Before the U.S. House of Representatives, Subcommittee on Labor, Health and Human Services, and Education Appropriations, Ralph Regula, Chairman
May 1, 2001
Mr. Chairman and Members of the Committee,I am pleased to have this opportunity to describe our funding requirements and performance goals to you today. The appropriation request for student aid administration in FY 2002 totals $883.3 million. Most of that, $780 million, is in the permanent definite appropriation under Section 458 of the Higher Education Act. The other $103 million of our funding is in the Department's request for administration of the Federal Family Education Loan program and for Program Administration. Our workload is growing, but our funding request is essentially level with last year's budget and will remain level at least through FY2004.
SFA is part of a nation-wide system of partner organizations -- schools, State agencies, commercial lenders, and guarantors. Each year our partners and we help make the dreams of nearly 9 million American students come true, by providing them more than $60 billion in financial aid. It's a job we believe in passionately, and the performance-based organization, created by Congress in 1998 with bipartisan support, is helping us do our job better than ever.
We have the numbers to prove it. As you know, the PBO is a kind of contract under which my management team and I accept responsibility for results and, in exchange, we get the tools and flexibility we need to deliver those results. Here are our results so far:
Customer satisfaction -- as measured on the 100-point American Customer Satisfaction Index, which is one of Wall Street's leading indicators of success -- rose from 63 to 72.9. That was the biggest improvement in all of government, putting us just one point under the average score for all private financial services companies. Our multiyear goal was to equal the private sector average. That and better are certainly within reach. A special nod goes to our Ombudsman office for solving customer problems -- they handle the very toughest problems and still get the biggest stack of fan mail -- including this nice letter to one of our Ombudsman workers: "All it took was for someone to just listen and hear my side -- you took the time...and changed everything about this situation from a nightmare to a blessing."
Our second goal is to reduce the cost of delivering financial aid to each student. We call that our unit cost. Since the number of students we serve grows each year, but our budget doesn't, we have to cut unit cost. Our main cost cutting strategy is e-commerce, so we are executing a multiyear plan to invest in modern, integrated technology and phase out our inefficient, stand-alone systems. Those investments will temporarily increase our unit costs to $22.77 this year. But we have some of our new systems in operation now and they are beginning to pay off. Our FY2002 budget is based on a lower unit cost of $21.68. In other words, we will serve 3 million more students without a bigger budget - and we'll serve them better than ever before.
The best businesses have found that employee satisfaction goes hand in hand with customer satisfaction and cost control. Our employee satisfaction -- as measured by an Office of Personnel Management survey of 48 Federal agencies -- rose dramatically from 38th place to a tie for 5th in one year. Top five status was our multiyear PBO goal. No we are using the Gallup Q12 survey to measure employee satisfaction with more precision. It tells us more about how to improve and lets us compare ourselves with the private sector as well as other government agencies.
I am proud of these initial results, and of the fact that school officials and bankers throughout the student aid community tell me they can see great improvements in SFA's performance and in our public-private partnership. I think we are on track to show that government can deliver service and financial results equal to the best in business. But we have to do more than that to be a complete success.
IMPROVED FINANCIAL MANAGEMENT AND PROGRAM INTEGRITY
We have to be worthy of trust. I don't believe there is widespread fraud or abuse in student aid programs -- nothing like that. But, any waste of taxpayer dollars calls for all-out effort to recover the funds and plug the holes. We are well into an aggressive program to do that so the Congress and the American people have no doubt about trusting us with the $883 million we want for FY 2002.
The FY 2002 President's Budget includes an explicit commitment to correct the longstanding financial management and operations issues that have resulted in the student aid programs' continued inclusion on the General Accounting Office's High Risk List. It's past time for us to get off this list once and for all, and I'd like to discuss some of the specific steps we're taking to make that happen.
STUDENT LOAN DEFAULTS
Last year, we drove the student-based cohort default rate to an all-time low of 6.9 percent and boosted collections to an all-time high of $4.3 billion, so that for the second straight year, collections exceeded defaults. But we know we must do more. As loan volume has grown dramatically over the past 8 years, outstanding defaults have increased as well, more than doubling to nearly $25 billion. In addition, there's a chance that a downturn in the economy could take threaten the progress we've made so far, so we are getting even more aggressive. For example, this year we got access to the National Directory of New Hires, an electronic system designed to find deadbeat parents who have skipped out on child support payments. It's just as good at finding student loan defaulters, especially those who are able but unwilling to pay. In January, we compared 2 million records and found over a million defaulters in the New Hires database. Sixty percent of them have jobs paying less that $16,000, so they are protected from collection activities. But we recently turned over to our collectors the names, addresses, and phone numbers of 424,508 people who owe us over $2 billion, and our collectors have already contacted 21,000 of them and gotten over $20 million back for the Treasury. Just yesterday, we sent 3 million more records to HHS to bounce against the New Hires data, this time with the files of 10 guaranty agencies that are looking for defaulters, too. We'll run the lists every quarter.
But we know an ounce of prevention is even better. At the start of this school year we held a National Repayment Symposium to give everyone in the student aid community a chance to learn from the best in the business. A hundred professionals came and a thousand more have read the book of lessons from the symposium at on the web at http://ifap.ed.gov/eannouncements/0119stuhbkbestprectice.html. Next, we are homing in on schools where more than 15 percent of students default. We're bringing them in for an Anti-Default Training Day on August 2, to drill on the proven ways schools can keep students out of financial trouble.
SAFEGUARDING GOVERNMENT PROPERTY
Last year, we discovered and plugged a hole in our shield against pilferage -- a dishonest employee had found a way to order telephones, computers, and other electronic equipment and have it billed to the government and delivered to his home and homes of several other employees and friends. We have recovered a lot of the goods and so far seven people have pled guilty to charges and now face up to 10 years in prison. We also established what we should have had before -- a no-exception procurement system that completely separates ordering from receiving and authorizing payment, so that no one person can do it all.
We've started using that same kind of fail-safe system -- the kind that requires at least two people to approve - any time we manually override one of our automated systems. We looked at the history of misrouted payments and double payments and found that almost every time, somebody had made a mistake during a manual override of an automated system. So now we handle manual overrides the way the military handles atomic weapons -- two people -- two keys, if you will. We take it that seriously.
IMPROVING LOAN DISCHARGE PROCEDURES
Because of growing trends we began to suspect some fraud in death and disability claims, so we asked the Department's Inspector General (IG) to look into it. File matches with the Social Security Administration and credit bureaus have confirmed our suspicions -- 153 "dead or disabled" borrowers with debts over $10,000 each are apparently still working and earning enough to pay us back. I know that in the grand scheme of things that doesn't sound like a huge problem, but we just won't tolerate it. We have turned the 153 cases over to the IG's investigators who doing the legwork for legal action. (Note: The turnover meeting with the IG is scheduled this month prior to the hearing.) To fight future fraud, we asked guaranty agencies to dig into claims more thoroughly, and we changed the claim form for disability to include the doctor's licensing number and state -- and, effective July 1, 2001, we are requiring an original or certified copy of the individual's death certificate. We think that will plug the hole in our defenses.
To test our fix, four guaranty agencies have volunteered to help with some high-intensity screening. Starting next month, the guaranty agencies will file their death or disability claims after completing their more thorough reviews with the new doctor license and death certificate safeguards in place. Then they will send the file to our affiliate, ECMC. ECMC will go over each file with a fine-tooth comb to ensure that all accuracy checks have been done. If everything checks out on a disability claim, they will set it aside for 90 days and then check with national credit bureaus to see what changes have occurred in the borrower's pattern of financial activity. They will also check it against the National Student Loan Data System to see if the disability discharge is reflected for all of the borrower loans and determine why not if that action is not recorded. If all appears correct, they will set it aside for review again at 6 months, 1 year, 2 years, and a final check at the end of year 3. ECMC will be doing the same sort of thing with death claims -- checking periodically over three years with the SSA Death file and credit bureaus for any evidence of criminal fraud.
We are hoping this high-intensity screening will come up empty -- that the guaranty agency reviews along with requiring doctors' license numbers and certified death certificates will stop or catch all the fraud attempts. But if some are still slipping through, we will make high-intensity screening part of the routine for all guaranty agencies.
STUDENT LOANS AT FOREIGN SCHOOLS
Americans who attend foreign schools are eligible for FFEL loans, but the way the money flows makes it vulnerable to fraud. You see, under law, American students in foreign schools may get their aid money directly from the lenders, not through the schools like they do in the States. So, it is much easier for someone to con the Federal government by falsifying foreign enrollment. The issue is not one of school fraud, but fraud cooked up by individuals who use valid social security numbers. The National Student Clearinghouse is conducting a pilot project with foreign schools and guaranty agencies to help us get a better fix on foreign school enrollment, and we're working on other ways to fix the problem. But the best fix would be to change the law so we could involve the schools the way we do here in the U.S. It's that old two-person fail-safe system again. If we had the same money flow as we have in the States, a student couldn't defraud us without collusion by the school.
This month, we will finish recertifying all foreign schools that want to handle Title IV funds -- we only have a few to go. We sort of saved the best until last -- Oxford, Cambridge, The University of London. Overall 487 foreign schools applied for recertification and 50 were denied. The average default rate for foreign schools is only 2.6 percent.
VERIFYING STUDENT AID APPLICANT INCOMES
Congress asked us to compare data with the IRS to check whether people report all their income when they apply for student aid. We have run some initial tests with them to see if misreporting is a big problem. Last April, we compared student income information from 50,000 applicants and found that, on average, the income they reported to SFA was $154 lower than what they reported to IRS. Annual income of $154 doesn't have much affect on a Pell Grant, for example -- only about 60 cents. So, there is no pattern of widespread cheating. We took a closer look at the more significant income mismatches and got a surprise: 1/3 of them had actually reported higher income when they applied for aid -- we'll dig into the reasons for that because we don't want to shortchange students on eligibility. We also found that about 10 percent of the sample underreported their income to us by an average of $7,000 -- enough to raise a red flag and make us interested in expanding IRS crosschecks. This year, we are comparing 200,000 files including parents' income information as well as students. We should have those results soon. We would like to make cross-checking with IRS a routine step in our application process, but there are some obstacles. One is timing. Most schools need aid applications processed before the April tax deadline, but the IRS database doesn't contain all the latest tax year information until around August, so we will never be able to match records completely at the time we are processing applications. Last April, the IRS database had records for only 76 percent of our sample. The other problem is that the IRS is understandably reluctant to use tax information in this way without a change in the tax code. We are ready to work with IRS and the Congress to see if we can overcome these obstacles.
ACHIEVING A CLEAN AUDIT
The heart of financial integrity is a good set of books. I'm sorry to say we failed again last year to get a clean audit. There were fewer problems with our books than the year before and they were mostly of a technical nature. But they kept us from absolutely reassuring the taxpayers that we can account for every dime they entrust to us. And that is absolutely unacceptable. Secretary Paige and I have made it a top priority to straighten out the books and get a clean audit this year.
It's not going to be easy because our old, partially automated financial management system needs too many manual overrides -- remember, that's the same thing that use to cause misrouted and double payments. So, for this year, we put the same kind of fail-safe system in place. Every manual override in accounting will be confirmed by a second person, and the reason for the override will be well documented so the auditors can see what went on and why.
But that's just a stopgap measure. We are installing a new financial management system -- fully automated, one of the best on the market. The part of the system we've already installed tightens control over payments to Guaranty Agencies and gives us faster updates on collections. It's a better system for automated reconciliation too, and it fixes a longstanding problem of tracking guarantor-held defaulted loans and other federal assets. When our new FMS is completely installed this October, at the beginning of FY 2002, we will have, for the first time, a fully automated accounting system that complies with all Federal and general accounting standards.
Another way to win public trust is to never let our customers down. Since we've been a PBO, we have not had a single interruption in service -- even under the pressure of record volumes -- not a single breakdown in the application system, or the Pell Grant system, or loan origination or consolidation. We have kept the trains running on time.
And all the time, we've been innovating -- award-winning web sites like FAFSA and the best e-servicing site for loans in the business, government's first share-in-savings IT contract, middleware already working to integrate and retire old legacy systems, the Schools Portal that completely integrates our services for aid administrators, electronic forms for FFEL, and much, much more. Let me give you an example: Each month, each of the nation's 36 FFEL guarantors had to send us a 3-inch stack of paper reports -- and sent them a 6-inch stack. Compare all that paper to the half dozen Web screens they fill out now. We are in the process of doing the same thing for lenders -- all 4,000 of them. It's a perfect example of how our e-commerce strategy improves service and cuts cost.
Customer satisfaction and morale are up, costs are coming down, and trust is building. Overall, I believe any fair observer would call this PBO experiment a success -- so far. But we face some big challenges. Any businessman can tell you that achieving and maintaining high scores for customer satisfaction takes plenty of ingenuity and hard work. Any government manager can tell you that serving more and more customers without a bigger budget is no small trick either. We have to do it all. I believe we have the right e-commerce strategy, the inspired workers, and the talented management team we need to pull it off. All we need now is your continuing support. My colleagues and I will be happy to answer any questions you may have. Thank you.