Education Office Warns of Breach in Student-Loan Records.

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Author: Pekow, Charles

Internal controls over the processing of student loans works well enough. But a problem could arise because of incompatible recordkeeping systems.

Or so concluded the Department of Education's Inspector General's office after an examination of the Office of Federal Student Aid's supervision of two loan programs. The handling of the master promissory note process, usually referred to as MPNs, for the Federal Family Education Loan and Direct Loan programs was the subject of the Inspector General's investigation.

"We did not identify any significant problems with the department's internal controls over the MPN process for the two loan programs," the office concluded in its final audit report. The Inspector General's office examined 313 randomly selected disbursements at Education Account Montgomery -- Ancillary Services, a contractor for the federal Direct Loan program, and Federal Family Education Loan lenders Sallie Mac and Edfinancial/Edamerica.

Both FFEL lenders adequately implemented policies and procedures to handle MPNs consistently, and kept records safely and privately.

But the Inspector General's office noticed a "potential disconnect between the record retention regulations for FFEL lenders and the record retention regulations for schools." The Education Department requires that FFEL lenders keep disbursement records for "not less than three years following the date the loan is repaid in full by the borrower, or for not less than five years following the date the agency receives payment in full from any other source." The lenders appear to comply with the rule.

Yet the schools -- which the Education Department orders to keep records for only three years after the student last attended -- aren't giving disbursement records to the lenders, so the lenders don't know when the students actually get the cash.

And unlike the previous systems, students don't need to sign each loan they get with an MPN. Therefore, "if a borrower claims that he or she did not receive a loan, it may be difficult for the department to enforce the loan and recover the funds," the Inspector General's office warned. Since schools can throw out records after three years, "there may not be sufficient documentation to demonstrate" that the schools actually credited the money properly to students.

The office noted that Education Department officials "generally agreed" with its concerns.

The problem doesn't seem to apply to the Direct Loan program.

The report is online at <www.ed.gov/about/ offices/list/oig/auditreports/a04e0008.pdf>.

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By Charles Pekow