UNITED STATES DEPARTMENT OF EDUCATION
WASHINGTON, D.C. 20202
In the Matter of Docket No. 96-9-SA
UNITED EDUCATION INSTITUTE, Student Financial Assistance Proceeding
_________________________________ ACN: 09-30002
In 1993, the Office of the Inspector General (OIG), U.S. Department of Education (ED),
conducted an audit of UEI's administration of the Title IV programs for the period of July 1,
1992, through June 30, 1993. On August 10, 1994, OIG issued its audit report, in which it found
that UEI was in violation of Title IV by understating refunds due to students who dropped out of
its ESL program. On October 19, 1995, ED's Student Financial Assistance Programs (SFAP)
issued a final audit determination which adopted the findings of the OIG audit report and
directed that UEI refund $302,000 to ED for the understated refunds. By letter dated December
21, 1995, UEI appealed the SFAP determination. The parties submitted briefs and exhibits in
support of their positions, and oral argument was held on June 6, 1996.
For the reasons provided below, I agree with SFAP that UEI understated the amount of refunds due under its ESL program. However, since my basis for this conclusion is different from that of SFAP, the amount due to ED for the understated refunds must be recalculated.
When UEI raised its tuition in October 1992, it also implemented an incentive loan
program wherein interest-free loans were given to students to cover the difference between their
Pell Grants and the tuition. For example, for a tuition charge of $3,200, and where the student
qualified for a Pell Grant of $2,400, UEI would give a student an incentive loan of $800 to cover
the difference between the Pell Grant and the tuition charge. Students participating in the
incentive loan program would sign a contract in which the loans were repayable within six
months after graduation or after the student dropped out of the program. If the student graduated
from the ESL program with fewer than twelve absences, the school would forgive repayment of
The OIG auditors concluded that the incentive loans were not valid for the following
reasons: UEI forgave loan balances for graduates with fewer than twelve absences; UEI did not
make a serious attempt to collect loan balances owed by students; UEI did not record the loan
balances in its accounting system; and the loans were used to cover tuition increases that had no
link to instructional changes. Specifically, the audit report noted that, on the face of the loan
agreement, students who graduated from the program with less that twelve absences had their
loans forgiven. For those students who graduated with twelve or more absences, or who dropped
out of the program before completion, the auditors found that the school sent one letter informing
a student of his or her obligation to repay the loan balances. If the student did not respond to the
letter, no follow-up effort was made. The auditors examined a random sample of 284 student
files from the 1,323 students who withdrew from the ESL program, and found that UEI received
no payments from any of these students for the incentive loans. Further, the auditors found that
UEI kept no master record acknowledging the loans as accounts receivable, or any ledgers
keeping track of the loans. Based on these factual findings, the auditors concluded that UEI
never intended to collect the loans, and were used for the sole purpose of inflating the cost of
attendance in order to be able to retain more Pell funds if a student dropped out of the program.
By increasing the tuition charge, UEI was able to increase the amount of tuition allegedly earned
on behalf of a student who withdrew, thereby decreasing the amount of Pell refunds.See footnote 11
Based on the original tuition rate, OIG recalculated the refunds due on behalf of the students included in the sample that they reviewed, and projected the recalculation for all students who withdrew from the ESL program during the audit period. OIG estimated the amount due for all students to be $252,000. In addition, UEI identified an additional $50,000 in refunds that the school failed to pay from July 1993, to April 1994, as a result of the alleged artificial tuition charge. Consequently, SFAP directed UEI to pay $302,000 in unpaid Pell Grant refunds.
Under pressure from OIG, UEI discontinued the incentive loan program in April 1994.
According to Mr. Lajevardi's declaration, around the same time UEI decided to increase
its ESL tuition it also decided to implement the incentive loan program to encourage students to
complete the ESL program. UEI determined that, although students usually enroll in vocational
education programs in order to earn a credential to obtain employment in a particular field,
students take ESL in order to learn English well enough to communicate with others. Because
facility in English is easily demonstrated through conversation, a certificate from an ESL
program does not have the same intrinsic value as other academic credentials. As a result, as
soon as students were able to communicate effectively enough in English to secure employment,
they often dropped out of the ESL program. UEI, of course, believed that students should remain
in the program until completion in order to achieve the maximum level of competence.
Moreover, UEI's state authorizing agency requires institutions to maintain at least a 60 percent
completion rate for each of its educational programs or risk losing its license to provide the
programs. Thus, UEI designed the incentive loan program questioned by SFAP. Id. at 5-6.
In response to SFAP's charge that the incentive loans are not binding agreements, Mr.
Lajevardi noted that students sign promissory notes for the loans. Id. at 7. When UEI instituted
the incentive loan program it had hoped that the program would be financially viable in that it
would collect enough money from students not able to have their loans waived and maintain
enough corporate-sponsored students to be able to pay for the waived loans through its increased
tuition. Id. at 13. Most students, of course, took advantage of the program, although a few
students had the difference between their Pell Grants and the full tuition paid for by a corporate
sponsor or rehabilitation agency. Id. at 7 and Exhibit R-16. However, very few of the students
who dropped out of the program, or completed it with more than twelve absences, paid off their
loans. Although UEI sent a collection letter to each of its former students, 20 percent were
returned as undeliverable. UEI did not send repetitive collection letters or make any further
attempt to collect the loans because, according to Mr. Lejevardi, the school knew, due largely to
the economic and transient nature of its ESL students, that the loans were largely uncollectible.
Exhibit R-4 at 9-10.
In response to the charge that UEI never kept track of the incentive loans in its accounting
system, Mr. Lajevardi notes that, during the time period at issue, UEI was on a cash accrual
system of accounting and thus did not report the incentive loans on its financial statements until
cash was actually received. Id. at 11. UEI submitted an opinion from its CPA that this method
of accounting was in accordance with generally accepted accounting principles. Exhibit R-20.
The only rebuttal evidence submitted by SFAP was a declaration by James Okura, the OIG supervisory auditor in this case. Exhibit E-7. Although Mr. Okura expressed his opinion that the incentive loans were not valid loans, his declaration is nothing more than a reiteration of the conclusions made in the OIG audit report and adds nothing of value to the record.See footnote 22 Mr. Okura makes no attempt to further elaborate on the OIG conclusions or to address any of the testimony given by Mr. Lajevardi.
Under 20 U.S.C. § 1070a-6(5) (1990),See footnote 33 the cost of attendance can only include those
tuition and fees normally charged to a student. According to SFAP, quoting from Black's law
Dictionary and Webster's Ninth New Collegiate Dictionary, to charge means to impose a
burden, duty, obligation, or lien, to create a claim against property; to assess, to demand ...; to
fix or ask a fee or payment.... Under the plain meaning of the term charge, to qualify as
tuition under Title IV, the student must have a legal obligation, duty, or burden to pay the alleged
charge. SFAP brief at 8. I accept the SFAP definition. Under the terms of the promissory
notes signed by the students, a clear, unequivocal, legal obligation was created requiring the
students to repay the loans if they dropped out of the program or completed the program with
twelve of more absences. The fact that the loan agreements provided for possible forgiveness of
the loans has no impact on the legality of the obligation created.
The fact that UEI never attempted to seek enforcement does not undermine the legal
significance of the debt created by the notes. Mr. Lajevardi's declaration, which was available to
SFAP before Mr. Okura's declaration was executed,See footnote 44 states why UEI never sought enforcement.
Mr. Lajevardi's declaration also states why the incentive loans were not included in UEI's
financial statements and notes that other records concerning the loans were maintained by the
school. Neither Mr. Okura, nor anyone else in SFAP or OIG, made any attempt to rebut Mr.
Lajevardi's declaration on any of these points. Finally, the fact that the tuition increases were not
linked to any instructional change in the ESL program is not conclusively probative of whether
the loans at issue were valid. Institutions may decide to increase tuition on the basis of criteria
other than instructional content. Indeed, Mr. Lajevardi's declaration provided a number of
economic reasons as to why the tuition was increased. Mr. Lajevardi's declaration is credible
and, since it was unrebutted, must stand.
There is no statute, regulation, or ED policy that directly deals with institutional loans as
a cost of attendance.See footnote 55 What case law that exists supports UEI's position.See footnote 66 In In re Mount
Wachusett Community College, Docket No. 94-102-SP, U.S. Dept. of Educ. (Sept. 1, 1995),
certified by Secretary (Nov. 22,1995), the judge held that tuition could be included for
incarcerated students in the cost of attendance calculation because the students were potentially
liable for any unpaid balances that existed at the end of the year even though the institution
routinely waived any charges which remained after Title IV assistance was credited to the
student accounts. In In re Hallmark Institute of Technology, Docket No. 94-127-SP, U.S. Dept.
of Educ. (Aug. 23, 1995), and In re Arkansas Valley Technical Institute, Docket No. 95-52-SP,
U.S. Dept. of Educ. (Jan. 31, 1996) the judge held that tuition and fees could be included in the
calculation of the cost of attendance where the tuition and fees were reimbursed to the institution
from another source since the students were billed and remained liable for the tuition and fees if
the reimbursement was not received.
Thus, under the language of 20 U.S.C. § 1070a-6(5) and the prevailing case law of this
tribunal, I must conclude that the incentive loan program represented a valid means of providing
institutional financial assistance and represented a bona-fide charge to UEI students which could
be included as a valid cost of attendance for purposes of determining refunds.
III. Improper Calculation of Refunds by UEI:
Although UEI contends that the tuition increases were bona-fide and that the incentive
loans were valid, it ignored this position when it calculated the refunds due on behalf of the
students who dropped out of the ESL program. Under 34 C.F.R. § 668.22(a) (1992), an
institutional refund means the amount paid for institutional charges for a payment period by
financial aid and/or cash payments minus the amount retained by the institution for the portion of
the payment period that the student was actually enrolled at the institution. The record
demonstrates that when UEI performed this mathematical calculation, it did not treat the amount
of the tuition represented by the incentive loan program as financial aid or payment received.
This failure had the effect of having the Pell Grant program pay for most of the tuition and fees
earned by the institution, rather than distributing those cost among all sources of payment,
including the institutional loan program. Put another way, the Pell Grant program in effect
funded most of the incentive loans for students who dropped out of the ESL program.
This effect may be seen by examination of UEI's own evidence. For example, V.R. was
a student in UEI's ESL program who dropped out during the first payment period. According to
her enrollment agreement, V.R.'s tuition was to be paid as follows:
Total tuition and fees: . . . . . . . . . . . . . . . . $3,200.00
Pell: . . . . . . . . . . .. $1,533
Incentive loan: . . . .$1,667
At the time of V.R.'s withdrawal, the school had distributed one-half of the Pell Grant, or $766.
Exhibit R-12-4.See footnote 77 Thus, V.R. was also disbursed one-half of her incentive loan, or $833.50.
However, there is no recognition of the incentive loan in the refund calculation. UEI calculated
the refund by subtracting the amount earned from the Pell funds received rather than by
subtracting the amount earned from the total financial aid package as required by the regulation.
UEI determined the refund as follows:
Pell funds paid: . . . . . . . . . . . . . . . . . . . . . . $766.00
Tuition and fees earned: . . . . . . . . . . .. . . . . 773.44
Refund : . . . . . .. . . . . . . . . . . . . . . . . . . . . .. ($7.44)See footnote 88
V.R.'s refund should have been calculated as follows:
Tuition and fees paid: . . . . . . . . . . . . . . . . . $1,600.00
Pell funds: . . . . .. . .$766.50
Incentive loan:. .. . . .833.50
Tuition and fees earned:. .. . . . . . . . . . . . . . 773.44
Refund. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. $826.56
Under the regulations in effect during the period at issue in this case, UEI could retain a portion
of the refund based on the amount of the incentive loan it provided to the student at the time the
student dropped the program, or, in the case of V.R., approximately 52 percent of the refund. See
34 C.F.R. § 668.22 (a)(3)(ii) (1992).
Other examples of UEI's miscalculations appear in Exhibits R-12-10 to R-12-13. In
Exhibit R-12-10, UEI's record shows no refund due to the Pell program. However, a refund of
approximately $393.00 was due for this student which should have been distributed between the
Pell Grant fund and the incentive loan program. Similarly, Exhibit R-12-13 shows no refund due
to the Pell program, when a refund of approximately $711 should have been distributed between
the Pell Grant program and the incentive loan program. In both of these cases UEI paid itself the
tuition it earned completely from the Pell Grant program, and then went to the student for the
balance, which was a minimal amount which the students simply paid off. If one examines the
OIG audit work papers (Exhibit E-6), one can see that UEI miscalculated the refunds for all of its
student who dropped out of the ESL program.
In addition to violating 34 C.F.R. § 668.22(a) in its calculation of refunds, UEI also
violated its fiduciary duty to ED. Under the Title IV program, wherein participating institutions
are distributing Federal money, the institutions act as a fiduciary. 34 C.F.R. § 668.82 (1992).
Fiduciary is defined as [a] person having duty, created by his undertaking, to act primarily for
another's benefit in matters connected with such undertaking. Black's Law Dictionary 563 (5th
ed. 1979). As to matters within the scope of a fiduciary duty, the person having the fiduciary
duty must not benefit at the expense of the beneficiary to the duty. Cf. Restatement 3d Trusts,
S.170. By charging, in most cases, the entire tuition earned to the Pell program, rather than
allocating the cost more equitably between the Pell program and the incentive loan program, UEI
acted to its own benefit and to the detriment ED in violation of its fiduciary duty.
2. The incentive loans made by UEI to students to cover the cost of tuition not covered
by the Pell Grant program were valid institutional loans, even though UEI failed to collect those
loans from most of the students in the program.
3. As valid institutional financial assistance to cover bona-fide educational charges, the
institutional loans should have been used in UEI's calculation of refunds, and UEI's failure to
include the institutional loans in the calculation was a violation of 34 C.F.R. § 668.22(a)(2)
4. UEI's failure to use the incentive loans in calculating the refunds due to the Pell Grant
program clearly benefitted UEI to the detriment of the Pell Grant program, in violation of UEI's
fiduciary duty under 34 C.F.R. § 668.82 (1992).
August 16, 1996
Frank K. Krueger, Jr.
A copy of the attached initial decision was sent by certified mail, return receipt requested
to the following:
Denise Morelli, Esq.
Office of the General Counsel
U.S. Department of Education
600 Independence Avenue, S.W.
Washington, D.C. 20202-2110