Office of the Auditor General Newfoundland and Labrador Highlights Highlights of a review of the designation of educational institutions for the purpose of student loans for the period 2004-05 to 2006-07. Why our Office did this Review The objectives of our review were to determine whether the Department: is monitoring educational institutions to assess whether they are complying with designation requirements under the Student Financial Assistance Act and Regulations; has adopted the National Designation Policy Framework relating to the student loan program; and has established and is complying with educational institution designation policy and procedures. What our Office Recommends We recommend that the Department should: Develop policies and procedures to ensure that educational institutions comply with the designation requirements for the purposes of student loans under the Student Financial Assistance Act and Regulations. Consider adopting the National Designation Policy Framework. In connection with this the Department should: develop socio-economic indicators to be used in assessing the performance of educational institutions in the Province, as provided for under the Framework; and develop policies and procedures and enter into formal agreements with educational institutions as outlined under the Framework. Advise all educational institutions in the Province of their student loan repayment performance. What the Department Said To provide balance to this report and to ensure full disclosure, the Department was asked to formulate a response to our findings and conclusions. The Department s response, verbatim, is included at the end of this report. Readers are encouraged to consider the Department s comments in this regard. Reviews of Departments and Crown Agencies January 2008 Chapter 2, Part 2.4 DEPARTMENT OF EDUCATION Student Loan Program - Designation of Educational Institutions Educational institutions play a role in retaining students, ensuring students succeed, and ensuring students improve their overall employability, which contributes to the success that students have in repaying their student loans. In order for a student to be eligible for a student loan from Government, the Student Financial Assistance Regulations under the Student Financial Assistance Act stipulate that the educational institution they are attending must be formally recognized or designated by the Minister (Department of Education). The Designation Policy Framework introduced in 2004 is a guide for all jurisdictions in Canada in the development of their educational institution designation policies and procedures. The Framework supports government in working with educational institutions to improve the performance and accountability of the student loan portfolio. The Framework outlines the criteria that should be established to determine whether an educational institution should be and continue to be designated. These criteria are supported by performance standards such as student loan portfolio repayment and default rates, institution administrative compliance and student program completion and employment rates. Educational institutions that do not meet performance standards of the Framework must take action to improve their performance or face sanctions, including possible de-designation. However, jurisdictions may determine that the role an educational institution plays in fulfilling regional, socio-economic or cultural provincial policy priorities should be taken into account in assessing institutions that do not meet performance standards. Under the Framework, the Province is required to advise, monitor and assist institutions in taking the appropriate action to ensure compliance. What We Found We have concluded from our review that the Department could not demonstrate whether the Province has developed policies and procedures to ensure that educational institutions comply with the designation requirements for the purposes of student loans under the Student Financial Assistance Act and Regulations. Furthermore, the Province did not adopt the National Designation Policy Framework developed in 2004 because of the absence of socio-economic indicators which could be used in assessing the performance of educational institutions in the Province, as provided for under the Framework. In addition, the Province did not develop the policies and procedures or enter into formal agreements with educational institutions as outlined under that Framework. The agreements, which are required to be in place to maintain Federal student loan program designation, should outline for example, student loan repayment performance targets, required information exchange between institutions and the Province and tuition refund policies. As a result of the inaction on the part of Government and in accordance with the Framework, all educational institutions in the Province may be at risk for de-designation for Federal student loan purposes i.e. students will not be eligible for the 60% Federal portion of a total student loan. Educational institutions at particular risk would be the 11 of 43 institutions whose student loan repayment performance in July 2007 was rated as poor (student loan repayment rate less than 48.7%). To view the full report, refer to the web site www.gov.nl.ca/ag. For more information, call the Office of the Auditor General, 709-729-2700 or email oag@gov.nl.ca. Of particular note is that Department officials indicated none of the educational institutions have been advised of their student loan repayment performance, whether improvements are required and whether there is risk of de-designation. In addition, the Province still has not taken action to monitor and work with educational institutions to address student loan repayment performance. Auditor General of Newfoundland and Labrador Chapter 2, Part 2.4, January 2008
Background Educational institutions play a role in retaining students, ensuring students succeed, and ensuring students improve their overall employability, which contributes to the success that students have in repaying their student loans. Educational institutions, therefore, are important to any effort by Government to effectively manage the financial risks inherent in a student loan program. During the period of our review, student loans were funded by the Federal Government (60%) and the Provincial Government (40%). As at 31 March 2007, there were 27 educational institutions designated for student loan purposes, some of which had more than one campus. In order for a student to be eligible for a student loan from Government, the Student Financial Assistance Regulations under the Student Financial Assistance Act stipulate that the educational institution they are attending must be formally recognized or designated by the Minister (Department of Education). Figure 1 The Province, through the Student Loan Corporation of Newfoundland and Labrador (SLCNL) has a significant investment in student loans. Figure 1 shows a summary of student loans outstanding at the SLCNL for the three year period ending 31 March 2007. Student Loans Outstanding Fiscal Years Ending 31 March ($ millions) 2004-05 2005-06 2006-07 Loan Status Students $ Students $ Students $ Class A: in school, not in repayment 13,300 $ 83.1 11,749 $ 81.7 10,942 $ 75.3 Class B: out of school, in repayment - Current, up to date - Interest relief Hardship, no payments due - Delinquent, In arrears, 1-270 days 11,379 3,358 3,418 68.2 27.9 20.1 13,208 3,488 2,207 75.7 28.7 13.6 14,690 3,214 2,275 81.6 26.2 14.7 Total Class B 18,155 116.2 18,903 118.0 20,179 122.5 In default - In arrears > 270 days 3,412 20.5 5,447 31.8 6,801 39.3 Interest receivable - 2.6-4.5-7.1 Total 34,867 $ 222.4 36,099 $ 236.0 37,922 $ 244.2 Source: Student Loan Corporation of Newfoundland and Labrador Auditor General of Newfoundland and Labrador Chapter 2, Part 2.4, January 2008 45
As Figure 1 shows, as at 31 March 2007, 6,801 students had defaulted on loans totalling $39.3 million. This represents an increase of 3,389 students and $18.8 million in defaulted loans over the period ended 31 March 2005. In addition, the Department reported that, as at 31 March 2007, guaranteed loans purchased from chartered banks prior to establishment of the SLCNL for 4,341 students and totalling approximately $35.6 million, were also in default. Therefore, as at 31 March 2007 there were 11,142 students in default totalling $74.9 million (average of approximately $6,700 per student). Chronology of designation requirements Although in 2002 the Province established legislation under the Student Financial Assistance Act and Regulations governing the designation and monitoring of educational institutions, the Department deferred establishing formal designation policy and procedures pending the outcome of a joint Federal/Provincial Pan Canadian Designation Policy Framework which was being developed. In 2003, the Council of Ministers of Education approved a National Designation Policy Framework (the Framework) to facilitate a common approach to designating educational institutions for student loans in jurisdictions across Canada. In 2004, Federal, Provincial and Territorial Ministers formally announced the launch of the Framework. In 2005, the Federal Government identified the Student Financial Services Division of the Province's Department of Education as the appropriate authority to exercise and perform the powers, duties and functions under the Canada Student Financial Assistance Act in accordance with the Framework. Departmental officials indicated that the Province has not adopted the Framework and developed policy and procedures because, in the view of the Province, the Framework is not complete in relation to the development of specific socio-economic indicators that would be used in assessing the designation of institutions. For example, officials indicated that using the Framework to de-designate an institution in a small region without consideration of the socio-economic realities would not be prudent. 46 Chapter 2, Part 2.4, January 2008 Auditor General of Newfoundland and Labrador
Audit Objectives and Scope Audit objectives The objectives of our review were to determine whether the Department: is monitoring educational institutions to assess whether they are complying with designation requirements under the Student Financial Assistance Act and Regulations; has adopted the National Designation Policy Framework relating to the student loan program; and has established and is complying with educational institution designation policy and procedures. Audit scope We interviewed officials at the Department of Education, reviewed the relevant legislation and the National Designation Policy Framework. We completed our review in November 2007. Overall Conclusions The Department could not demonstrate whether the Province has developed policies and procedures to ensure that educational institutions comply with all of the designation requirements for the purposes of student loans under the Student Financial Assistance Act and Regulations. In particular, the Department does not monitor institutions to determine whether acceptable default prevention plans are in place. Furthermore, the Province did not adopt the National Designation Policy Framework developed in 2004 because of the absence of socio-economic indicators which could be used in assessing the performance of educational institutions in the Province, as provided for under the Framework. In addition, the Province did not develop the policies and procedures or enter into formal agreements with educational institutions as outlined under that Framework. The agreements, which are required to be in place to maintain Federal student loan program designation, should outline for example, student loan repayment performance targets, required information exchange between institutions and the Province and tuition refund policies. Auditor General of Newfoundland and Labrador Chapter 2, Part 2.4, January 2008 47
As a result of the inaction on the part of Government and in accordance with the Framework, all educational institutions in the Province may be at risk for de-designation for Federal student loan purposes i.e. students will not be eligible for the 60% Federal portion of a total student loan. Educational institutions at particular risk would be the 11 of 43 institutions whose student loan repayment performance in July 2007 was rated as poor (student loan repayment rate less than 48.7%). Of particular note is that Department officials indicated none of the educational institutions have been advised of their student loan repayment performance, whether improvements are required and whether there is risk of de-designation. In addition, the Province still has not taken action to monitor and work with educational institutions to address student loan repayment performance. Detailed Observations Overview In 2002, the Province introduced the Student Financial Assistance Regulations (the Regulations) under the Student Financial Assistance Act. The Regulations state that in order to qualify for and maintain a designation as an educational institution, the institution must, among other things: provide information and counselling to students with respect to their eligibility for financial assistance; have a refund policy acceptable to the Minister for students who withdraw before completing their program; where applicable, comply with the requirements of the Private Training Institutions Act i.e. have been in continuous operation for one year and graduated a class of students, have a security bond in an appropriate amount, submit audited annual financial statements to the Minister, hire instructors approved by the Minister, etc. have a grade 12 or equivalent entrance requirement or a mature student policy in place that is acceptable to the Department; and have a default prevention plan that is acceptable to the Department. 48 Chapter 2, Part 2.4, January 2008 Auditor General of Newfoundland and Labrador
Designation Policy Framework The Designation Policy Framework introduced in 2004 is a guide for all jurisdictions in Canada in the development of their educational institution designation policies and procedures. The Framework supports government in working with educational institutions to improve the performance and accountability of the student loan portfolio. In accordance with the Designation Policy Framework, the Province is responsible for: adhering to provisions of the Framework; implementing a process for the initial designation and ongoing monitoring of educational institutions (implementing designation policy and procedures); and establishing formal agreements with educational institutions to govern their designation. The Framework outlines the criteria that should be established to determine whether an educational institution should be, and continue to be, designated. These criteria are supported by performance standards such as student loan portfolio repayment and default rates, institution administrative compliance and student program completion and employment rates. Educational institutions that do not meet performance standards of the Framework must take action to improve their performance or face sanctions, including possible de-designation. However, jurisdictions may determine that the role an educational institution plays in fulfilling regional, socio-economic or cultural provincial policy priorities should be taken into account in assessing institutions that do not meet performance standards. Under the Framework, the Province is required to advise, monitor and assist institutions in taking the appropriate action to ensure compliance. Findings The detailed findings that support our conclusions are contained in the following section: Department does not monitor compliance with Regulations Our review indicated that the Department could not demonstrate whether all procedures under the Student Financial Assistance Regulations to monitor institutions for compliance with the Regulations were fully established and carried out. Auditor General of Newfoundland and Labrador Chapter 2, Part 2.4, January 2008 49
The Department does monitor private training institutions for compliance with the requirements of the Private Training Institutions Act. However, they do not monitor whether institutions had acceptable default prevention plans in place. Although Department officials indicated that it does monitor institutions to determine whether: requirements to provide information and counselling to students are met; there is a refund policy acceptable to the Minister; and there is a grade 12 or equivalent entrance requirement, officials could not demonstrate that this monitoring was taking place. Furthermore, the Department indicated that the Regulations do not reflect the educational institution designation requirements under the Designation Policy Framework of 2004. For example, all institutions must: provide independent assurance of institutional integrity; provide a financial guarantee; and meet portfolio, institutional and student performance standards. Designation Policy Framework not implemented We found that the Framework of 2004 has not been formally approved by the Minister of Education for implementation in Newfoundland and Labrador. The Department indicated that once the Framework is approved by the Minister, designation policies and procedures will be formally established subject to approval of the Lieutenant-Governor in Council. As a result, the Province is not meeting its responsibilities under the Framework. No formal agreements in place with educational institutions In September 2005, the Federal Government informed the Department that should an educational institution not be compliant with the mandatory provisions of the Framework, it would deem the institution to not be designated for the purpose of Federal Student Loans. Furthermore, the Federal Government stated that, for greater certainty, these provisions with which educational institutions must comply include requiring them to enter into a formal agreement with the appropriate authority as a condition for their designation. 50 Chapter 2, Part 2.4, January 2008 Auditor General of Newfoundland and Labrador
At the time of our review, the Department had not entered into agreements with any educational institutions as required under the Framework. Department officials indicated that a draft agreement did exist; however, it had not been approved by the Minister. As a result, educational institutions are not aware of their role and responsibilities under the Framework and could be at risk of de-designation for the purposes of Federal student loans. Significant number of educational institutions have poor student loan repayment performance The Framework provides a mechanism to assess financial risk posed by individual educational institutions to a student loan program. Student loan repayment data is used to measure student loan portfolio performance relating to individual schools. Student loan repayment targets were set in 2004 based on national student loan repayment targets, as follows: Figure 2 National Student Loan Repayment Targets Student Loan Repayment Rate Target Student Loan Portfolio Performance Source: Designation Policy Framework Institution Risk Zone Improvement Required > 70.2% Good Green None 48.7% - 70.2% Average Yellow Increase by 3% < 48.7% Poor Red Move to Yellow As Figure 2 shows, students who meet the required monthly payments on their student loan are considered to be in good standing. Educational institutions with less than 70.2% of its students' loans in good standing must take action within a required period of time to meet the required targets or face sanctions, including possible de-designation, unless it is determined by the Province that significant improvement in student loan repayment performance has occurred. Also, the Province may consider the role that an educational institution plays in fulfilling regional, socioeconomic, or cultural provincial policy priorities when assessing performance. Figure 3 indicates the initial assessment for student loan repayment performance for designated educational institutions in the Province as at 31 July 2004 and updated at 31 July 2006 and 31 July 2007. Auditor General of Newfoundland and Labrador Chapter 2, Part 2.4, January 2008 51
Figure 3 Student Loan Repayment Performance Number of campuses by Institution type As at 31 July 2004, 2006 and 2007* Student Loan Repayment Performance MUN CNA Initial Assessment 2004 Private College Total MUN CNA Assessment 2006 Private College Total MUN CNA Assessment 2007 Private College Good 2 8 0 10 3 11 1 15 3 11 7 21 Average 1 7 2 10 0 5 9 14 0 3 8 11 Poor 0 1 23 24 0 0 15 15 0 2 9 11 Total 3 16 25 44 3 16 25 44 3 16 24 43 Source: Student Financial Services Division *There was no assessment required under the Framework in 2005 Total As Figure 3 shows, in 2004, 24 of 44 (55%) educational institutions had poor student loan repayment performance and were therefore in the Framework's red risk zone. Although in 2007 the number decreased to 11 of 43 (26%), this still represents a significant number of institutions at risk of de-designation. In both years, the poor performance ratings were mainly attributed to loans through private colleges (2004-23 of 24; 2007-9 of 11). As of 31 July 2007, 9 of 24 or 38% of the provincial private colleges and 2 of 16 or 13% of the College of the North Atlantic campuses designated for student loans were rated as poor in student loan repayment performance. Province has not taken action to address student loan repayment performance The Framework requires that institutions in the red risk zone improve their student loan repayment rates to average and reduce their risk to yellow by July 2008 or face possible de-designation for purposes of student loans. The Framework also requires that the Province advise, assist and monitor institutions in taking the appropriate action to improve student loan repayment performance. However, we found that none of the 24 educational institutions that were in the red risk zone on 31 July 2004, had been advised by the Province that they had poor student loan repayment performance and what actions would be required of them to prevent de-designation from occurring in 2008-09. Furthermore, as of November 2007 the Province still had not taken any action to monitor and work with educational institutions to address student loan repayment performance. 52 Chapter 2, Part 2.4, January 2008 Auditor General of Newfoundland and Labrador
The Department of Education should: Develop policies and procedures to ensure that educational institutions comply with the designation requirements for the purposes of student loans under the Student Financial Assistance Act and Regulations. Consider adopting the National Designation Policy Framework. In connection with this the Department should: develop socio-economic indicators to be used in assessing the performance of educational institutions in the Province, as provided for under the Framework; and develop policies and procedures and enter into formal agreements with educational institutions as outlined under the Framework. Advise all educational institutions in the Province of their student loan repayment performance. In particular, for educational institutions where improvement is required the Department should advise, assist, and monitor these institutions in taking the appropriate action to improve student loan repayment performance. Department s Response The Department acknowledges the national designation framework is one of a suite of initiatives to monitor how students and graduates are performing following their participation in post-secondary institutions. Other processes exist to track student outcome and the performance of institutions including student and graduate surveys, program accreditation and monitoring of private training. The national framework document is a guide intended to support provincial processes. The Department notes the Auditor General's report finds repayment rates at Provincial post-secondary institutions have improved without implementation of the national designation framework. The Department has not received official notification from the Federal minister's office responsible for student loans of the Federal government's intent to withdraw providing Federal student loans to students in this Province. Auditor General of Newfoundland and Labrador Chapter 2, Part 2.4, January 2008 53
In consultation with Federal and Provincial governments, the Department will continue to work to identify appropriate social and economic indicators in support of the national designation framework. Upon development of these indicators and in consultation with stakeholders, options will be presented to Cabinet in relation to the processes for monitoring of educational institutions. 54 Chapter 2, Part 2.4, January 2008 Auditor General of Newfoundland and Labrador