IN THE MATTER OF Docket No. 93-58-SP .
PHILLIPS COLLEGE OF CHICAGO, . Student Financial
. Assistance Proceeding
Appearances: Leslie H. Wiesenfelder, Esq., and Kelli J. Crummer,
Esq., of Dow, Lohnes & Albertson, Washington, D.C.,
for the Respondent.
Denise Morelli, Esq., Office of the General Counsel,
Department of Education, Washington, D.C., for
Office of Student Financial Assistance Programs.
Before: Judge Ernest C. Canellos
Phillips College of Chicago (Phillips) is one of a number of
proprietary schools owned by Phillips Colleges, Inc. On May 28,
1992, the Office of the Inspector General (OIG) of the U.S.
Department of Education (ED), issued a report of the results of an
audit performed at Phillips between September 24, 1991 and December
13, 1991. The audit analyzed Phillips' administration of the
student financial assistance programs authorized under Title IV of
the Higher Education Act of 1965, as amended (Title IV) between
February 1989, and June 30, 1991.
ED's Office of Student Financial Assistance Programs (SFAP) issued a final audit determination (FAD) dated March 22, 1993, which found that Phillips violated various provisions of Title IV. Three of those findings are the subject of this appeal. They are: Phillips employed commissioned salespersons to promote the availability of the Guaranteed Student Loan Programs (GSL); Phillips disbursed Title IV funds in two rather than the required three installments; and, Phillips administered its Title IV programs in such an improper manner that all its records are unreliable and do not support any of the expenditures of federal student financial assistance during the period of the audit.
Two of the issues enumerated above, namely, the commissioned
salesperson issue and the payment in two rather than three
installments, have been litigated previously between the schools of
Phillips Colleges Inc., and ED. Since all the schools under the
umbrella of Phillips Colleges Inc., operate under the same
corporate student financial aid regulations, the decisions in those
two cases are relevant to the current dispute.
First, in In the Matter of Phillips Colleges Inc., Docket No. 93-
48-SP, U.S. Dep't of Educ. (August 23, 1994), the judge found that
the company-wide policy of "One-Stop Shopping" violated the
prohibition against employment of commissioned salespersons to
promote the availability of GSL funds. A similar decision was
reached in In the Matter of Phillips College of Atlanta, Docket No.
91-96-SA, U.S. Dep't. of Educ. (February 28, 1994). My review of
the evidence in the instant case, and the arguments of Phillips'
counsel, reveals that the facts of this case are indistinguishable
from those in the cases cited above. Consequently, I find that
Phillips violated 34 C.F.R. § 682.200 by employing commissioned
salespersons to promote the availability of GSL funding from
February 1989 until April 11, 1991.
Second, in In the Matter of Edmondson Junior College, Docket No.
93-7-SP, U.S. Dep't of Educ. (June 4, 1993), I found that another
school in the Phillips Colleges Inc. family did not violate the
Title IV regulations by dispensing federal student financial
assistance in two payments as a non-term school, rather than in
three payments as a term school. On April 5, 1994, the Secretary
affirmed my decision. The facts of the current case and those in
Edmondson, are also indistinguishable. Therefore, I find that
Phillips did not disburse federal student financial assistance by
utilizing incorrect payment periods.
Finally, the remaining issue is that Phillips' records were so
deficient and unreliable that all Title IV funds are unsupported
and should be returned. Specifically: 32 out of 60 randomly
selected files contained some conflicting information; in 14
instances, social security numbers differed on documents (only two
of which were out of the random sample); one file did not contain
a financial aid transcript; the cost of attendance for one student
was incorrectly determined; the dependency status of one student
was incorrectly determined; in one case, an SLS application was
certified prior to certification of a Stafford Loan application;
one student's academic file could not be located; the school had a
1989 cohort default rate of 36.9% and a 40% withdrawal rate for
calendar year 1990. SFAP concluded that because of the extent of
these violations, "(W)e consider all Stafford Loans certified after
April, 1990 (the date Phillips Schools Inc. purchased the school)
to be unsupported."
In its defense, Phillips presented evidence seeking to rebut the
specific findings of error enumerated in the audit report. It
points out that, with the exception of two students, the errors,
even if correct, did not lead to receipt of more Title IV funds
than the respective students were entitled. In the two cases where
excess awards were made, Phillips refunded those amounts. Phillips
also questions how the stated cohort default rate or withdrawal
rate is indicative of poor program administration. In addition,
Phillips pointed out that: the school had two biennial audits
ending on June 30, 1990 and June 30, 1992, accomplished by an
independent Certified Public Accounting firm; the reports generated
by those audits indicated compliance by Phillips with the
applicable regulations. Those audits were accepted by ED without
dispute. Phillips argues it is illogical to believe that its
records are as bad as alleged by SFAP.
This issue seems to be one of first impression. It is the first
time that I have been able to ascertain where SFAP is seeking the
return of all Title IV funds on the basis of a showing of
inadequate administration of the Title IV programs in specified
situations. This is not an attempt to determine liability of the
universe by applying an error rate from a statistically significant
sample. See, In the Matter of Hi-tech Institute of Hair Design,
Docket No. 93-129-SA, U.S. Dep't of Educ. (July 14, 1994). Neither
is this a case when the institution is given the option of the
extension of the sample to the universe or completing a full file
review. See, In the Matter of Oregon State System of Higher
Education, Docket No. 92-25-SP, U.S. Dep't of Educ. (March 1,
1993). Finally, this is not a case where the Respondent was
ineligible to participate in the Title IV Programs and, as a
result, all federal funds received during the period of
ineligibility must be returned. See, In the Matter of Long Beach
College of Business, Docket No. 92-132-SP, U.S. Dep't of Educ.
(July 14, 1994). Rather, this is a case where SFAP demands the
return of all Title IV funds as an audit recovery on the basis of
its showing of instances of poor program administration.
In an appeal of a FAD, the institution has the burden of proving
that its expenditure of Title IV funds was correct. 34 C.F.R. §
668.116(d). This presupposes that the FAD raises a prima facie
case of erroneous expenditure of funds for which ED should be
compensated. By definition, audit recoveries under Subpart H
procedures, 34 C.F.R. § 668.111 et seq., are meant to provide a
mechanism for compensatory recovery with the institution being
afforded an opportunity to prove it did not violate the rules as
alleged. Here, SFAP's own evidence reveals most files reviewed by
the OIG were correct, yet SFAP still demands the return of all the
funds in those cases. How, therefore, can Phillips meet its burden
under this scenario. It would appear that, whatever hearing right
is available, there is no practical way the school could prevail.
It further appears to me that SFAP has attempted, through the medium of a FAD, to sanction Phillips in a punitive way. I note that the only available method to accomplish such sanction is through a termination, fine or suspension action under Subpart G, 34 C.F.R. § 668.81, et seq. I note further that ED has the burden of proof in these cases and the procedural rights afforded are more favorable to the Respondent than those under Subpart H.
It is quite clear that Subpart H and G procedures are separate and
complimentary. The remedies available in a Subpart H proceeding
are contractual in nature and allow for recovery of proven
compensatory damages while the remedies in a Subpart G proceeding
are punitive in nature. See generally, In the Matter of Macomb
Community College, Docket No. 91-80-SP, U.S. Dep't of Educ. (June
Consistent with the above, I find that ED has attempted to assess
liability on an impermissible basis - punishment as opposed to
compensation. I find further that Phillips has met its burden of
establishing that it did not misspend Title IV funds as alleged,
and, as a result, I disapprove the finding that Phillips should
return all Title IV funds received because of its failure to
properly administer the Title IV programs.
In summary, having found that Phillips improperly utilized
commissioned salespersons between February 1989 and April 11, 1991,
I must assess an appropriate recovery. It is clear that an
institution that violates the prohibition against the employment of
commissioned salespersons to promote the availability of the GSL
Programs becomes ineligible to participate in those programs during
the period of such violation. In the Matter of Phillips Colleges
Inc., supra. All GSL funds expended by an institution during a
period when it was ineligible are improperly spent and must be
returned. See, In the Matter of Long Beach College of Business,
Accordingly, Phillips Colleges, Inc., is ordered to refund to the
appropriate lenders $692,632, for improper Guaranteed Student
Loans, and repay $256,799 to the U.S. Department of Education for
excess interest and special allowance costs.
Judge Ernest C. Canellos
Issued: November 14, 1994