Program Integrity

% CHAPTER
8

THE DEPARTMENT’S ROLE Integrity of the HEA Programs

One of the Department’s functions is to oversee the FSA programs cite
to ensure that they are administered properly. Here we discuss the two Part H of the HEA
major types of oversight activities – audits and program reviews.

Program reviews and audits are conducted to identify procedural The FSA Assessment module
problems at the school and recommend solutions. If a school is cited that can assist you in understanding and
assessing your compliance with the
in a program review or audit for improperly disbursing FSA program
provisions of this chapter is "Institutional
funds, the school must restore those funds as appropriate.
Eligibility," at

If a school is cited in a program review or audit for other serious http://ifap.ed.gov/qamodule/

program abuses, the school may be subject to corrective action and InstitutionalEligibility/
sanctions, such as fines, emergency action, or limitation, suspension, or AssessmentApage3.html
termination discussed later in this chapter.

Audit submission cite

FSA AUDIT REQUIREMENTS FOR SCHOOLS 34 CFR 668.23(a)(4)

A school that participates in any FSA program, including

participating foreign schools, generally must have an independent Audit requirements
auditor conduct, at least once a year, an audit of the school’s for schools cite
compliance with the laws and regulations that are applicable to the Sec. 487(c)A(1) of the HEA
FSA programs in which the school participates (a compliance audit), and 34 CFR 668.23(a)(1)
an audit of the school’s financial statements (a financial statement audit). 34 CFR 668.23(a)(5)

An independent auditor is a certified public accountant or a Independent auditor

government auditor who meets the Government Auditing Standards An independent auditor or government
qualifications and independence standards. A recent major revision to auditor, except that a government auditor
Government Auditing Standards provides that independent auditors may must meet the Government Auditing
not audit their own work. Therefore, schools that engage a certified Standards qualification and independence
standard, including standards related to
public accountant to perform significant non-audit services (such as
organizational independence.
maintaining their accounting records) may not engage that certified
public accountant to perform their independent audits. Schools and
auditors should consult the Government Accountability Office (GAO)
website at www.gao.gov for full details on these standards.
Clarification

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A compliance audit provides an assessment of how well a school

Financial Statements and Audits complies with federal requirements for administering federal student
for Foreign Schools aid programs, and must be conducted according to ED regulations
Foreign schools must also submit annual and Government Auditing Standards.
compliance and financial audits.
A financial audit provides an opinion on the school’s financial
Because financial responsibility
statements. The financial statements must be prepared on an accrual
requirements vary for foreign schools
basis in accordance with generally accepted accounting principles
based on the amount of federal student
financial aid funds a school receives, the
(GAAP) and audited by an independent auditor in accordance with
requirements for preparing the financial auditing standards generally accepted in the United States,
statement also vary. Government Auditing Standards, and other applicable provisions of ED
regulations and Office of Management and Budget (OMB) circulars.
A school that received less than $500,000 A financial statement audit provides the Department with information
(in U.S. dollars) in Title IV funds during its necessary to evaluate a school’s status vis-a-vis the financial standards.
most recently completed fiscal year must (See the Federal Student Aid Handbook, Volume 2 – School Eligibility and
have its financial statements prepared ac- Operations, chapter 11.)
cording to the accounting principles of the
school’s home country. Audits of for-profit institutions are to be conducted in accordance
with the FSA Audit Guide. Audits of public and non-profit institutions
ED Regulations require that a foreign school
are to be conducted in accordance with OMB Circular A-133 using the
that received $500,000 (in U.S. dollars) or
more in Title IV funds during its most re-
OMB Compliance Supplement (A-133 Audit). Audits of foreign
cently completed fiscal year must have its schools must be conducted in accordance with the Foreign School Audit
financial statements translated into U.S. Guide.
Generally Accepted Accounting Principles.
The Office of Inspector General (OIG) also conducts audits,
Audits of foreign schools must be con- usually in cases where there is concern over a school’s administration
ducted in accordance with the of the FSA programs. An OIG or other federal audit does not satisfy
“Foreign School Audit Guide.” the requirement that a school have annual compliance and financial
statement audits performed by an IPA.

Simultaneous FSA audit submissions

A school that has an audit performed under the FSA Audit Guide
must submit both the compliance audit and the audited financial
statements within six months of the end of the school’s fiscal year.
Both the compliance audit and the financial statement audit must be
performed on a fiscal-year basis. In addition, both audits must be
prepared by an independent public accountant (IPA) in accordance
with the Generally Accepted Accounting Principles (GAAP) and
audited in accordance with the Generally Accepted Government
Auditing Standards (GAGAS). The compliance audit and financial
statement audit may be performed by different auditors. However, the
audits must be submitted as one package.

The compliance audit of a school that has a fiscal year that does
not coincide with an award year will cover parts of two award years.
(See examples on facing page.)

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Fiscal Year Not Equal to Award Year Example

January 1, 2004 July 1, 2004 December 31, 2004

end of award year 03-04 beginning of award year 04-05

is June 30, 2004 is July 1, 2004

school’s fiscal year (period covered by the audit)

Waivers of the FSA audit requirement

A school may request a waiver of the annual audit requirement Waiver cite
if it disburses less than $200,000 dollars a year in FSA program 34 CFR 668.27(c)
funds. If such a waiver is approved, the school must submit a
compliance audit (covering each individual fiscal year in the waiver 90/10 Disclosure
period) and a financial statement audit (for the last year of the waiver At the end of the waiver period, for each
individual year in the waiver period
period) at the end of the waiver period.
(in accordance with 34 CFR 668.23(d)(4)),
the auditor for a proprietary school must
The regulations do not waive the requirement that a school audit disclose whether the school met the
its administration of the FSA programs; they waive the requirement 90/10 requirement of 34 CFR 600.5 and the
that these audits be submitted on an annual basis. Therefore, if a conditions of institutional eligibility in 34 CFR
school is granted a waiver for three years, when the waiver period 600.7 and 34 CFR 600.8(e)(2).
expires and the school must submit its next compliance audit, that
audit must cover the institution’s administration of the FSA programs The school must also submit a financial
since the end of the period covered by its last submitted compliance statement audit for the last year of the
audit. In that audit, the auditor must audit, and attest to, the waiver period.
institution’s annual 90/10 determination for the waived period.

To qualify for a waiver, a school must demonstrate that it –

• is not a foreign school;

• disbursed less than $200,000 in FSA program funds during
each of the two completed award years prior to the audit
period;
• agrees to keep records relating to each award year in the
unaudited period for two years after the end of the regular
record retention period for the award year;
• has participated in the FSA programs under the same
ownership for at least three award years preceding the
school’s waiver request;
• is financially responsible under the general requirements of
financial responsibility, and does not rely on the alternative
standards and requirements of exceptions to participate in
the FSA programs;
• is not receiving funds under the reimbursement or cash
monitoring system of payment;
• has not been the subject of a limitation, suspension, fine or
termination proceeding, or emergency action initiated by

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the Department or a guaranty agency in the three years

preceding the school’s waiver request;
• has submitted its compliance audits and audited financial
statements for the previous two fiscal years, and no
individual audit disclosed liabilities in excess of $10,000; and
• submits a letter of credit in the amount as determined
below, which must remain in effect until the Department
has resolved the audit covering the award years subject to
the waiver.

For purposes of this section, the letter of credit amount is

10% of the total FSA program funds the school disbursed to
or on behalf of its students during the award year preceding
the school’s waiver request.
The Department rescinds a waiver if the school:

• disburses $200,000 or more of FSA program funds for an

award year;
• undergoes a change in ownership that results in a change of
control; or
• becomes the subject of an emergency action or a limitation
suspension, fine, or termination action initiated by the
Department or a guaranty agency.
This exception to the annual audit requirement may not be
granted for the award year preceding a school’s required
recertification.

If the Department grants the waiver, the school does not have to
submit its compliance or audited financial statement until six months
after

• the end of the third fiscal year following the fiscal year for
which the school last submitted a compliance audit and
audited financial statement; or
• the end of the second fiscal year following the fiscal year for
which the school last submitted compliance and financial
statement audits if the award year in which the school will
apply for recertification is part of the third fiscal year.
An institution’s waiver request may include the fiscal year in
which that request is made, plus the next two fiscal years. That
request may not include an already completed fiscal year.

A school remains liable for repaying any FSA program funds it

improperly expends during the waiver period. A compliance audit
is the vehicle for discovering improper expenditures. Therefore, a
school will be required to pay any liabilities when the school
eventually submits a compliance audit for the fiscal years in which it
made improper expenditures.

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Examples of Effects of Waivers

Example 1: The school is still required to have its administration of the FSA
programs audited for the waiver period. If a school is granted a waiver for three
years, when the waiver period expires, the next audit must cover the school’s
administration of the FSA programs since the end of the period covered by its last
submitted compliance audit. For example, if a school’s fiscal year coincides with an
award year (July 1 – June 30). It submits a compliance audit for its fiscal year that
ends on June 30, 2002, and then receives a waiver so that its next compliance audit
is due six months after the end of its 2004-2005 fiscal year. When it submits that
audit, it must cover the 2002-2003, 2003-2004, and 2004-2005 fiscal years.

Example 2: If a school’s fiscal year is based on an award year (July 1 – June 30),
and the school requests a waiver on May 1, 2002, that waiver request may include
its 2001-2002 fiscal year (July 1, 2001 through June 30, 2002) plus its 2002-2003 and
2003-2004 fiscal years. If the school’s fiscal year was a calendar year, the school’s
waiver request could include its calendar 2002 fiscal year plus its 2003 and 2004
fiscal years.

Submission dates for FSA audits

A school’s or servicer’s (discussed under Audits for third-party Submission dates cite
servicers) annual compliance and financial statements audits 34 CFR 668.23(a)(4)
performed under the FSA Audit Guide must be based upon the fiscal
year and submitted to the Department within six months after the end
of the school’s or servicer’s fiscal year. (These requirements do not
apply to audits performed under the Single Audit Act that are due as
specified in OMB Circular A-133.)

The following chart lists audit due dates and the period the audit
must cover for audits due in 2005 and 2006. (The chart provides
information for the most common institutional fiscal-year-end dates.)

Generally, a school’s first audit performed under these

requirements must cover the entire period of time since the school
began to participate in the FSA programs. Each subsequent audit must
cover the period since the end of the period covered by the
preceding audit that is accepted by the Department.

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Audit Submission Due Dates for 2005 and 2006

School’s Both audits Period audited School’s Both audits Period audited
fiscal year due (financial and fiscal year due (financial and
end date compliance) end date compliance)

September 30, March 31, October 1, 2003 September 30, March 31, October 1, 2004
2004 2005 through 2005 2006 through
September 30, 2004 September 30, 2005

December 31, June 30, January 1, 2004 December 31, June 30, January 1, 2005
2004 2005 through 2005 2006 through
December 31, 2004 December 31, 2005

March 31, September 30, April 1, 2004 March 31, September 30, April 1, 2005
2005 2005 through 2006 2006 through
March 31, 2005 March 31, 2006

June 30, December 31, July 1, 2004 June 30, December 31, July 1, 2005
2005 2005 through 2006 2006 through
June 30, 2005 June 30, 2006

FSA Compliance audit submission requirements

Compliance audits must be conducted in accordance with:

• the general standards and the standards for compliance

The FSA Audit Guide is available on the audits contained in the U.S. General Accountability Office’s
Internet at:
(GAO’s) Government Auditing Standards; and
http://www.ed.gov/about/offices/list/ • applicable audit guides from the Department’s Office of the
oig/nonfed/sfa.html Inspector General.

The Gaps Users Guide is available at In conducting an audit, a for-profit school or servicer and its
auditor should use the Department of Education’s latest FSA Audit
http://gapsweb.ed.gov Guide, the accounting and recordkeeping manual for the FSA
programs (known as The Blue Book), and the GAPS Users Guide, as
applicable.

Audits must be performed by an independent auditor and

conducted in accordance with auditing standards generally accepted
in the United States and Government Auditing Standards. The auditor or
auditing firm used for a compliance audit may be the same one used
to audit a school’s other fiscal activities. The auditor must, however,
be independent of the school, and of any person or firm authorizing a
school ’s expenditure of Title IV program funds. An audit conducted
by a state auditor who meets applicable standards for auditor
qualifications and independence satisfies the nonfederal compliance-
audit requirement.

The Department may require a school to provide a copy of its

compliance audit report to guaranty agencies, lenders, state agencies,
the Department of Veterans Affairs, or accrediting agencies.

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FSA Audited financial statement requirements

A school’s audited financial statement must cover the school’s
most recently completed fiscal year. The Department uses the
information in a school’s audited financial statement to evaluate the
school’s status vis-a-vis the financial standards (See the Federal Student
Aid Handbook, Volume 2 – School Eligibility and Operations, chapter 11.)
In addition to a school’s audited financial statement, the Department
may require that the school submit additional information. For
example, the Department may require a school to submit or provide
access to the accountant’s work papers. Also, if the Department finds it
necessary to evaluate a particular school’s financial condition, the
Department can require a school to submit audited financial
statements more frequently than once a year.

Financial statements must be prepared on an accrual basis in

accordance with generally accepted accounting principles (GAAP),
and audited by an independent auditor in accordance with GAGAS
and other guidance contained in OMB Circular A-133, or in audit
guides from the Department’s Office of the Inspector General, as
applicable.

FSA Consolidated statements

In some cases, a school’s relationship with another entity may
cause the Department to require a school to submit additional
financial statements both of the school and the entity, such as audited
consolidated financial statements; audited full consolidated financial
statements; audited combined financial statements; or, under certain
circumstances, audited financial statements of one or more related
parties. This occurs when the Department determines that the
activities or financial health of another entity may impact upon the
school’s total financial health. So that the Department can make this
determination, a school must include in its audited financial
statements a detailed description of related entities based on the
definition of a related entity in the Statement of Financial Accounting
Standards (SFAS) 57. In addition, the description must include all
related parties and a level of detail that would enable the Department
to readily identify the related party. This information may include, but
is not limited to, the name, location, and description of the related
entity, including the nature and amount of any transaction between
the related party and the school, financial or otherwise, regardless of
when it occurred.

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Required disclosure of 90/10 revenue test

90/10 Rule cite A proprietary school must disclose the percentage of its revenues
34 CFR 600.5 and derived from the FSA programs that the school received during the
34 CFR 668.23(d)(4)
fiscal year covered by the audit as a footnote to its audited financial
statements. The calculation of this percentage and the funds included
must be arrived at using the cash basis of accounting. A school that
converts from a for-profit to a nonprofit status must report its compliance
with the 90/10 revenue test for the first year after its conversion.
Guidance on footnote disclosures can be found in the FSA Audit
Guide, in 34 CFR 600.5, and in appropriate accounting references.
Information regarding the calculation of the 90/10 Rule percentage is
found in the Federal Student Aid Handbook, Volume 2 – School Eligibility
and Operations, chapter 1.

Circular A-133 is titled “Audits of States, A-133 audit guidelines

Local Governments, and Nonprofit
Organizations “ and is applicable to
In lieu of audits performed under the FSA Audit Guide, some
nonprofit postsecondary schools, states, schools are required to have audits performed under the guidelines
local governments, and Indian tribal of the Single Audit Act (chapter 75 of Title 31, U.S.C.). Audits
governments. For many schools, this is a performed under the Single Audit Act satisfy the Department’s audit
combined audit of all the federal programs requirements.
at that school. OMB circular A-133 is
available through the OMB Home Page at Audits performed under the Single Audit Act have distinct
auditing and submission requirements. A school submitting an audit
http://www.whitehouse.gov/omb/ under the guidelines of the Single Audit Act must use the submission
circulars/index.html deadlines established by the Single Audit Act.

or by calling OMB’s Publication Office at Under the requirements of Circular A-133, a school that expends
less than $500,000 of federal funds during a fiscal year is exempt from
(202) 395-3080.
submitting an annual A-133 audit. (The former criteria of $300,000
was increased for fiscal years ending after December 31, 2003.)
However, if that school has compiled, reviewed, or prepared an
audited financial statement for any purpose for that fiscal year, the
school must submit that financial statement to the Department.

Circular A-133 permits the submission of program-specific audits if

an entity expends funds in only one federal program and the
program’s regulations do not require a financial statement audit. The
FSA program regulations require a financial statement audit.
Therefore, a school may not submit a program-specific audit to satisfy
the Department’s audit submission requirements.

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Circular A-133 also now allows an independent auditor to use

professional judgment to determine whether certain federal
programs must be included in the scope of an audit. An
independent auditor can exclude certain program components,
such as FSA program funds, if they fall below a predetermined
dollar and risk threshold.

The independent auditor must make an annual assessment of

the dollar and risk conditions, determine whether such exclusions
are appropriate, and whether any FSA programs must be included
within the scope of the audit. You can find additional information
on this topic in the latest Compliance Supplement to Circular A-133.

Audits for third-party servicers

There are also annual audited financial statements and Third party servicers cite
compliance audit requirements for third-party servicers. A third-party 34 CFR 668.23(a)(3) and (c)
servicer must submit an annual compliance audit. However, if a 34 CFR 668.23(d)(5)
servicer contracts with only one FSA school and that school’s own
audit sufficiently covers the functions performed by the servicer, the
servicer does not have to submit a compliance audit. If a servicer Guidance for audits of third-party servicers
contracts with several FSA schools, a single compliance audit can be is found in the January 2000 Department
performed that covers its administrative services for all schools. A of Education’s “Audit Guide, Audits of
servicer must submit its compliance audit within six months after the Federal Student Aid Programs at
Participating Institutions and Institution
last day of the servicer’s fiscal year. The Department may require a
Servicers.”
servicer to provide a copy of its compliance audit report to guaranty
agencies, lenders, state agencies, the Department of Veterans Affairs,
or accrediting agencies.

In addition to submitting a compliance audit, a servicer that enters

into a contract with a lender or guaranty agency to administer any
aspect of the lender’s or guaranty agency’s programs must submit
annually audited financial statements. The financial statements must
be prepared on an accrual basis in accordance with GAAP and
audited by an independent auditor in accordance with GAGAS and
any other guidance contained in audit guides issued by the
Department’s Office of the Inspector General.

If the Department determines that, based on audit findings and

responses, a third-party servicer owes a liability for its administration
of the FSA programs, the servicer must notify each school that it
contracts with of the liability. Generally, unless they submit an
appeal, schools and servicers owing liabilities must repay those
liabilities within 45 days of being notified by the Department.

A school may never use a third-party servicer’s audit in place of its

own required audit, because the school is ultimately liable for its own
violations as well as those incurred by its third-party servicers. (See
chapter 3 for more information on third-party servicers.)

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Having the audit performed

The school or servicer must make its program and fiscal records,
as well as individual student records, available to the auditor.
(Required recordkeeping is discussed in chapter 7.) Both the
financial aid and business offices should be aware of the dates the
auditors will be at the school, and make sure that someone is on hand
to provide requested documents and answer questions during that
period.

At the end of the on-site review, the auditor conducts an exit

interview. At a school, this exit interview is usually conducted with the
personnel from the school’s financial aid and other relevant offices.
The exit interview is not only an opportunity for the auditor to suggest
improvements in procedures, but it also gives the school or servicer a
chance to discuss the draft report and review any discrepancies cited
in the report. The exit interview is a good time to resolve any
disagreements before the final report is prepared.

The final report is prepared by the auditor and submitted to the

school or servicer.

eZ-Audit
Applicability eZ-Audit is the web-based application, launched by the
This requirement applies to any compliance
Department on April 1, 2003. It provide a paperless single point of
audits or financial statements required under
submission for financial statements and audits (i.e., compliance
34 CFR 600.20(a) or (b) to begin or continue
participating in the FSA programs, any
reports). eZ-Audit provides automatic error checking as you enter the
financial statements required due to a data and before submission. In addition, it gives you instant
change in ownership resulting in a change acknowledgment of receipt.
in control as provided under
34 CFR 600.20(g), any compliance audits Since June 16, 2003, all schools that participate in the Federal
and financial statements required annually Student Aid Programs have been required to submit financial
under 34 CFR 668.23, and any compliance statements and compliance audits to FSA electronically through the
audits and financial statements required eZ-Audit process (including copies of the A-133 reports that non profit
when a school ceases to participate in the and public institutions file with the Federal Audit Clearinghouse).
FSA programs as provided under
34 CFR 668.26(b).
Non profit and public institutions are still required to submit their
A-133 audits to the Federal Clearinghouse, and the Clearinghouse will
Non profit and public institutions submit process the audits for the Department.
their A-133 audits to the Federal
Clearinghouse at—
Federal Audit Clearinghouse
Bureau of the Census
1201 East 10th Street
Jeffersonville, Indiana 47132

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The eZ-Audit process

To access the eZ-Audit Web site you must be a registered user. Information about eZ-audit
Each school must select an eZ-Audit Institution Administrator who will be You can find everything you need to know
responsible for managing your school’s access to the eZ-Audit Web about it on IFAP at
site. This Institution Administrator will receive the user name and
password necessary for your school’s access, and will be responsible for http://ifap.ed.gov
and
granting access to others you name as additional users.
http://ezaudit.ed.gov

Each registered user must sign and retain the eZ-Audit Rules of A Step-by-Step Users Manual is available
Behavior. (For registration instructions and to download the Rules of online and on IFAP. If you have questions,
Behavior please visit http:ezaudit.ed.gov). please send an email to

Once you have obtained your school ID, you will access the [email protected]
appropriate page on the audit-Audit Web site, and —
or call the eZ-Audit Help Desk at
1. enter general information about your school’s compliance
audit and financial statement; 877-263-0780.

2. enter specific financial data directly from its audited financial

statement; and
Schools and school servicers submit their
3. attach authentic electronic copies of the audit originals.
audits and any required Corrective Action
Plan (CAP) to the Department’s Data
After you have entered the required information, you must attach Management and Analysis Division
a copy of the audit prepared and signed by the independent auditor. through eZ-Audit.
The copy must be in a PDF, non-editable format created using Adobe
Acrobat version 5.0 or higher. If your school finds that it cannot use the
eZ-Audit system, it may be asked to send
Review of FSA audit submissions a written copy of its audit and financial
statements to
For an audit performed under the Department’s FSA Audit Guide,
the Department reviews the audit report for format, completeness, U.S. Department of Education
and to ensure that it complies with the government’s auditing School Eligibility Channel
standards. Data Management and Analysis
Division
We will use the general information to make an initial Document Receipt and Control
determination of whether the audits are materially complete and Center
conducted in accordance with applicable accounting standards. Based 830 First Street, NE
on the financial data, we will also make a preliminary determination as Room 71-I-1
Washington, DC 20002- 5042
to whether your school is financially responsible with respect to the
financial responsibility ratios, or in the case of a change in ownership
resulting in a change in control, whether the school satisfies the
financial ratio requirements under 34 CFR 668.15. Later, the
Department will review submissions to determine whether the
school must provide additional information or ED should take
further action.

Based on the audit findings and the school’s or servicer’s written

explanation, the Department will determine if any funds were spent
improperly. Unless the school or servicer has properly appealed the
decision, the school or servicer must repay any improperly spent funds
within 45 days.

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ACCESS TO RECORDS
Access includes the right to copy Once the audit is complete, the school or servicer must give the
records (including computer records), to Department and the OIG access to all records and documents needed
examine computer programs and data, and to review the audit. A school that uses a third-party servicer must give
to interview employees without the presence the Department and the OIG access to all records and documents
of management or the presence of the needed to review a third-party servicer’s compliance or financial
school’s or a servicer’s tape recorder.
statement audit. In addition, the school’s or servicer’s contract with
the auditor must specify that the auditor will give the Department and
Access and examination cite the OIG access to the records and documents related to the audit,
34 CFR 668.24(f) including work papers. Cooperation includes providing timely and
reasonable access to records (including computer records) for
examination and copying, and to personnel for the purpose of
obtaining relevant information.

Throughout the audit process, and for other examinations such as

program reviews and state reviews, the school or servicer is required
Reminder to cooperate fully with its independent auditor, the Department and its
Inspector General, the Comptroller General of the United States, the
appropriate guaranty agency and accrediting agency.

PROGRAM REVIEWS
Administrative subpoena The Department conducts program reviews to identify possible
authority problems in a school’s FSA administration. A program review covers
The Amendments of 1998 give the Depart- many of the same areas as an audit, including fiscal operations and
ment the authority to issue administrative accounting procedures, as well as the school’s compliance with the
subpoenas to assist in conducting investiga- specific program requirements for student eligibility and awards.
tions of possible violations of the provisions However, program reviews tend to focus more on regulatory
of FSA programs. In addition, the law autho-
requirements that are specific to the FSA programs. For example, the
rizes the Department to request the Attorney
program review team will examine student records and admissions
General to invoke the assistance of any court
of the United States for purposes of enforcing
and records, fund requests and transfers, records pertaining to due
a subpoena if necessary diligence. ED will base penalties arising from a program review on the
seriousness of the violations.
Administrative subpoena
authority cite Unannounced Program Reviews
Sec. 490A of the HEA Occasionally, it may be necessary for Department officials to
perform an unannounced program review. The General Provisions
regulations stipulate that Department officials provide a school with a
written request for a program review, but do not preclude the
Department from providing such a request at the time the reviewers
arrive at the school.

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In an unannounced program review, the Department reviewers

will present a written request to school officials before beginning the
review. The school is expected to have its records organized and
readily available, without objection to providing access to those
records. However, because certain school officials may not be
immediately available during the review, the school may be afforded
additional time to submit information required in the review. The
Department has regulatory authority to take an emergency action if a
school denies access to the reviewers performing an unannounced
program review. (See discussion under emergency action.) School
officials will be informed if an emergency action is to be taken.

Program Reviews
The Department gives priority in program reviews to schools that meet criteria
specified in the law as follows —

• a school has a cohort default rate in excess of 25% or a rate that places the school in
the highest 25% of such schools;

• a school has a default rate in dollar volume that places the school in the highest 25%
of such schools;

• a school has a significant fluctuation in Federal Stafford Loan volume, Direct Stafford
Loan volume, or Federal Pell Grant awards, that is not accounted for by changes in
the programs (significant fluctuations in amounts of aid received by schools are
those that do not relate to programmatic changes and added Direct Loans to the list
of programs);

• a school is reported to have deficiencies or financial aid problems by the appropriate

state agency or accrediting agency;

• a school has high annual dropout rates; and

• it is determined by the Department that the school may pose a significant risk of
failing to comply with the administrative capability or financial responsibility
requirements.

In addition, the Department is required to:

• establish guidelines designed to ensure uniformity of practice in the conduct of

program reviews;

• make copies of all review guidelines and procedures available to all participating
schools;

• permit schools to correct administrative, accounting, or recordkeeping errors if the

errors are not part of a pattern and there is no evidence of fraud or misconduct; and

• inform the appropriate state and accrediting agency whenever it takes action against
a school.

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Written report
After the Department performs a program review of a school, the
program review team prepares a written report that will be sent to the
school within approximately 60 days of the review. The school may
respond to this report if it wishes to offer additional information to
support its position or if it disagrees with any of the report’s
conclusions. When the Department has fully considered the school’s
response and any additional documentation provided by the school,
the Department will send a copy of the final program review
determination to the school.

APPEALING AUDIT AND PROGRAM REVIEW

DETERMINATIONS
Appeals cite The law allows for appeals of final audit or program review
34 CFR 668.34, Subpart H determinations. Note that only a final determination may be appealed.
The letter conveying a final audit determination is clearly identified as
a Final Audit Determination Letter (FADL) and explains the appeals
procedures. For a program review, the final determination letter is
marked Final Program Review Determination Letter (FPRD).

If a school or servicer wants to appeal an audit or program review

determination, it must appeal, in writing, to the Departmental official
identified in the FPRD within 45 days. If the school or servicer makes
such a request, the determination will be reviewed by an impartial
hearing official appointed by the Department. In most cases, an oral
hearing will not be required. The school or servicer and the
Department must submit briefs with any accompanying materials to
the official, and provide the other party with a copy of its submission at
the same time. If the final decision is appealed by either party, the
Department will review it.

If the hearing official (or the Secretary) finds that the school or
servicer improperly expended funds or otherwise failed to comply with
applicable program rules and requirements, the Department will
collect the liability owed, if any. The school or servicer must repay the
funds within 45 days of the Department’s notification of the liability,
unless the Department grants an extension. At its option, the
Department may elect to use an administrative offset to collect the
funds owed.

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REVIEWS CONDUCTED BY
GUARANTY AGENCIES
The FFEL Program regulations require guaranty agencies to
conduct program reviews at postsecondary schools. A guaranty agency
must conduct biennial (once every two years) on-site reviews of at least
all schools for which it is the principal guaranty agency that have a
cohort default rate for either of the two preceding fiscal years that exceeds
20%. Schools that the Department requires to take specific default
reduction measures and schools where the total amount of loans
entering repayment in each of those fiscal years does not exceed
$100,000 are exempted. Alternatively, a guaranty agency may use its
own criteria to select schools for the biennial on-site reviews if the
Department approves the agency’s proposed alternative selection
methodology. A program review conducted by a guaranty agency is
similar to a Department program review, consisting of an entrance
interview, a review of student records, an exit interview, and a written
report. However, the guaranty agency’s review will focus on how the
school meets FFEL-specific requirements, such as –

• certification of the loan application;

• maintenance of records supporting the student’s loan
eligibility;
• processing procedures and payment of loan monies; and
• prompt lender notification when the student changes
enrollment status, such as complete withdrawal.
Two copies of the guaranty agency’s report are forwarded to the
Department, including the school’s payment if liabilities were assessed.

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CASE MANAGEMENT
Case Management is the Department’s approach to oversight of
schools that participate in the FSA programs. School Participation
Management conducts program reviews, reviews compliance audits
and financial statements and provides the Department with a picture
of a school’s overall compliance through the use of School
Participation Teams.

FSA’s School Eligibility Channel (SEC) coordinates the case

management approach. School Participation Teams are staffed by
personnel in the regions and in Washington, DC, and each is assigned
a portfolio of schools. Each team is responsible for oversight functions
for the schools in its portfolio. These functions include audit
resolution, program reviews, financial statement analysis, and
recertification. There are Institutional Improvement Specialists for
each School Participation Team. Institutional Improvement Specialists
are responsible for improving compliance by offering targeted
technical assistance and presentations on important FSA topics.

Each school is assigned a case manager who leads the team in its
evaluation of that school. The entire team will evaluate information on
the school from a variety of sources to identify any compliance issues
at the school. The team can then assess potential risk to the FSA
programs and determine appropriate action. Once appropriate
actions are decided upon, the case manager assigned to the school
ensures that the recommended actions are taken.

School Participation Teams will collect and review information on

a school from many sources including, but not limited to

• applications for recertification,

• financial and compliance audits,
• state agencies,
• accrediting agencies and licensing boards,
• student complaints, and
• Department databases.
Possible actions
A School Participation Team may decide to take actions that
include, but are not limited to

• reviewing recertification or awarding only provisional

certification;
• initiating a program review;
• establishing liabilities;
• developing a strategy for providing technical assistance,

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• transferring the school to the reimbursement payment

method (See the Federal Student Aid Handbook, Volume 4 –
Processing Aid and Managing FSA Funds.);
• requiring a letter of credit; and
• referring the school for an enforcement action.
Actions do not always have to be negative. For example, the School
Participation Team can recommend a school for participation in the
Quality Assurance Program.

The Department will use a system of risk analysis as well as other

tools to identify schools with the greatest need for oversight. The
Department will use analysis by various Department data systems to
generate a risk score for a school. This will enable the Department to
target resources to those schools that present the highest risk to the
government.

Case management provides the additional benefit of permitting

a school to contact one team that will have all information on the
school available in one place. (For a list of phone numbers for the
regional School Participation Teams, see the chart at the end of this
chapter.)

CORRECTIVE ACTIONS AND SANCTIONS

Sanctions
Sanctions include emergency actions, fines, limitations, For details on steps that a school should
suspensions, and terminations. follow in any of these situations, see
Subpart G of the General Provisions
The Department will sanction any school that: regulations and Section 600.41 of the
Institutional Eligibility regulations.

• violates the law or regulations governing the FSA programs,

its PPA, or any agreement made under the law or
regulations; or
• substantially misrepresents the nature of its educational
programs, its financial charges, or its graduates’
employability. For details on misrepresentation, see
the Federal Student Aid Handbook, Volume 2 – School Eligibility
and Operations, chapter 6.
Similarly, the Department may also sanction a third-party servicer
that performs functions related to the FSA programs. Further, the
Department has the authority to sanction a group of schools or
servicers if it finds that a person or entity with substantial control over
all schools or servicers within the group has violated any of the FSA
program requirements or has been suspended or debarred from
program participation. (See the Federal Student Aid Handbook, Volume
2 – School Eligibility and Operations, chapters 1 and 3.)

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Actions due to program violations or

misrepresentation
If a school has violated the FSA program regulations, the
Department may allow the school to respond to the problem and
indicate how it will correct it. If this informal approach fails to correct
the situation, or if the school has repeatedly violated the law or
regulations, the Department may take an emergency action, fine the
school, or initiate a limitation, suspension, or termination of
FSA program participation.

In addition, the Department has the authority to terminate a

school or program that no longer meets the eligibility criteria given in
the Federal Student Aid Handbook, Volume 2 – School Eligibility and
Operations, chapters 1, 3, and 4.

Emergency action
The Department may take an emergency action to withhold FSA
program funds from a school or its students if the Department
receives information, determined by a Department official to be
reliable, that the school is violating applicable laws, regulations, special
arrangements, agreements, or limitations. To take an emergency
action, the Department official must determine that:

• The school is misusing federal funds.

• Immediate action is necessary to stop this misuse.
• The potential loss outweighs the importance of using
established procedures for limitation, suspension, and
termination.
The school is notified by registered mail (or other expeditious
means) of the emergency action and the reasons for it. The action
becomes effective on the date the notice is mailed.

An emergency action suspends the school’s participation in all FSA

programs and prohibits the school from disbursing FSA program
funds or certifying FFEL applications. The action may not last more
than 30 days unless a limitation, suspension, or termination
proceeding is initiated during that period. In that case, the emergency
action is extended until the proceeding, including any appeal, is
concluded. The school is given an opportunity to show cause that the
action is unwarranted.

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Fine
The Department may fine a school up to $27,500 for each
statutory or regulatory violation. (The Department first notifies the
school of its intent to fine so the school can, if it chooses, request a
hearing.) If the school is found guilty of any violations, it may appeal
to the Department for a compromise on the amount of the fines
imposed at the hearing. In determining the amount owed by the
school, the Department will consider the school’s size and the
seriousness of its violation or misrepresentation.

Limitation
Under a limitation, a school agrees to abide by certain specific
conditions or restrictions as it administers FSA program funds; by
doing so, it is allowed to continue participating in the FSA programs.
A limitation lasts for at least 12 months. If the school fails to abide by
the limitation’s conditions, a termination proceeding may be initiated.

Suspension
A suspension removes a school from participation in the FSA
programs for a period not to exceed 60 days (unless a limitation or
termination proceeding has begun). A suspension action is used when
a school can be expected to correct an FSA program violation in a
short time.

Corrective action
As part of any fine, limitation, or suspension proceeding, the
Department may require a school to take corrective action. This may
include making payments to eligible students from its own funds or
repaying illegally used funds to the Department. In addition, the
Department may offset any funds to be repaid against any benefits or
claims due the school.

Termination
A termination ends a school’s participation in the FSA programs.
A school that has violated the law or regulations governing the FSA
programs, its PPA, or any other agreement made under FSA
regulations and was terminated from participating in the FSA
programs generally may not apply to be reinstated for 18 months. A
school that substantially misrepresented the nature of its educational
programs, its financial charges, or the employability of its graduates
may not be reinstated for at least three months.

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Possibility of reinstatement
A school requesting reinstatement in the FSA programs must
submit a fully completed E-App to the Department and demonstrate
that it meets the standards in Subpart B of the General Provisions. As
part of the reinstatement process, the school must show that it has
corrected the violation(s) on which its termination was based,
including repaying all funds (to the Department or to the eligible
recipients) that were improperly received, disbursed, caused to be
disbursed, or withheld. The Department may approve the request,
deny the request, or approve the request subject to limitations (such as
granting the school provisional certification). If the Department
approves the reinstatement request, the school will receive a new
ECAR and enter into a new PPA.

Criminal penalties
The law provides that any person who knowingly and willfully
Criminal penalties cite
embezzles, misapplies, steals, obtains by fraud, false statement, or
Sec. 490 of the HEA
forgery, or fails to refund any funds, assets, or property provided or
insured under Title IV of the Higher Education Act, or attempts to
commit any of these crimes will be fined up to $20,000 or
imprisoned for up to five years, or both. If the amount of funds
involved in the crime is $200 or less, the penalties are fines up to
$5,000 or imprisonment up to one year, or both.

Any person who knowingly and willfully makes false statements,

furnishes false information, or conceals material information in
connection with the assignment of an FSA program loan or attempts
to do so, will, upon conviction, be fined up to $10,000 or imprisoned
for up to one year, or both.

Any person who knowingly and willfully makes, or attempts to

make, an unlawful payment to an eligible lender of loans as an
inducement to make, or to acquire by assignment, a loan insured
under such part will, upon conviction, be fined up to $10,000 or
imprisoned for up to one year, or both.

Any person who knowingly and willfully destroys or conceals, or

attempts to destroy or conceal, any record relating to the provision of
FSA program assistance with intent to defraud the United States or to
prevent the United States from enforcing any right obtained by
subrogation under this part, will, upon conviction, be fined up to
$20,000 or imprisoned up to five years, or both.

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REQUIREMENTS WHEN A SCHOOL CEASES TO

BE AN ELIGIBLE INSTITUTION
A school loses its eligibility to participate in the FSA programs
when it no longer meets the requirements of 34 CFR Part 600, certain
requirements of Part 668, or when the Department terminates the
school under Subpart G of the General Provisions.

In general, a school that ceases to be eligible must notify the

School Eligibility Channel within 30 days of its loss of eligibility to
participate in the FSA programs. Requirements for notifying the
Department are in 34 CFR 600.40.

Loss of accreditation
When a school loses its school-wide accreditation, the Department
generally may not certify or recertify that school to participate in any
FSA program for two years after the school has had its accreditation
withdrawn, revoked, or otherwise terminated for cause or after a
school has voluntarily withdrawn under a show cause or suspension
order. If a school wishes to be reinstated, it must submit a fully
completed E-App to the Department.

The Department will not recertify a school that has lost its school-
wide accreditation in the previous two years unless the original
accrediting agency rescinds its decision to terminate the school’s
accreditation. In addition, if a school voluntarily withdrew from
accreditation during the last two years under a show cause or
suspension order, the Department will not recertify the school unless
the original order is rescinded by the accrediting agency. Finally, a
school may not be recertified on the basis of accreditation granted by
a different accrediting agency during the two-year period.

There are two exceptions to the two-year rule.

1. If the Department determines that loss of school-wide

accreditation was due to the school’s religious mission or
affiliation, the school can remain certified for up to 18
months while it obtains alternative accreditation.
2. If a school’s school-wide accrediting agency loses its
Department recognition, the school has up to 18 months to
obtain new accreditation.
Note that it is possible for accreditation to be withdrawn from
one of the programs at a school without affecting the accreditation
(and eligibility) of other programs at the school.

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REQUIREMENTS WHEN A SCHOOL’S FSA

PARTICIPATION ENDS
If an additional location or branch of a A school may stop participating in the FSA programs voluntarily or
school closes and borrowers who
it may be required to leave involuntarily. In either situation, there are
attended the school obtain loan
required closeout procedures to follow.
discharges by reason of the closure of the
location or branch (or improper ATB or loan
certifications), the Department will pursue A separate closeout audit is not required if a school closes an
recovery against the larger school, its affili- additional location or a branch campus because the next due
ates, and its principals. compliance audit for the school must report on the use of FSA
(20 USC 1087(c)(1). program funds at the closed location. However, the school must notify
the Department of the additional location or branch closure. See the
Federal Student Aid Handbook, Volume 2 – School Eligibility and
Operations, chapter 5 for information on reporting information to the
Department.

VOLUNTARY WITHDRAWAL FROM

FSA PARTICIPATION
For any number of reasons, a school may voluntarily withdraw
from participating in one or all of the FSA programs. For instance, a
school might wish to withdraw from the Perkins Loan Program to
work on lowering high student-loan cohort default rates. To withdraw
from one or all of the FSA programs, the school must notify the
Department via the electronic application. For more information on
these requirements and procedures, contact the appropriate School
Participation Team.

Note: A school that withdrew voluntarily (for instance, to lower its

default rate) can request to participate again without the
waiting period required for a school that was terminated
from the program involuntarily or withdrew voluntarily
while under a show-cause or suspension order.

Withdrawing from the FSA programs while under a termination

order or other sanction — or to avoid being placed under them — is
not considered a voluntary withdrawal.

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INVOLUNTARY WITHDRAWAL FROM FSA

PARTICIPATION
A school’s participation ends in the following circumstances:

• the school closes or stops providing instruction (for a reason

other than normal vacation periods or as a result of a
natural disaster that directly affects the school or its
students);

Note: If the school closes its main campus or stops providing

instruction on its main campus, its loss of eligibility includes
all its locations and programs.

If a school ceases to provide educational instruction in all

FSA programs, the school should make arrangements for its
students to complete their academic programs. If the school
chooses to enter into a formal teachout arrangement, the
school should contact the appropriate School Participation
Team for guidance.
• the school loses its accreditation;
• the school loses its state licensure;
• the school loses its eligibility;
• the school’s PPA expires;
• the school’s participation is terminated under Subpart G;
• the school’s provisional certification is revoked by the
Department;
• the school’s cohort default rate exceeds allowable limits; or
• the school files a petition for bankruptcy or the school, its
owner, or its CEO is responsible for a crime involving FSA
funds.
When participation ends
When a school’s participation in an FSA program ends—for
whatever reason—the school must immediately notify the Department
and comply with the following minimum requirements:

• within 45 days of the effective ending date of participation,

submit to the Department all financial reports, performance
reports, and other reports required by each appropriate FSA
program regulation, as well as a dated letter of engagement
for an audit by an independent public accountant (IPA) of
all FSA program funds received. The completed audit report
must be submitted to the Department within 45 days after
the date of the letter of engagement.

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• report to the Department on the arrangements for retaining

and storing (for the remainder of the appropriate retention
period described in 34 CFR 668.24) all records concerning
the school’s management of the appropriate FSA programs.
(See chapter 7.)
• tell the Department how the school will provide for
collecting any outstanding FSA program student loans held
by the school.
• refund students’ unearned FSA student assistance. (See
Appendix G.)
Additional closeout procedures
In addition, a school that closes must refund to the federal
government or, following written instructions from the Department,
otherwise distribute any unexpended FSA program funds it has
received (minus its administrative cost allowance, if applicable). The
school must also return to the appropriate lenders any loan proceeds
the school received but has not disbursed to students. If the school’s
participation in the Leveraging Educational Assistance Partnership
(LEAP) Program ends, the school must inform the state and follow
the state’s instructions.

If a school’s participation ends during a payment period (or

enrollment period for FFEL programs), but the school continues to
provide education in the formerly eligible program until the end of
the payment or enrollment period, the school may use the FSA
program funds in its possession to —

• satisfy unpaid Pell Grant or Campus-Based program

commitments made to students for that payment period or
for previously completed payment periods before the
school’s participation ended;

Note: The school may request additional funds from the

Department to meet these commitments.
• satisfy any unpaid FFEL commitments made to students for
that period of enrollment by delivering subsequent FFEL
disbursements to the students or by crediting them to the
students’ accounts (only if the first disbursement already was
delivered or credited before the school’s participation
ended);

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• use the FSA program funds in its possession to satisfy unpaid

Direct Loan commitments made to students for that period
of enrollment before participation ended by delivering
subsequent Direct Loan disbursements to the students or by
crediting them to their accounts (if the first disbursement
already was delivered or credited to the students’ accounts
before the school’s participation ended).

Note: The school may request additional funds from the

Department to fulfill this commitment.

If you need additional information, contact the staff of the

Department’s appropriate regional office for guidance in fulfilling
these requirements and responsibilities.

LOSS OF ELIGIBILITY OR WITHDRAWAL

FROM LOAN PROGRAMS
If a school is notified that it has lost its eligibility to participate in
the Direct Loan or FFEL programs and the school does not intend to
appeal the decision, it must immediately inform all current and
prospective students of its loss of eligibility. The school must also explain
that it can no longer certify Stafford and PLUS loans for students or
parents. If the school appeals its loss of eligibility within the required
timeframe, the school may continue certifying Stafford and PLUS
loans during the appeal process. Once a final decision on the appeal is
made, the school must take the actions described in the Department’s
final appeal determination letter.

A student enrolled at a school that loses eligibility or discontinues

participation in the Direct or FFEL programs, can continue to receive
interest subsidies if the student enrolls and remains enrolled at an
eligible school.

If a school plans to withdraw from participation in the Direct Loan

and/or FFEL programs, it must notify the appropriate guaranty
agency or agencies (for FFEL schools) and the Department (for
schools with either loan program) of its decision in writing. Once the
effective date of withdrawal has been established, the school is
prohibited from disbursing loan funds to the student. However, if
your school made a first disbursement to the student before it lost
eligibility, it may still be able to make a subsequent disbursement to
that student. (See the conditions in 34 CFR 668.26(d).)

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School Participation Teams

School Participation Management
School Eligibility Channel
The School Eligibility Channel (formerly Case management and Oversight) contains three School Participation
Management Divisions. These divisions perform similar functions, and each division is responsible for a
separate section of the United States. Each division implements the following school participation
team functions: audit resolution, program review, financial statement analysis, and
recertification. The three divisions are:

● School Participation Management Division Northeast

● School Participation Management Division Southcentral
● School Participation Management Division Northwest

The division functions are performed by teams headed by an Area Case Director and
composed of staff from Washington, D.C. and the region. Each division contains two or
more of these teams. Listed below are the teams, their telephone numbers, and the states
each team is responsible for.

Team Telephone # States Covered

School Participation Management Division Northeast
Boston Team 617-289-0133 Connecticut, Maine, Massachusetts, New Hampshire, Rhode
Island, and Vermont
New York Team 646-428-3750 New Jersey, New York, Puerto Rico, and Virgin Islands
Philadelphia Team 215-656-6442 Delaware, Maryland, Pennsylvania, Virginia, W. Virginia, and
the District of Columbia
School Participation Management Division Southcentral

Atlanta Team 404-562-6315 Alabama, Florida, Georgia, Mississippi, North Carolina,

and South Carolina
Kansas City Team 816-268-0410 Iowa, Kansas, Kentucky, Missouri, Nebraska,
and Tennessee
Dallas Team 214-661-9490 Arkansas, Louisiana, New Mexico, Oklahoma, and Texas
School Participation Management Division Northwest
Chicago Team 312-886-8767 Illinois, Minnesota, Ohio, and Wisconsin
San Francisco Team 415-556-4295 Arizona, California, Hawaii, Nevada, American Samoa, Guam,
Republic of Palau, Republic of the Marshall Islands, Northern
Marianas, and the Federated States of Micronesia
Denver Team 303-844-3677 Colorado, Michigan, Montana, North Dakota, South Dakota, Utah,
and Wyoming
Seattle Team 206-615-2594 Alaska, Idaho, Oregon, Washington, and Indiana

The School Participation Management Division Northeast is also responsible for certification and monitoring of
foreign schools. For information on foreign schools you should contact 202-377-3168.

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