In the Matter
SOUTHEASTERN UNIVERSITY, Student
Financial Assistance Proceeding
Appearances: Stanley A. Freeman, Esq., Powers, Pyles, Sutter, & Verville, of Washington, D.C., for Southeastern University.
Russell B. Wolff, Esq., Office of the General Counsel, for the Office of Student Financial Assistance Programs, United States Department of Education.
Before: Judge Ernest C. Canellos.
decision is the result of a second remand order (Remand II) by the Secretary issued September
14, 1995, in the above-captioned proceeding.See
In Remand II, the Secretary recognized that my decision, issued in response to his order in
Remand I, concluded that Judge
Clerman's decision did not base its monetary liability upon application of the actual loss
formula and, in that regard, addressed the issues raised by the Secretary in Remand I.
Subsequent to the issuance of my decision, the parties requested that I determine
whether the actual loss formula should have been applied by Judge Clerman in his
calculation of Respondent's liability. Jurisdiction over this matter, however, had passed to the
and, as a result, I could not rule on the parties requests. In light of that fact, the Secretary
agreed with the parties that I address this new issue arising from Judge Clerman's Initial
Decision. Accordingly, the questions before me are: whether the actual loss formula should
have been applied and, if so, what would be Respondent's liability under the formula. For the
reasons stated below, I find that the application of the actual loss formula to determine
Southeastern University's (Southeastern) liability for improperly disbursed Title IV loan funds
As I noted in my decision in response to Remand I, it is well
understood that the
actual loss formula measures the estimated loss to
the Department that has or will result from
ineligible loans certified by an institution. Under the formula, an institution's cohort default
rate is multiplied by the total amount of ineligible loans disbursed during a given award year to
yield an estimated expenditure of defaulted loans. This estimate is added to estimated loan
subsidies and special allowance payments See footnote
made by the Department to yield the actual loss
formula liability. Prior decisions of this tribunal have indicated that application of the actual
loss formula is not appropriate in cases where its use would ultimately deprive the student
borrower of the benefit of a reduction in the amount of his or her debt. In that respect, use of
the actual loss formula has been rejected in cases where an institution has a clear legal
obligation to make a refund to a student or lender, and SFAP has obtained the relevant data to
precisely determine the amount of the ineligible Title IV loan disbursement. See, e.g., In re
Jett College of Cosmetology and Barbering, Dkt. No. 95-21-SP In such cases, institutions
have been required to repurchase the face value of an improperly disbursed loan by repaying
the current holder of the Title IV loan note and, thereby, relieve the student of his or her
student loan debt.See footnote 3
In other cases, however, use of the actual loss formula has been upheld as an alternative
assessment of liability against an institution found to have improperly disbursed Title IV loans.
Those decisions have consistently approved SFAP's use of the actual loss formula as an
accurate assessment of liability when use of the formula supports principles of fairness and
equity. In this respect, the decisions of this tribunal have recognized that it would frustrate
principles of fairness and equity to preclude SFAP's use of the actual loss formula
in cases where the Department could otherwise
require an institution to repurchase the face value of
ineligible loans and repay the Department interest and special allowances, despite the fact that
the student debtors may either have repaid their Title IV loan debt or have commenced
repayment of that obligation.See footnote 4
See, e.g., In the Matter of Selan's System of Beauty Culture, Dkt. No. 93-82-SP,
U.S. Dep't of Educ. (December 19, 1994); In the Matter of Berk Trade & Business
School, Dkt. No. 93-170-SP, U.S. Dep't of Educ. (June 27, 1994).
In this regard, the law is clear and
straightforward in permitting the Secretary to either demand the
repayment of all improperly disbursed Title IV loans when appropriate or impose a
liability based upon the use of the actual loss formula when such use is clearly supportable.
See In re Southeastern University, Dkt. No. 93-61-SA, U.S. Dep't of Educ.
(October 22, 1993).
In the case at bar, the parties do not dispute that the circumstances
of this case fall
squarely within the line of the Department's cases finding that the facts of the case warrant the
application of the actual loss formula. Indeed, the parties agree that the actual loss formula
should be applied in this case since it is quite likely that at least some of the improperly
disbursed Title IV loans have been repaid by the student debtors who successfully completed
their academic programs at Southeastern.See footnote 5
In this regard, I give considerable weight to SFAP's decision to use the actual loss formula,
instead of seeking full recovery of all
ineligible Title IV loans. SFAP has the duty to act in a manner that would ensure protection
of the Federal government's interest and, in doing so, SFAP's decision to adopt an assessment
of liability that may result in the Department's recovery of a reduced amount of funds is
presumed to reflect SFAP's tacit acknowledgment that Southeastern's student debtors may
have or are likely to have repaid their Title IV loan debts.
More important, it is not disputed that SFAP clearly sets forth the
factors upon which
the calculation of Southeastern's actual loss liability is based. In this respect, SFAP's actual
loss worksheet shows that for purposes of the actual loss formula, the relevant cohort default
rate was Southeastern's 1989 21.5% cohort default rate. The final audit determination (FAD)
issued by the Office of Student Financial Assistance Programs (SFAP) determined that
Southeastern disbursed $317,071 in ineligible Title IV loans during the period at issue. The
findings of the Initial Decision reduced the amount of ineligible Title IV loans to $136,584.
On this basis, SFAP estimated Southeastern's Title IV student loan defaults to total $29,366
for the period at issue. SFAP also estimated its recoverable loan subsidies and special
allowance payments to total $35,692.
Therefore, under the formula,
Southeastern's actual loss liability totals $65,058. In this respect, I find SFAP's calculation of
Accordingly, the use of the actual loss formula is
clearly appropriate in this case.
On the basis of the foregoing findings, it is HEREBY ORDERED:
(1) That the monetary liability imposed against Southeastern
University for $13,514 by
my March 23, 1995 Decision be modified in accordance with this decision, and
(2) That the monetary liability imposed against Southeastern
University by the Initial
Decision for ineligible Title IV loan disbursements be modified and calculated on the basis of
the actual loss formula.
Accordingly, consistent with the liability established by the Secretary's initial Remand Order,
Southeastern University should repay to the Department of Education $65,058 for ineligible
Title IV loan disbursements, $11,139 for improper Title IV grant fund disbursements, and
should repay $12,139 to the appropriate Title IV PLUS loan lenders.
Ernest C. Canellos
Dated: November 13, 1995
A copy of the attached initial decision was sent by certified mail, return receipt requested to the
Stanley A. Freeman, Esq.
Powers, Pyles, Sutter & Verville, P.C.
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
Russell B. Wolff, Esq.
Office of the General Counsel
U.S. Department of Education
600 Independence Avenue, S.W.
Washington, D.C. 20202-2110