UNITED STATES DEPARTMENT OF EDUCATION
WASHINGTON, D.C. 20202
In the Matter of
Docket No. 97-39-SP
TIGER WELDING INSTITUTE,
Denise Morelli, Esq., Office of the General Counsel, United States Department of
Education, Washington, D.C., for Student Financial Assistance Programs.
In its appeal of the FPRD, Tiger does not contest the factual basis of SFAP's allegations.
Instead, Tiger responds that mitigating circumstances should relieve it of liability but that, in the
event of a finding of liability, the Department's estimated actual loss formula is an inappropriate
measure of damages. First, Tiger asserts that it should be held harmless for loans issued prior to
a newsletter which explained how schools should prorate FFEL loans. Tiger also argues that it
relied upon an example in the Department's Federal Student Financial Aid Handbook, 1994-95
(Handbook), which misled it to base its proration only upon the number of clock hours in its
program, and it therefore should be afforded safe harbor. In the event of a finding of liability,
Tiger requests that this tribunal discard the estimated actual loss formula in favor of a net loss
formula that considers post-default collections. If the estimated actual loss formula is used,
however, Tiger urges this tribunal to apply its draft cohort default rate for fiscal year 1995.
Finally, Tiger argues that because the initial financial aid transcript (FAT) it received for the
student in Finding #6 did not inform it of the student's default, it probably would not have known
of the default even if it had requested the FAT in a timely fashion and so should not be held
The Department noted in its FPRD that while Tiger had programs that consisted of 640
and 740 clock hours, they lasted only 16 and 19 weeks, respectively. The programs met the
clock-hour requirement for two-thirds of a year, but they did not meet the minimum-weeks
requirement. Thus, according to the regulations, Tiger should have prorated its loans according
to the amount allowed for one-third of an academic year. Tiger, however, calculated the loan
proration on the basis of two-thirds of an academic year, considering only the number of clock
hours in its programs.
Tiger does not dispute that it incorrectly prorated the loans according to the above
regulations, which took effect on July 1, 1994. It contests the assessment of liability for five
loans which were certified and disbursed before it received the August 15, 1994, National
Association of Student Financial Aid Administrators (NASFAA) newsletter that explained how
to prorate federal loans disbursed on or after July 1, 1994.
The date on which NASFAA published its information is irrelevant to the question of
Tiger's notice of the effective date of the regulations. Even the speculation that NASFAA
apparently did not know about the new proration requirement until August 15 provides no
exculpatory justification for a school's ignorance of regulations already in effect. As Tiger itself
noted, the April 29, 1994, Federal Register gave notice of the new definitions of one-third and
two-thirds of an academic year and their effective date. See 59 Fed. Reg. 82,22348 (April 29,
1994). This argument, therefore, is without merit.
Tiger's reliance on an unclear section of the Department's Handbook is likewise
misplaced. Although SFAP's assertion that Tiger could not have been misled by the explanation
of loan proration is unpersuasive in light of the literal text of the Handbook, an institution must
look to the highest source of authority when implementing financial aid procedures. In this case,
the regulations clearly required an institution to consider the length of a program both in clock
hours and in weeks, a point which Tiger does not argue. Tiger cannot justify its ignorance of the
law by its reliance on a confusing explanation of the regulations when the regulations themselves
were clear and explicit.
Both Tiger and SFAP reference a case in which this tribunal found that an institution
could rely on the defense of a safe harbor provision for its improper disbursement of Pell grants.
See In Re Travel University International, Docket No. 94-99-SP, U.S. Dep't of Educ. (February
3, 1995). Tiger's analogy to this case is untenable for a number of reasons. Most significantly,
in Travel University there were no regulations or detailed explanations on how to calculate Pell
grant awards for periods of less than 30 weeks, and all institutions were told by the Department
that they would be held harmless for overawards as long as they made a reasonable attempt to
comply. Furthermore, the institution made numerous unsuccessful attempts to confirm the
correct procedure with regional Department officials. As previously noted, Tiger has not argued
that the regulations themselves are unclear, only that the Handbook was misleading. Tiger did
not suffer from Departmental confusion and lack of published guidance, as did the institution in
Travel University. Regardless of whether the Handbook was in fact misleading, there were clear,
published regulations concerning the proration of federal loans.See footnote 22
Tiger challenges the use of the cohort default rate in the calculation of loss. It cites a
Department press release which stated that the Department's net default costs for fiscal year 1992
were approximately one-tenth of the gross default claims paid in that year. Tiger then uses these
figures to assert that the Department should recover only ten percent of the estimated defaults, as
this ten-percent figure is the true loss to the Department.
The total amount of defaulted student loan collections in a given year has no connection
to the Department's actual loss in a case of improperly disbursed loans. In addition, basing the
formula on the cohort default rate does not result in a double collection by the Department, for it
is impossible to predict the success of future collection efforts, the amount of money that must be
spent in such efforts, or the dollar value of funds collected years later. The estimated actual loss
formula is a method by which the Department can attempt to assess its present and future losses
in a particular case with relative accuracy.
Tiger has argued that, if this tribunal accepts the estimated actual loss formula, its liability
under the estimated actual loss formula should be assessed by using its draft cohort default rate,
and SFAP has agreed in this case. Because Tiger does not yet have a published cohort default
rate, the Department would normally apply the preceding fiscal year's national average cohort
default rate for proprietary schools with programs of less than two years. Tiger's fiscal year 1995
draft rate of 12.5%, however, is approximately half the national average. Both parties believe
that the draft rate is more accurately representative of Tiger's liability to the Department.
The Department has limited its use of the draft cohort default rate because its sole
purpose is to provide an institution with the opportunity to challenge the rate before an official
rate is issued. This case, however, presents no danger of the Department using an unofficial rate
against a school before it can challenge it. The draft cohort default rate provides a fair means of
computing liability in this specific instance in which SFAP is willing to reformulate the
assessment of liability, and the institution has acquiesced to the use of the 12.5% rate in its
liability calculation and does not yet have a published rate.
1. Tiger violated 34 C.F.R. § 682.204 by improperly prorating FFEL awards and 34 C.F.R.
§§ 668.19 and 668.32 by disbursing Stafford loan funds to an ineligible student during the 1993- 94 and 1994-95 award years as detailed in Findings #1 and #6.
2. Tiger remains liable for the prorated awards (Finding #1) and the ineligible loans (Finding
3. The estimated actual loss formula will be used to calculate Tiger's FFEL liability for Finding
On the basis of the foregoing, it is hereby ORDERED that Tiger Welding Institute pay to the United States Department of Education the sum of $7,547.43 and purchase the ineligible Stafford loans.
Judge Richard I. Slippen
Dated: July 2, 1998
A copy of the attached initial decision was sent by certified mail, return receipt requested, to the
Higher Education Compliance Counseling
1149 Sixteenth Avenue South
Birmingham, AL 35205
Denise Morelli, Esq.
Office of the General Counsel
United States Department of Education
600 Independence Avenue, S.W.
Washington, D.C. 20202-2110