UNITED STATES DEPARTMENT OF EDUCATION
WASHINGTON, D.C. 20202
In the Matter of
SMITH BUSINESS SCHOOL, A/K/A INTERNATIONAL SCHOOL FOR CAREER EDUCATION,
Docket No. 95-108-SA
Student Financial Assistance Proceeding
Appearances: Barbara Herold, President, Smith Business School,
Arnold, Maryland, for Respondent.
Alexandra Gil-Montero, Esq., Office
of the General Counsel, United States
Department of Education, Washington, D.C., for Student Financial Assistance
Before: Frank K. Krueger, Jr., Administrative Judge.
Four of the findings made in the final audit determination remain in contention and are the subject of this appeal. In Finding # 2, SFAP contends that Respondent improperly used $5,458 in Title IV funds to pay an institutional debt, and must repay ED this amount. In Finding # 6, SFAP contends that Respondent failed to make matching payments for Supplemental Educational Opportunity Grants (SEOG), for a liability of $2,000, which, as discussed below, has now been reduced by SFAP to $114. In Finding # 10, SFAP contends that Respondent failed
to make refunds in the amount of $15,147 on behalf of students receiving Federal Family
Education Loans (FFEL) who withdrew from their courses of study prior to completion. SFAP
also assessed interest payments and special allowances due to ED with respect to these unpaid
refunds in the amount of $8,179. In Finding # 11, SFAP contends that Respondent owes ED
$5,425 in unpaid Pell Grant and SEOG refunds to cover students who withdrew from their
of study prior to completion.
As discussed below, I find partially in favor of Respondent and
partially in favor of
Respondent argues that it has no liability in this area since it
joined forces with ED to successfully argue to the U.S. District Court for the District of
Columbia that the money in the
accounts belonged to ED. In August of 1992, ED received a check for $12,575 from
Respondent's Title IV accounts which the court held in its registry until it was determined that
ED owned the money.See footnote 1
SFAP concedes that it eventually recovered all of the cash in
Respondent's Title IV accounts and does not contest Respondent's contention that it fully
cooperated with ED in recovering the Title IV funds temporarily held by the district court. As
noted in the final audit determination, "[t]he auditor concluded that although the bank was
notified that the account contained Federal funds, the bank ignored this when the judgement was
executed." ED Exhibit 1-3. SFAP simply argues that Respondent was in violation of 34 C.F.R.
§ 668.16, because it failed to ensure that Federal funds held in trust for ED were not used
purpose other than to pay for the education of its student beneficiaries.
I find that Respondent has not violated 34 C.F.R. § 668.16
(1990). Respondent did not
use Title IV funds for any purpose other than the education of its students. Although the funds
question were initially held by the district court, they were simply held in a registry account until
a proper determination could be made by the court concerning the proper ownership of the funds.
As noted above, as a result of the adjudication in the district court, the funds were released to
Attached to its initial brief, Respondent submitted a letter dated
June 9, 1993, addressed
to Philip Brumbach, at SFAP's regional office in Philadelphia, wherein the auditor concluded
that follow-up review indicated that Respondent fully matched the SEOGs for the 1991-92 award
year. In its brief, SFAP "accepts" Respondent's evidence. Thus, the $2,000 liability is reduced
to $114 for the 1989-90 award year. Respondent requests a waiver for the 1989-90 award year
because it "discovered that additional institutional scholarships were awarded." Respondent's
initial brief, p. 3.
I conclude that Respondent was in violation of 34 C.F.R. §
676.21 (1989) by failing to
fully match the SEOGs for 1989-90, and owes ED $114 to cover its unmatched share of those
grants. In its initial brief, Respondent submitted no evidence which supports its contention that
"discovered" additional institutional scholarships, or even states which year the alleged
scholarships were provided. With its reply brief, Respondent attached certain student records
which it contends demonstrate that it fully met its responsibilities to match the SEOGs in
question. However, these exhibits are not trustworthy as they are unverified and without any
foundation as to reliability. In addition, the exhibits were not submitted in a timely manner and
with opportunity for review and comment by SFAP. The Order Governing Proceeding, issued
on August 2, 1995, allows for the Respondent to submit a reply brief, but makes it clear that the
brief is to deal with rebuttal matters only. The exhibits proffered as part of Respondent's reply
brief clearly concern matters which were part of its case-in-chief and should have been brought
forward when it submitted its initial brief, thus providing SFAP with an opportunity for review
$15,147. SFAP also assessed an additional $8,179 in interest and special allowances to cover
these unsatisfied refunds.
In its defense, Respondent notes that when the school's Federal
accounts were garnished
and placed in the court's registry, one of the accounts was an operating account intended to cover
loan refunds. In addition, SFAP placed the school on a reimbursement basis whereby the school
was reimbursed for student assistance after the assistance was awarded, thus further preventing
Respondent from having the necessary resources to provide student refunds. Respondent also
argues that SFAP owes it $84,970 in unreimbursed Title IV money which it would have used for
refunds. Respondent additionally requests that the special allowances and interest payments be
waived in light of these circumstances.
SFAP argues that the issue of whether the Department owes
Respondent any money for
unpaid reimbursements is outside the scope of this proceeding. However, SFAP notes that
Respondent's request has not been resolved because of outstanding liabilities of $56,384
associated with an earlier final program review determination issued in January 1992, and upheld
on appeal in September of 1992.
I am sympathetic to Respondent's cash flow problems which appear
to be caused in part
by SFAP's delayed reimbursement. While the amount of the reimbursement owed to
Respondent by SFAP may be involved in an earlier program review, by SFAP's own admission
the amount involved is $56,384, thus leaving a balance of $28,586 owed to Respondent. This
matter has been pending since 1992. However, while the Department cannot delay
reimbursement indefinitely, an institution participating in the Federal student loan programs on a
reimbursement basis must be prepared to have the cash resources necessary to provide timely
refunds for students who withdraw from their education programs before completion and cannot
rely on SFAP reimbursements to cover such refunds. The decision by SFAP to place
Respondent on a cash reimbursement basis was within the discretion of SFAP in fulfilling its
obligation to ensure that Federal funds are not jeopardized. Given the circumstances of this case,
it does not appear that SFAP has abused its discretion. Thus, I find that Respondent was in
violation of 34 C.F.R. § 682.607 (1989, 1991) by failing to make refunds on behalf of
receiving FFELs upon withdrawal from Respondent's program, and must reimburse the holders
of these FFELs $15,157 to be credited to the accounts of these students. However, while I do
have the authority to waive this liability, see 34 C.F.R. § 668.117(d), SFAP should
consider waiving or reducing the amount of money owed ED in light of its delay in processing
Respondent's reimbursement request.
In its brief, SFAP agreed that the $12,575 it received in August of
Respondent's garnished Federal accounts should be used to reduce Respondent's liability to ED.
In addition, SFAP must recalculate the amount of estimated interest and special allowances owed
to ED to take into account this substantial payment it received which should have reduced the
interest payments and special allowances made on behalf of Respondent and its students.
$144 -- liability for unmatched SEOGs ( SFAP Finding # 6)
* $5,425 -- unpaid Pell and SEOG refunds (SFAP Finding # 11); subject to verification by SFAP (see footnote 2).
* Special allowances and interest payments made by SFAP which should not have been made had Respondent made FFEL refunds (SFAP Finding # 10); however, SFAP must recalculate the amount due in light of the $12,575 payment it received from Respondent's garnished Federal accounts.
* The total amount of the three items above must be reduced by the $12,575 payment received by SFAP in 1992.
FURTHER ORDERED, that Respondent pay to the holders of
FFELs $15,147 to be
credited to student accounts for unpaid refunds (SFAP Finding # 10).
Frank K. Krueger, Jr.
A copy of the attached initial decision was sent by certified mail,
return receipt requested to the following:
Alexandra Gil-Montero, Esq.
Office of the General Counsel
U.S. Department of Education
600 Independence Ave., S.W.
Washington, D.C. 20202