TUI University inappropriately gave out an estimated $923,000 in financial aid funds to students who either were ineligible for the money or did not earn it because they withdrew from the institution, the U.S. Education Department's inspector general said in an audit released Thursday.

The inspector general's audit recommended that the Education Department's Federal Student Aid office require the for-profit university, which was the online arm of Touro University until its sale to private equity investors in 2007, to repay a minimum of $200,000 to the government and lenders for the money that it has already found should not have been distributed -- a figure that could climb if its recommendations are upheld by department leaders. The IG's office also suggests that the department "consider" taking much more serious action, to "fine, limit, suspend or terminate" TUI's ability to participate in the federal student aid programs.

University officials vigorously disputed the audit's findings and its recommendations, saying they were based on the misinterpretations of federal laws and rules by the inspector general itself. "The university believes that it has properly accounted for all of its Federal student financial aid funds, is taking steps to resolve issues raised in the OIG report, and does not anticipate there will not be any significant repayment liability or adverse impact on the institution upon resolution of this matter," Tom Finaly, the vice president for administration, said via e-mail.

TUI enrolled about 8,300 students in spring 2008, and awarded about $8.6 million in federal financial aid (the vast majority in loans) to 963 of them. The audit, which examined the university's policies and a sample of 98 of its students from the point of its launch as a freestanding institution in October 2007 through June 2008, found a wide range of problems -- enough to conclude that "TUIU had not demonstrated the capability to adequately administer the Title IV programs." Specifically, it found that TUI:

• Awarded financial aid to students as if it was using a term-based academic calendar, when in fact it was using a nonterm calendar that allowed students to finish courses at their own pace. Because of this, the inspector general found, the university in some cases disbursed financial aid funds to students for a second payment period before they had completed the coursework to be eligible for the money.
• Did not ensure that students were participating in academic activity before giving them financial aid. According to the audit, TUI officials ensured that students were enrolled before disbursing funds, but did not follow up to make sure they were actually participating in the scheduled courses.
• Failed to check on whether students had stopped attending classes without informing the university.

That combination of failures, the inspector general found, resulted in what federal officials estimated to be $923,379 that "was either disbursed to ineligible students or not earned by students who withdrew from the institution."

The inspector general recommends that TUI develop and implement policies to conform with its interpretation of federal laws and rules, and repay the government about $8,000 in Pell Grant funds found to have been overpaid to students in its sample and reimburse lenders $184,634 found to have been paid in loans to students in the sample. The audit also recommends that TUI be required to review its entire pool of students to see exactly how much was inappropriately paid -- the $923,379 was an estimate -- and that the university repay that amount. The IG's office also notes that TUI officials said the same policies had been in place prior to the 2007 sale, and suggests that the government require TUI to review periods before the sale for possible overpayments, too.

TUI officials did not respond to a telephone message seeking comment left with a university administrator. But a written response to a draft of the inspector general's audit, which was appended to the final audit as published on the department's Web site this week, challenges the government's findings and recommendations on multiple fronts.

The department's assertion that the university misapplied federal guidelines related to the academic calendar, "which underpins many of the findings in the Report, is not supported by the applicable law and evidences a misunderstanding of the facts," TUI said in its reply. Because of misinterpretations like that, the university said, "the report seriously overstates any non-compliance by the University," adding that "no further action is warranted or appropriate."

"The university has fully established that it has the administrative capability necessary to administer the Title IV programs," TUI said.