The objectives of our inspection were to describe 1. the involvement of the U.S. Department of Education (Department) in transactions among Education Management Corporation, Dream Center Education Holdings, LLC (Dream Center), Education Principle Foundation, and Studio Enterprise Manager, LLC, and the steps the Department took to protect students and taxpayers; 2. how the Department drew down and applied surety funds from letters of credit for Education Management Corporation and Dream Center and how the Department ensured that the surety funds were used in accordance with the terms of the provisional program participation agreements and any other requirements; and 3. how the Department ensured that Dream Center complied with requirements for drawing down and disbursing Title IV of the Higher Education Act of 1965, as amended (Title IV), program funds.During and after Federal Student Aid’s (FSA) preacquisition review, the Department identified significant financial risks associated with Dream Center’s purchase of 13 postsecondary schools, including Dream Center’s loss of the financial backing of an investor who was to provide at least 50 percent of the capital for the purchase, Dream Center’s lack of experience investing in or operating schools participating in the Title IV programs, potential cash flow issues, and more than a decade of failing financial health scores for all 13 schools.
Open Recommendations
| Recommendation Number | Significant Recommendation | Recommended Questioned Costs | Recommended Funds for Better Use | Additional Details | |
|---|---|---|---|---|---|
| 1.1 | Yes | $0 | $0 | ||
| Ensure that records explaining decisions regarding changes in ownership, changes in accreditation status, percentage of required letters of credit, or heightened cash monitoring placement that deviate from the regulations or Department policy are created and retained. | |||||
| 1.2 | Yes | $0 | $0 | ||
| Design and implement policies and procedures for reviewing and approving schools’ applications for conversions from for-profit to nonprofit status. | |||||
| 2.1 | Yes | $0 | $0 | ||
| Clarify the functional statements for the Office of the Under Secretary and FSA to clearly state whether and in what circumstances the Under Secretary may, consistent with the provisions of the HEA governing FSA as a performancebased organization, exercise the Secretary’s authority to direct the operations of FSA. Authority areas that should be clarified include but are not limited to determinations regarding changes in school ownership. | |||||
| 2.2 | Yes | $0 | $0 | ||
| Ensure that FSA creates and retains records explaining decisions to deviate from prescribed policy for letter of credit requirements and temporary provisional program participation agreement extensions during a change in ownership and documenting how the interests of students and taxpayers are adequately protected. | |||||
| 3.1 | Yes | $0 | $0 | ||
| Clarify the functional statements for the Office of the Under Secretary and FSA to clearly state whether and in what circumstances the Under Secretary may, consistent with the provisions of the HEA governing FSA as a performancebased organization, exercise the Secretary’s authority to direct the operations of FSA. Authority areas that should be clarified include but are not limited to dealing with potential school closures and the Department’s release of and approval for the use of surety funds. | |||||
