Sikich Title IV Common Findings Corner – June 2019 Edition

Common Findings During Title IV Audits

Our team compiled some common findings we’ve come across during our Title IV audits. Here are some things to look out for as you think about your 2019 compliance audit:

1. Incomplete Verification

Students occasionally make errors when filling out their Free Application for Federal Student Aid (FAFSA), so there is a process for verifying applications and making corrections. When a student’s Institutional Student Information Report (ISIR) is selected for verification, an institution is required to match documentation to the information provided on the student’s ISIR. Students who are selected for verification will be placed by the Department of Education’s Central Processing System (CPS) into a verification tracking group.

The most common verification errors we see during audits tend to be mistakes made for the V1 – Standard Verification Group. Tax filing students in this group must verify:

• Adjusted gross income
• Income tax paid
• Untaxed portions for IRA distributions and pensions
• IRA deductions and payments
• Tax-exempt interest income
• Education credits
• Household size
• The number of years in college

While filling out the FASFA online, students have the option to import tax return information electronically from the IRS database using the IRS Data Retrieval Tool. However, this does not always apply to every student, as a student can choose not to use it, or at times it may be unavailable.

IRS tax transcripts should then be used to verify the tax information, and in some cases (when the Data Retrieval Tool and transcript requests are unavailable), a signed copy of the student’s and/or parent’s tax return can be used. However, not all tax returns and transcripts are the same. The items you need to verify depend on the type of tax return that was filed: 1040, 1040A and 1040EZ. Certain line items from these returns are commonly verified incorrectly and corrections go unmade.

The Department of Education releases a “Tax Return Matrix” for each award year, which specifically shows which line items to take from the IRS transcripts or tax returns. Not all schools know this document exists, and it is a great tool to use when verifying a student’s ISIR. Here is a link to the most recent matrix for the 2018-2019 award year.

Properly verifying a student’s ISIR to supporting documentation can prevent any ineligible or unauthorized Federal funds from being received, as this can have a large effect on the student’s Expected Family Contribution (EFC).

2. Incorrect Refunds – Inadvertent Overpayments – Aid paid after LDA

Return to Title IV Refund Calculations (R2T4s) are typically one of the higher risk areas when we are performing Title IV compliance audits. When a student drops from the program they are enrolled in, the school must perform an R2T4 to determine the amount of Title IV aid that the school has earned and the amount of Title IV aid that needs to be refunded to the Department of Education. We have consistently noted issues regarding Step 1: Students Title IV Aid Information of the R2T4s we have been auditing. This section looks at the Title IV aid that was either disbursed or could have been disbursed in the audit period (or period of enrollment).

For aid to be considered disbursed, it must arrive by the Last Day of Attendance (LDA) for schools that are required to take attendance, and by the Date of Determination (DOD) for schools that are not required to take attendance. Aid often arrives shortly after these dates, just due to the timing of the drawdowns. This aid is known as inadvertent overpayments. As long as these inadvertent overpayments were certified prior to the LDA or DOD discussed above, they should be listed as “Amount That Could Have Been Disbursed” on the R2T4, rather than “Amount Disbursed.” Amounts that could have been disbursed are used to help the student earn more aid that was disbursed during the audit period, as these funds were scheduled prior to dropping from the program. As noted, “Amount That Could Have Been Disbursed” refers to aid the student has earned before the school draws down the funds from the Department of Education. For example, the student begins earning Title IV aid the first day of class, but the Title IV may come 30 days after that first day of class. If a student drops out of school before that aid is drawn down by the school, the school still must offer aid in a pro-rata manner for the days the student did attend class.

The main issue we see here is institutions will properly list this aid as could have been disbursed, calculate the refund due and refund the amounts listed as due back to the Department in Step 6: Return of Funds by the School; but they will fail to actually refund back the inadvertent overpayments themselves. As R2T4s will typically not list these amounts as due back, clients often overlook that the inadvertent overpayments are part of the Title IV funds that are due back. We always recommend clients double-check the R2T4 process to assure all amounts due back are being refunded.

3. Credit Balances – Waivers – Paying by End of Loan Period

An institution must pay credit balances to students within 14 days of the creation of such credit or within 14 days of the date the institution performs the return calculation for withdrawn students. A student must sign a waiver to allow the institution to keep or hold this credit balance so these funds can be applied to a future period. When a valid waiver has been obtained, an institution must pay the remaining balance on loan funds by the end of the loan period and any remaining Title IV program funds by the end of the last payment period in the award year for which the funds were awarded.

During our Title IV compliance audits, we have noted that though valid credit balance waivers have been obtained, institutions don’t always refund the credit balances due back at the end of the loan period. Often these funds are eliminated with subsequent tuition charges, overtime charges or simply refunded in an untimely fashion at the end of the program. Since institutions can only apply $200 from one academic year to the next, they will never be able to use these credit balances past the end of the loan period, or award year, as applicable.

As institutional charges need to be broken down by the payment period as well (or at the very least tracked in this manner), eliminating credit balances for each payment period is the most accurate and cleanest way to update the student ledger.