UNITED STATES DEPARTMENT OF EDUCATION
WASHINGTON, D.C. 20202
In the Matter
COLLEGE, Student Financial Assistance Proceeding
Appearances: Leigh M. Manasevit, Esq., Brustein &
Manasevit, Washington, D.C., for Respondent.
Sarah L. Wanner, Esq., Office of the
General Counsel, United States Department
of Education, Washington, D.C., for Student Financial Assistance Programs.
Before: Frank K. Krueger, Jr., Administrative Judge.
Morgan does not contest SFAP's monetary calculations,See footnote 1
but it does put forth a number of arguments which it contends excuses it from liability. For
the reasons noted below, except for
SFAP's determination that the Respondent must actually purchase all of the loans made to
students in Respondent's truck-driving program, the program review determination is
The regulations, from the time Morgan established the Limon program to the present, provide that an educational institution seeking to participate in the Federal student financial assistance programs authorized by Title IV of the Higher Education Act of 1965, as amended, shall apply for a determination from ED that it is an "eligible institution." 34 C.F.R. § 600.20 (1991, 1992, 1993). The Secretary of Education then notifies the institution by letter whether or not the institution is eligible and which locations or programs qualify. Id. at § 660.21. "Eligibility does not extend to any location that the institution establishes after it receives the eligibility designation." Id. at § 600.10(b)(3). If an eligible institution seeks to provide educational services at an additional location not specified in its eligibility determination letter, it must notify the Secretary in writing at the time it notifies its accrediting agency or association, but in no event later than ten days after the change occurs. Id. at §§ 600.30 and 600.32(a).See footnote 2 2 "Additional
location" is defined as one not designated as an eligible location in the letter of eligibility sent to
the institution under 34 C.F.R. § 600.21. Id. at § 600.32(e).
Morgan admits that it never provided the Secretary with the
required notification for the
addition of the Limon location, but argues that for a number of reasons it was not required to
provide the notification clearly called for by the regulations. First, Morgan argues that it was
required by state law to provide educational services to its entire service area, and that the Limon
Correctional Facility was in its service area; therefore, since Limon students were incarcerated at
the institution, it had no other choice than to provide the entire program at Limon. Thus, Morgan
should be excused for not seeking ED approval. This argument makes little sense. One can
follow state law and provide educational services to the entire service area and still provide the
Secretary with the required notice of the additional location. Even if the Secretary disapproves
the additional location, Morgan can still provide the educational services at Limon, but without
Federal student assistance. There is no requirement that the Federal taxpayers subsidize
Morgan's compliance with state law.
Morgan next argues that long-standing ED policy exempted it from
providing the required
notice to the Secretary. In support of its contention that such a policy existed, Morgan cites to
several documents -- a letter from Lois Moore, Chief, Division of Eligibility and Certification, to
Leigh Manasevit, dated July 28, 1989 (Respondent's Exhibit 19) and ED Form E40-34P,
Application for Institutional Eligibility and Certification (Respondent's Exhibit 20). In response
to an inquiry from Mr. Manasevit concerning another client, Ms. Moore advised as follows:
If an eligible institution will be providing only a portion of an
eligible education program at an auxiliary classroom that is separate
from the main campus, it is not required to submit an Application
for Institutional Eligibility and Certification (ED Form E40-34P) to
report the addition or utilization of that classroom space. However,
the institution should contact its accrediting agency to determine if
approval is needed to offer portions of eligible education programs
at auxiliary classrooms.See footnote 3
If an institution offers an eligible educational program in its entirety
at an auxiliary classroom location and publishes a catalogue or
brochure listing programs offered at that classroom location, then,
the institution must submit a completed application for approval to
include the classroom at that location in its eligibility status.
ED Form E40-34P (9/88) provided as follows:
Non-Main Campus Locations. If the institution offers a portion of an eligible program
at a classroom location that is separate from
the main campus (i.e., auxiliary or supplemental classroom space)
of the eligible institution, at the time the institution requests
eligibility/renewal for that educational program, the institution must
notify ED that a portion of that program is offered at a separate
If an institution offers only a portion of an eligible educational
program at a separate classroom location, the institution is not
required to submit a separate Application for Institutional Eligibility
and Certification form for that classroom location.
If an accredited and licensed educational program is offered in its
entirety at a non-main campus location and the institution publishes
a catalogue or brochure of programs offered at that location,
institutional eligibility is required at that location. To establish
eligibility, the institution must submit to ED a completed
Application for Institutional Eligibility and Certification form (ED
Form E40-34P) for that location.
Although the September 1988 version of ED Form E-40-34P
continued to be used (see
transcript pp. 48 and 89), it was revised in "9/90" to delete the reference to publicizing
the availability of the
satellite location. Based on the Moore letter and the quoted language in ED Form E-40-34P,
Morgan argues that there was a longstanding policy of not requiring auxiliary classrooms to seek
a separate eligibility determination.
I agree that, at the time Morgan commenced its program at Limon, it was not required to seek approval or give notice to the Department for the operation of an off-campus auxiliary classroom. However, the evidence in this case indicates that Morgan was operating a complete and separate program at the Limon Correctional Facility. Morgan's counsel conceded that the Limon program was designed to allow inmates to take all of the courses necessary to be awarded a certificate or an associate degree. Transcript, pp. 60-61. At any rate, it was more than the
"auxiliary" classroom contemplated by the Moore letter and ED-40-34P.See footnote 4
The evidence in the record establishes that Morgan operated a complete and separate
program at Limon over a two
year period attended by 282 inmates. The program was staffed by instructors from both the main
Morgan campus, and instructors hired especially for the Limon program. Transcript pp. 15-16.
The inmates in question were all enrolled in established certificate or associate decree programs.
Respondent's Exhibits 25 and 26. Thus, I cannot accept Morgan's attempt to mis-characterize its
Limon program as an auxiliary classroom.
In the alternative, Morgan argues that, even if its Limon program
is found to be an
additional location, another longstanding ED policy exempts all but a few of its Limon students
from coverage by the liability incurred from not informing ED of the additional location. This
policy was established by William Hudson, Institutional Review Specialist, ED-Region VII, by
letter dated August 18, 1994, to the President, Pratt Community College, Pratt, Kansas.
Respondent's Exhibit 21. The letter provides as follows:
As we understand it, the College taught classes in the Secretarial
Certificate program at four additional locations. Students attended
classes at these locations in addition to classes at the main campus,
except that the program was offered in its entirety for students at
the Harper and Kingman County Centers. The College maintains
that it was never the intent to offer the entire program at these
locations. "However, the secretarial courses were offered for a
short time inadvertently in a manner in which it was possible for a
student to complete the course without attending the main
We consulted with the Eligibility and Administrative Analysis Branch (EAAB) regarding whether the locations were eligible. EAAB indicated that at the time the program was offered in its entirety, the locations should have been approved. Those Title IV funds disbursed to students who completed the program in its
entirety at the two locations are ineligible because the locations had
not been approved. EAAB does not agree, however, that the Title
IV funds are ineligible for the students who continued to attend
classes at the locations as well as at the main campus and did not
complete the program at the two locations. These students could
receive Title IV finds because the entire programs were not
completed at the two locations.
From this letter, Morgan comes up with the somewhat perverse
argument that it was ED
policy that only those students who fail to complete their programs at the unapproved location
were ineligible to receive Federal aid. Morgan additionally argues that students who complete
their program and earn a certificate or degree at the unauthorized additional location should still
be considered eligible for Federal assistance if the award of the certificate or decree was possible
because of a substantial number of credits earned at other institutions for which Morgan gave
My interpretation of this letter is that it does not establish any kind
of national policy, but
is fact specific to the case being addressed by the letter. According to the letter, the program in
question was not designed so that a student could complete the program at the additional
locations, but some students had completed the program during a short period when it was
inadvertently possible. That is a far cry from stating, as a general rule, that
students are eligible to receive
Federal financial assistance if they simply avoid completion of their programs. The
Morgan situation is clearly distinguishable from the Pratt situation as described by the Hudson
letter, in that all of the students enrolled at Morgan's Limon location were in certificate or degree
granting programs which they could complete at the Limon facility. To argue that only those
students who do not complete the program should be allowed to receive Federal aid is to turn
logic on its head and to, in effect, reward failure.
One of the obvious purposes of requiring institutions to seek
approval for additional
locations is to ensure that students receiving Federal aid are not being deceived, and are
in fully accredited educational programs. Morgan argues that it was fully accredited to operate
any program at any location within its service area; that its accrediting agency does not require
that it seek approval for additional locations. However, when asked, Morgan's counsel could
point to no document in the record which supported this position. Transcript pp. 30-32. Even if
this were true, it is entirely reasonable for ED to be notified of the opening of additional
to be able to review the program application to ensure that the program is fully accredited and
authorized at the additional location.
In summary, the evidence clearly demonstrates that Morgan was
operating a separate
program at the Limon Correctional Facility. Although SFAP appeared to allow eligible
institutions to operate auxiliary classrooms, the Limon program was clearly not an auxiliary
classroom but was an "additional location" within the meaning of the regulations for which
Morgan was obligated to seek a new eligibility determination.
Although Morgan retained a certain amount of administrative
control, it clearly contracted
out its truck-driving program. The contract provided that Morgan shall be responsible for the
overall assessment of the quality of the program and shall retain the overall authority to admit
dismiss students into and from the program. However, Sage was responsible for practically
everything else associated with the program. All of the faculty were Sage employees.
pp. 68-70. Although some of the faculty worked for Morgan before it entered into the Sage
contract, some were hired initially by Sage for this contact. Id. at 70. Although Morgan
had the authority to approve decisions, the authority to hire, compensate, and supervise
associated with the contract was that of Sage. Sage was responsible for the placement of all
students, for the preparation of all financial aid applications, for representing the college in all
industry related conferences and activities, for the marketing and advertising of the program, for
securing and maintaining the trucks, and for securing the truck-driving range. Although Morgan
was to make office and classroom space available for the program, it charged Sage rent for the
space. Sage received well over 80 percent of the tuition payments received for the program.
See Respondent's Exhibit 23.
Morgan cites several affidavits in the record to demonstrate that the contract was not enforced as it reads; that is, that Morgan retained much more control over the program than contemplated by the actual contract. Although 34 C.F.R. § 600.9(d) can be read as allowing an eligible institution to enter into an agreement wherein the ineligible institution provides all of the educational program, so long as in actual practice the ineligible institution only provides 25 percent of the program, I find such a reading extremely strained and illogical. The sounder reading, and the one I accept, is that an institution is in violation of the regulation if the agreement with the ineligible institution on its face violated the regulation, no matter what the actual practice is. Thus, the affidavits become irrelevant to the issue at hand. However, even if I accept the theory that it was the actual practice which was important, the affidavits are of little help. The affidavits merely state that certain Morgan officials attended many meetings with Sage employees
and attempted to monitor the program closely. However, the evidence still demonstrates that the
program was run almost totally by Sage.
In the United Education case, the administrative law judge
decided that the remedy available to ED in a Subpart H program review appeal proceeding, that
the institution remit all
Federal funds improperly awarded, was inappropriate and instead imposed a fine. Subsequent to
the filing of briefs in this case, the initial decision on this issue was reversed by the Secretary.
In re United Education Institute, Docket No. 93-59-SP, U.S. Dep't of Educ., (Decision of
the Secretary , May 18, 1995); Petition for Reconsideration Denied (September 11, 1995). Thus,
clear that the hearing official in a Subpart H proceeding lacks the authority to adjust the dollar
amount of proved liability to correspond to his or her sense of fairness. See also 34
§ 668.117(d). The Flavio and Baytown cases stand for the proposition that the hearing official may waive procedural requirements to insure a fair hearing. But see In re Gulf Coast Trades Center, Docket No. 89-16-S , U.S. Dep't of Educ. (Decision of Secretary, October 19, 1990). Thus Flavio and Baytown are inapposite to the present case.
Respondent also cites In re Mary Holmes College, Docket
No. 94-32-SP, U.S. Dep't of Educ. ( March 30, 1995). In the Mary Holmes case, the
judge found that the Respondent was in violation of the regulations for failure to notify ED of
contracts that it had entered into with
ineligible institutions to provide services related to its Entrepreneurial/Truck Driving Program.
The judge in that case found that, since they appeared to be for 25 percent or less of the overall
program, the contracts would probably
be approved had they been
submitted for review as required. Thus, the judge determined that the failure to notify ED was a
mere technical violation,
not warranting a finding that the entire program was ineligible for Federal student aid. However,
in the case at hand, Morgan had essentially contracted out the entire operation of its program.
The Morgan program, unlike that in the Mary Holmes case, would never have been
approved by ED had it been submitted. Although Morgan has subsequently entered into a
contract with Sage
which had been approved by SFAP (Respondent's Exhibit 24), that contract clearly provides that
Morgan is running the program with some
logistical and administrative
support from Sage. Under the new contract it appears that Sage is providing somewhat less that
25 percent of the program.
In addition, although the violations in this case may be technical, they are important.
Eligible institutions disburse millions of dollars in Federal money to their students. The rule
prescribing notification of additional locations satisfies an obvious governmental interest of
ensuring that participating students are receiving an accredited and state-approved educational
program. The rule proscribing eligible institutions from contracting out their programs to
ineligible institutions has the obvious purpose of again preventing student receiving Federal
assistance from receiving educational services which are not approved or accredited. The
integrity of the student financial assistance program depends, to a great extent, on participating
institutions following these somewhat technical rules, and would not be furthered if full liability
waived whenever a Respondent could come forth with an "equitable" reason to excuse its failure
Finally, Respondent argues that, rather than being required to
purchase the loans
improperly made to students participating in the Sage program, it be held to a liability as
calculated using SFAP's "actual loss formula." The actual loss formula is used by SFAP as an
alternative to requiring an institution to purchase unauthorized loans where there is a large
number of loans in question, and when it is difficult to actually identify all of the students who
were awarded unauthorized loans. Thus, SFAP calculates an estimate of the actual loss to ED
using cohort default rates for that institution. However, in this case, the students in question are
specifically identified; thus, it is logistically possible to purchase all of the loans at issue.
Morgan's position on this matter makes sense. The regulations do
not specify how the
specific liability should be calculated. Although the students receiving the loans in the present
case are known, it makes little sense to require the Respondent to purchase those loans from
lenders. The only loss to the taxpayers for unauthorized loans is interest subsidies and special
allowances paid by ED for those loans, and any sums provided by ED to cover repayment
on the loans. Since defaulting students will not be identified for several years, a reasonable
method to estimate the loss to ED is to multiply an average default rate by the total amount of the
unauthorized loans. In addition, lenders of student loans may not want to have their loans
out; the students may be repaying their loans on a regular basis and the lenders may be earning a
profit. Thus, there appears to be little reason to require an institution to purchase unauthorized
loans, except, perhaps, to punish the institution. In many cases, requiring a total purchase of all
unauthorized loans could bankrupt the school in question. In this case, it would be particularly
unreasonable to require the specific purchase of all unauthorized loans, as the default rates for
Morgan over the past six years has been low, ranging from 14.6 percent to 7.3 percent.
See Respondent's Supplemental Exhibit 4. Thus, I have arrived at Morgan's liability by
default rates for the past six years that are available and multiplied that percentage by the total
dollar amount of unauthorized loans made to students participating in the Sage program (.11 x
$85,158 = $9,367.38).
Respondent's final liability is as follows, all payable directly to
I. Limon Correctional Facility.
2. The program offered by Respondent at the Limon Correctional
Facility was not part of
the eligibility determination made by the Secretary in determining that Respondent was eligible
participate in the Federal student financial assistance program authorized under Title IV of the
Higher Education Act of 1965, as amended.
3. Respondent never notified the Secretary of its operation of the
additional location at
the Limon Correctional Facility as required by 34 C.F.R. §§ 600.30 (1991, 1992,
600.32 (1992, 1993). Thus, all Federal student financial assistance awarded by the Respondent
students attending courses at the Limon Correctional Facility was unauthorized.
4. During the period in question, a total of $380,417 in Pell Grants
was awarded by
Respondent to students attending the unauthorized program at the Limon Correctional Facility.
Respondent is required to reimburse ED for these unauthorized Pell Grants.
C.F.R. § 600.9(d) (1993).
6. As a result, all Federal student financial assistance awarded by
Respondent to students
participating in the Morgan-Sage truck-driving program during this period was unauthorized.
Respondent is legally responsible to pay ED $30,531 as reimbursement for unauthorized Pell
Grants, $9,367 in estimated losses to ED for defaulted Stafford and SLS loans, and $1,382 in
interest subsidies and special allowances paid by ED for these unauthorized loans.
Frank K. Krueger, Jr.
Date: September 28, 1995 Administrative Judge
Sarah L. Wanner, Esq.
Office of the General Counsel
U.S. Department of Education
600 Independence Ave., S.W.
Washington, D.C. 20202-2110
Respondent's Exhibit 25.