INTRODUCTION
The Illinois Student Assistance Commission (ISAC) was created to establish and
administer a system of financial assistance, through loan guarantees, scholarships and
grant awards for residents of the State of Illinois to enable them to attend qualified
public or private institutions of their choice within Illinois. FY 1999 was the first year
ISAC issued the first contracts in its new mandate of offering a prepaid tuition program.
Based upon the extent of noncompliance noted during State Compliance audit tests, it
was concluded that there is more than a relatively low risk that there exists other
noncompliance in areas not tested by the auditors.
FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
INCORRECT INTEREST RATES FOR DEFAULTED LOANS
ISAC incorrectly applied a fixed rate of interest instead of a variable rate of
interest to certain defaulted PLUS, SLS, and Stafford student loans guaranteed and held by
ISAC.
Defaulted student loans are purchased by ISAC from the lending institutions. Collection
of defaulted loans is the responsibility of ISAC pursuant to an agreement with the U.S.
Department of Education (ED). ED reimburses ISAC for the defaulted loan purchased
including the amount of capitalized interest paid to the lending institution. ISAC is
required to continue collection efforts in accordance with federal regulations.
The 1986 reauthorization of the Higher Education Act established variable interest
rates for PLUS and SLS loans effective for loans disbursed July 1, 1987 and thereafter.
Stafford loans, previously made at fixed rates, became eligible for variable rates as of
October 1, 1992. At the time of default on variable interest rate student loans, ISAC
froze the variable interest rate being applied. Interest was then applied to the loan
balance using a fixed rate convention rather than a variable rate. These defaulted student
loans should have continued to have a variable interest rate even after default by the
borrower.
Effective July 1, 1995, all variable interest rate loans in ISAC’s portfolio were
calculated at the applicable variable rate. Variable interest rate loans which had been in
default prior to ISAC’s system changes, required retroactive adjustments for every
year they had been in default and subject to the fixed interest rates prior to July 1,
1995. ISAC began these modifications in June of 1996 which continue to the present time.
ISAC’s ability, however, to identify and correct balances has been impaired by its
computer system. The computer system did not maintain previous account balances and
changes in balances after payments were made. In order to reconstruct an account history
of accrued interest and other manual adjustments such as refunds, ISAC needed to conduct
manual calculations outside the computer system which is a cumbersome and time consuming
process.
ISAC provided documents that showed, of the 61,000 loan accounts identified, about
14,000 accounts were potentially lower than appropriate by approximately $291,000. ISAC
has decided to waive the application of any potential increases. ISAC is in the process of
resolving this issue with ED. As of November 1999, 4,387 accounts out of the 14,000
contained potential misstatements of approximately $125,000. These accounts are being
addressed in the pending proposal with ED.
About 47,000 accounts were potentially higher than appropriate by about $2.7 million.
ISAC has provided refunds to borrowers who were overcharged interest. As of August 1999,
ISAC had issued 4,276 refunds totaling approximately $390,000. ISAC does not believe that
any additional refunds are due.
The full financial effects of account balance adjustments had not been determined as of
the end of the audit. Since the loans were in default, adjustments would not affect the
account receivable balances within ISAC financial statements. In accordance with federal
regulations, ISAC is working with ED to develop a reimbursement plan for amounts due the
federal government for defaulted accounts with "undercharged" amounts. (Finding
1, pages 16-18)
We recommended ISAC complete its review and ensure that adjustments to loans are
performed so that correct interest is posted to the accounts where a fixed rate was
applied instead of a variable rate after default. Further, ISAC should determine the
proper method of resolving the matter by seeking guidance from the U.S. Department of
Education.
ISAC officials agreed with the finding and recommendation and stated they have embarked
on a project to overhaul their systems. At present, they are awaiting a response from ED
on their reimbursement plan to the federal government.
ANNUAL REPORT INFORMATION NEEDS TO BE IMPROVED
ISAC presented its Annual Reports with inappropriate references to financial
schedules in the reports as "audited" in violation of professional reporting
standards.
Besides the Annual Reports, ISAC issued a Comparative Reserve Fund Sources and Uses
statement on a federal fiscal year and presented it as an "audited" report.
Audit reports require an attestation by an external, independent auditor.
Also, ISAC's Annual Reports did not include the following information as required by
State law:
We recommended Annual Reports not be presented as "audited" unless attested
by an external, independent auditor. Additionally, appropriate disclosure should be made
as to date and source of information when taken from an "audited" report and
used in another publication. Also, although ISAC prepares a number of reports that
includes the number and amount of receivables, we recommended the official Annual Report
contain the information required by State Statute.
ISAC officials agreed with the finding and recommendations and stated they will ensure
that staff follow the professional standards when issuing financial reports. Further,
action will be taken to include the information pertaining to the number and amount of
receivables in their official Annual Report.
AMOUNT OF COLLATERIALIZATION NOT WITHIN REQUIREMENTS OF STATE OFFICERS AND EMPLOYEES
MONEY DISPOSITION ACT
The amount of collateral pledged to secure cash on deposit with various banks was
not adequate as required by the State Officers and Employees Money Disposition Act. Both
the Illinois Designated Account Purchase Program (IDAPP) and the Illinois Opportunity Loan
Program (IOLP) program's bank balances exceeded FDIC Insurance and collateral. This
finding has been repeated since 1995.
A review of the IDAPP and IOLP records revealed that the two programs together had
cash and cash equivalents on deposit with banking institutions totaling $175.5 and $193.7
million in FY 1999 and FY 1998, respectively. Of this total, $149.9 million (85.4%) and
$167.2 million (86.3%) in FY 1999 and FY 1998, respectively, were not covered by FDIC
Insurance or adequately collateralized.
The State Officers and Employees Money Disposition Act requires that public deposits be
protected against risk of loss with FDIC Insurance or with collateral.
Agency officials state the cost of securing all its deposits with collateral at its
various banks exceeded the benefits to be derived. (Finding 13, pages 37-38)
We recommended ISAC require financial institutions to pledge an adequate amount of
collateral to secure their deposits where the amount on deposit exceeds FDIC Insurance
coverage.
ISAC officials agreed with the finding and recommendation and stated they are taking
steps to review and monitor its cash and cash equivalents held in financial institutions.
(For previous ISAC responses, see Digest footnote #1.)
OTHER FINDINGS
Other findings involved issues such as inadequate reconciliation of student
receivable records to accounts assigned to collection agencies, lack of implementation of
procedures for eligibility for fees, poor documentation of claims reimbursements and
credit bureau reports, delays in following ISAC's established timetable for post-secondary
institutional audits, untimely compliance with reporting required by bond indentures, a
need to maintain proper accountability over fixed assets, and failure to adopt procedures
so that unauthorized bank signatories are removed by the disbursing banks. These findings
and recommendations are being given attention by ISAC management. We will review progress
toward implementation of our recommendations during our next audit.
Responses to the recommendations were provided by Marcia Thompson, Fiscal Officer.
AUDITOR’S OPINION
The auditors have stated the financial statements for the Illinois Student
Assistance Commission as of and for the year ended June 30, 1999 are fairly presented in
all material respects.
___________________________________
WILLIAM G. HOLLAND, Auditor General
WGH:SES:pp
AUDITORS ASSIGNED
Pandolfi, Topolski, Weiss & Co. were our special assistant auditors for
this audit.
DIGEST FOOTNOTES
#1 ILLINOIS DESIGNATED ACCOUNT PURCHASE PROGRAM AND ILLINOIS OPPORTUNITY LOAN PROGRAM
CASH AND CASH EQUIVALENTS - (Previous ISAC Responses)
1997: ISAC agrees and has taken steps to collateralize as much of its cash and
cash equivalents as it believes is cost beneficial. All outstanding Guaranteed Investment
Contracts are collateralized at 102% with U.S. Treasury Notes and Bills. Money Market
accounts selected for investment of funds invest only in U.S. Treasury Notes and Bills,
U.S. Agencies or Repurchase Agreements collateralized at 102% with U.S. Treasury Notes and
Bills. The remaining cash and cash equivalents are invested in savings and checking
accounts with various banks and are secured with collateral agreements, except for certain
cases where the amount exceeding FDIC insurance is not large enough for collateralization
to be cost beneficial. Less than 1% of IDAPP and IOLP assets are not adequately
collateralized due to the cost benefit analysis. We will continue to make improvements in
this area and will monitor this figure on a regular basis in order to adequately manage
this risk.
1995: ISAC agrees and will seek to collateralize deposits with financial institutions
that exceed FDIC Insurance in accordance with the State Officers and Employees Money
Disposition Act. The majority of the cash and cash equivalents were invested in accordance
with the Public Funds Investment Act in Treasury money market funds and Guaranteed
Investment Contracted and were not deposits that needed to be collateralized.
