U.S. Says It Overpaid State on Student Aid : Education: Bad debts were overstated by $1.5 billion in 1991, audit claims. Federal agency seeks reimbursement of $65.4 million.

The California Student Aid Commission collected millions of dollars more than it deserved from the federal government in 1991 because it overstated its portfolio of outstanding student loans by $1.5 billion, a federal audit claims.

The audit, performed by the U.S. Department of Education’s San Francisco office, argues that the little-known agency should be forced to reimburse the federal government at least $16.4 million because of sloppy bookkeeping, which showed that the California agency had 50% more in loan funds than it really did at the time.

The highly critical audit, a copy of which was obtained by The Times, is just the latest complaint leveled at the commission by federal officials. The Department of Education has also demanded a $49-million refund from the agency because it says the commission has not been aggressive enough with former students who fail to make their loan payments.

Sam Kipp III, the commission’s executive director, said he believes the latest audit, issued in September, to be politically motivated and “seriously flawed.” Although he said the state agency is taking the accusations seriously, he expressed confidence that the aid commission will be able to show the department that its loan files are properly maintained.

“We don’t agree with the generalization as to the magnitude of what the discrepancies may be,” he said recently.

Run by a 15-member board, the commission awards $200 million in state grants a year and serves as guarantor for federal student loans. Private institutions, such as banks, make the loans but the commission steps in to pay them off if a student defaults. The commission, in turn, gets reimbursed for the bad loans and administrative overhead by the federal government.

The rate of payment on these bad loans is determined, in part, by the commission’s portfolio of outstanding debts. And in the year ending September, 1991, it reported $4.6 billion worth of student loans in “repayment.”

But the audit claims that figure was inflated by 50%, in great part because of sloppy computer bookkeeping of the commission’s “borrower master file.” Of the sample of 326 supposedly outstanding loans the auditors said they examined, 85 had been paid off or canceled, had conflicting lender information or were otherwise ineligible for the final tally.

In one example, auditors found a $5,000 loan that was paid off in July, 1983, but was still on the commission’s books. Extrapolating to the entire file, the auditors estimated the actual amount of outstanding student loans at the time to be $3.1 billion.

Because the commission used the $4.6 billion figure, it collected $16.4 million more than it deserved in 1991, auditors concluded. They also suggested that the federal government overpaid the commission $5.9 million in 1990 and $8.5 million in 1992.

However, Kipp said auditors were basing their findings on an obsolete computer field in its master file--a field that has not been changed or used by the commission for several years. Although the commission warned auditors about the mistake, he said, they insisted on using the approach and a sample that he claimed “leads to distortion.”

Kipp said the commission is disputing the audit findings and has filed an appeal with the Department of Education, which is reviewing the matter. Federal officials could not be reached for comment.