to assist you in determining whether the current internal control systems at your school are adequate, not only for the Direct Loan Program but for the other Title IV programs, as well. The following is a brief summary of the audit results and recommended actions that you can take to strengthen your school's internal controls. o STUDENT ENROLLMENT STATUS REPORTING DEFICIENCIES HINDER EFFICIENT LOAN SERVICING The majority of the schools audited had student status data which differed from that in the Direct Loan Servicing System. While some of the problems can be attributed to the fact that the National Student Loan Data System (NSLDS) was not fully functional and the Direct Loan Servicing System was not updating all reported status changes, two key concerns emerged: some of the schools had not reported student status data and three schools sent inaccurate data. In two cases, the inaccuracies were the result of inadequacies in the schools' own computer systems. Two schools compounded the problem by using the report preparation date as the status change date instead of the actual date of the status change. Please refer to Dear Colleague Letter GEN-97-9 for an update on the SSCR process of the NSLDS. o WEAK SYSTEM CONTROLS JEOPARDIZE DATA INTEGRITY Many of the schools audited lacked adequate Electronic Data Processing (EDP) controls. Actions that can be taken to improve EDP processing controls for the Direct Loan Program are: Ensure that the appropriate level of access is given only to staff who need access to perform their duties. Issue unique user IDs and passwords to each employee instead of using common or shared IDs and passwords for all employees accessing the system. This will minimize the risk of data inappropriately being altered or disclosed. Prepare backup and/or disaster recovery plans. Schools should be able to restore operations and data due to operational disruption. Another action that schools can take to improve data integrity is to make sure they have a process in place to create and export loan records and import and record acknowledgments from the Loan Origination Center in a timely manner. The Department has emphasized the importance of good EDP controls in its training presentations and materials on Direct Loan software. Please refer to the Direct Loan School Guide and the Direct Loan Data Matching and Cash Management Guide for further guidance. o SCHOOLS WERE NOT KEEPING ACCURATE LOAN RECORDS Comparisons between loan information recorded on the schools' internal student accounts system and that recorded in their Direct Loan system showed that the majority of the schools audited had disbursement and adjustment date discrepancies between their internal systems. The report noted that the majority of these discrepancies pertained to disbursement dates; 12 of the 16 schools had date discrepancies. Loan balance discrepancies were found at 4 out of the 16 schools. These types of discrepancies can result in the student's loan liability being inaccurate and, for unsubsidized and PLUS loans, incorrect interest billings. Clarification on the definitions of a disbursement and disbursement dates was initially provided in Direct Loan Bulletin DLB-96-5, dated February 1996. Schools should now be using the guidance provided in the General Provisions regulations published November 29, 1996 (34 CFR 668.164) to record correct disbursement dates. The revised definition is effective for funds disbursed on or after July 1, 1997. The key points to remember are that loan data recorded in a school's internal accounting system must be the same as the data entered into the Direct Loan database and exported to the Loan Origination Center. Problems occur when a change or correction, e.g., a disbursement adjustment, is made in one database but not others. Therefore, schools should have a process to insure that changes are made to all databases in a timely manner and then schools should periodically monitor their student account database and Direct Loan database to find discrepancies and correct them immediately. o DUPLICATE ENTRIES HAVE CREATED INACCURATE STUDENT LOAN BALANCES AT THE SERVICER The report stated that "Duplicate entries have been made by the servicer to student accounts as a result of schools returning Direct Loan funds to the servicer by check and simultaneously transmitting electronic entries for the same transactions." Duplicate entries can result in the school's cash balance being overstated and the borrower's account at the servicer being overstated or understated. Clarification on how funds are to be returned was provided in DLB-96-13, dated August 1996, and later updated in DBL-97-17 and DBL-97-33. Please review these bulletins for further guidance. o SCHOOLS DID NOT REPORT TRANSACTIONS IN A TIMELY MANNER The report disclosed that almost half of the schools audited were untimely in reporting transactions to the Loan Origination Center. The need to report transactions within 30 days following the date of the disbursement was brought to the attention of schools in a DLB-15, issued in October 1995, and in Direct Loan regulations published on December 1, 1995 (34 CFR 685.301(d)). When loan transactions are not reported in a timely manner to the Loan Origination Center, it will hinder prompt and accurate servicing of loans to the detriment of student and parent borrowers. o CASH MANAGEMENT PRACTICES AND MONITORING NEED IMPROVEMENT The report cited instances of schools having excess cash on hand. Funds not disbursed by the end of the third business day following the date the school received those funds are considered to be excess cash and must be returned promptly, within two or three days. No excess cash may be maintained by a school any longer than seven days. Please refer to Section 668.166(a)(1) of the Cash Management regulations, the Direct Loan Schools Guide and the Direct Loan Data Matching and Cash Management Guide for further guidance. o SCHOOLS WERE NOT PERFORMING TIMELY RECONCILIATIONS More than half the schools audited were failing to perform the monthly reconciliation process as required by the Direct Loan Program. Schools must implement controls and procedures to ensure that this requirement is met. Guidance on the reconciliation process is provided in the Direct Loan School Guide and the Direct Loan Data Matching and Cash Management Guide. Recent bulletins on the subject include DLB-97-49 and DLB-97-53. o SCHOOLS LACKED WRITTEN POLICIES AND PROCEDURES FOR ADMINISTERING THE PROGRAM A little over one third of the schools audited failed to have internal written policies and procedures on how their school administered the Direct Loan Program. The schools relied on written material provided by the Direct Loan Task Force. While the Department has a responsibility to provide guidance for program administration, regulations require schools to develop their own internal written procedures. Benefits of having internal written procedures include clarification of the functions of staff involved in administering the program and providing for consistent processes. o SCHOOLS DID NOT IMPLEMENT A SYSTEM OF QUALITY ASSURANCE One fourth of the schools audited had not implemented a quality assurance system. A quality assurance system provides assurance that the school is complying with program requirements and meeting program objectives. Implementation of a quality assurance system is a control mechanism and one of the keys to effective program management. The Direct Loan Quality Assurance Planning Guide provides comprehensive guidance in this area. The Department has addressed many of the findings contained in the report by providing additional training to schools. By highlighting the audit results in this letter, we hope that schools will reexamine their internal control structure for administering the Direct Loan Program to ensure that accurate and complete data are maintained and reported to the Loan Origination Center and to NSLDS, as appropriate. We also hope that this information will be of use to you in administering not only the Direct Loan Program but all Title IV programs. We note that prior to the audits, the Department had provided training and guidance and distributed Direct Loan Bulletins that addressed many of the issues raised in the report. The Department will continue to provide guidance to schools regarding efficient and effective management of the Direct Loan Program. We urge you to read the regulations, bulletins and other documents as they are issued and review them periodically to insure that your school establishes and maintains good internal controls. Direct Loan Bulletins for the current fiscal year can be obtained on the Internet at http://www.ed.gov/offices/OPE/. Schools may obtain Direct Loan Bulletins for prior years by calling the Direct Loan Task Force at 202/708-9951. Thank you for supporting the Direct Loan Program. Sincerely, Linda L. Paulsen, Director Joe L. McCormick, Chair Accounting and Financial Direct Loan Task Force Management Service |