UNITED STATES DEPARTMENT OF EDUCATION
WASHINGTON, D.C. 20202
In the Matter of Docket No. 96-28-ST
Docket No. 96-93-SP
Docket No. 96-103-SA
INSTITUTO de EDUCACION UNIVERSAL, Student Financial Assistance Proceedings
On March 12, 1996, the office of Student Financial Assistance Programs (SFAP) of the U.S. Department of Education (Department) issued a notice of intent to terminate the eligibility of Instituto de Educacion Universal (IEU) to participate in the student financial assistance programs authorized under Title IV of the Higher Education Act of 1965, as amended (Title IV). 20 U.S.C. § 1070 et seq. and 42 U.S.C. § 2751 et seq. SFAP also stated its intention to impose a fine of $275,000. Later in 1996, SFAP commenced two additional proceedings against IEU to recoup $2,762,150 based on its evaluation of a final program review determination and a final audit determination which described statutory and regulatory violations IEU is alleged to have committed.See footnote 11 At the request of the parties, these three interrelated administrative proceedings were combined into one and a hearing to address them was conducted on October 22 and 23, 1996.
Before an institution may begin participation in Title IV financial aid programs, it must
demonstrate that it has the administrative capability to adequately administer these programs. 34
C.F.R. § 668.16.See footnote 22 Additionally, such an institution must act as a fiduciary when handling Federal
funds which are ultimately to be disbursed to the eligible students. 34 C.F.R. § 668.82. With
these guidelines in mind, an institution which participates in the Title IV student aid programs is
given the discretion to make withdrawals, or draw downs, of Federal funds from the Department
account at such times as funds are needed to disburse to eligible students. The institution is not
permitted to draw down funds in excess of its immediate need, and immediate need has been
defined as those funds which the institution can expect to disburse to students within an average
of three days. 31 C.F.R. § 205.4(a) (1988); Recipient's Guide for the Department of Education
Payment Management System, Chapter 5, 6 (October 1995).See footnote 33 If an institution discovers it has
funds in excess of this immediate need, it is expected to return them immediately to the
Department account. Id.
In May 1994 auditors assigned to the Department's Regional Office of Inspector General
for Audit (OIG) in New York conducted an audit review of IEU's administration of its Title IV
student financial aid programs for the period July 1, 1991, to June 30, 1994. The auditors
determined that during the audit period IEU consistently drew down more Federal monies than it
could expect to disburse within an average of three days, and monies in excess of its annual
authorizations. This finding was based on a review of IEU's funding authorizations for the Pell
Grant, Federal Work-Study, Supplementary Educational Opportunity Grant, and Perkins Loans
programs, the amounts of the cash draw downs, and the timing and amounts of disbursements for
each of these programs. The auditors recorded all of IEU's draw downs and disbursements on a
monthly basis for each of the three award years. After subtracting the disbursements from the
draw downs, the remaining balance of funds in IEU's accounts represented excess cash held by
IEU, or cash held for more than three days.
In the 36 months under evaluation, IEU maintained excess cash balances at the
conclusion of every month but October 1991 and March 1993. The highest amount of excess
cash balance for any one month was $4,018,150; over the three year period, the average excess
cash balance at the end of the month was $1,367,783. In addition to monthly totals, the OIG
auditors also prepared a chart, ED Exhibit 48, which lists each draw down of federal funds, each
disbursement to IEU's operating account, and a running balance of funds in that account. This
chart further details the significance of IEU's excess cash position.
In its September 12, 1995, response to the OIG audit report, IEU admitted that it had a
problem with maintaining excess cash during the three award years, but argued that the
Department had overstated the problem, both in terms of the amount of excess cash at the end of
the 1993-94 award year and in the amount of the imputed interest due the Department. Despite
this earlier admission, during the hearing, IEU challenged this excess cash finding through the
testimony of its witnesses, who made assurances that all federal funds were disbursed within
three days of their draw down. IEU's witnesses explained that the reason for this OIG finding
was that OIG mistakenly believed that the date student aid was posted on the student ledger was
the date the funds were credited to the student accounts. In reality, however, IEU stated that
student aid funds were properly credited within three days of their draw down, but this event was
posted on a later date. In the absence of a Departmental requirement that these ledgers be
updated on a daily basis, it was IEU's practice to post these ledger entries several months after a
financial event occurred.
Through this testimony, IEU attempted to demonstrate that the reason it was being
mistakenly accused of maintaining excess cash in its school accounts was because of the time
delay in posting transactions to the student ledger accounts. However, I am not convinced this is
true. ED Exhibit 48 provides a picture of IEU's draw downs and disbursements, with a running
account balance. This document clearly demonstrates that it was IEU's practice to draw down
more Federal funds than it disbursed within a three day, or even longer period. IEU's testimony
regarding the timing of the posting of the student ledger accounts dates is irrelevant, and its
testimony that all federal funds were credited within three days of a draw down is unpersuasive.
Throughout the three award years examined, IEU maintained excess federal funds in its account
for longer than three days.
SFAP also alleged that IEU used Title IV funds for unauthorized purposes. In support of
this allegation it presented ED Exhibit 49, an OIG work paper, which indicated that by the end of
each month most of the funds in IEU's Federal funds account balance were removed but that the
school's operating account balance was not simultaneously increased by the same amounts.
SFAP interprets this apparent disappearance of Federal funds to be evidence that IEU used
these funds for non-program purposes. There is no question that IEU maintained excess cash
throughout this period, but I was not provided with sufficient evidence to meet SFAP's burden of
proof that the funds were otherwise abused. Therefore, I decline to find that IEU expended Title
IV funds for unauthorized purposes.
Overstated Clock Hours
IEU utilizes a clock hour system of measuring the length of its technical programs. For
any program measured in clock hours, student eligibility for second and subsequent Pell Grant
awards depends upon a student's completion of a prescribed minimum number of clock hours.
During the May 1994 audit, the OIG auditors found that IEU was incorrectly computing the
number of clock hours assigned to its programs in such a way as to permit students to become
eligible for second or subsequent Pell Grant payments sooner than proper.
The issue of how to define a clock hour continues to be a vexing problem for the
Department and the subject of much litigation and interpretation.See footnote 44 A clock hour traditionally was
defined as a 50-to-60 minute class, recitation, or lecture. Because of ambiguities in the
interpretation of this definition, it was further refined in the regulations. The definition
applicable to the term clock hour beginning with the 1993-94 award year is found in 34 C.F.R.
§ 600.2 (1994).
IEU offers two programs, the day program which runs from 8:00 AM to 1:50 PM and a
night program which runs from 6:00 PM to 10:30 PM. The day program is 350 minutes in length
and consists of six 50 minute periods of instruction for a total of 300 minutes of instruction and
one 50-minute student break.See footnote 55 The night program is 270 minutes long and consists of five 50-
minute periods of instruction for a total of 250 minutes of instruction and a 20-minute student
break. SFAP argues that, in spite of a change to the regulation in 1993 and Secretarial guidance
found in the Federal Register, IEU has persisted in its practice of aggregating the number of
minutes of instructional time in the program and dividing the number by 50, rather than 60, to
compute the number of clock hours. This practice results in IEU's conclusion that its day
program gives the students six clock hours of instruction per day and the night program five
clock hours of instruction. SFAP insists that the aggregate hours of instruction be divided by 60,
rather than 50, and that IEU's method of computation has resulted in an overstatement of clock
hours in its programs and a resultant over award of Pell Grant awards. Using 60 rather than 50 as
the divisor results in the day program offering 5 clock hours of instruction and the night program
4.17 clock hours, versus IEU's calculation of 6 and 5, respectively.
SFAP points out that IEU's use of a 50- rather than 60-minute clock hour resulted in an
over award of $3,854,700 in Pell Grants over the three year audit period. However, because of a
previous ambiguity of the definition of a clock hour which SFAP attempted to clarify in 1993,
SFAP seeks to recover over awarded funds for only the 1993-94 award year.
IEU justifies its method of determining clock hours by explaining that since its day
students receive 300 minutes of instruction a day, and the increments of instruction are divided
into 50-minute periods, it is only natural to divide the total number of minutes of instruction by
50 to arrive at the proper number of clock hours. It is adamant about not including non-
instructional time in the clock hour computation because to do so would result in a higher fee for
its students. There is a certain logical appeal to IEU's arguments on this issue; however, this
method has its flaws.
The Department's primary goal is to award Pell Grants to students based upon receiving a
specified amount of instruction - a clock hour. This instructional clock hour must not consist of
anything less than 50 minutes of class, lecture or recitation; the Department will recognize a 50
minute class, accompanied by a 10-minute non-instructional period, to be the equivalent of one
clock hour. The regulation confirmed this when it was amended in 1993 specifically sanctioning
the inclusion of up to 10 minutes of non-instructional time within one clock hour. However, in
many institutions which offer classes which cover a two, three, or four hour block of time in one
session, designed with 10-minute breaks for each hour, the instructor and students frequently
decide to reallocate the 10 minute break periods. This is accomplished by aggregating them
either in the middle, or at the conclusion, of the class session. The obvious benefit to the choice
of the latter option is that the class ends early and the non-instructional period is taken after the
students and faculty have departed the facility. This, or any other form of realignment of the
non-instructional periods does not deprive the students of any instructional time, as the student
has had the benefit of several 50 minute periods of instruction and several 10 minute periods of
SFAP's failure to include the 50 minutes of non-instructional time IEU allows each of its
day program students, and the 20 minutes of non-instructional time for the night students, in the
computation of the program's clock hours suggests that the Department is interested in
preventing a school from providing a continuous stream of 50 minute lectures, without the
benefit of a break. Perhaps this is premised on the concern for the value of such non-stop class
time. If the non-inclusion of non-instructional time in the clock hour computation is based on
this theory, then this appears to be a venture by the Department to exercise direction or control
over IEU's curriculum or program of instruction, which is expressly prohibited. 20 U.S.C. §
3403; see also 20 U.S.C. §§ 1232-a, 5899. The arrangement of instructional and non-
instructional class hours is not a Departmental concern, but one within the province of a state
licensing body or accrediting agency.
Another theory which SFAP may be pursuing here is its interpretation that the clock hour
definition in Section 600.2 requires the 50- to 60-minute class and any resulting 0- to 10-minute
non-instructional time to occur within one consecutive 60 minute period, as opposed to being
aggregated as discussed above. If this is SFAP's position, it is based on an ambiguous change to
the regulation which leaves the regulation subject to further contention. Although the Secretary
indicates a clock hour of instruction should occur in a discrete 60-minute period, the regulation
is not quite so precise. Requiring that the non-instructional time immediately follow a distinct
50-minute period of class ignores the realities of the dynamics of classroom behavior involving
classes of two or more consecutive hours in length.See footnote 66
The problem faced by IEU would have been avoided if it had not aggregated the periods of non-instruction, but rather attached them to the end of each 50-minute segment of lecture. However, I believe it retains this discretion, absent a contrary ruling by its accrediting agency or licensing body. Accordingly, I find that IEU has not overstated its clock hours to the extent advocated by SFAP because it should be permitted to use the combined total of its instructional and non-instructional time to arrive at the clock hour figure. After recomputing the clock hours for the day program, I find IEU provides six clock hours of instruction per day as it claims. This is based on it providing 300 minutes of class, plus the 50-minute aggregated student break, plus 10 minutes of an imputed break at the conclusion of the school day. This total of 360 minutes is divided by 60, with the result of six clock hours. I find the evening program provides 4.66 clock hours of instruction. This is based upon 250 minutes of class, plus the 20-minute aggregated student break, plus a 10-minute imputed break at the conclusion of the school day. Dividing the total, 280 minutes, by 60 results in a clock hour computation of 4.66 clock hours per day, one- third of a clock hour short of what IEU had allocated for the evening program. Using my recalculation of IEU's clock hours, there has been no over award for the day program, and an over award of one-third of a clock hour per day for the night program. IEU's financial liability for this reduced over award should be recomputed accordingly.
Institutions which participate in any Title IV programs are required to have implemented
a fair and equitable refund policy which provides a refund of the unearned portion of the tuition,
fees, room and board, and other charges to any student who has received some form of Title IV
program assistance and subsequently withdraws, drops out, or is expelled after the first day of the
payment period. 34 C.F.R. § 668.22(a). The institution must return the Title IV program portion
of the refund to the appropriate program account within 30 days of the date the student withdrew
or dropped out. 34 C.F.R. § 668.22(g)(2)(iv) (1994).
From April 18 through 22, 1995, institutional review specialists from the Department's
New York Regional Office conducted a program review of IEU's administration of the Title IV
program. The program review cited IEU for having a history of making late refunds to students
and to the Pell Grant account. The program reviewers discovered that the cause of most of the
late refunds was IEU's admission that its usual practice was to wait until the September
following each award year to make refund payments; its method for effecting this refund was to
offset the refund against future draw downs from the Pell Grant Statement of Account. As a
result, IEU's eligibility for funds would be reduced by the amount of the offset. Based on this
finding of late refunds, the program reviewers asked IEU to prepare a report of refunds not made,
or made late, to the Pell Grant account for each award year under review. In compliance with
this request, IEU compiled an initial list of late or unpaid refunds which disclosed 803 late
refunds, totaling $971,914, for the 1992-93 award year; 865 late refunds, totaling $1,044,454, for
the 1993-94 award year; and, as of the time of the review, IEU had failed to make 512 refunds,
totaling $655,554, for the 1994-95 award year. All refunds for the 1992-93 and 1993-94 award
years had been paid at the time of the program review.
In response to the SFAP claim that IEU owed the Pell Grant account refunds of $655,554
for the 1994-95 award year, the school produced testimony and documents proving that on July
20, 1995, it reduced its authorization for Pell Grant funds by generating an offset of $1,120,192
to its Pell Grant account. IEU argues that this transaction represents a refund, albeit late, of more
than double the amount SFAP requested. SFAP disagrees with IEU's conclusion. SFAP
confirms that an offset is an appropriate method of paying a refund, but that a reduction of the
authorization in a school's Pell Grant statement of account can occur for other reasons as well,
such as a reduction in the number of enrolled students. SFAP insists, and I agree, that in this
situation a valid refund would have been effectuated only if the reduction of IEU's authorization
was accompanied by a showing that IEU enrolled additional students who were eligible for Pell
Grants, but for which IEU did not draw down federal funds to award them those grants. IEU
presented no evidence of its forbearance of the award of additional Pell Grants to match the
offset of its authorizations; therefore, I must conclude that the refund for the award year for 1994-
95 has not been consummated.
Discussion as to Termination
The Secretary has been given the statutory authority to terminate the eligibility for any
program under Title IV, of an otherwise eligible institution, if it fails to carry out any regulation
prescribed by the Secretary. 20 U.S.C. § 1094(c)(1)(D). Pursuant to this authority, the Secretary
has promulgated 34 C.F.R. § 668.86(a), which provides that the Secretary may terminate the
eligibility of an institution to participate in any or all Title IV programs if the institution violates
any provision of Title IV or any regulation or agreement implementing that Title. In addition, if
an institution's regulatory violations result in a breach of its fiduciary duty to administer Title IV
programs in accordance with the highest standard of care and diligence, this conduct also
constitutes grounds for termination of eligibility to participate in these programs. 34 C.F.R.
During the award years under consideration, IEU consistently engaged in conduct which
was contrary to the Title IV regulations and regularly ignored policy guidance regarding its
obligation to properly estimate the amount of Federal funds needed for a three day period of
operation, thus allowing it to maintain excess Federal funds in its school account in violation of
regulatory prohibitions designed to prevent this situation. Additionally, IEU failed to make
timely refunds, and for the 1994-95 award year failed to make refunds at all, to students and/or
the Pell Grant account for students who withdrew, dropped out, or were expelled from the
institution. Based upon the credible evidence of these regulatory violations, SFAP has shown to
my satisfaction that IEU lacks the administrative capability to administer Title IV programs and
that it has also failed to act in a manner consistent with its fiduciary duty. I find IEU's failure of
its duties in these two critical areas warrants termination of its eligibility to participate in the
Title IV programs.See footnote 77
For IEU improperly requesting more funds than it needed for immediate disbursement,
SFAP seeks a fine of $75,000. This amount is based on a fine of $25,000 for each of the three
award years of the violations.See footnote 88 The gravity of IEU's retention of these excess Federal funds
throughout the three year period warrants approval of $75,000, the maximum amount of this fine.
In conjunction with the excess cash situation, SFAP also seeks a fine of $75,000 for using the
excess Federal funds for unauthorized purposes over the period of the three award years. SFAP
did not prove this allegation, so no fine is appropriate for this finding.
SFAP is seeking a fine of $25,000 for IEU's overstatement of clock hours of instruction
for award year 1993-94 and an additional $25,000 for the award of excess Pell Grant funds to its
students as a result of overstating these same clock hours. Having found the overstatement of
clock hours of instruction is significantly less than advocated by SFAP, no fine is appropriate for
For failure to make refunds and failure to make timely refunds, SFAP seeks a fine of
$75,000, based on $25,000 for each award year's violations. Once again, treating all late refunds
occurring in each award year as one separate violation, I find that a fine of $25,000 for each year,
for a total fine for this finding of $75,000 is appropriate, considering the disregard shown by IEU
for regulations requiring a more timely payment of refunds.
In conclusion, I find that a total fine of $150,000 for IEU's misconduct is appropriate.
For IEU's consistent maintenance of excess cash during the three award years, SFAP has
assessed a liability of $756,864. This amount represents $213,917 for the imputed interest on
these excess funds which were held by IEU in its account rather than returning them to the
Federal account upon the realization that it had in excess of three days need. It also includes
$542,947 which represents the amount of excess cash remaining in IEU's Federal account at the
conclusion of the three year program review period. I find that IEU must reimburse SFAP for
Although I have found that IEU did not overstate its clock hours for the students in the
day program for the 1993-94 award year, there is an overstatement of one-third of a clock hour
per day for the students enrolled in its night program. IEU must recalculate the Pell Grant
awards for the night students and reimburse SFAP for any resulting over awards. Additionally
IEU must recalculate the number of clock hours for both programs for the 1994-95 award year,
using the same formula as used for the 1993-94 award year, and then recalculate the Pell Grant
awards accordingly. IEU must reimburse SFAP for any resulting 1994-95 over awards.
I have confirmed SFAP's finding that IEU made 1,668 late refunds for the 1992-93 and
1993-94 award years and the total dollar value of these late refunds of $2,016,368. For these late
refunds, SFAP is entitled to recover the interest on those late refunds at a rate of 3 percent per
year. SFAP has computed this as $15,544 for 1992-93 and $18,427 for 1993-94. Additionally, I
agree with SFAP's assertion that it is entitled to a refund from IEU of $655,554 which was due
for the 1994-95 award year, along with interest of $28,561.
During the 1995 program review, it was discovered that IEU failed to conduct verification
of information submitted by student number 27. IEU has not submitted satisfactory evidence to
rebut this finding; therefore, it must repay SFAP the $2,300 in Title IV funds paid to that student.
2. IEU did not overstate the number of clock hours in its day program for the 1993-94
award year. It must recalculate the Pell Grant award for its 1993-94 night program, as well as
both programs for the 1994-95 award year, and reimburse the Department for the over awards in
Federal Pell Grant funds.
3. IEU failed to make timely refunds to the Pell Grant program for the 1992-93, 1993-94,
and 1994-95 award years and must reimburse the Department $62,532 in imputed interest costs
of those late refunds. Further, IEU must reimburse the Department $655,554 for its failure to
make a refund payment for the 1994-95 award year.
4. IEU must reimburse the Department $2,300 for its failure to verify the eligibility for student number 27.
Judge Richard F. O'Hair
Dated: January 24, 1997
A copy of the attached initial decision was sent by certified mail, return receipt requested to the
Benny Frankie Cerezo, Esq.
Hostos 848, Hyde Park
San Juan, Puerto Rico 00927-4216
Alexandra Gil-Montero, Esq.
Russell B. Wolff, Esq.
Office of the General Counsel
U.S. Department of Education
600 Independence Avenue, S.W.
Washington, D.C. 20202-2110