oversight

U.S. Department of Education FY 2001 Financial Statement Audit Reports.

Published by the Department of Education, Office of Inspector General on 2002-02-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                              U.S. Department of Education
                                        FY 2001
                                  Accountability Report
                                    Table of Contents
Message from the Secretary of Education
Message from the Deputy Chief Financial Officer
Management Discussion and Analysis………………………………………..………..……..1
Part I
          Goals and Objectives
                 Goal 1: Create a Culture of Achievement…………………………..……....6
                 Goal 2: Improve Student Achievement……………………………...……....7
                 Goal 3: Develop Safe Schools and Strong Character…………….....…....8
                 Goal 4: Transform Education into an Evidence-Based Field……...…....9
                 Goal 5: Enhance the Quality of and Access to Postsecondary and
                         Adult Education…………………………………………...………….10
                 Goal 6: Establish Management Excellence…………………………….….16
          Highlights of Reporting Requirements
                 Federal Managers’ Financial Integrity Act……………………………...…..25
                 Semi-Annual Report to Congress on Audit Follow-up…………………..28
                 Prompt Pay…………………………………………...……………………………28
          Management Challenges of the Department of Education...…………………29
          Limitations of the Financial Statements………………..………………………….41
Part II
          Principal Financial Statements, Notes and Required Supplementary
          Information
                 Principal Financial Statements…………………...…………………………...43
                 Notes to the Principal Statements…………………………………………….48
                 Human Capital……………………………………………………………………77
          Supplementary Information…………………………………………………………. 85
          Attachments……………………………………………………………………………….96
                Report of Independent Auditors
                Report on Internal Control
                Report on Compliance with Laws and Regulations
          Appendix A
               Glossary
          Appendix B
               Department of Education Web Sites
                      U.S. Department of Education - FY 2001 Accountability Report




                      Management Discussion and Analysis

                      Introduction

                      The Department of Education is pleased to present the FY2001 Annual
                      Accountability Report. This report is submitted in response to various
                      statutory requirements, including the Government Management Reform
                      Act of 1994 (GMRA). In accordance with the Reports Consolidation Act
                      of 2000, it includes information on the Department's internal controls and
"If our country
fails in its
                      reports required under the Federal Manager's Financial Integrity Act
responsibility to     (FMFIA). Further included are the Department's financial statements
educate every         prepared in conformity with Office of Management and Budget Bulletins
child, we're likely   No. 97-01 and 01-09 as applicable.
to fail in many
areas. But if we
succeed in            Mission
educating our
youth, many other     Education is an American priority. The American people are constantly
successes will
follow throughout
                      examining how education is organized, structured, delivered and
the country and in    assessed in order to improve quality and ensure equal access to all.
the lives of our      While education is primarily a state and local community responsibility,
citizens"             private organizations and federal entities play an important role in
                      improving education.
President George
W. Bush
                      Within this context, the U.S. Department of Education carries out its
                      mission in two major ways. First, the Secretary and the Department
                      provide leadership responsibility in the ongoing dialogue over how to
                      improve the results of our education system. Second, the Department
                      pursues its goals of access and excellence through the administration of
                      programs covering all areas of education from preschool to postdoctoral
                      research.

                      In accordance with Government Performance and Results Act (GPRA)
                      results-oriented management, the Department utilizes strategic planning
                      and performance reporting. The Department's mission statement is the
                      guiding standard that gives direction to all goals and objectives of the
                      plan and hence, all activities of the Department. The Department’s
                      mission is:


                                         to ensure equal access to education
                                         and promote educational excellence
                                               throughout the Nation


                      Organization

                      The Department is headquartered, with most of its operations, in
                      Washington D.C. Additionally, about one third of the Department's
                      employees are stationed in ten regional offices and 11 field offices,




                                                   1
U.S. Department of Education - FY 2001 Accountability Report



making it easier to serve state and local educational systems. The
organizational chart, which follows on the next page, shows the structure
that supports the day-to-day work.


Goals

Part I of this report illustrates how the Department pursues its mission of
ensuring equal access and promoting excellence by focusing its activities
on the following six basic strategic goals extracted from the
Department’s Strategic Plan currently under development:

1. Create a culture of achievement
2. Improve student achievement
3. Develop safe schools and strong character
4. Transform education into an evidence-based field
5. Enhance the quality of and access to postsecondary and adult
   education
6. Establish management excellence

Specifically, Part I presents the goals and objectives developed during
FY 2001 along with selected indicators. When appropriate, this report
will also include other descriptive information aimed at providing a
richer and more complete picture of the initiatives and programs
supported by the Department. Additionally, in compliance with FMFIA,
it identifies major management challenges and describes ED's progress
toward their resolution.

Part II of the report describes the Department's financial performance
during fiscal year 2001. It includes the Department's 2001 consolidated
financial statements and the reports of the independent auditor.

The reports includes the following two appendices: (A) a glossary of
abbreviations and acronyms used in this report, and (B) a list of the
Department of Education offices' web sites.




     High performance will become a way of life that defines the culture of federal
     service.
                                      President's Management Agenda for FY 2002




                             2
                         U.S. Department of Education - FY 2001 Accountability Report




                           U.S. Department of Education




   Office of the                                                                                Office of
                                              Secretary of Education
  General Counsel                                                                             Public Affairs

                                                                                        Decision/Strategy Support
                                                 Deputy Secretary
      Office of
  Inspector General                                                                           Executive
                                                                                           Management Team
                                                 Under Secretary
                                                                                               Operations
  External Relations
                                           Budget, Policy and Planning
     Office of                                                                             Office of the Chief
  Legislation and                                     Budget                               Financial Officer
Congressional Affairs                                 Service

       Office of                                  Planning and                              Office of the Chief
Intergovernmental and                           Evaluation Service                         Information Officer
  Interagency Affairs

                                                                                               Office of
                                                                                              Management
                                                   Programs

                                    Office of                   Office of                      Office of
   Office of Student
                                 Elementary and            Educational Research              Postsecondary
  Financial Assistance
                               Secondary Education          and Improvement                    Education

   Office of Special                Office of               Office of Bilingual                  Office
    Education and              Vocational and Adult        Education & Minority                    for
 Rehabilitative Services           Education                Languages Affairs                  Civil Rights




                                                      3
U.S. Department of Education - FY 2001 Accountability Report




                             4
U.S. Department of Education - FY 2001 Accountability Report




PART I
Goals and Objectives

Highlights of Reporting Requirements

Management Challenges of the Department
of Education

Limitations of the Financial Statements




                             5
U.S. Department of Education - FY 2001 Accountability Report




Goal 1

Create a culture of achievement

Create a culture of educational excellence by effectively
implementing the President’s plan, No Child Left Behind

As America enters the 21st century full of hope and promises, too many
of our neediest students are left behind. Today, nearly 70 percent of
inner city fourth graders are unable to read at a basic level on national
reading tests. Our high school seniors trail students in developing
nations on international math tests. And nearly a third of our college
freshmen find they must take a remedial course before they are able to
begin regular college level courses. While education is primarily a state
and local responsibility, the federal government needs to do more to
reward success and sanction failure of our education system.

Individuals and groups who work in social systems like the American
education system are strongly influenced by the system’s culture. To
achieve improvements in such a system, the most potent strategy for
change is cultural change. As part of this effort, we have identified
several areas that must be addressed in order to build a solid foundation
of learning for all children. Specifically, we have identified the
following four principles and will embed these principles in programs
and activities throughout the Department:
     •    Link federal education funding to accountability for results
     •    Increase flexibility and local control
     •    Increase information and options for parents
     •    Encourage the use of scientifically based methods within
          federal education programs

In order to create a culture of achievement, we must demonstrate that
achievement counts. Formula-based grants will become performance
based, awarding bonuses to States for significant progress and imposing
sanctions for lack of results. With Federal support, States will develop
systems that hold all educational institutions accountable for results.
Demonstration programs in areas of national significance will be
supported, but discretionary programs that do not demonstrate results in
terms of student outcomes will be recommended for consolidation.

In return for accountability, States, school districts, and other grantees
will receive increased flexibility over the use of Federal funds.
Department-wide information technology initiatives will dramatically
reduce the paperwork burden on State and local officials by seamlessly
collecting and disseminating performance information. States will
publish report cards that provide school performance information to
parents. Children trapped in persistently failing schools will have the



                             6
                     U.S. Department of Education - FY 2001 Accountability Report



                     opportunity to attend better public schools or use Federal funds for
                     private tutoring. Public school options, including charter schools, will be
                     strongly supported.

                     Goal 2
                     Improve Student Achievement

                     Improve achievement for all groups of students by putting reading
"We know that
children who         first, expanding high quality math and science teaching, and
have poor            boosting teacher quality
beginning
reading skills are   In education, the bottom line is student learning. As a result of the
less likely to
develop reading
                     Department’s efforts under this plan, American students will improve
skills throughout    their achievement in reading, math and science sufficiently to make
their school         choices about their future work or study, and to participate fully in
careers.             citizenship of the United States. The U.S. Department of Education will
Children, who        lead a national campaign to ensure that every child is taught to read at
start school
behind, often        grade level by third grade. Pre-school and elementary school teachers
stay behind.         throughout the nation will have access to training in the proven
We can reverse       components of effective early reading instruction. To ensure that students
that trend."         become proficient in mathematics and science, the Department will
                     establish a broad collaboration of school districts, colleges and
First Lady Laura     universities, and research institutions to improve the quality of
Bush                 instruction in those areas. Since the quality of instruction is dependent
                     upon the development of well-prepared teachers, the Department will
                     establish initiatives to ensure that supply meets demand. Here are the
                     Department’s objectives for this goal:
                          •    Ensure that all students read on grade level by the third
                               grade
                          •    Improve math and science achievement for all students
                          •    Improve the performance of all high school students
                          •    Improve teacher and principal quality

                     Reading

                     Reading is the foundation of all other skills essential for learning, yet the
                     National Assessment of Educational Progress (NAEP) reports that only
                     63 percent of all fourth-graders read at the basic level or higher.


                                      Percentage of fourth-grade students at or above reading
                                                        achievement levels


                                   100%
                                    80%
                                           62%         60%      62%       63%           Basic
                                    60%
                                    40%                                                 Proficient
                                    20%                                                 Below Basic
                                      0%
                                            1992       1994      1998      2000



                                                   7
U.S. Department of Education - FY 2001 Accountability Report



Research shows that students who fail to read well by fourth grade are at
greater risk of educational failure. Mastering basic skills such as reading
are essential first steps to reaching challenging academic standards.
Since the 1970's, NAEP scores for fourth-graders have been relatively
flat (around 60 percent at basic or higher levels). These statistics are
disturbing because they indicate that around 40 percent of the fourth-
grade population continues to have difficulty reading at the basic level.
The Department will strive to ensure that every child must read on grade
level by the end of third grade. To reach that goal we will ensure that
reading instruction is based on solid research.

Mathematics

To be prepared for postsecondary study and promising careers, students
need to master advanced skills in mathematics, science and technology.
Mathematics also teaches ways of thinking that apply in the workplace
and are essential for informed civic participation. A report released in
August 2001, by the National Center for Education Statistics (NCES)
                         Eighth Grade Performance in Mathematics
                Percentage of Eighth Grade Students who Perform at or above
                                       Basic on NAEP




                    80%                                        66%
                                          58%        62%
                    60%      52%
                    40%
                    20%
                     0%
                            1990       1992          1996    2000
                                              Year




shows improvement for U.S. students in mathematics. Scores for
students in fourth and eighth grade indicate continued progress over the
last ten years. The percentage of eighth-graders at or above Basic
increased from 52 percent in 1990 to 66 percent in 2000. However, the
U.S. Commission on National Security/21st Century reported that the
nation’s mediocre math and science performance is one of our major
national security liabilities.

Goal 3

Develop safe schools and strong character

Establish safe and disciplined educational environments that foster the
development of good character and citizenship

September 11th has created a new environment in which we must ensure
that our children are safe from threats from without as well as within; we
will work to maintain a safe and drug-free environment in which they
can learn. In addition, as the President said on his campaign, “Teaching



                              8
                      U.S. Department of Education - FY 2001 Accountability Report



                      is more than training, and learning is more than literacy. Our children
                      must be educated in reading and writing—but also in right and wrong.”
                      He quoted Dr. Martin Luther King, Jr., who said, “Intelligence plus
“First, we must do    character—that is the true goal of education.” We will focus the nation’s
everything in our
power to ensure the
                      education system on our children’s hearts, as well as their minds. Here
safety of our         are the Department’s objectives for this goal:
children.”
                           •    Ensure that our nation’s schools are safe and drug-free and
President George
                                that students are free of alcohol, tobacco and other drugs
W. Bush                    •    Promote strong character and citizenship among our
                                nation’s youth

                      The Department will sponsor research initiatives to develop a better
                      understanding of the causes of student violence, and it will work with
                      law enforcement departments to remove barriers to information sharing.
                      In addition, states will be supported in their efforts to provide greater
                      parental choice of schools to ensure that students are not forced to attend
                      persistently dangerous schools.

                      Goal 4
                      Transform education into an evidence-based field

                      Strengthen the quality of educational research

                      For too long, the education field has been subject to fads and fancies,
                      much like the pre-scientific era of medicine. We will change the culture
                      of education into one that values evidence over ideology. We will do our
                      part by dramatically improving the quality of research funded or
                      published by the Department, and by providing policymakers, educators,
                      parents, and other stakeholders ready access to high quality, easy-to-
                      understand research. Here are the objectives for this goal:

                           •    Raise the quality of research funded or conducted by the
                                Department of Education
                           •    Increase the relevance of our research in order to meet the
                                needs of our research customers

                      The U.S. Department of Education is one of the primary sources of
                      funding for educational research. Thus, we have an opportunity and a
                      responsibility to ensure that the research funded or published by the
                      Department is of the highest quality. We will develop and enforce
                      rigorous standards, will rejuvenate the peer review process, and will
                      bring focus to the Department’s research activities.




                                                   9
U.S. Department of Education - FY 2001 Accountability Report




Goal 5
Enhance the quality of and access to postsecondary and adult
education

Increase opportunities for students and the productivity of institutions.

The Department of Education recognizes that the productivity of our
nation is dependent upon the quality of the postsecondary education
opportunities made available to the American people. Besides helping to
ensure access to postsecondary training for our young people, it is also
essential that we encourage lifelong learning, whether it is graduate
school or adult basic education, advanced technical training or training in
job entry skills. This includes many for whom lifelong learning
opportunities are of special importance, such as persons with disabilities,
adults lacking basic skills, and those whose job skills need upgrading or
who require retraining because of labor market changes.

To help guarantee access to postsecondary education and lifelong
learning, the Department has set the following objectives for this goal:

     •    Reduce the gaps in college access and completion among
          student populations differing by race/ethnicity,
          socioeconomic status, and disability while increasing the
          educational attainment of all
     •    Strengthen accountability of postsecondary institutions
     •    Establish effective funding mechanisms for postsecondary
          education
     •    Strengthen Historically Black Colleges and Universities,
          Hispanic Servicing Institutions, and Tribal Colleges and
          Universities
     •    Enhance the literacy skills of American adults

The single largest category of investment the Department makes with the
federal education dollar is in postsecondary education - helping families
pay for college.

The history of federal financial assistance to college students goes back
to the GI Bill of 1944, which served as the springboard to the middle
class for millions of American servicemen and their families. Today, the
federal government funds a large percentage of all student financial aid
in the nation. The major programs supporting Goal 5 are described
below.

The Pell Grant Program helps ensure financial access to postsecondary
education by providing grant aid to low and middle-income
undergraduate students. The most need-focused of the Department's
student aid program, Pell Grant awards, vary in proportion to the
financial circumstances of students and their families. During fiscal year
2001, almost 4 million students received grants averaging $2,311.



                            10
                      U.S. Department of Education - FY 2001 Accountability Report



                      Two major student loan programs account for most of the remainder of
                      the Department's support for postsecondary education. The Federal
                      Direct Loan Program lends funds directly to college students. The U.S.
                      Treasury provides loan funds for the Direct Loan Program. The Federal
                      Family Education Loan (FFEL) Program makes federally guaranteed
                      loans available to students through private lenders.

                      The Department's Campus Based programs provide assistance to
                      institutions, which enable them to provide students with employment,
                      grants and low interest rate loans on the basis of need. Higher
                      Education programs provide institutional support, student services,
                      quality reforms and improvements to help minority and other
                      disadvantaged students prepare for and succeed in college.

                      The total portfolio of postsecondary aid programs run by the Department
                      generated $61 billion in student aid (including Federal Family Education
                      Loan capital, Perkins Loan capital from institutional revolving funds, and
                      institutional and state matching funds) to more than 8.1 million
                      postsecondary students and their families during FY 2001.

                      During FY 2001, the Department of Education worked with over 6,000
                      postsecondary institutions, 4,000 lenders, and 36 guaranty agencies
“The purpose of       to deliver grant, loan and work-study assistance to students who rely on
prosperity is to      federal student aid to pay for college.
make sure the
American dream
                      The Department has identified the modernization of the student aid
touches every
willing heart. The    delivery system as one of the highest priority management
purpose is to leave   objectives. This modernization is managed by a performance-based
no one out – to       organization (PBO), Student Financial Assistance (SFA). The PBO's
leave no child        operations are shaped by a five-year performance plan.
behind.”
                      SFA’s 2001 Performance Plan included an ambitious list of 86 operating
President George      goals and improvement projects. The Plan features an e-commerce
W. Bush               strategy with products and services for students, schools and financial
                      partners. SFA has published brochures covering a sweeping spectrum of
                      information for students - from finding affordable ways to search for
                      scholarships and apply for federal student aid, to Spanish versions of The
                      Student Guide, Funding Your Education and the 2001-02 drug brochure.
                      A Web portal for schools consolidates many SFA school services onto
                      one master Web page and provides real-time information that will enable
                      financial aid professionals to respond more quickly, accurately and
                      productively. In May 2001, the first release of the Financial Partners
                      data mart was unveiled that provides access to historical information
                      from the FFEL system. Subsequent releases will provide for links with
                      other systems, expand the amount of data which can be accessed and
                      allow guaranty agencies and other SFA divisions access to FFEL
                      financial information needed for reviews and technical assistance.




                                                  11
U.S. Department of Education - FY 2001 Accountability Report



However, the plan doesn’t cover the fundamental set of values that
employees bring to their jobs. These values -- be worthy of trust, be
courteous, deliver great products and services and be efficient -- are the
basis for prioritizing day-to-day decisions, especially when things don’t
go according to plan. These values are exhibited in SFA’s success of the
past years, as noted by its receipt of numerous prestigious awards -- the
2001 Federal Acquisition Award, the 2001 Digital Government Award
and the 2001 Pioneer and Explorer Awards -- the highest and second-
highest awards given by E-Gov.

The following performance measures highlight the progress being made
in meeting SFA performance plan goals.

Customer Satisfaction - Process Loan Consolidations in 50 days
or less

SFA consolidated and completed processing of 366,970 loans in
FY 2001 with an average turnaround time less than its goal of 50 days or

Number of Apps                                                                                   Days to Complete Processing
                                              Loan Consolidations

 70,000                                                                                                                         60


 60,000
                                                                                                                                50


 50,000
                                                                                                                                40

 40,000

                                                                                                                                30

 30,000

                                                                                                                                20
 20,000


                                                                                                                                10
 10,000


    -                                                                                                                           0
          Oct-00   Nov-00   Dec-00   Jan-01      Feb-01      Mar-01   Apr-01     May-01     Jun-01   Jul-01   Aug-01   Sep-01

                              Accepted        Consolidated      Avg Days to Consolidation     Benchmark




less. Loan consolidators have exceeded the established timeframes and
are currently averaging 42 days for processing consolidations. For FY
2001, the goal of 150,000 applications filed electronically was exceeded,
with over 347,854 electronic applications being received.




                                     12
U.S. Department of Education - FY 2001 Accountability Report



Customer Satisfaction - Increase the number of Free Applications
for Federal Student Aid (FAFSAs) filed electronically from four
million in FY 2000 to five million in FY 2001.
                  FAFSAs Processed in Fiscal Year 2001

    12.0

    10.0

    8.0

    6.0

    4.0

    2.0

       0
           Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
            Paper Apps   Electronic Apps - Non-Web   Electronic Apps - Web




SFA met its goal of receiving 5 million electronic FAFSAs by the end of
fiscal year 2001. The electronic application is faster and easier for the
students to file and for the Department to process. Of 11.1 million
applications processed in FY 2001, 5.36 million were filed electronically.
SFA was a recipient of the E-Gov Explorer Award for its web-based
FAFSA.

Customer Satisfaction - Provide, via Direct Loans Servicing
Website, new Spanish Language Deferment and Forbearance
request.

With implementation of the website http://www.dlservicer.ed.gov/ in
February 2001, SFA increased E-commerce for the Spanish-speaking
borrower. Spanish-speaking borrowers were able to access and
download deferment and forbearance forms in Spanish. A borrower
now has the ability to toggle between English and Spanish interfaces.
SFA was a recipient of the Digital Government Award for the Direct
Loans Servicing Website - chosen for top honors from 100 nominations.

Reduce Costs - Increase to 400,000 the total number of
borrowers repaying direct loans through electronic debiting

The Electronic Debit Account (EDA) provides an efficient means of
payment, generates savings to SFA processing costs by electronically
debiting borrowers and provides a more consistent payment flow in an
error free environment. The EDA provides the borrower with an
efficient means of payment that eliminates the need for check writing,
mailing and postage. The total number of borrowers using Electronic




                             13
U.S. Department of Education - FY 2001 Accountability Report



Debiting increased from 261,236 at the beginning of FY 2001 to 424,209
at the end of the fiscal year. This exceeds the goal of 400,000. More
significantly, this increase of EDA users eliminated the need to mail
3,589,630 bills, resulting in direct cost savings of $1,196,414 in FY
2001.

Reduce Costs - Implement the National Directory of New Hires
database matching program.

In FY 2001, SFA collected over $150 million as a result of matching
SFA collection records against the National Directory of New Hires
(NDNH) database, a database operated by the Office of Child

                                          NDNH Collection Results
    $180,000,000

    $160,000,000

    $140,000,000

    $120,000,000

    $100,000,000

        $80,000,000

        $60,000,000

        $40,000,000

        $20,000,000

                 $0

                        Jan*      Feb     Mar       Apr         May    Jun       Jul       Aug          Sep
                                          Monthly Collections          * Initial Match Occurred
                                          Collections to Date



Support Enforcement of the Department of Health and Human Services
(HHS). Since matching efforts with HHS began in January 2001, new
information has been obtained on 890,621 accounts with unpaid loan
balances totaling $3.2 billion. Quarterly matches are planned for FY
2002, to include all guaranty agencies and eligible ED accounts.

Reduce Costs - Keep the Default Recovery Rate at 10% or higher.

The combined ED and Guaranty Agency (GA) collections on defaulted
loans totaled $5.121 billion for FY 2001 -- $1.403 billion in ED

                               Default Recoveries - In Billions
 $6.0




 $4.0




 $2.0




 $0.0
           Oct        Nov   Dec    Jan    Feb     Mar     Apr    May   Jun     Jul     Aug        Sep

                      FY2000 Cumulative            FY2001 Cumulative




                                         14
U.S. Department of Education - FY 2001 Accountability Report



recoveries and $3.718 billion with the guaranty agencies. The
collections resulted in annual recoveries of 17.7 percent1 of the
outstanding portfolio. SFA exceeded its collections goal of 10 percent of
its outstanding portfolio. The commission paid (as a percentage of
recoveries) to our private collection agencies has dropped from 18.1
percent in FY 2000 to 16.9 percent in FY 2001. The decreased
percentage has resulted in direct cost savings in excess of $9.3 million.

Reduce Costs - Keep the Cohort Default Rate Under 8%

Under statute, a key measure of student loan defaults is the "cohort
default rate," which is the percentage of borrowers that entered into
repayment on FFEL and Direct Loan Program loans during one fiscal
year and defaulted on those loans in the same fiscal year that they
entered repayment or the following fiscal year.

Because of concerns about high default rates and inadequate loan
collection in the student aid programs, Congress and the Department
have taken actions to reduce defaults - including management reforms
and increased attention to assist at-risk postsecondary institutions. This
has allowed the Department to cut the default rate by 75 percent - from
22.4 percent in FY 1990 to 5.6 percent in FY 1999 (the most recent
cohort default rate data available).




1
 The recovery rate is comprised of the sum of ED's collections and the guaranty agency's
(GA) collection on defaulted loans divided by the outstanding portfolio at the end of the
previous year. At the end of FY 00, the outstanding portfolio was $28.8 billion reflecting
approximately $12 billion with ED and $16.8 billion with the guaranty agencies.


                            15
U.S. Department of Education - FY 2001 Accountability Report




Goal 6

Establish Management Excellence throughout the Department of
Education

When the Secretary of Education, Rod Paige, arrived at the Department,
he found financial and management problems that over the course of
several years had damaged the Department's credibility on Capitol Hill
and with the American public. Auditors had been unable to issue a clean
opinion on the Department's financial statements for each of the prior
three years; the student financial assistance programs remained a fixture
of the General Accounting Office's (GAO's) High-Risk List; and
information technology security and management needed improvement.
GAO and the Department's Office of the Inspector General (OIG) had
repeatedly documented problems with respect to Department
management. Auditors also had identified several areas within the
Department susceptible to fraud and abuse. Secretary Paige decided that
the Department of Education needed to strengthen its management in
order to fulfill President Bush’s goals for America’s schools and
students. He demanded a solid foundation of excellent management to
enable the Department to perform its mission more effectively.

In April 2001, Secretary Paige took quick and decisive action to address
longstanding management problems. He tasked a “SWAT” team of
senior career managers -- called the Management Improvement Team
(MIT) -- to develop a blueprint for management excellence at the
Department.

Secretary Paige then directed the MIT to formulate a strategy to:

     make accountability for results the primary operating principle for all
     Department employees, grantees, and contractors;
     obtain a clean audit opinion from the Department's auditors;
     remove the Student Financial Assistance (SFA) programs from the
     GAO High Risk List;
     put in place an effective system of internal controls to protect the
     Department's assets from waste, fraud and abuse;
     further modernize student aid delivery and management to continue
     reducing student loan default cost and use Internal Revenue Service
     data for income verification; and
     measure progress toward solving these problems.

The Blueprint for Management Excellence describes how the
Department will achieve the Secretary's vision to establish the U.S.
Department of Education as the benchmark for accountability and
performance by which all other Federal agencies and State and local
education systems will be measured. The Blueprint embraces GAO
guidance with specific actions addressing GAO concerns.




                            16
                  U.S. Department of Education - FY 2001 Accountability Report



                  The Management Improvement Team (MIT)

                  The MIT established a process to identify, catalogue and track actions to
                  correct management weaknesses identified as of April 1, 2001. The MIT
                  identified, prioritized and tracked the progress toward resolution of
                  hundreds of recommendations for management improvements. These
                  recommendations came from reports issued by the Department's auditors,
                  GAO and OIG, other internal reviews and the Student Financial
                  Assistance (SFA) Performance Plan. The MIT worked with Principal
                  Offices to facilitate and monitor the completions of actions and it made
                  every effort to determine the steps necessary to satisfy the auditors’
                  concerns. The MIT has also taken steps to ensure that this process
                  continues after the MIT's initial work is completed.

                  To be effective, management reforms also require the support of
                  Department employees and the public, including that of their
                  elected representatives in Congress. The MIT worked with the
                  Department's financial statement auditors and the OIG to determine
                  specific action steps and structure for addressing issues raised in previous
                  financial statement audits. The Department's senior leadership worked
                  closely with Congress, GAO and the Office of Management and Budget
                  (OMB) to update them on the Department’s actions and to obtain their
                  guidance concerning future activities. Senior leadership also
                  implemented an awareness campaign to inform Department of Education
                  employees and the public of management improvements.

Without           To further engage GAO in the Department’s management reforms,
accountability,   Secretary Paige and Deputy Secretary Hansen initiated a meeting with
how can we        the U.S. Comptroller
expect results?   General in July 2001.
                  The discussion centered       GAO High-Risk Guidance
President
                  on the high-risk status of    • Strengthen Financial Management and Internal
George W.
                  the student financial            Controls
Bush
                  assistance programs and       •  Implement Integrated Information Systems
                  related management            •  Minimize Noncompliance and Default Rates
                  issues. GAO wrote to             while Promoting the Programs
                  Deputy Secretary
                                                August 1, 2001, letter from GAO to the Department
                  Hansen on August 1,
                  2001 offering its
                  guidance for managing student aid risk and for removing the programs
                  from the high-risk list. The Blueprint Action Plan includes items that
                  address GAO’s requirements.




                                              17
U.S. Department of Education - FY 2001 Accountability Report



Vision for the Future

The first step to achieving management excellence is to clarify the
Department’s appropriate role in education. Through its long-range
strategic planning process, the Secretary and his management team are
communicating what it means to craft a different, better federal role in
education. The Blueprint is a next step in this communication process.

The Blueprint action items plus the interrelated goals and objectives in
the Department’s Government Performance and Results Act (GPRA)
strategic and annual performance plans will be tracked in one
management system. The Secretary will use the action items to hold
political and career leaders accountable for results in all areas of the
Department’s responsibilities. Management excellence means that the
Department will be a well-run, well-respected agency. It means that the
Department maintains and documents its commitment to accountability.
A structure for measuring progress in identifying and solving problems,
oversight of the management process, and steps to prevent future
management problems are all essential to achieving this vision. Having a
solid foundation of excellent management will enable the Department to
perform its mission more effectively.

Selected Highlights of the Blueprint for Management
Excellence:
The Blueprint describes the Department's commitment to
management improvement in five distinct areas:

•    Developing and Maintaining Financial Integrity and Management
     and Internal Controls
•    Modernizing the Student Financial Assistance Programs and
     Reducing Their High-Risk Status
•    Expanding Strategies for Using Human Capital
•    Managing Information Technology Systems to Improve Business
     and Communications Processes
•    Achieving an "Accountability for Results" Culture

The Blueprint is a living plan, consisting of a series of actions, that will
change as circumstances change and as the Department performs
benchmarking with high-performing agencies and business. The
Department must implement these actions to accomplish its
programmatic goals and create a culture of accountability. The MIT
worked with the Department's auditors, the Council for Excellence in
Government, OMB, GAO and Department managers and employees to
establish this action plan.




                            18
U.S. Department of Education - FY 2001 Accountability Report



Develop and Maintain Financial Integrity and Management and
Internal Controls

Financial Integrity means the Department will be assured of accurate and
relevant financial reporting systems and processes to provide managers
and stakeholders with timely and accurate financial information and
reports. It means revenues and expenditures are properly accounted for
and reported on. It means that the reports and data produced by these
systems and
processes will      A clean financial audit is a basic prescription for any
                    well-managed organization. Without accurate and
aid managers
                    timely financial information, it is not possible to
and                 accomplish the President’s agenda to secure the best
stakeholders        performance and highest measure of accountability for
when making         the American people.
programmatic
and asset-                     President’s Management Agenda for FY 2002
related
decisions. Financial integrity will result in the Department’s auditors
concluding that the Department's financial reporting systems produce
accurate and reliable data.

The sought-after clean audit opinions from the auditor will affirm that
systems and processes are reliable and produce accurate and reliable data
that will be useful in education program decision-making.


                 Develop and Maintain Financial Integrity

 Implement Oracle Federal
 Financials                                      Beginning with FY 2002 the
                                                 Department will achieve a
 Prepare quarterly statements
                                                 clean audit opinion.
 Reconcile systems to general ledger
                                                 By FY 2003 program
 Publish strategic plan and                      managers will have financial
 financial reports in one                        data necessary to manage
 document
                                                 effectively.
 Upgrade Oracle Federal
 Financials                                      By FY 2004 the Department
                                                 will receive a Certificate of
 Submit combined financial and                   Excellence for Accountability
 GPRA report to Association of
                                                 Reporting.
 Government Accountants




                              19
U.S. Department of Education - FY 2001 Accountability Report



Management and Internal controls will be adopted and enhanced to
reduce risk of errors and permit effective monitoring of programs and
processes. Management controls will ensure that the Department's
organizational structure, policies and procedures support its programs so
that they achieve the intended results. They will ensure that resources
are used in a manner consistent with the Department's mission and that
programs and resources are protected against waste, fraud and
mismanagement.

       Develop and Maintain Management and Internal Controls

 Complete the examination of
 structures for monitoring and
 holding accountable grantees                    By FY 2002 external and
 and contractors                                 internal accountability
                                                 risks will have been
 Reengineer the process of                       substantially reduced.
 developing, issuing, and
 disseminating directives                        By FY 2002 monitoring
                                                 processes will assess the
 Implement data-mining to detect                 quality of performance and
 fraud                                           any issues identified will be
                                                 promptly resolved.
 Complete reviews of all internal
 controls




Modernize the Student Financial Assistance Programs and
Reduce Their High-Risk Status.

The Department will improve its financial and management information
to manage the student aid programs effectively. It will follow the
specific criteria provided by GAO in their August 1, 2001 letter for
reducing student aid risk and removing the programs from the high-risk
list. It will strengthen financial management and internal controls so that
relevant, timely
information is           Erroneous payments to students will be reduced,
                         ensuring that aid is targeted to the neediest students
available to
                         and increasing public confidence in the programs’
manage day-to-           integrity.
day operations
and provide                    President’s Management Agenda for FY 2002
accountability. It
will integrate
information systems by refocusing the plans in the SFA's Modernization
Blueprint. These plans reflect strategies for improving service, cutting
costs and integrating and improving systems. It will also minimize
noncompliance and default rates while promoting widespread program
use.




                             20
U.S. Department of Education - FY 2001 Accountability Report




Expand Strategies for Using Human Capital.

The Department will align its functions and organization structure with
its primary mission, its long-range strategic plan, and the Blueprint to
support its culture of accountability. It will streamline operations and
bring work closer to its customers—taxpayers, states, school districts and
schools. At the center
of this reform is the         Human capital strategies will be linked to
                              organizational mission, vision, core values, goals,
strategic use of human        and objectives.
capital. The                  Agencies will use strategic workforce planning and
Department’s human            flexible tools to recruit, retrain, and reward
capital strategy will         employees and develop a high-performing workforce.
transform the agency by       Agencies will determine their “core competencies”
                              and decide whether to build internal capacity or
reducing the number of        contract for services from the private sector. This will
managers, delayering          maximize agencies’ flexibility in getting the job done
management levels,            effectively and efficiently.
increasing competitive
                                      President’s Management Agenda for FY 2002
sourcing, and improving
decision-making. Through strategic retention and innovative
recruitment, the Department will transform the problem of retirements
over the next five years into an opportunity to improve the overall
workforce quality. (The Blueprint includes action items to guard against
the loss of institutional knowledge). The transformed workforce will
understand the Department’s mission and will have the tools needed to
perform that mission. To recruit top-notch talent, the Department will
make full use of all existing authorities, such as repayment of student
loans and expedited hiring practices. It will also seek new and
innovative human resources authorities to achieve personnel goals. It
will implement the administration’s Managerial Flexibility Act.
Expanding human capital strategies will result in a high-performing
organization that accomplishes its mission effectively and efficiently.

              Expand Strategies for Using Human Capital

 Develop a vision of human capital         In FY 2002 and FY 2003 the
 tied to the Department’s strategic
                                           Department will meet or
 plan and mission
                                           exceed OMB goals for
                                           competitive sourcing.
 Develop a workforce plan
 framework
                                           By FY 2003 managers will
                                           have tools and flexibility to
 Perform a five-year workforce
 planning and restructuring                recruit top-notch talent.
 analysis

                                           By FY 2004 employees will
 Determine specific actions needed         possess skills necessary to do
 to implement the plan
                                           their jobs.




                                 21
U.S. Department of Education - FY 2001 Accountability Report



Manage Information Technology Systems to Improve Business
and Communications Processes.

To accomplish the expanded electronic government initiative in the
President’s Management Agenda for FY 2002 and meet the business
needs of its customers, the Department will effectively manage
information
                        In short, by improving information technology management,
technology (IT).
                        simplifying business processes, and unifying information flows
The Department          across lines of business, agencies will provide high quality
will also provide       customer service regardless of whether the citizen contacts the
principal offices,      agency by phone, in person, or on the Web.
schools and
                                          President’s Management Agenda for FY 2002
students with
information and
services that respond to their business needs and accomplish Blueprint
and long-range strategic plan goals. The Department will also manage its
IT investments, protect the integrity and confidentiality of data, improve
its data management and increase the use of technology in serving
customers. Finally, the Department will maintain integrated, secure and
reliable systems in a changing data-sharing environment and safeguard
its assets, including information.


                  Manage IT Systems to Improve Processes
  Have Enterprise Architecture in
  place
                                                    By FY 2003 the Department
  Review, approve and prioritize                    will conduct business with
  the Department’s significant
  information system investments                    customers online to the fullest
                                                    extent possible.
  Establish and publish agreed
  upon data dictionary
                                                    By FY 2003 financial
  Certify and accredit general                      statement audit will be in
  support systems and major                         compliance with statutes
  applications                                      supporting IT management.
  Complete remedial actions
  identified in Government                          By FY 2003 procurement and
  Information Security Reform Act                   program data reporting will
  reviews and Critical                              be performed online.
  Infrastructure Protection
  assessments




                            22
U.S. Department of Education - FY 2001 Accountability Report



Achieve an “Accountability for Results” Culture.

The Department will measure progress and monitor results as it performs
its mission. Through the Blueprint the recipients of Department funds,
Department employees and Department contractors will be held
responsible for their performance in relation to the goals and objectives.
They will all
understand what is          High performance will become a way of life that
                            defines the culture of federal service.
expected of them. The
Department will work                   President’s Management Agenda for FY 2002
with grantees and
contractors to develop performance standards that will yield the results
called for in the long-range strategic plan. Managers will evaluate their
performance, and will reward or participate in corrective actions as
necessary based on that performance. All parties will take personal
responsibility for achieving their program and administrative goals.

“Accountability” from the employee perspective means that all
employees:
• realize how their work contributes to satisfying principal office and
   agency-wide strategic plans, and positively affects students,
   educators and citizens;
• will have zero tolerance for fraud or other forms of intentional abuse
   of public funds, as will contractors, external partners and customers;
• understand agency values, expectations and its code of conduct; and
• assume responsibility for identifying and addressing issues, thus
   allowing the Department to rely less on external auditors to provide
   this important service.

                          Accountability for Results

                                                By FY 2003 the Department
                                                will be known for providing
  Agreement on program and                      world-class programs and
  management results for senior                 customer and internal
  officers                                      services that focus on results
                                                and meet our goals.

  Agreement on program and                      By FY 2003 the Department
  management results for                        will set the standard for
  managers                                      performance accountability
                                                among federal agencies.

  Agreement on performance                      By FY 2003 the Department
  plans for employees                           will be the benchmark for
                                                management excellence
                                                around the nation.




                            23
U.S. Department of Education - FY 2001 Accountability Report



Success Indicators

Transforming the Department of Education into a high-performance
organization and restoring the public trust will require continuous
improvement over an extended time period. By following this Blueprint
and the detailed action plan, the Department will achieve the following
success indicators envisioned by Secretary Paige.



                              Success Indicators
    The Department will have established a foundation for management
         excellence that supports its role in American education.




  Beginning with the FY 2002 financial     By FY 2003 Student Financial Assistance
  statements the Department will achieve   programs will be removed from the GAO
  a clean audit opinion.                   High-Risk List.


  By FY 2003 the Department will get the   By FY 2004 the Department will get an A
  highest rating on the OMB President’s    in Federal Financial Management.
  Management Agenda Score Card.




                             24
U.S. Department of Education - FY 2001 Accountability Report




The unresolved weaknesses were all identified prior to FY 2001.
Specifically, the first of these prior years material weaknesses is listed as
“Quality of Data Needed to Support Management Decision” and was
first reported in 1995. This material weakness deals with the Student
Financial Assistance not having quality data to provide for effective
management decision-making. While the data quality issues were
initially associated with the Federal Family Education Loan (FFEL)
Program system, it was expanded to include all SFA systems. ED has
completed a considerable number of the planned corrective actions
aimed at the resolution of this material weakness. Corrective actions
remaining include: 1) secure legislation to allow for data matches with
the Department of Treasury; 2) continue data quality efforts to improve
timeliness and quality of lender and other FFEL data; and 3) implement
the Common Origination and Disbursement (COD) system which will
improve the quality of SFA student level information across the SFA
systems. This weakness is scheduled to be resolved during FY 2002.

Further, the weakness listed under “IT Security Program” in 2001 has
been expanded to include security corrective actions, policies,
procedures, reviews, and plans necessary to bring the Department’s IT
systems into compliance with the Government Information Security
Reform Act (GISRA). The last of the corrective actions for this
weakness is scheduled to be completed during FY 2002.

The remaining material weaknesses reported – Foreign School
Recertification, Audit Tracking and Resolution Process and Financial
Reconciliation - are scheduled to be resolved during FY 2002.

FMFIA Section 4, Management Control
Of the 95 financial management systems non-conformances identified
since the beginning of the program two remain unresolved. These two
material non-conformances were reported prior to FY 2001.
                             Number of Material Non-Conformances

 Period     Number Reported            For That Year      For That Year
 Reported    for the first time        number corrected   number still pending

Prior Yrs       95                        93                      2
1999 Rpt         0                        0                       0
2000 Rpt         0                        0                       0
2001 Rpt         0                        0                       0
Total          95                        93                       2


The two material non-conformances currently outstanding encompass the
following areas: The Federal Family Education Loan System -where the
Department did not have a methodology for determining the loan loss of
FFEL using validated data. This item was first identified as a material
non-conformance in 1990. All but one major milestone to close this




                                  26
U.S. Department of Education - FY 2001 Accountability Report



issue has been completed. The completion of the last pending action has
been delayed until the Department’s new general ledger becomes fully
implemented. This is scheduled for completion in the second quarter of
FY 2002.

The other area involved is the Department’s Financial Management
Systems. The Legacy core financial management systems had numerous
functional and technological problems. Conversion to a new system, the
Education Central Automated Processing System (EDCAPS), was
completed during 1998. However, shortcomings of the Financial
Management System Software (FMSS) portion prevented ED from
preparing timely financial statements. The implementation of the new
general ledger system to replace FMSS is scheduled for completion in
the second quarter of FY 2002.




                            27
U.S. Department of Education - FY 2001 Accountability Report




Semiannual Report to Congress on Audit Follow-up
As required by the Inspector General Act Amendments of 1988, the
Department reports on management actions in response to audit
recommendations. Management is required to report on these two areas:

     1. Number of Audit Reports and the Dollar Value of Disallowed
        Costs

Disallowed Costs are questioned costs that management, in a
management decision, sustained or agreed should be recovered by
the federal government. The information contained in the table
represents audit reports for which receivables were established.

               Final Actions on Audits with Disallowed Costs
                   For the Fiscal Year Ended September 30, 2001


                                          # of Reports Disallowed Costs

       Beginning Balance as of            188             $ 152,870,062
       10/1/00
       + Management Decision              256                   28,460,651
       Pending Final Action               444                  181,330,713
       - Final Action                     300                   26,882,033
       Ending Balance as of 9/30/01       144                  154,448,680

     2. Reports Pending Final Action One Year or More After
        Issuance of a Management Decision

On September 30, 2001 the Department had a total of 12 OIG internal
and nationwide audit reports on which final action was not taken within
one year after the issuance of a management decision. Fifty percent of
the 12 reports were 1 to 2 years old. Twenty-five percent were 2 to 4
years old. The remaining twenty-five percent were 4 years old. Many
corrective actions are dependent upon major system changes that are
currently being implemented. For detailed information on these audits,
refer to previously issued Semiannual Reports to Congress on Audit
Follow-up Numbers 24 and 25.

Prompt Pay
The Prompt Pay Act requires agencies to report on their efforts to pay
bills on time. In FY 2001, ED processed 97.2 percent of its 19,613
payments on time, representing $1.137 billion. Late payment penalties
were paid on 565 invoices.




                            28
U.S. Department of Education - FY 2001 Accountability Report




Limitations of the Financial Statements
The following limitations apply to the preparation of the FY 2001
Financial Statements:

•    The principal financial statements have been prepared to report the
     financial position and results of operations of the entity, pursuant to
     the requirements of 31 U.S.C. 3515 (b).

•    While the statements have been prepared from the books and records
     of the entity in accordance with generally accepted accounting
     principles (GAAP) for Federal entities and the formats prescribed by
     OMB, the statements are in addition to the financial reports used to
     monitor and control budgetary resources which are prepared from the
     same books and records.

•    The statements should be read with the realization that they are for a
     component of the U.S. Government, a sovereign entity. One
     implication of this is that liabilities cannot be liquidated without
     legislation that provides resources to do so.




                            41
U.S. Department of Education - FY 2001 Accountability Report




PART II
Principal Financial Statements, Notes and
Required Supplementary Information

Supplementary Information

Attachments




                            42
                                                UNITED STATES DEPARTMENT OF EDUCATION
                                                 Departmentwide Consolidated Balance Sheet
                                                     As of September 30, 2001 and 2000
         DW                                                              (Dollars in Thousands)




                                                                                                          2001            2000
         Assets

                   Intragovernmental Assets:
                   Fund Balance with Treasury (Note 2)                                             $40,476,338     $42,160,719
                   Accounts Receivable, Net (Note 3)                                                    10,730
                   Interest Receivable                                                                      57          70,755
                   Governmental Assets:
                   Accounts Receivable, Net (Note 3)                                                   113,083          82,703
                   Credit Program Receivables, Net (Note 4)                                         80,698,787      70,472,689
                   Advances                                                                             38,738          38,739
                   Cash and Other Monetary Assets                                                             -         14,132
                   Property and Equipment (Note 5)                                                      25,224           1,307
                   Other Governmental Assets                                                           259,945         236,363
                   Guaranty Agency Federal & Restricted Funds Receivable (Note 3)                    2,462,445       2,231,814

         Total Assets                                                                             $124,085,347    $115,309,221

         Liabilities
                  Intragovernmental Liabilities:
                  Accounts Payable                                                                     $22,293          $6,647
                  Interest Payable                                                                       7,866          83,469
                  Borrowing from Treasury (Note 6)                                                  77,448,205      65,715,386
                  Guaranty Agency Federal & Restricted Funds Due To Treasury (Note 3)                2,462,445       2,231,814
                  Payable to Treasury (Note 7)                                                       4,212,555       7,860,621
                  Payable to Federal Financing Bank (Note 8)                                            31,349          20,699
                  Other Intragovernmental Liabilities (Note 9)                                          44,857         362,823
                  Governmental Liabilities:
                  Accounts Payable                                                                     590,921         213,051
                  Accrued Grant Liability (Note 10)                                                  1,854,940       2,006,129
                  Liabilities for Loan Guarantees (Note 4)                                           8,376,767       9,978,668
                  Other Governmental Liabilities (Note 9)                                              381,264         231,158

         Total Liabilities                                                                         $95,433,462     $88,710,465

         Net Position

                Unexpended Appropriations (Note 11)                                                $30,691,817     $26,722,760
                Cumulative Results of Operations (Note 11)                                          (2,039,932)       (124,004)

         Total Net Position                                                                        $28,651,885     $26,598,756


         Total Liabilities and Net Position                                                       $124,085,347    $115,309,221




The accompanying notes are an integral part of these financial statements.        43
                                              UNITED STATES DEPARTMENT OF EDUCATION
                                            Departmentwide Consolidated Statement of Net Cost
                                             For the Years Ended September 30, 2001 and 2000
                           DW                                            (Dollars in Thousands)



                                                                                                         2001          2000


                           Program Costs
                             Intragovernmental

                                  #   Interest Expense, Federal (Note 12)                          $5,578,045    $4,993,313
                                  #   Other Production Expense                                              0           434
                                  #   Grant Expense                                                    71,180        79,460
                                  #   Contractual Service Expense                                      81,349        57,754
                                  #   Salaries and Administrative Expense (Note 13)                   153,433       147,010
                                  #   Bad Debt & Write-offs                                                38         2,050
                                  #   Other Program Expenses                                                0           800

                              Governmental

                                  #   Subsidy Expense (Note 4)                                        999,287    (3,637,993)
                                  #   Grant Expense                                                37,068,699    34,715,035
                                  #   Interest Expense, Non-Federal (Note 12)                             411           305
                                  #   Contractual Service Expense                                     805,532       827,976
                                  #   Salaries and Administrative Expense (Note 13)                   436,586       438,907
                                  #   Bad Debt & Write-offs                                               588            14
                                  #   Other Program Expenses                                          199,590       180,207

                           Total Program Cost                                                     $45,394,738   $37,805,272

                           Less: Earned Revenues
                                # Interest, Federal (Note 12)                                      $1,522,371    $1,761,285
                                # Interest, Non-Federal (Note 12)                                   4,058,251     3,234,323
                                # Other Earned Revenue                                                  6,153        90,840

                           Earned Revenues                                                         $5,586,775    $5,086,448


                           Net Cost of Operations                                                 $39,807,963   $32,718,824




The accompanying notes are an integral part of these financial statements.        44
                                        UNITED STATES DEPARTMENT OF EDUCATION
                                Departmentwide Consolidated Statement of Changes in Net Position
                                                     For the Years Ended
                                                 September 30, 2001 and 2000
                                                                             (Dollars in Thousands)



                                                                                                              2001            2000



                         Net Cost of Operations                                                       $(39,807,963)   $(32,718,824)

                         Financing Sources (Other than Exchange Revenues):
                            Appropriations Used                                                       $40,730,970     $37,238,317
                            Donations (Non-exchange Revenue)                                                  535           1,016
                            Imputed Financing (Note 14)                                                    20,600          20,795
                            Future Transfers Out due to Downward Subsidy Re-estimate                   (2,707,275)     (4,010,604)

                         Total Financing Sources                                                      $38,044,830     $33,249,524

                         Net Results of Operations                                                     $(1,763,133)      $530,700

                         Prior Period Adjustments (Note 15)                                               (152,829)       (873,584)

                         Net Change in Cumulative Results of Operations                                $(1,915,962)     $(342,884)

                         Increase (Decrease) in Unexpended Appropriations                                3,969,091      (4,039,342)

                         Change in Net Position                                                        $2,053,129      $(4,382,226)

                         Net Position - Beginning of Period                                            26,598,756      30,980,982

                         Net Position - End of Period                                                 $28,651,885     $26,598,756




The accompanying notes are an integral part of these financial statements.            45
                                          UNITED STATES DEPARTMENT OF EDUCATION
                                    Departmentwide Combined Statement of Budgetary Resources
                                         For the Years Ended September 30, 2001 and 2000
                                                                             (Dollars in Thousands)
                  DW




                                                                                                             2001           2000



                      Budgetary Resources

                   1 Budget Authority                                                                 $69,343,857    $56,900,834
                   2 Unobligated Balance-Beginning of Period (Adjusted) (Note 16)                      10,529,655     13,864,271
                     Spending Authority from Offsetting Collections (Adjusted)                         27,638,727     21,346,713
                   4 Adjustments                                                                      (13,393,186)   (10,844,127)

                      Total Budgetary Resources (Note 17)                                             $94,119,053    $81,267,691

                      Status of Budgetary Resources

                   6 Obligations Incurred (Adjusted) (Note 16)                                        $86,385,110    $70,697,100
                   7 Unobligated Balances-Available                                                     2,213,757      1,822,381
                   8 Unobligated Balances-Not Available                                                 5,520,186      8,748,210

                      Total Status of Budgetary Resources (Note 17)                                   $94,119,053    $81,267,691

                      Outlays
                  10 Obligations Incurred (Adjusted) (Note 16)                                        $86,385,110    $70,697,100
                  11 Less: Spending Authority from Offsetting Collections (Adjusted)                  (34,131,697)   (21,916,198)
                  12 Obligated Balance, Net-Beginning of Period (Adjusted) (Note 16 )                  36,112,102     36,166,395
                     Less: Obligated Balance, Net-End of Period (Adjusted)                            (36,087,219)   (36,339,231)


                      Total Outlays (Note 17 )                                                        $52,278,296    $48,608,066




The accompanying notes are an integral part of these financial statements.            46
                                               UNITED STATES DEPARTMENT OF EDUCATION
                                              Departmentwide Combined Statement of Financing
                                              For the Years Ended September 30, 2001 and 2000
                                                                             (Dollars in Thousands)




                                                                                                              2001            2000




               Obligations and Nonbudgetary Resources (Note 18)

               Obligations Incurred (Adjusted) (Note 16)                                              $86,385,110     $70,697,100
               Spending Authority from Offsetting Collections and Adjustments (Adjusted)              (34,131,697)    (21,916,198)
               Financing Imputed for Cost Subsidies (Note 14)                                              20,600          20,795
               Financing Sources Transferred Out                                                       (2,707,275)     (4,010,604)
               Exchange Revenue Not In the Entity's Budget                                              4,837,150       4,366,080
               Other                                                                                      (17,221)        (23,089)

               Total Obligations and Nonbudgetary Resources                                           $54,386,667     $49,134,084

               Resources That Do Not Fund Net Cost of Operations (Note 18)

               Change in Amount of Goods, Services, and Benefits
                  Ordered But Not Yet Provided (Net Increases) Net Decreases                           ($1,009,541)    $2,423,469
               Credit Program Collections that Increase
                   Liabilities for Loan Guarantees or Allowance for Subsidy                            11,471,786        8,996,426
               Resources that Fund Expenses Recognized in Prior Periods                                   (41,431)         (33,759)
               Resources that Finance the
                   Acquisition of Assets or Liquidation of Liabilities                                 (35,192,107)    (31,352,816)
               Other Resources that Finance the
                   Acquisition of Assets or Liquidation of Liabilities                                   4,197,500       4,287,021

               Total Resources That Do Not
                    Fund Net Cost of Operations                                                       $(20,573,793)   $(15,679,659)

               Costs That Do Not Require Resources (Note 18)

               Adjustments                                                                                $75,145       $(360,763)

               Total Costs That Do Not Require Resources                                                  $75,145       $(360,763)

               Financing Sources Yet to be Provided (Note 18)                                          $5,919,944       $(374,838)

               Net Cost of Operations (Note 19)                                                       $39,807,963     $32,718,824




The accompanying notes are an integral part of these financial statements.            47
                       United States Department of Education
                        Notes to Principal Financial Statements
                                 September 30, 2001

Note 1.   Summary of Significant Accounting Policies

Reporting Entity

The U.S. Department of Education (the Department) was established on May 4, 1980,
by Congress, under the Department of Education Organization Act of 1979 (Public Law
96-88). It is responsible, through the execution of its congressionally approved budget,
for administering direct loan, guaranteed loan, and grant programs.

The Department’s Office of Student Financial Assistance (SFA) administers the
Federal Direct Student Loan Program, the Federal Family Education Loan (FFEL)
Program, Pell Grants, and the Campus-Based Program. The Federal Direct Student
Loan Program, authorized by the Student Loan Reform Act of 1993, makes loans
directly to eligible undergraduate and graduate students and their parents through
participating schools. Funds are borrowed from the Treasury Department to fund these
loans. The Federal Family Education Loan (FFEL) Program, authorized by the
Higher Education Act (HEA) of 1965, as amended, cooperates with state and private
nonprofit Guaranty Agencies to provide loan guarantees and interest subsidies on loans
made by private lenders to eligible students. The Pell Grant and Campus-Based
Programs provide educational grants and other financial assistance to eligible applicants.

The Department also administers numerous grant programs and the Facilities Loan
Program. Grant programs include grants for the disadvantaged, elementary and
secondary education, special education and rehabilitative services, and educational
research and improvement. Through the Facilities Loan Program, the Department
administers low interest loans to institutions of higher learning for the construction and
renovation of facilities.

Basis of Accounting and Reporting

The financial statements present the financial position of the Department as of
September 30, 2001 and 2000, including the statements of net cost, changes in net
position, budgetary resources, and financing. This disclosure is required by the Chief
Financial Officers Act of 1990 (Public Law 101-576), and the Government Management
Reform Act of 1994 (GMRA). The financial statements were prepared from the books
and records of the Department, in accordance with accounting principles generally
accepted in the United States. The accounting principles are promulgated by the Federal
Accounting Standards Advisory Board (FASAB) and are presented in the format
prescribed by the Office of Management and Budget (OMB) Bulletin No. 97-01, as
amended and OMB Bulletin No. 01-09. These statements are different from the financial
reports, also prepared by the Department pursuant to other OMB directives that are
primarily used to monitor and control the use of budgetary resources. The balance sheet,
statement of net cost, and the statement of changes in net position consolidate the
balances of 215 discrete appropriations that comprise 31 fund accounts within eight
reporting groups.


                                           48
                       United States Department of Education
                        Notes to Principal Financial Statements
                                 September 30, 2001


The reporting groups include: Student Financial Assistance (SFA); Office of Elementary
and Secondary Education (OESE); Office of Special Education and Rehabilitative
Services (OSERS); Office of Vocational and Adult Education (OVAE); Office of
Postsecondary Education (OPE); Office of Educational Research and Improvement
(OERI); Office of Bilingual Education and Minority Languages Affairs (OBEMLA); and
Department Management (DM).

The accounting structure reflects both accrual and budgetary accounting transactions.
Under accrual accounting, revenues are recognized when earned and expenses are
recognized when incurred, without regard to receipt or payment of cash. Under
budgetary accounting, budgetary resources are obligated based on legal requirements,
which may differ from when an accrual-based transaction is recorded.

Use of Estimates

The preparation of financial statements in accordance with generally accepted accounting
principles in the United States requires management to make assumptions and estimates
that directly affect the amounts reported in the financial statements, actual results may
differ from those estimates.

Estimates for the credit program receivables and liabilities contain assumptions that
significantly impact the financial statements. The primary components of this
assumption set include, but are not limited to, collections, repayments, default rates,
prevailing interest rates, and loan volume. Actual loan volume, interest rates, cash flows
and other critical components used in the estimation process may differ significantly from
the assumptions made at the time the financial statements were prepared. Minor
adjustments to any of these assumption components can create significant changes in the
estimate.

The Department recognizes the sensitivity of the changes in assumptions and the impact
that the projections can have on the estimate. As a result, management has attempted to
mitigate these fluctuations by utilizing historical trend analysis to project future cash
flows. The assumptions used for the September 30, 2001 and 2000 financial statements
are based on the best information available at the time the estimate was derived.

The Department and OMB have established a Student Loan Credit Modeling Working
Group that will refine the underlying assumptions used to generate baseline and policy
estimates. The Working Group plans to summarize the key issues regarding the subsidy
calculation methodology, which requires an OMB policy decision. This is expected to
occur in time for the Mid-Session review of the FY2003 Budget.

At this time, the Working Group has not determined a specific set of alternative
assumptions or model structures. The use of an alternative set of assumptions or model



                                           49
                        United States Department of Education
                         Notes to Principal Financial Statements
                                  September 30, 2001

configurations is considered a change in estimate and may produce cost estimates
significantly different than those reflected in these financial statements.

Present Value Credit Program Receivables and Loan Guarantee Liabilities

The financial statements at September 30, 2001 and 2000 reflect the Department’s
estimate of the long-term cost of direct and guaranteed loans in accordance with he
Federal Credit Reform Act of 1990 (the Act).

The Act requires that the net present value of the estimated long-term cost to the
government of new direct loans and loan guarantees be financed from new budget
authority and recorded as budget outlays at the time the direct loan or guaranteed loans
are disbursed. The FASAB’s Statement of Federal Financial Accounting Standard
(SFFAS) No. 2, Accounting for Direct Loans and Loan Guarantees, and related
regulations and guidance, defines subsidy costs as the present value of interest subsidies,
defaults, fee offsets, and other cash flows associated with direct loans and loan
guarantees in the year loans are disbursed. The Department records subsidy costs as an
allowance to direct loans receivable or as a liability for loan guarantees.

Subsidy costs are estimated based on the difference between the present value of
expected government cash outflows (e.g. interest the government pays to borrow, interest
subsidies, and defaults) and inflows (e.g. interest income from borrowers and collections
of fees), discounted by the average interest rate on marketable Treasury securities. Direct
Loan subsidy costs are recognized as an expense in the year the loans are disbursed.
Guaranty Loan subsidy costs are re-estimated each year. The Department is consistent
with SFFAS Standard No. 2 in its treatment of pre-FY92 loan receivables and loan
guarantees. SFFAS Standard No. 2 allows pre-FY92 loan receivables and loan
guarantees to be valued at net realizable value or expected value, respectively, or at the
net present value of their cash flows. The Department values pre-1992 loan receivables
and loan guarantees at the net present value of their cash flows.

The Department has included additional disclosure in Note 4 as required by FASAB’s
SFFAS No. 18 for FY2001, which is included in Note 4. Subsidy re-estimates, the
interest rate re-estimate and the technical/default re-estimate are separately disclosed. A
reconciliation is provided between the beginning and ending balances for the subsidy cost
allowance for direct loans and the liability for loan guarantees.

Budget Authority

Budget authority is the authorization provided by law for the Department to incur
financial obligations that will result in outlays. The Department’s budgetary resources as
of September 30, 2001 include current authority (appropriations and borrowing authority)
and unobligated balances remaining from annual, multi-year, and no-year budget
authority received in prior years. Budgetary resources also include reimbursements
received and other revenue (spending authority from offsetting collections credited to an


                                            50
                        United States Department of Education
                         Notes to Principal Financial Statements
                                  September 30, 2001

appropriation account and recoveries of prior year obligations). Pursuant to Public Law
101-510, unobligated balances associated with appropriations expiring at the end of the
fiscal year remain available for obligation adjustment for five years, after which the
account is cancelled.

Borrowing from Treasury provides most of the funding for the loan principal
disbursements made under the Federal Direct Student Loan Program. The costs of the
Department’s programs are generally funded with congressional appropriations.
Revenues are recognized from other agencies and from the public in exchange for goods
or services. Major sources of reported revenue include interest income recognized from
the Federal Direct Student Loan Program borrowers on outstanding loans receivable and
interest accrued from Treasury on undisbursed loan balances.
Property and Equipment

The Department capitalizes single items of property and equipment with an aggregate
cost of $50,000 or more that have an estimated useful life greater than 2 years. The
Department also capitalizes bulk purchases of property and equipment with an aggregate
cost of $500,000 or more. A bulk purchase is defined as the purchase of like items
related to a specific project or the purchase of like items that occur within the same fiscal
year that have an estimated useful life greater than 2 years. In accordance with SFFAS
No. 6, Accounting for Property, Plant and Equipment, these assets are depreciated using
the straight-line method. The Department adopted the following useful lives for classes
of depreciable property:

•   3-Year Property – Information Technology (IT) and Telecommunications equipment

•   5-Year Property – Furniture and Fixtures.

Leases

The Department leases office space from the General Services Administration (GSA).
Future lease payments are not accrued as liabilities as these lease agreements generally
meet the requirements of operating leases. Leased office space costs for FY2001
amounted to approximately $50.8 million, of which $17.0 million related to non-GSA
owned office space. In FY2000, leased office costs amounted to approximately $48.8
million, of which $15.6 million related to non-GSA owned office space. Under existing
commitments as of September 30, 2001, estimated future minimum lease payments are as
follows:




                                             51
                       United States Department of Education
                        Notes to Principal Financial Statements
                                 September 30, 2001



                             Future Minimum Lease Payments
                                     at September 30
                                   (Dollars in Thousands)

                         Fiscal Year End                    Amount
                         2002                               $22,475
                         2003                                21,898
                         2004                                22,353
                         2005                                23,007
                         After 2005                          23,484
                         Total                              $113,217

The Department does not have any capital leases.

Accounts Receivable

Accounts receivable are amounts due the Department from the public and other federal
agencies. Receivables from the public typically result from items such as overpayments
of educational assistance, while amounts due from other federal agencies result from
agreements entered into by the Department with these agencies. Accounts receivable are
recorded at cost less an allowance for uncollectible amounts.

Accounts Receivable – Guaranty Agency Reserves

Section 422A of the Higher Education Act of 1965 (HEA), as amended, required FFEL
Guaranty Agencies to establish a Federal Student Loan Reserve Fund (the “Federal
Fund”) and an Operating Fund by December 6, 1998. The Federal Fund and the non-
liquid assets developed or purchased by a Guaranty Agency as a result, in whole or in
part with federal funds, are the property of the United States. However, such ownership
by the Department is independent of the actual control of the assets.

The Department disburses funds to the Guaranty Agency through the Federal Fund for
the payment of lender claims and default aversion fees of a Guaranty Agency. The
Operating Fund is the property of the Guaranty Agency except for funds an agency
borrows from the Federal Fund (under Section 422A of the HEA of 1965, as amended).
The Operating Fund is used by the Guaranty Agency to fulfill its responsibilities. These
responsibilities include repaying money borrowed from the Federal Fund, default
aversion and collection activities.

Guaranty Agency Reserves consist of the Department’s interest in the net assets of FFEL
Program Guaranty Agencies. Guaranty Agency assets include initial Federal start-up
funds (Guaranty Agency advances), receipts of Federal reinsurance payments, insurance
premiums, Guaranty Agency share of collections on defaulted loans, investment income
and administrative cost allowances, and other assets purchased out of reserve funds.


                                            52
                        United States Department of Education
                         Notes to Principal Financial Statements
                                  September 30, 2001

Liabilities result from initial Federal start-up funds, lender claims, operating expenses
and Federal reinsurance fees. Guaranty agency reserves are recorded as a governmental
asset (see Note 3) and as a corresponding liability due to Treasury.

Liabilities

Liabilities represent actual and estimated amounts likely to be paid as a result of
transactions or events that have already occurred. Liabilities without budget authority are
classified as liabilities not covered by budgetary resources. FFEL and Federal Direct
Student Loan Program liabilities result from entitlements covered by permanent
indefinite budget authority.

Liabilities for Loan Guarantees

The liability for loan guarantees under the FFEL Program is the estimated long-term cost
to the Department of its loan guarantees calculated on a net present value basis, excluding
administrative costs. Obligations for subsidy cost are recorded against budget authority
when a loan guarantee commitment is made. Subsidy costs are recognized as expenses in
the year loans are disbursed. The subsidy cost is re-estimated each year. The re-
estimation results in an increase or decrease of recognized subsidy expense.

Borrowing from Treasury

Programs are generally funded by congressional appropriations. However, borrowing
from the U.S. Treasury provides most of the funding for loans made under the Federal
Direct Student Loan Program and the Facilities Loan Program. The Department repays
the loan principal based on available fund balances. Interest on the debt is calculated at
fiscal year end using rates set by the U.S. Treasury. Principal and interest payments are
remitted to the U.S. Treasury on an annual basis.

Accrued Grant Liability

Disbursements of grant funds are made to recipients through a drawdown request using
the Grants and Administrative Payment System (GAPS). Drawdown requests typically
are recorded as expenditures at the time of disbursement. However, some grant
recipients incur expenditures prior to initiating a drawdown request. Accordingly, a
liability is accrued by the Department for expenditures incurred by grantees prior to the
processing of a drawdown request. The accrual amount is estimated using statistical
sampling techniques.

Net Position

Net position consists of unexpended appropriations and cumulative results of operations.
Unexpended appropriations include undelivered orders and unobligated balances, and
exclude activity of the liquidating and financing accounts that are required under the


                                            53
                       United States Department of Education
                        Notes to Principal Financial Statements
                                 September 30, 2001

Federal Credit Reform Act of 1990. Cumulative results of operations represent the net
result of operations since inception.

Prior Period Adjustments

Prior period adjustments are included in the calculation of the net change in cumulative
results of operations. Prior period adjustments reflect correction of errors from prior
periods.

Annual, Sick and Other Leave

The liability for annual leave, compensatory time off, and other leave is accrued when
earned and reduced when taken. Each year, the accrued annual leave account balance is
adjusted to reflect current pay rates. Annual leave earned but not taken, within
established limits, is funded from future financing sources. Sick leave and other types of
non-vested leave are expensed as taken.

Retirement Plans and Other Employee Benefits

Employees participate either in the Civil Service Retirement System (CSRS), a defined
benefit plan, or the Federal Employees Retirement System (FERS), a defined benefit and
contribution plan. For CSRS employees, the Department contributes 8.51 percent of pay.
For FERS employees, the Department contributes 10.7 percent of pay to the defined
benefit plan and 1 percent of pay to the thrift savings plan, a defined contribution plan.
Additionally, the Department matches employee contributions to the thrift savings plan
up to an additional 4 percent of pay. For FERS employees, the Department also
contributes the employer’s share for Social Security (FICA) and Medicare.

SFFAS No. 5, Accounting for Liabilities of the Federal Government, requires
government agencies to report the full cost of employee benefits for CSRS, FERS, FEHB
(Federal Employee Health Benefits), and FEGLI (Federal Employees Group Life
Insurance). For financial statements, the Department uses the applicable cost factors
provided by the Office of Personnel Management (OPM).

Federal Employees Compensation Act

A portion of the estimated liability for disability benefits assigned to the Department
under the Federal Employees Compensation Act (FECA) is accrued. This estimated
liability is administered and determined by the Department of Labor and is based on the
net present value of estimated future payments.

Related Party Transactions

The Department’s financial activities are interrelated with the Federal government as a
whole. Specifically, the Department is subject to financial regulation and management


                                           54
                            United States Department of Education
                             Notes to Principal Financial Statements
                                      September 30, 2001

control by the Office of Management and Budget (OMB) and the U.S. Treasury. As a
result of this relationship, operations may not be conducted and financial positions
reported, as they would if the Department were a separate and unrelated entity.

Reclassifications

Reclassification adjustments were made to the September 30, 2000 balance sheet,
statement of budgetary resources and statement of financing to enhance the usefulness of
presenting comparative statements, as follows:

Amounts were reclassified from “liabilities for loan guarantees” to “credit program
receivables, net”. The purpose of this reclassification is to align the present value of
future cash flows for the FFEL program between defaults that have already occurred and
future defaults.

Beginning obligations and obligations incurred were reduced for the FFEL program to
conform the re-estimate process to those used in 2001. The reduction of the obligated
balance and the corresponding increase in the unobligated balance reflects that a
budgetary accounting event only occurs when an actual re-estimate is executed.

Note 2.   Fund Balance with the U.S. Treasury


                                   Fund Balance with Treasury
                                        at September 30
                                         (Dollars in Thousands)


                                                        FY2001        FY2000
                    Appropriated Funds              $33,130,371   $29,993,164
                    Revolving Funds                   7,143,257    12,104,012
                    All Other Funds                     202,710        63,543
                    Total                           $40,476,338   $42,160,719

The Fund Balance with the U.S. Treasury represents appropriated funds and revolving
funds, which include undisbursed U.S. Treasury borrowings that are available to pay
current liabilities and finance loan programs. The Department has the authority to
disburse the funds directly to agencies and institutions participating in its programs. The
U.S. Treasury processes cash receipts and disbursements on behalf of the Department.
The undisbursed account balances are entity assets.

A portion of the appropriated funds included at September 30, 2001 was funded in
advance by multi-year appropriations for expenditures anticipated during the current and
future fiscal years. Revolving funds conduct continuing cycles of business-like activity
and do not require an annual appropriation. The decrease in the revolving fund balance



                                                  55
                        United States Department of Education
                         Notes to Principal Financial Statements
                                  September 30, 2001

for FY2001 is primarily due to the return of approximately $4.7 billion to the U.S.
Treasury relative to FFEL program cost re-estimates.

Note 3.   Accounts Receivable


                             Accounts Receivable, Net Amount Due
                                       at September 30
                                      (Dollars in Thousands)


                                                            FY2001          FY2000
                   Accounts Receivable
                   Intragovernmental                   $     10,730    $       --
                   Governmental                             113,083          82,703
                   Guaranty Agency Federal and
                    Restricted Funds Receivable            2,462,445       2,231,814
                   Total Accounts Receivable           $ 2,586,258     $ 2,314,517

Accounts receivable represent balances due from recipients of grant and other financial
assistance programs, and from other Federal agencies. They are recorded at their net
realizable value. Estimates for the allowance for loss on uncollectible accounts are based
on historical data.

Guaranty agency federal and restricted funds receivable are non-entity assets. Guaranty
agency federal and restricted funds receivable are also a liability due to the U.S. Treasury
and are considered intragovernmental liabilities. These balances represent the Federal
government’s interest in the net assets of state and non-profit FFEL Program Guaranty
Agencies.

Note 4    Credit Program Receivables and Liabilities for Loan Guarantees

The Department operates the William D. Ford Direct Student Loan and Federal Family
Education Loan (FFEL) programs to help students finance the costs of higher education.
Under the programs, the Department makes loans directly or guarantees all or a portion
of loans made by participating lending institutions to individuals who meet statutorily set
eligibility criteria and attend eligible institutions of higher education. Eligible higher
education institutions include public and private two- and four-year institutions, graduate
schools, and vocational training schools. Students and their parents receive loans
regardless of income; student borrowers who demonstrate financial need also receive
Federal interest subsidies.

Under the Direct Loan program, the Federal Government makes loans directly to students
and parents through participating schools. Loans are originated and serviced through
contracts with private vendors. Under the FFEL program, over 4,000 financial
institutions make loans directly to students and parents. FFEL loans are guaranteed by
the Federal Government against default, with 36 State or private non-profit guaranty


                                                  56
                        United States Department of Education
                         Notes to Principal Financial Statements
                                  September 30, 2001

agencies acting as intermediaries in administering the guarantees. Beginning with loans
first disbursed on or after October 1, 1993, financial institutions became responsible for
2 percent of the cost of each default; guaranty agencies also began paying a portion of the
cost (in most cases 5 percent) of each defaulted loan from Federal funds they hold in
trust. FFEL participants receive statutorily set Federal interest and special allowance
subsidies; guaranty agencies receive fee payments as set by statute. In most cases, loan
terms and conditions under the two programs are identical.

The Federal Credit Reform Act of 1990 (the Act) governs the proprietary and budgetary
accounting treatment of direct and guaranteed loans. The long-term cost to the
government for direct loans or loan guarantees is referred to as “subsidy cost.” Under the
Act, subsidy costs for loans obligated beginning in FY1992 are recognized at the net
present value of projected lifetime costs in the year the loan is disbursed. Subsidy costs
are revalued annually. Components of subsidy include interest subsidies, defaults, fee
offsets, and other cash flows. Consistent with the Act, subsidy cash flows exclude direct
Federal administrative expenses; however, contractual payments to third-party private
loan collectors, who receive a set percentage of amounts they collect, are included in
these cash flows.

The Department estimates all future cash flows associated with Direct Loans and FFEL.
Projected cash flows are used to develop subsidy estimates, which, as noted above,
represent the net present value of future Federal costs associated with direct loans and
defaulted guaranteed loans. Subsidy costs can be positive or negative; negative subsidies
occur when expected program inflows (e.g., repayments, fees) exceed expected Federal
costs. Subsidy estimates are recorded as a change to direct and defaulted FFEL program
loans receivable and the liability for guaranteed loans. The Department uses a computer-
based cash flow projection model to calculate subsidy estimates for direct loans and
defaulted guaranteed FFEL program loans, and for the FFEL program loan guarantee
liability. Cash flows are projected over the life of the loan, aggregated by loan type,
cohort year, and risk category. The loan’s cohort year represents the year a direct loan
was obligated or a loan was guaranteed, regardless of the timing of disbursements. Risk
categories include two-year colleges, freshmen and sophomores at four-year colleges,
juniors and seniors at four-year colleges, graduate schools, and proprietary schools.

In recent years, the consolidation of existing loans into new direct or guaranteed loans
has increased significantly. Under the Act and requirements provided by OMB Circulars
A-11 (Budget Formulation) and A-34 (Budget Execution), the retirement of loans being
consolidated is considered a receipt of principal and interest, even though no cash is
received from the borrower because a new consolidated loan is created. Under this
definition of collections, defaults on loans in any given cohort are reduced in that
refinancing provides payment of defaulted loans in the cohort and opens new loans in a
current cohort. This consolidation activity and resulting refinancing is taken into
consideration in setting the subsidy rate for defaults.




                                            57
                        United States Department of Education
                         Notes to Principal Financial Statements
                                  September 30, 2001

The FFEL estimated liability for loan guarantees is reported at the present value of
estimated net cash outflows. Defaulted FFEL loans are reported net of an allowance for
subsidy computed using net present value methodology, including defaults, collections,
and other cancellations. The same methodology is used to estimate the allowance on
Direct Loan receivables.

The Department disbursed $18 billion in Direct Loans to eligible borrowers in FY2001
and $16 billion in loans in FY2000. Half of all volume is obligated in the fourth quarter
of the fiscal year. Loans typically disburse in multiple installments over an academic
period; as a result, multiple loan disbursements for a cohort year often cross fiscal years.
Regardless of the fiscal year in which they occur, disbursements are tracked back to the
cohort of obligation.

As of September 30, 2001 and 2000, the total principal balance outstanding of guaranteed
loans held by lenders was approximately $160 billion and $146 billion, respectively. As
of September 30, 2001 and 2000, the maximum government exposure on outstanding
guaranteed loans held by lenders was approximately $157 billion and $143 billion,
respectively. Of the insured amount, the Department would pay a smaller amount to the
guaranty agencies, based on the appropriate reinsurance rates, which range from 100 to
95 percent. Any remaining insurance not paid as reinsurance would be paid to lenders by
the guaranty agencies from their Federal funds. Payments by guaranty agencies do not
reduce government exposure, however, since these payments are made from Federal
funds. The liability and allowance estimates on the Department’s books are independent
of these guaranty agency Federal funds, since they are considered outside the direct or
indirect control of the Secretary.

The Department accrues interest on its outstanding performing direct loans. In
accordance with SFFAS No. 1, Selected Assets and Liabilities, the Department accrues,
but does not report, interest on non-performing loans. Given the Department’s
comprehensive compromise authority, there is limited expectation of collection of
accrued interest and fees on defaulted loans. Collections from borrowers are allocated to
principal, interest, and fees, as appropriate. Non-performing loans have been in default
an average of four years before they are assigned to the Department. Program data
indicate that significant collections are made later in the life of non-performing student
loans.

As previously noted, borrowers may pre-pay and close out existing loans without penalty
from capital raised through the disbursement of a new consolidation loan. The loan
liability and net receivable include estimates of future prepayments of existing loans; they
do not reflect costs associated with anticipated consolidation loans.




                                            58
                          United States Department of Education
                           Notes to Principal Financial Statements
                                    September 30, 2001


Credit Program Receivables


The Department reclassified $3.6 billion for FY2000 from liabilities for loan guarantees
for FFEL to credit program receivables to align the allowance for subsidy to the expected
value under credit reform. This reclassification did not result in program costs or
additional subsidy. Credit program receivables are comprised of direct and defaulted
FFEL loan principal and related interest receivable, net or inclusive of the allowance for
subsidy. The credit program receivables are as follows:

                         Direct Loan Program Credit Program Receivables
                                         at September 30
                                         (Dollars in Thousands)

                                                                         FY2001                       FY2000
 Principal Receivable                                               $ 70,544,902                 $ 58,522,455
 Interest Receivable                                                   2,615,855                    1,707,927
 Sub-total                                                           $ 73,160,757                 $ 60,230,382
 Allowance for Subsidy                                                  1,568,317                    2,585,250
 Credit Program Receivable, Net                                      $ 74,729,074                 $ 62,815,632

The allowance for subsidy for Direct Loans is a negative (debit) balance due to high
interest payment projections on Department receivables such that total projected principal
and interest received will exceed the face value of the loan receivables.

                           FFEL Program Credit Program Receivables
                                      at September 30
                                         (Dollars in Thousands)
                                        FY2001                                          FY2000
                          Pre-1992      Post-1991              Total      Pre-1992      Post-1991          Total
Principal Receivable     $14,120,871     $5,366,538    $19,487,409        $14,986,951    $5,341,825   $20,328,776
Interest Receivable        1,740,152      1,286,825         3,026,977       2,006,678     1,188,792     3,195,470

Sub-total                $15,861,023     $6,653,363    $22,514,386       $16,993,629     $6,530,617   $23,524,246
Allowance for Subsidy    (14,488,687)   (2,438,910)    (16,927,597)      (14,086,594)   (2,186,537)   (16,273,131)

Credit Program
Receivable, Net           $ 1,372,336   $ 4,214,453        $ 5,586,789    $ 2,907,035    $4,344,080   $ 7,251,115




                                                      59
                          United States Department of Education
                           Notes to Principal Financial Statements
                                    September 30, 2001


Direct Loan Program Reconciliation of Allowance for Subsidy

The reconciliation of allowance for subsidy for the Direct Loan Program follows:

                        Direct Loan Reconciliation of Allowance for Subsidy
                                         (Dollars in Thousands)

                                                                        FY2001            FY2000
 Beginning Balance, Allowance for Subsidy                            $2,585,250        ($1,557,854)
 Components of Subsidy Transfers
    Interest Rate Differential                                       $2,204,550         $1,880,221
    Default, Net of Recoveries                                         (597,850)          (784,166)
    Fees                                                                243,567            341,472
    Other                                                              (811,259)          (368,877)
 Current Year Subsidy Transfers from Program Account                 $1,039,008         $1,068,650
 Components of Subsidy Re-estimates
    Interest Rate Re-estimates                                        $875,608           $378,049
    Technical and Default Re-estimates                               (3,221,618)         2,486,229
 Total Subsidy Re-estimates                                         $(2,346,010)        $2,864,278
 Activity
     Fee Collections                                                  $(315,040)         $(360,570)
     Loan Cancellations1                                                342,897             89,793
     Subsidy Allowance Amortization                                     161,748            459,522
     Other                                                              100,464             21,431
 Total Activity                                                        $290,069           $210,176
 Ending Balance, Allowance for Subsidy                               $1,568,317         $2,585,250

        1
         Loan cancellations include those loans where the primary borrower has died, become disabled or
        declared bankruptcy.

Liabilities for Loan Guarantees


Liabilities for loan guarantees represent the net present value of future projected cash
flows, including principal and interest repayments. As such, these estimates vary
significantly with changes in forecasting assumptions; particularly involving the interest
rates charged to students, those paid to loan holders, and those used for discounting cash
flows. The FY2001 and FY2000 liabilities were calculated using government-wide
interest rate projections provided by the Office of Management and Budget.




                                                  60
                                  United States Department Of Education
                                    Required Supplementary Information
                                            September 30, 2001

FFEL Program Reconciliation of Liabilities for Loan Guarantees
The FFEL Program loan guarantee liability reconciliation, associated with the FFEL
Program loans guaranteed in the financing account is as follows:

                                FFEL Program Guarantee Liability Reconciliation
                                                     (Dollars in Thousands)

                                                                                               FY2001                   FY2000
 Beginning Balance, Liability for Loan Guarantees                                          $9,534,955                $8,250,606
 Components of Subsidy Transfers
    Interest Supplement Costs                                                              $2,671,860                $2,816,347
    Defaults, Net of Recoveries                                                               954,195                 1,267,680
    Fees                                                                                   (1,371,175)               (1,067,127)
    Other                                                                                     854,129                   513,234
 Current Year Subsidy Transfers from Program Account                                       $3,109,009                $3,530,134
 Components of Subsidy Re-estimates
    Interest Rate Re-estimates                                                             $ (43,022)               $     (412)
    Technical and Default Re-estimates                                                     (2,864,956)              (1,283,104)
 Subsidy Re-estimates in Liability                                                        $(2,907,978)              $(1,283,516)
 Activity
     Interest Supplement Payments                                                         $(3,343,333)              $(3,108,557)
     Claim Payments                                                                        (2,568,548)               (1,858,902)
     Fee Collections                                                                        1,392,343                 1,254,210
     Interest on Liability Balance                                                            460,717                   499,843
     Other1                                                                                 2,549,042                 2,251,137
 Total Activity                                                                           $(1,509,779)                $(962,269)
 Ending Balance, Liabilities for Loan Guarantees                                           $8,226,207                $9,534,955
 FFEL Liquidating Account Liabilities for Loan Guarantees                                     150,560                   443,713
 Total Liabilities for Loan Guarantees                                                     $8,376,767                $9,978,668

1
 Includes amounts recorded to the liability balance for defaults, adjustments and loan consolidation activity. The adjustments include
reclassification between the Liability for Loan Guarantees and Allowance for Subsidy for FY 2001 and FY 2000.




                                                                61
                         United States Department Of Education
                           Required Supplementary Information
                                   September 30, 2001


Subsidy Expense
Direct Loan and FFEL Program loan guarantee subsidy expenses are as follows:


                               Direct Loan Program Subsidy Expense
                              For the Fiscal Years Ended September 30
                                       (Dollars in Thousands)
                                                                     FY2001           FY2000
   Interest Rate Differential                                    $(2,204,550)     $(1,880,221)
   Defaults, Net of Recoveries                                       597,850          784,166
   Fees                                                             (243,567)        (341,472)
   Other                                                             811,259          368,877
 Current Year Subsidy Transfers                                  $(1,039,008)     $(1,068,650)
   Re-estimates                                                    2,346,010       (2,864,278)
 Direct Loan Subsidy Expense                                      $1,307,002      $(3,932,928)




                           FFEL Program Loan Guarantee Subsidy Expense
                              For the Fiscal Years Ended September 30
                                        (Dollars in Thousands)
                                                                      FY2001          FY2000
     Interest Supplement Costs                                    $ 2,671,860     $ 2,816,347
     Defaults, Net of Recoveries                                      954,195       1,267,680
     Fees                                                          (1,371,175)     (1,067,127)
     Other                                                            854,129         513,234
   Current Year Subsidy Transfers                                  $ 3,109,009     $ 3,530,134
    Re-estimates                                                    (3,423,314)     (3,234,603)
   FFEL Loan Guarantee Subsidy Expense                              $ (314,305)    $ 295,531




                                               62
                         United States Department of Education
                          Notes to Principal Financial Statements
                                   September 30, 2001

Subsidy Rates
The subsidy rates are used to compute each year’s subsidy expense, disclosed on the
Statement of Net Cost. The subsidy rates applicable to the 2001 loan cohort year are as
follows:


                                           Subsidy Rates
                               Applicable to 2001 Loan Cohort Year

                                         Interest
                                       Differential   Defaults     Fees    Other     Total
 Direct Loan Program, Cohort 2001       (10.31%)       2.64%     (1.18%)   4.39%    (4.46%)
                                        Interest
                                      Supplements     Defaults     Fees    Other     Total
 FFEL Program, Cohort 2001               7.79%         2.47%     (4.40%)   2.81%     8.67%



The subsidy rates disclosed pertain only to the cohort listed. These rates cannot be
applied to direct or guaranteed loans disbursed during the current reporting year to yield
the subsidy expense. The subsidy expense for new direct or guaranteed loans reported in
the current year relate to disbursements of loans from both current and prior years’
cohorts. Subsidy expense is recognized when direct loans are disbursed by the SFA or
third-party lenders disburse guaranteed loans.

Facilities Loan Programs
The Department administers the College Housing and Academic Facilities Loans
(CHAFL), College Housing Loans (CHL), and Higher Education Facilities Loans
(HEFL) programs. From 1952 to 1993, these programs provided low-interest financing
to institutions of higher education for the construction, reconstruction, and renovation of
housing, academic, and other educational facilities. Since 1998, no new loans have been
authorized.

The Department also administers the Historically Black Colleges and Universities
(HBCU) Capital Financing program. Since 1992, this program has provided HBCUs
with access to capital financing for the repair, renovation, and, in exceptional
circumstances, the construction, or acquisition of facilities, equipment, and infrastructure
through Federally insured bonds. The Department has authorized a designated bonding
authority to provide for the operation of the program including making the loans to
eligible institutions, charging interest, and providing for a schedule of repayments. A
mandatory escrow account has been established to pay the principal and interest on bonds
for loans that are in default. The credit program receivables are as follows:




                                               63
                            United States Department of Education
                             Notes to Principal Financial Statements
                                      September 30, 2001


                                     Facilities Loan Programs
                                         at September 30
                                        (Dollars in Thousands)

                                                                   FY2001         FY2000
 Principal Receivable                                              $481,608      $504,976
 Interest Receivable                                                  7,426         9,342
 Subtotal                                                          $489,034      $514,318
 Allowance for Subsidy                                             (106,109)     (108,375)
 Credit Program Receivables, Net                                   $382,925      $405,943



The allocation of administrative expense is disclosed in note 13.

Note 5.     Property and Equipment

                                   Property, Plant and Equipment
                                          at September 30
                                        (Dollars in Thousands)
                                 Asset Cost       Accumulated Depreciation       Net Asset Value
                             FY2001 FY2000           FY2001 FY2000             FY2001 FY2000
   IT Equipment              $28,393    $1,307        $4,732   $ --            $23,661     $1,307
   Furniture and Fixtures      1,563       --            156      --             1,407         --
   Building Improvements         173       --             17      --               156         --
   Total                     $30,129    $1,307        $4,905   $ --            $25,224     $1,307

Information Technology Equipment consists of computer hardware and related software.
The majority of these costs represent the continuing acquisition and implementation of a
new financial accounting system. Furniture and fixtures, and building improvements are
related to the renovation and furnishing of new quarters for SFA.

The significant increase in capitalized amounts for FY2001 in comparison to FY2000 is
related to a modification in capitalization policy. Prior to FY2001, the Department only
capitalized bulk purchases with an acquisition cost of $500,000 or more. Beginning in
FY2001, the capitalization policy was modified to include the capitalization of single
items with a cost of $50,000 or more.




                                                 64
                         United States Department of Education
                          Notes to Principal Financial Statements
                                   September 30, 2001

Note 6.   Borrowing from Treasury

                                   Borrowing from Treasury
                                       at September 30
                                      (Dollars in Thousands)
                    Direct Student Loans          Facilities Loans             Total
                      FY2001       FY2000        FY2001       FY2000     FY2001      FY2000
Beginning Balance $65,346,881 $52,069,506       $368,505 $ 379,803 $65,715,386 $52,449,309
New Borrowing      20,703,739 16,346,598           2,374          --  20,706,113 16,346,598
Repayments         (8,861,515) (3,069,223)      (111,779)       (298) (8,973,294) (3,069,521)
Reclassified as
  Payable to FFB           --          --              --       (11,000)           --        (11,000)
Ending Balance    $77,189,105 $65,346,881       $259,100       $368,505    $77,448,205 $65,715,386

The Department’s debt to the U.S. Treasury was $77.4 billion as of September 30, 2001
and $65.7 billion as of September 30, 2000. The funds were borrowed to provide funding
for the direct loan and facilities loan programs. The borrowing is authorized through
indefinite permanent authority at interest rates set each year by the U.S. Treasury.

Borrowing authority is a budgetary resource that is realized when disbursed. The
Department draws funds from the U.S. Treasury to finance the majority of its direct
lending activity in accordance with its needs. Borrowing authority not realized during the
year is carried over for use in the future to fund loans that have been obligated, but not
disbursed. Unused Borrowing Authority as of September 30, 2001 and September 30,
2000 was as follows:


                          Unused Borrowing Authority from Treasury
                                      at September 30
                                      (Dollars in Thousands)

                                                                   FY2001        FY2000
           Beginning Balance, Unused Borrowing Authority        $4,770,736    $1,505,188
           Current Year Borrowing Authority                     21,794,507    19,612,146
           Realized Borrowing from the U.S. Treasury           (20,703,739)   (16,346,598)
           Prior Year Unused borrowing Authority Cancelled      (2,318,678)             --
           Ending Balance, Unused Borrowing Authority           $3,542,826    $4,770,736

Note 7.   Payable to Treasury

At September 30, 2001 and 2000, the Department reported $4.2 billion and $7.9 billion as
payable to the U.S. Treasury. For the FFEL liquidating account the Department includes
a payable to Treasury equivalent to the net cash inflows for the remaining life of the
program; for FY2001, this amount was $1.5 billion, for FY2000 this amount was $3.9
billion. A payable to Treasury is also included for the downward re-estimates of subsidy



                                               65
                         United States Department of Education
                          Notes to Principal Financial Statements
                                   September 30, 2001

needs for the FFEL financing account. This amount was $2.7 billion in FY2001 and $4
billion in FY2000, respectively.

The Department pays downward subsidy re-estimates in the year they are executed in the
Budget, usually the fiscal year following financial statement accrual. The payable to
Treasury consisted of the following:


                                     Payable to the Treasury
                                        at September 30
                                      (Dollars In Thousands)

                                                                   FY2001                  FY2000
   Future Excess Liquidating Account Collections – FFEL         $1,506,429              $3,850,017
   FFEL Downward Subsidy Re-estimate                             2,706,126               4,010,604
   Ending Balance                                               $4,212,555              $7,860,621

Note 8.   Payable to Federal Financing Bank

Public Law 102-325, the Higher Education Amendments of 1994, authorized the
Department to issue bonds on behalf of the HBCU Capital Financing Program. To date,
all bonds issued under this program have been purchased by the Federal Financing Bank
(FFB). The Department reports the corresponding liability for full payment of principal
and accrued interest as a payable to the FFB under rules established by the Credit Reform
Act of 1990.


                                Payable to Federal Financing Bank
                                         at September 30
                                      (Dollars in Thousands)

                                                               FY2001      FY2000
               Beginning Balance                               $20,699    $   --
               Reclassified from Borrowing from Treasury            --        11,000
               Borrowing                                        10,983         9,796
               Repayments                                         (333)          (97)
               Ending Balance                                  $31,349       $20,699

The level of borrowing increased moderately in FY2001. The difference in ending
balances between FY2001 and FY2000 reflects the cumulative effect of net borrowing
for both fiscal years.

Note 9.   Other Liabilities

Other liabilities covered by budgetary resources include contractual services,
administrative services, interagency agreement accruals, and suspense account balances.

                                               66
                       United States Department of Education
                        Notes to Principal Financial Statements
                                 September 30, 2001

Other liabilities not covered by budgetary resources include accrued annual leave and
FECA disability benefits.


                                       Other Liabilities
                                       at September 30
                                     (Dollars in Thousands)

                                                          FY2001            FY2000
                  Other Liabilities Covered by Budgetary Resources:
                      Intragovernmental                  $ 40,839          $112,562
                      Governmental                        332,764           186,424
                      Total                              $373,603          $298,986
                  Other Liabilities Not Covered by Budgetary Resources:
                      Intragovernmental                   $ 4,018          $250,261
                      Governmental                         48,500            44,734
                      Total                              $ 52,518          $294,995
                  Total Other Liabilities               $426,121           $593,981

Total other Intragovernmental liabilities (covered and not covered by budgetary
resources) were $44.8 million in FY2001 and $362.8 million in FY2000. Total other
Governmental liabilities (covered and not covered by budgetary resources) were $381.3
million in FY2001 and $231.2 million in FY2000.

Note 10.   Accrued Grant Liability

The Department’s accrued grant liability represents an estimate of the expenses incurred
by grantees that have not yet been reimbursed. For FY2000, the total liability was
estimated from data reported from a random sample of grant awards and allocated among
the reporting groups based on the grant balance available at fiscal year-end. For FY2001,
the sample of grant awards was selected at the reporting group level, making further
allocation unnecessary. The accrued grant liability by reporting group is shown below:


                                   Accrued Grant Liability
                                      at September 30
                                     (Dollars in Thousands)

                                                         FY2001             FY2000
                   SFA                                 $ 899,180          $ 319,376
                   OESE                                  298,202            752,098
                   OSERS                                 303,824            486,687
                   OVAE                                   45,419            137,219
                   OPE                                   187,077            179,749
                   OERI                                   61,934             80,245
                   OBEMLA                                 59,304             50,755
                   Total                              $1,854,940          $2,006,129



                                              67
                       United States Department of Education
                        Notes to Principal Financial Statements
                                 September 30, 2001

Note 11.   Net Position

Net position is comprised of two elements – unexpended appropriations and cumulative
results of operations. Unexpended appropriations represent appropriations not yet
expended, which have not lapsed, been withdrawn, or rescinded. Balances not available
are those that are non-apportioned for use by OMB. The Department’s unexpended
appropriations consist of unobligated balances - available, unobligated balances – not
available, and undelivered orders. The Department’s unexpended appropriations as of
September 30, 2001 and September 30, 2000, are summarized as follows:


                                Unexpended Appropriations
                                     at September 30
                                    (Dollars in Thousands)

                                                        FY2001        FY2000
                   Unobligated
                     Available                       $ 2,209,285   $ 1,795,131
                     Not Available                       283,903       566,462
                   Undelivered Orders                28,198,629    24,361,167
                   Total                            $30,691,817    $26,722,760

Undelivered orders and unobligated balances for federal credit financing and liquidating
funds are not included in the chart above, as they are not funded through appropriations.
As a result, unobligated and undelivered order balances in the above chart will differ
from these balances contained in the Combined Statement of Budgetary Resources.

The Department had Cumulative Results of Operations of ($2) billion as of September
30, 2001 and ($124) million as of September 30, 2000. Cumulative results of operations
arise from unfunded expenses, capital equipment purchases, reimbursable agreements,
and upward loan subsidy re-estimates. The FY2001 and FY2000 re-estimate for direct
loans were recorded as net upward re-estimates, reducing cumulative results of
operations. The net upward re-estimates for direct loans for FY2001 and FY2000 were
$2.1 billion and $250 million, respectively. Accordingly, the cumulative results of
operations for FY2001 and FY2000 reflect the net upward re-estimate in those years.

Note 12.   Interest Revenue and Expense

For the Direct Loan program, non-federal interest revenue is earned on the individual
non-defaulted loans in the loan portfolio and federal interest is earned on the uninvested
fund balances with the U.S. Treasury. Also, for the Direct Loan program, interest
expense is incurred on the Department’s borrowings from the U.S. Treasury. For the
FFEL program, federal interest revenue is earned on the uninvested fund balance with the
U.S. Treasury. The interest revenues and expenses directly attributable to the Direct
Loan Program, the FFEL Program, and other remaining programs are summarized below:



                                             68
                                 United States Department of Education
                                  Notes to Principal Financial Statements
                                           September 30, 2001

                                            Interest Revenue and Expenses
                                         For Fiscal Years Ended September 30
                                                     (Dollars in Thousands)

                         Direct Student Loans           FFEL Program            Other Programs              Total
                          FY2001       FY2000          FY2001 FY2000           FY2001 FY2000           FY2001     FY2000
Interest Revenue
  Federal                $1,061,471    $1,261,281      $460,717 $499,843       $      183   $ 161     $1,522,371   $1,761,285
  Non-Federal             4,039,690     3,211,256            --       --           18,561    23,067    4,058,251    3,234,323
Total Interest Revenue $5,101,161     $4,472,537       $460,717 $499,843       $ 18,744     $23,228   $5,580,622   $4,995,608

Interest Expense
  Federal                $5,101,161    $4,472,537      $ 460,717 $499,843      $ 16,167     $20,933   $5,578,045   $4,993,313
  Non-Federal                   183           115            159      109            69          81          411          305
Total Interest Expense   $5,101,344   $4,472,652       $460,876 $499,952        $16,236     $21,014   $5,578,456   $4,993,618


Note 13.        Allocation of Direct and Indirect Cost

The reported salaries and administrative expenses include the allocation of direct and
indirect administrative costs among the reporting groups. The distribution is calculated
based on a combination of full time employees and program costs.


                                      Allocation of Administrative Expenses
                                      For Fiscal Years Ended September 30
                                                    (Dollars in Thousands)

                                Direct Costs                    Indirect Costs                   Total Costs
                             FY2001    FY2000                 FY2001     FY2000               FY2001 FY2000
          SFA                $52,998       $50,580            $72,263         $63,131        $125,261 $113,711
          OSERS               32,300        32,182             30,270          22,628          62,570   54,810
          OCR                     (3)           --             34,852          30,076          34,849   30,076
          OERI                36,537        34,806             16,203          14,304          52,740   49,110
          OESE                24,284        23,304             34,523          23,124          58,807   46,428
          OPE                 24,981        25,878             14,441          12,468          39,422   38,346
          OBEMLA               3,941         3,729              2,914           2,569           6,855    6,298
          OVAE                10,968         9,943              8,878           7,077          19,846   17,020
          Total             $186,006      $180,422           $214,344       $175,377         $400,350 $355,799

Note 14.        Imputed Financing

The Statement of Changes in Net Position recognized an imputed financing source of
$20.6 million for the year ended September 30, 2001, and $20.8 million for the year
ended September 30, 2000. Corresponding post-employment benefit expenses are
recognized on the Statement of Net Cost as a program cost under salaries and
administrative expense for both fiscal years. The imputed financing source represents
annual service costs not paid by the Department or employee contributions to the Civil
Service Retirement System. No imputed financing source is recognized for the Federal


                                                              69
                         United States Department of Education
                          Notes to Principal Financial Statements
                                   September 30, 2001

Employees Retirement System, since it is a fully funded retirement service plan. The
post-employment benefit expense represents the Department’s estimate of the funds
necessary to pay employees future pension, life, and health benefits.

Note 15.    Prior Period Adjustments

During FY2001 and FY2000, the Department performed various analyses of its account
balances in an effort to improve the financial data recorded in its accounting system.
Items of income and expense related to prior periods were recorded as prior period
adjustments and Net Position was amended to reflect the adjustments.
                            Prior Period Adjustments to Net Position
                             For Fiscal Years Ended September 30
                                     (Dollars in Thousands)
                                                  FY2001          FY2000
                    FFEL                          $      69      ($824,645)
                    DL                                   50        (20,694)
                    SFA Grants                    (48,462)         (85,716)
                    OESE                          (98,942)             (3,701)
                    OSERS                             (2,095)          63,372
                    OVAE                                223             3,824
                    OPE                               44,424       (59,631)
                    OERI                          (13,031)             27,935
                    OBEMLA                              (220)      (10,191)
                    DM                            (34,845)             35,863
                    Total                      ($152,829)        ($873,584)

During FY2001, the Department made prior period adjustments to:

       •   Adjust cumulative results of operations account balances based on an analysis
           of unfunded liabilities and capitalized assets.

       •   Align Fund Balance with Treasury and budgetary accounts comprising
           unobligated balances, undelivered orders, and accounts payable and
           receivable.

       •   Align subsidiary systems to general ledger balances

During FY2000, the Department reconciled its undelivered order balances between its
general ledger and the GAPS payment system, disbursement in transit account balances,
and its Fund Balance with Treasury to the budgetary status of resource accounts. In
addition, it reviewed the FFEL financing fund to correct the cumulative results of
operations account balance. Prior period adjustments were made based on these analyses.



                                             70
                            United States Department of Education
                             Notes to Principal Financial Statements
                                      September 30, 2001

Note 16.     Unobligated and Obligated Balances – Beginning of Period

During FY2001 and FY2000, the Department performed a review of unobligated and
obligated balances and recorded adjustments to the beginning account balances. The
statement of budgetary resources reflects the adjusted beginning unobligated and
obligated balances, and the related adjustments to obligations incurred during the period.

The FY2001, adjustments to the beginning obligated balances resulted from an analysis
of the budgetary and proprietary accounts payable balances. Adjustments to the prior
year’s posting logic resulted in changes to the beginning obligated balances.
Additionally, the FY2001 beginning obligated and unobligated balances were adjusted
due to systematic problems in the general ledger closing process and other accounting
problems that occurred in prior years.

The beginning unobligated balance was adjusted downward by $16.3 million in FY2001
and adjusted upward by $611 million in FY2000, while the beginning obligated balance
was adjusted downward by $227.1 million in FY2001 and adjusted upward by $798
million in FY2000. The obligations incurred balance was adjusted upward by $229
million in FY2001 and adjusted downward by $798 million in FY2000.

The reconciliations are shown below:

                              Unobligated Balances – Beginning of Period
                                           at September 30
                                           (Dollars in Thousands)

                              Beginning Balance                                       Beginning Balance
                                 (Unadjusted)                 Adjustments                 (Adjusted)
                              FY2001       FY2000           FY2001 FY2000              FY2001     FY2000
FFEL                       $8,173,288 $7,771,917             $6,774 $498,922        $8,180,062 $8,270,839
DL                             22,960       29,794          (17,969)     --              4,991      29,794
SFA Grants                  1,652,835    4,720,204           41,184 182,208          1,694,019 4,902,412
OESE                          168,984      349,420          (31,661) (43,763)          137,323     305,657
OSERS                         286,040      176,630             (288)  (7,741)          285,752     168,889
OVAE                           89,588       68,870              577        (9)          90,165      68,861
OPE                           118,650       80,431             (324)    (986)          118,326      79,445
OERI                            6,579       22,278            3,147     (120)            9,726      22,158
OBEMLA                          2,847        3,682              --       --              2,847       3,682
DM                             24,212       30,209          (17,768) (17,675)            6,444      12,534
Total                    $10,545,9831 $13,253,435          $(16,328) $610,836 $10,529,655 $13,864,271

        1
         The difference between the FY2000 ending unobligated balance and the FY2001 beginning unobligated
        (unadjusted) balance is the result of a $24 million transfer of a prior year unobligated balance to the
        Department of Labor.




                                                     71
                          United States Department of Education
                           Notes to Principal Financial Statements
                                    September 30, 2001


                            Obligated Balances – Beginning of Period
                                        at September 30
                                      (Dollars in Thousands)

                      Beginning Balance                                    Beginning Balance
                         (Unadjusted)               Adjustments                (Adjusted)
                     FY2001       FY2000         FY2001 FY2000            FY2001       FY2000
       FFEL       $3,878,875 $3,060,836        $(170,661) $745,255     $3,708,214 $3,806,091
       DL          7,229,151    6,907,766          2,291       --       7,231,442    6,907,766
       SFA Grants 6,510,518     2,807,498         16,126 143,208        6,526,644    2,950,706
       OESE        8,825,209    9,751,345        (15,839) (76,228)      8,809,370    9,675,117
       OSERS       5,118,981    7,868,327          1,435    (3,320)     5,120,416    7,865,007
       OVAE        1,271,965    1,912,742            726        11      1,272,691    1,912,753
       OPE         1,994,678    1,572,427           1048         (4)    1,995,726    1,572,423
       OERI          732,133      704,807         (6,926) (10,610)        725,207      694,197
       OBEMLA        557,130      529,117            263       --         557,393      529,117
       DM            220,591      253,153        (55,592)       65        164,999      253,218
       Total        $36,339,231 $35,368,018    $(227,129) $798,377 $36,112,102 $36,166,395



                                      Obligations Incurred
                                        at September 30
                                     (Dollars in Thousands)

                         Beginning Balance                             Beginning Balance
                            (Unadjusted)          Adjustments              (Adjusted)
                         FY2001      FY2000      FY2001 FY2000          FY2001      FY2000
       FFEL          $15,004,142 $11,560,310    $170,661 $(745,255) $15,174,803 $10,815,055
       DL             27,882,115 24,521,127       (2,291)      --    27,879,824 24,521,127
       SFA Grants     11,709,192 12,921,838      (14,024) (143,208) 11,695,168 12,778,630
       OESE           16,648,985 13,279,508       15,839    76,228   16,664,824 13,355,736
       OSERS           9,223,684 5,020,339        (1,435)    3,320    9,222,249 5,023,659
       OVAE           $1,850,617     866,315        (726)      (11)   1,849,891     866,304
       OPE             2,175,184 1,839,809        (1,048)         4   2,174,136 1,839,813
       OERI              727,456     591,954       6,926    10,610      734,382     602,564
       OBEMLA            458,380     405,808        (263)      --       458,117     405,808
       DM                476,124     488,469      55,592       (65)     531,716     488,404
       Total         $86,155,879 $71,495,477    $229,231 $(798,377) $86,385,110 $70,697,100

Note 17.   Statement of Budgetary Resources

The Statement of Budgetary Resources compares budgetary resources with the status of
those resources. As of September 30, 2001, budgetary resources outstanding were $94.1
billion and outlays for the year were $52.3 billion. As of September 30, 2000, budgetary
resources outstanding were $81.3 billion and outlays for the year were $48.6 billion.



                                               72
                       United States Department of Education
                        Notes to Principal Financial Statements
                                 September 30, 2001

Budgetary Resources

Borrowing authority is a budgetary resource used to fund loans made under the Federal
Direct Student Loan Program. Borrowing authority is granted to a federal entity to
borrow, obligate and expend the borrowed funds. This program may borrow from
Treasury to fund loans originated during the year. Borrowings may be repaid to Treasury
at any time without penalty and funds not expended accrue interest as uninvested funds.
The majority of the funds used to repay Treasury borrowings are from collections on
outstanding loans.

The Federal Direct Student Loan Program and the FFEL Program were granted
permanent indefinite appropriation budget authority through legislation. Part D of the
William D. Ford Federal Direct Loan Program and Part B of the Federal Family
Education Loan Program, pursuant to the HEA of 1965, pertains to the existence,
purpose, and availability of this permanent indefinite appropriations authority.

Adjustments

The “Adjustments” line item on the Statement of Budgetary Resources primarily includes
repayments of borrowings, negative subsidy returns, and excess collections returned to
Treasury.

Adjustments for Direct Loans totaled $8.3 billion in FY2001, consisting of transactions in
the Financing fund and in the Program fund. In the Financing fund, repayments to
Treasury totaled $6.6 billion. In the Program fund, $1.7 billion of collections from the
downward re-estimate/negative subsidy were returned to the Treasury Department.

Adjustments to FFEL totaled $5.9 billion in FY2001, consisting of transactions in the
Liquidating fund and in the Program fund. In the Liquidating fund, excess collections to
Treasury totaled $1.6 billion. In the Program fund, capital transfers (repayment of
downward re-estimate to Treasury) totaled $5.1 billion, offset by approximately $800
million in recoveries.




                                           73
                          United States Department of Education
                           Notes to Principal Financial Statements
                                    September 30, 2001



Obligated Balances

The budgetary resources obligated balances, by reporting group, as of September 30,
2001 and September 30, 2000 are summarized below:

                                     Obligated Balances
                                      at September 30
                                     (Dollars in Thousands)

                  Reporting Group                        FY2001        FY2000
                  SFA                                $13,985,723   $17,618,544
                  OES                                 11,004,528     8,825,209
                  OSERS                                5,517,160     5,118,981
                  OVAE                                 1,495,821     1,271,965
                  OPE                                  2,442,766     1,994,678
                  OERI                                   878,229       732,133
                  OBEMLA                                 603,438       557,130
                  DM                                     159,554       220,591
                  Total                              $36,087,219   $36,339,231

The Department adjusted its obligated balances for the direct loan program downward by
$4.6 billion in FY2001, as these amounts are no longer needed. This downward
adjustment of obligations resulted in the return of $2.3 billion in unused borrowing
authority and the repayment of $2.3 billion in outstanding borrowing from Treasury.

Comparison to the Budget of the United States Government

Differences exist between the Statement of Budgetary Resources and the FY 2001 actual
amounts reported in the Budget of the United States Government. These differences are
not material and relate to the use of all appropriations (current and expired) for the
Statement of Budgetary Resources versus only current year appropriations for the Budget
of the United States Government. In addition, the Budget of the United States
Government includes information and estimates that pre-date the completion of the
Department’s audited financial statements.

Note 18.   Statement of Financing

The Statement of Financing provides information on the total resources used by an
agency, both those received through appropriation and those received through other
means during the reporting period. It then explains how they were used in agency
operations to finance orders for goods and services not yet delivered, to acquire assets
and liabilities, and to fund the entity’s net cost of operations.




                                              74
                                 United States Department of Education
                                  Notes to Principal Financial Statements
                                           September 30, 2001

Cash flows associated with credit programs, flow through the liability for loan guarantees
or the allowance for subsidy. These flows, unlike other accounts, are not recorded as
revenues or expenses and do not affect the Department’s net cost of operations. Special
circumstances surround unfunded expenses such as upward subsidy re-estimates, accrued
annual leave, and other payroll-related accruals. These unfunded expenses affect the
Statement of Net Cost but are not covered by budgetary resources, (i.e. do not give rise to
a budgetary accounting event). Liabilities not covered by budgetary resources were
$52.5 million and $295 million, for FY2001 and FY2000, respectively.

The Statement of Financing is presented as a combined statement for the Department and
as a combining statement for its major programs. The net cost of operations, by reporting
group, for FY2001 and FY2000 is shown below:


                                            Net Cost of Operations
                                     For Fiscal Years Ended September 30
                                             (Dollars in Thousands)

                       Reporting Group                         FY2001        FY2000
                       SFA                                 $12,746,464    $6,234,813
                       OESE                                 13,947,813    13,828,926
                       OSERS                                 8,672,602     8,176,263
                       OVAE                                  1,549,502     1,608,749
                       OPE                                   1,718,380     1,542,678
                       OERI                                    603,784       715,758
                       OBEMLA                                  416,350       409,166
                       DM                                      153,068       202,471
                       Total                               $39,807,963   $32,718,824

Note 19.     Cost and Revenue by Budget Function

The Department’s costs and revenue, by budget function, are presented below:


                                    Cost and Revenue by Budget Function
                                    For Fiscal Years Ended September 30
                                           (Dollars in Thousands)

                                                                   Earned
                                        Gross Costs               Revenue                   Net Costs
                                     FY2001    FY2000         FY2001   FY2000          FY2001     FY2000
 Education, training, employ-,
  ment and social services         $45,250,503 $37,666,354 $5,586,644 $5,086,278 $39,663,859 $32,580,076
 Administration of justice             144,235     138,918        131        170     144,104     138,748
 Total                             $45,394,738 $37,805,272 $5,586,775 $5,086,448 $39,807,963 $32,718,824




                                                      75
                        United States Department of Education
                         Notes to Principal Financial Statements
                                  September 30, 2001

Note 20.   Contingencies

Guaranty Agencies

The Department can assist Guaranty Agencies experiencing financial difficulties by
advancing funds or by other means. No provision has been made in the principal
statements for potential liabilities related to financial difficulties of Guaranty Agencies
because the likelihood of such occurrences is uncertain and cannot be estimated with
sufficient reliability.

Perkins Loans Reserve Funds

The Perkins Loan Program is a campus-based program providing financial assistance to
eligible postsecondary school students. The Department provides funds to participating
schools to provide about 85.5 percent of the capital used to make loans to eligible
students at 5 percent interest. The remaining 14.5 percent of program funding is provided
by the school. For the latest academic year ended June 30, 2001, there were
approximately 620,000 loans made, totaling approximately $1.1 billion at approximately
1,761 institutions, averaging $1,790 per loan. For the academic year ended June 30,
2000, there were approximately 653,000 loans made, totaling approximately $1.1 billion
at approximately 1,817 institutions, averaging $1,700 per loan. The Department’s share
of the Perkins Loan Program was approximately $6.1 billion as of September 30, 2001;
and approximately $6.2 billion as of September 30, 2000.

Perkins Loan borrowers who meet statutory eligibility requirements—such as service as a
teacher in low income areas, as a Peace Corps or VISTA volunteer, in the military, or in
law enforcement, nursing, or family services—may receive partial loan forgiveness for
each year of qualifying service. In these circumstances a contingency exists. The
Department may be required to compensate Perkins Loan institutions for the cost of the
partial loan forgiveness.

Litigation and Other Claims

The Department is involved in various lawsuits incidental to its operations. Judgments
resulting from litigation against the Department are paid by the Department of Justice. In
the opinion of management, the ultimate resolution of pending litigation will not have a
material effect on the Department’s financial statements.

Other Matters

Some portion of the current year financial assistance expenses (grants) may include
funded recipient expenditures which were subsequently disallowed through program
review or audit processes. In the opinion of management, the ultimate disposition of
these matters will not have a material effect on the Department’s financial statements.



                                            76
                       United States Department Of Education
                         Required Supplementary Information
                                 September 30, 2001

                    INVESTMENT IN HUMAN CAPITAL
The U. S. Department of Education (ED) executes programs under the Education,
Training, Employment and Social Services function established by Congress in the
Budget Act of 1974. This report presents Human Capital activity related to the execution
of the ED's congressionally approved budget and programs.

NARRATIVE DISCUSSION

The Department of Education’s mission is to ensure equal access to education and to
promote educational excellence throughout the nation. To carry out this mission, the
Department works in partnership with states, schools, communities, institutions of higher
education and financial institutions--and through them with students, teachers and
professors, families, administrators, and employers. Key functions of the partnership are:

·      Leadership to address critical issues in American education.
·      Grants to education agencies and institutions to strengthen teaching and learning
       and prepare students for citizenship, employment in a changing economy, and
       lifelong learning.
·      Student loans and grants to help pay for the costs of postsecondary education.
·      Grants for literacy, employment, and self-sufficiency training for adults.
·      Monitoring and enforcement of civil rights to ensure nondiscrimination by
       recipients of federal education funds.
·      Support for statistics, research, development, evaluation, and dissemination of
       information to improve educational quality and effectiveness.

HUMAN CAPITAL PROGRAMS

Federal investment in Human Capital comprises those expenses for general public
education and training programs that are intended to increase or maintain national
economic productive capacity. The Department of Education’s Human Capital programs
include Elementary and Secondary, Postsecondary, Student Financial Assistance, Special
and Rehabilitative Education, Research and Improvement, Bilingual and Minority
Languages, and Vocational and Adult Education.

                          Elementary and Secondary Education

The Office of Elementary and Secondary Education provides leadership, technical
assistance, and financial support to State and local educational agencies for maintenance
and improvement of preschool, elementary, and secondary education.

Compensatory Education Programs provide financial assistance to State and local
education agencies and other institutions to support services for children in high poverty
schools, institutions for neglected and delinquent children, homeless children, and certain
Indian children.
                                            77
                       United States Department Of Education
                         Required Supplementary Information
                                 September 30, 2001


The Comprehensive School Reform Demonstration Program provides grants to States
to help public schools adopt or develop effective comprehensive school reforms with an
emphasis on basic academics and parental involvement.

Goals 2000 Programs provide grants to support State and local district efforts to
improve schools and parental involvement in schools so all children can reach
challenging academic standards.

The Impact Aid Program provides financial assistance for the maintenance and
operations of school districts in which the Federal Government has acquired substantial
real property. It provides direct assistance to local educational agencies that educate
substantial numbers of federally connected pupils (children who live on, or whose parents
work on, federal property).

Indian Education supports the efforts of local educational agencies, Indian tribes, and
other entities to meet the academic needs of American Indians and Alaska Natives so
these students can achieve to the same State performance standards as all students.

Migrant Education Programs support high-quality comprehensive educational
programs for migratory children to address disruptions in schooling and other problems
that result from repeated moves.

Safe and Drug-Free Schools Programs provide leadership to ensure that all schools are
free of drugs and violence and the unauthorized presence of firearms and alcohol and that
all schools offer a disciplined environment that is conductive to learning.

School Improvement Programs provide financial assistance to State and Local
Educational Agencies, institutions of higher education, and other public and private
nonprofit organizations for general assistance, projects to meet special educational needs
of target children and teacher development.

Class Size Reduction Program is an initiative to help schools improve student learning
by hiring additional, highly qualified teachers so children — especially those in the early
elementary grades — can attend smaller classes.


The 21st Century Community Learning Centers Program provides support to after-
school projects that keep children safe and provide academic enrichment and other
recreational and enrichment opportunities such as band, drama, art, and other cultural
events for children. It also provides life-long learning opportunities for community
members.

The Community Technology Centers Program expands access to information
technology and learning services by creating computer learning centers in low-income
                                            78
                       United States Department Of Education
                         Required Supplementary Information
                                 September 30, 2001

communities. The centers are used for pre-school preparation, workforce development,
after-school enrichment, and adult and continuing education.

The Reading Excellence Program helps children learn to read through instruction based
on research, professional development, family literacy, and extended learning activities.

                                Postsecondary Education

The Office of Postsecondary Education formulates policy and coordinates programs that
assist postsecondary educational institutions and students pursuing a postsecondary
education.

Policy, Planning, and Innovation supports The Fund for the Improvement of
Postsecondary Education, which provides grants to colleges and universities to promote
reform, innovation, and improvement in postsecondary education.

Higher Education Programs (HEP) administer discretionary funds and provide support
services that improve student access to postsecondary education and foster excellence in
institutions of higher education.

Learning Anytime Anywhere Partnerships (LAAP) - The Office of Postsecondary
Education supports partnerships among colleges, businesses, and other organizations to
promote technology-mediated distance education that is not limited by time or place.


                     Student Financial Assistance (SFA) Programs

SFA administers need-based financial assistance programs for students pursuing
postsecondary education. ED makes available federal grants, loans and work-study
funding to eligible undergraduate and graduate students.

ED’s two major loan programs are the Federal Family Education Loan Program (FFELP)
and the William D. Ford Direct Student Loan Program. The FFELP operates with State
and private nonprofit guaranty agencies to provide loan guarantees and interest
supplements through permanent budget authority on loans by private lenders to eligible
students. The William D. Ford Direct Student Loan Program is a direct lending program
in which loan capital is provided to students by the Federal Government through
borrowing from the U.S. Treasury.

                     Special Education and Rehabilitative Services

The Office of Special Education and Rehabilitative Services supports programs that assist
in educating children with special needs. It provides for the rehabilitation of youth and
adults with disabilities and supports research to improve the lives of individuals with
disabilities.
                                           79
                        United States Department Of Education
                          Required Supplementary Information
                                  September 30, 2001


The Office of Special Education Programs administers programs and projects relating
to the free public education of all children, youth, and adults with disabilities from birth
through age 21.

Rehabilitation Services Administration (RSA) oversees programs such as counseling,
medical and psychological services, job training, and other individualized services that
help individuals with physical or mental disabilities to obtain employment.

The National Institute on Disability and Rehabilitation provides leadership and
support for a comprehensive program of research related to the rehabilitation of
individuals with disabilities.

                         Educational Research and Improvement

The Office of Educational Research and Improvement (OERI) is responsible for
expanding America’s fundamental knowledge and understanding of education through
research and development.

Media and Information Services (MIS) provides leadership in developing effective
media and information services for OERI.

The National Center for Education Statistics fulfills a Congressional mandate to
collect, collate, analyze, and report complete statistics on the condition of American
education, conduct and publish reports, and review and report on education activities
internationally.

The National Institute on Early Childhood Development and Education administers
a comprehensive program of research and development to improve early childhood
development and education.

The National Institute on the Education of At-Risk Students administers a
comprehensive program of research and development for the improvement of education
for at-risk students (defined as those who because of limited English proficiency, poverty,
race, geographic location, or economic disadvantage face a greater risk of low education
achievement or reduced academic expectations).

The National Institute on Educational Governance, Finance, Policymaking, and
Management develops and disseminates information to guide the design and
implementation of effective governance strategies.

The National Institute on Postsecondary Education, Libraries, and Lifelong
Learning provides information about the education and training of adults in a variety of
settings including postsecondary institutions, community-based education programs,
libraries, and the workplace.
                                            80
                       United States Department Of Education
                         Required Supplementary Information
                                 September 30, 2001


The National Institute on Student Achievement, Curriculum, and Assessment
administers a comprehensive program of research and development to provide leadership
for states and localities to improve student achievement and enhance student learning.

The National Library of Education (NLE) is the largest federally funded library
devoted entirely to education. NLE serves in three areas: Reference and Information
Services, Collection and Technical Services, and Resource Sharing and Cooperation.

The Office of Reform Assistance and Dissemination supports comprehensive
education reform by linking teachers, administrators, parents, policymakers, and the
public with the best knowledge from education research, statistics, and practice.

                           Bilingual and Minority Languages

The Office of Bilingual Education and Minority Languages Affairs helps school districts
meet their responsibility to provide equal education opportunity to limited English
proficient children.

                       Office of Vocational and Adult Education

The Office of Vocational and Adult Education provides funds for vocational-technical
education for youth and adults. Most of the funds are awarded in the form of grants to
State education agencies.



STEWARDSHIP EXPENSES

In the Department of Education, discretionary spending constitutes approximately 90
percent of the budget and includes nearly all programs, the major exceptions being
student loans and rehabilitation services. While spending for entitlement programs is
usually a function of the authorizing statutes creating the programs, and is not generally
affected by appropriations laws, spending for discretionary programs is decided in the
annual appropriations process. Most Department programs are discretionary - for
example, Impact Aid, Vocational Education, Special Education, Pell Grants, Research,
and Statistics.




                                           81
                         United States Department Of Education
                           Required Supplementary Information
                                   September 30, 2001

Summary of Human Capital Expenses
(Dollars in thousands)
Student Financial Assistance                            FY 2001          FY 2000
  Direct Loan Subsidy Expense                          $ 1,307,001     $(3,932,928)
  Guaranteed Loan Subsidy Expense                         (314,305)        295,531
  Grant Program Expense                                 10,812,779       8,960,280
  Salaries & Administrative Expense                        248,945         273,866
   Subtotal                                            $12,054,420    $ 5,596,749

Other Departmental
 Elementary and Secondary Education Expense            $13,850,422    $13,773,266
 Special Education & Rehabilitative Services Expense     8,590,455      8,104,963
 Other Departmental Program Expense                      3,892,814      3,955,390
 Salaries & Administrative Expense                         341,074        312,051
   Subtotal                                            $26,674,765    $26,145,670

Grand Total                                            $38,729,185     $31,742,419



Intra-Governmental Amounts (Dollars in thousands)

Assets                                                  FY 2001         FY 2000
 Fund Balance With Treasury                            $40,476,338    $42,160,719
 Accounts Receivable                                        10,730             --
 Interest Receivable                                            57         70,755
 Total Assets                                          $40,487,125    $42,231,474

Liabilities
 Borrowing from Treasury                               $77,448,205     $65,715,386
 Payable to Treasury                                     4,212,555       7,860,621
 Guaranty Agency Federal & Restricted Funds
   due to Treasury                                       2,462,445       2,231,814
 Payable to Federal Financing Bank                          31,349          20,699
 Accounts Payable                                           22,293           6,647
 Interest Payable                                            7,866          83,469
 Other Intra-Governmental Liabilities
   Covered by Budgetary Resources                          40,839          112,562
 Other Intra-Governmental Liabilities
   Not Covered by Budgetary Resources                        4,018         250,261
      Total Liabilities                                $84,229,570     $76,281,459




                                          82
                       United States Department Of Education
                         Required Supplementary Information
                                 September 30, 2001

PROGRAM OUTPUTS

Education is primarily a State and local responsibility in the United States. States and
communities, as well as public and private organizations, establish schools and colleges,
develop curricula, and determine requirements for enrollment and graduation. The
structure of education finance in America reflects this predominantly State and local role.
Combining ED’s expenditures of roughly $42 billion a year with funding from all other
federal agencies, such as the Department of Health and Human Services' Head Start
program and the Department of Agriculture's School Lunch program, the Federal
Government contributes approximately 9 percent of total national expenditures on
education. The remaining 91 percent comes from State, local, and private sources. That
$42 billion is about 1.9 percent of the Federal Government's $1.9 trillion budget.

ED currently administers 174 programs affecting every area and level of education. The
Department's elementary and secondary programs annually serve 15,000 school districts
and more than 50 million students attending almost 85,000 public schools and more than
26,000 private schools. Department programs also provide grant, loan, and work-study
assistance to more than 8 million postsecondary students.

While ED's programs and responsibilities have grown substantially over the years, the
Department itself has not. In fact, ED's staff of 4,700 is nearly 40 percent below the
7,500 employees who administered Federal education programs in 1980, the year the
Department was created. These staff reductions, along with a wide range of management
improvements, have helped limit administrative costs to less than 3 percent of the
Department’s budget. This means that ED delivers about 97 cents on the dollar in
education assistance to States, school districts, postsecondary institutions, and students.


PROGRAM OUTCOMES

Education is the stepping stone to higher living standards for American citizens.
Education is key to national economic growth. But education’s contribution is more than
increased productivity and incomes. Education improves health, promotes social change
and opens doors to a better future for children and adults.

Economic outcomes, such as wage and salary levels, historically have been determined
by the educational attainment of individuals and the skills employers expect of those
entering the labor force. Recently, both individuals and society as a whole have placed
increased emphasis on educational attainment as the workplace has become increasingly
technological and employers now seek employees with the highest level of skills. For
prospective employees, the focus on higher level skills means investing in learning or
developing skills through education. Like all investments, developing higher level skills
involves costs and benefits.


                                            83
                       United States Department Of Education
                         Required Supplementary Information
                                 September 30, 2001

Returns, or benefits, of investing in education come in many forms. While some returns
accrue for the individual, others benefit society and the Nation in general. Returns
related to the individual include higher earnings, better job opportunities, and jobs that
are less sensitive to general economic conditions. Returns related to the economy and
society include reduced reliance on welfare subsidies, increased participation in civic
activities, and greater productivity.

Over time, the returns of developing skills through education have become evident.
Statistics illustrate the rewards of completing high school and investing in postsecondary
education:

•   Employment Rate: Between 1971 and 1998, the employment rate of male and
    female 25 to 34 year-olds was generally higher among those individuals with a higher
    level of education. The employment rate of males ages 25 to34 decreased for those
    who had not finished high school and those with a high school diploma or GED, and
    remained relatively constant for those with some college and those with a bachelor's
    degree or higher. The employment rate of females ages 25 to34 increased across all
    education levels. However, the rate of increase for females who did not complete
    high school was lower than the rate of increase for females who attained higher levels
    of education.

•   Annual Earnings: In 1998, the median annual earnings of adults ages 25 to 34 who
    had not completed high school were substantially lower than those of their
    counterparts who had done so (30 and 31 percent lower for males and females,
    respectively). Adults ages 25 to 34 who had completed a bachelor’s degree or higher
    earned substantially more than those who had less education (56 and 100 percent
    more for males and females, respectively).

These returns of investing in education directly translate into the advancement of the
American economy as a whole.




                                            84
U.S. Department of Education - FY 2001 Annual Accountability Report -




    SUPPLEMENTARY
    INFORMATION




                                85
                                                                                             UNITED STATES DEPARTMENT OF EDUCATION
                                                                                              Departmentwide Consolidating Balance Sheet
                                                                                                      As of September 30, 2001
                                                                                                                (Dollars in Thousands)



DW
                                                                                                                                                                                                                          Office of
                                                                                                                            Office of             Office of         Office of                            Office of        Bilingual
                                                                                                                          Elementary          Special Education    Vocational           Office of       Educational      Education
                                                                                                     Student Financial    & Secondary          & Rehabilitative     & Adult          Postsecondary      Research &       & Minority     Department
                                                                                  Consolidated          Assistance         Education              Services         Education           Education       Improvement       Languages      Management
Assets

         Intragovernmental Assets:
         Fund Balance with Treasury (Note 2)                                          $40,476,338          $17,196,330         $11,734,211           $5,659,539      $1,562,591          $2,450,010         $884,121        $608,471        $381,065
         Accounts Receivable, Net (Note 3)                                                 10,730                4,488                 150                1,957               -                   -              261               -           3,874
         Interest Receivable                                                                   57                    -                   -                    -               -                  57                -               -               -
         Governmental Assets:
         Accounts Receivable, Net (Note 3)                                                113,083              111,469                    -                   -                  -           1,498                 -               -             116
         Credit Program Receivables, Net (Note 4)                                      80,698,787           80,315,862                    -                   -                  -         382,925                 -               -               -
         Advances                                                                          38,738               38,738                    -                   -                  -               -                 -               -               -
         Cash and Other Monetary Assets                                                         -                    -                    -                   -                  -               -                 -               -               -
         Property and Equipment (Note 5)                                                   25,224               17,307                    -                   -                  -               -               535               -           7,382
         Other Governmental Assets                                                        259,945              258,006                    -                   -                  -           1,896                 -               -              43
         Guaranty Agency Federal & Restricted Funds Receivable (Note 3)                 2,462,445            2,462,445                   $0                  $0                 $0              $0                $0              $0              $0

Total Assets                                                                         $124,085,347         $100,404,645         $11,734,361           $5,661,496      $1,562,591          $2,836,386         $884,917        $608,471        $392,480

Liabilities
          Intragovernmental Liabilities:
          Accounts Payable                                                                $22,293               $3,410              $9,564               $1,512             $82                $48             $5,541             $8          $2,128
          Interest Payable                                                                  7,866                   (0)                 (0)                  (0)             (0)             7,866                 (0)            (0)             (0)
          Borrowing from Treasury (Note 6)                                             77,448,205           77,189,105                  (0)                  (0)             (0)           259,100                 (0)            (0)             (0)
          Guaranty Agency Federal & Restricted Funds Due To Treasury (Note 3)           2,462,445            2,462,445                  (0)                  (0)             (0)                (0)                (0)            (0)             (0)
          Payable to Treasury (Note 7)                                                  4,212,555            4,212,555                  (0)                  (0)             (0)                (0)                (0)            (0)             (0)
          Payable to Federal Financing Bank (Note 8)                                       31,349                   (0)                 (0)                  (0)             (0)            31,349                 (0)            (0)             (0)
          Other Intragovernmental Liabilities (Note 9)                                     44,857                  980                 193                  276             104                390                286             34          42,594
          Governmental Liabilities:
          Accounts Payable                                                                590,921              516,097             19,211                15,356           4,060              7,076             10,627            876          17,618
          Accrued Grant Liability (Note 10)                                             1,854,940              899,180            298,202               303,824          45,419            187,077             61,934         59,304              (0)
          Liabilities for Loan Guarantees (Note 4)                                      8,376,767            8,376,767                 (0)                   (0)             (0)                (0)                (0)            (0)             (0)
          Other Governmental Liabilities (Note 9)                                         381,264              119,937              9,312                 5,589           2,755              5,056             20,001            965         217,649

Total Liabilities                                                                     $95,433,462          $93,780,476           $336,482             $326,557          $52,420           $497,962            $98,389        $61,187        $279,989

Net Position

      Unexpended Appropriations (Note 11)                                             $30,691,817           $8,738,794         $11,400,664           $5,335,102      $1,511,642          $2,241,554         $790,474        $547,781        $125,806
      Cumulative Results of Operations (Note 11)                                       (2,039,932)          (2,114,625)             (2,785)                (163)         (1,471)              96,870          (3,946)           (497)        (13,315)

Total Net Position                                                                    $28,651,885           $6,624,169         $11,397,879           $5,334,939      $1,510,171          $2,338,424         $786,528        $547,284        $112,491


Total Liabilities and Net Position                                                   $124,085,347         $100,404,645         $11,734,361           $5,661,496      $1,562,591          $2,836,386         $884,917        $608,471        $392,480




     The accompanying notes are an integral part of these financial statements.                                           86
                                                                                              UNITED STATES DEPARTMENT OF EDUCATION
                                                                                            Departmentwide Consolidating Statement of Net Cost
                                                                                                  For the Year Ended September 30, 2001
                                                                                                                   (Dollars in Thousands)




            DW                                                                                                                                                                                                 Office of
                                                                                                                      Office of             Office of        Office of                           Office of     Bilingual
                                                                                                                     Elementary         Special Education   Vocational           Office of      Educational   Education
                                                                                               Student Financial     & Secondary         & Rehabilitative    & Adult          Postsecondary     Research &    & Minority     Department
                                                                             Consolidated         Assistance          Education             Services        Education           Education      Improvement    Languages      Management


            Program Costs
              Intragovernmental

                   #   Interest Expense, Federal (Note 12)                        $5,578,045         $5,561,878                   $0                  $0              $0            $16,167              $0           $0              $0
                   #   Other Production Expense                                            0                  0                   $0                   0               0                  0               0            0               0
                   #   Grant Expense                                                  71,180                  0              $69,954                   0             $50                  0          $1,176            0               0
                   #   Contractual Service Expense                                    81,349             12,869               10,779              $4,008          10,042              4,259          34,594         $276          $4,522
                   #   Salaries and Administrative Expense (Note 13)                 153,433             95,518                5,854               7,142           3,062              5,984           8,449          909          26,515
                   #   Bad Debt & Write-offs                                              38                  0                   37                   0               0                  0               0            0               1
                   #   Other Program Expenses                                              0                  0                    0                   0               0                  0               0            0               0

               Governmental

                   #   Subsidy Expense (Note 4)                                      999,287            992,696                    0                    0              0               6,591              0             0              0
                   #   Grant Expense                                              37,068,699         10,812,779           13,780,468            8,590,455      1,501,867           1,655,321        323,867       403,901             41
                   #   Interest Expense, Non-Federal (Note 12)                           411                358                    0                    6              0                   0              8             0             39
                   #   Contractual Service Expense                                   805,532            484,012               38,507               27,473         17,160              18,778        193,855         5,973         19,774
                   #   Salaries and Administrative Expense (Note 13)                 436,586            153,427               42,231               47,628         17,322              29,438         41,860         5,291         99,389
                   #   Bad Debt & Write-offs                                             588                  0                    0                    0              0                 587              0             0              1
                   #   Other Program Expenses                                        199,590            194,805                    0                    0              0                   0              0             0          4,785

            Total Program Cost                                                   $45,394,738        $18,308,342         $13,947,830            $8,676,712     $1,549,503          $1,737,125      $603,809       $416,350       $155,067

            Less: Earned Revenues
                 # Interest, Federal (Note 12)                                    $1,522,371         $1,522,188                  ($0)                ($0)            ($0)               $183           ($0)           ($0)           ($0)
                 # Interest, Non-Federal (Note 12)                                 4,058,251          4,039,690                   (0)                 (0)             (0)             18,561            (0)            (0)            (0)
                 # Other Earned Revenue                                                6,153                 (0)                 $17              $4,110              $1                   1           $25             (0)        $1,999

            Earned Revenues                                                       $5,586,775         $5,561,878                  $17              $4,110                 $1         $18,745            $25            ($0)        $1,999


            Net Cost of Operations                                               $39,807,963        $12,746,464         $13,947,813            $8,672,602     $1,549,502          $1,718,380      $603,784       $416,350       $153,068




The accompanying notes are an integral part of these financial statements.                                                  87
                                                                                                UNITED STATES DEPARTMENT OF EDUCATION
                                                                                        Departmentwide Consolidating Statement of Changes in Net Position
                                                                                                     For the Year Ended September 30, 2001
                                                                                                                          (Dollars in Thousands)




DW                                                                                                                                                                                                                       Office of
                                                                                                                           Office of              Office of         Office of                           Office of        Bilingual
                                                                                                                          Elementary          Special Education    Vocational          Office of       Educational      Education
                                                                                                     Student Financial    & Secondary          & Rehabilitative     & Adult         Postsecondary      Research &       & Minority        Department
                                                                                  Consolidated          Assistance         Education              Services         Education          Education       Improvement       Languages         Management



11 Net Cost of Operations                                                            $(39,807,963)        $(12,746,464)      $(13,947,813)          $(8,672,602)     $(1,549,502)      $(1,718,380)       $(603,784)       $(416,350)         $(153,068)

     Financing Sources (Other than Exchange Revenues):
21     Appropriations Used                                                           $40,730,970          $13,466,364         $13,926,219            $8,608,448      $1,527,097         $1,695,388         $559,198         $409,518          $538,738
23     Donations (Non-exchange Revenue)                                                      535                    ()                  ()                    ()              ()                 ()               ()               ()              535
#      Imputed Financing (Note 14)                                                        20,600              129,421              59,960                64,175          20,451             41,684           54,402            7,055          (356,548)
#      Future Transfers Out due to Downward Subsidy Re-estimate                       (2,707,275)          (2,706,125)                  ()                    ()              ()            (1,150)               ()               ()                ()

     Total Financing Sources                                                         $38,044,830          $10,889,660         $13,986,179            $8,672,623      $1,547,548         $1,735,922         $613,600         $416,573          $182,725

     Net Results of Operations                                                        $(1,763,133)         $(1,856,804)           $38,366                  $21           $(1,954)          $17,542           $9,816             $223           $29,657

#    Prior Period Adjustments (Note 15)                                                  (152,829)             (48,343)            (98,942)              (2,095)            223             44,424           (13,031)           (220)           (34,845)

     Net Change in Cumulative Results of Operations                                   $(1,915,962)         $(1,905,147)           $(60,576)             $(2,074)         $(1,731)          $61,966           $(3,215)                $3         $(5,188)

60 Increase (Decrease) in Unexpended Appropriations                                     3,969,091             (514,217)          3,166,980              434,734         291,606            393,749          166,599           40,285            (10,645)

     Change in Net Position                                                           $2,053,129           $(2,419,364)        $3,106,404             $432,660         $289,875           $455,715         $163,384          $40,288           $(15,833)

80 Net Position - Beginning of Period                                                 26,598,756             9,043,533           8,291,475            4,902,279        1,220,296         1,882,709          623,144          506,996           128,324

     Net Position - End of Period                                                    $28,651,885           $6,624,169         $11,397,879            $5,334,939      $1,510,171         $2,338,424         $786,528         $547,284          $112,491




     The accompanying notes are an integral part of these financial statements.                                                    88
                                                                                   UNITED STATES DEPARTMENT OF EDUCATION
                                                                             Departmentwide Combining Statement of Budgetary Resources
                                                                                       For the Year Ended September 30, 2001
                                                                                                         (Dollars in Thousands)




     DW                                                                                                                                                                                                      Office of
                                                                                                                     Office of             Office of         Office of                        Office of      Bilingual
                                                                                                                    Elementary         Special Education    Vocational        Office of      Educational    Education
                                                                                               Student Financial    & Secondary         & Rehabilitative     & Adult       Postsecondary     Research &     & Minority     Department
                                                                              Combined            Assistance         Education             Services         Education        Education      Improvement     Languages      Management



         Budgetary Resources

      1 Budget Authority                                                        $69,343,857         $37,514,043         $17,034,680           $9,070,063     $1,825,600       $2,190,453        $722,721       $460,000       $526,297
      2 Unobligated Balance-Beginning of Period (Adjusted) (Note 16)             10,529,655           9,879,072             137,323              285,752         90,165          118,326           9,726          2,847          6,444
        Spending Authority from Offsetting Collections (Adjusted)                27,638,727          27,505,541              61,504                8,928             71           55,145           5,035              -          2,503
      4 Adjustments                                                             (13,393,186)        (13,407,710)            161,001                  (85)         1,042         (157,903)          2,793            302          7,374

         Total Budgetary Resources (Note 17)                                    $94,119,053         $61,490,946         $17,394,508           $9,364,658     $1,916,878       $2,206,021        $740,275       $463,149       $542,618

         Status of Budgetary Resources

      6 Obligations Incurred (Adjusted) (Note 16)                               $86,385,110         $54,749,795         $16,664,824           $9,222,249     $1,849,891       $2,174,136        $734,382       $458,117       $531,716
      7 Unobligated Balances-Available                                            2,213,757           1,293,179             703,861              117,241         66,087           28,848             965          2,213          1,363
      8 Unobligated Balances-Not Available                                        5,520,186           5,447,972              25,823               25,168            900            3,037           4,928          2,819          9,539

         Total Status of Budgetary Resources (Note 17)                          $94,119,053         $61,490,946         $17,394,508           $9,364,658     $1,916,878       $2,206,021        $740,275       $463,149       $542,618

         Outlays
     10 Obligations Incurred (Adjusted) (Note 16)                               $86,385,110         $54,749,795         $16,664,824           $9,222,249     $1,849,891       $2,174,136        $734,382       $458,117       $531,716
      # Less: Spending Authority from Offsetting Collections (Adjusted)         (34,131,697)        (33,697,223)           (262,730)             (45,403)        (9,713)         (72,056)        (14,344)       (10,527)       (19,701)
     12 Obligated Balance, Net-Beginning of Period (Adjusted) (Note 16 )         36,112,102          17,466,300           8,809,370            5,120,416      1,272,691        1,995,726         725,207        557,393        164,999
        Less: Obligated Balance, Net-End of Period (Adjusted)                   (36,087,219)        (13,985,723)        (11,004,528)          (5,517,160)    (1,495,821)      (2,442,766)       (878,229)      (603,438)      (159,554)


         Total Outlays (Note 17 )                                               $52,278,296         $24,533,149         $14,206,936           $8,780,102     $1,617,048       $1,655,040        $567,016       $401,545       $517,460




The accompanying notes are an integral part of these financial statements.                                         89
                                                                                 UNITED STATES DEPARTMENT OF EDUCATION
                                                                                Departmentwide Combining Statement of Financing
                                                                                     For the Year Ended September 30, 2001
                                                                                                       (Dollars in Thousands)




DW

                                                                                                                                                                                                                  Office of
                                                                                                                        Office of              Office of        Office of                          Office of      Bilingual
                                                                                                                       Elementary          Special Education   Vocational          Office of      Educational    Education
                                                                                                 Student Financial    & Secondary           & Rehabilitative    & Adult         Postsecondary     Research &     & Minority       Department
                                                                                Combined            Assistance         Education               Services        Education          Education      Improvement     Languages        Management




Obligations and Nonbudgetary Resources (Note 18)

Obligations Incurred (Adjusted) (Note 16)                                        $86,385,110          $54,749,795        $16,664,824             $9,222,249      $1,849,891        $2,174,136       $734,382        $458,117          $531,716
Spending Authority from Offsetting Collections and Adjustments (Adjusted)        (34,131,697)         (33,697,223)          (262,730)               (45,403)         (9,713)          (72,056)       (14,344)        (10,527)          (19,701)
Financing Imputed for Cost Subsidies (Note 14)                                        20,600              129,421             59,960                 64,175          20,451            41,684         54,402           7,055          (356,548)
Financing Sources Transferred Out                                                 (2,707,275)          (2,706,125)                 -                      -               -            (1,150)             -               -                 -
Exchange Revenue Not In the Entity's Budget                                        4,837,150            4,824,026                  -                      -               -            13,124              -               -                 -
Other                                                                                (17,221)                   -                  -                      -               -           (17,221)             -               -                 -

Total Obligations and Nonbudgetary Resources                                     $54,386,667          $23,299,894        $16,462,054             $9,241,021      $1,860,629        $2,138,517       $774,440        $454,645          $155,467

Resources That Do Not Fund Net Cost of Operations (Note 18)

Change in Amount of Goods, Services, and Benefits
   Ordered But Not Yet Provided (Net Increases) Net Decreases                     ($1,009,541)          $3,095,274        ($2,570,631)            ($576,673)      ($312,522)        $(444,007)      ($170,933)      ($38,330)           $8,281
Credit Program Collections that Increase
    Liabilities for Loan Guarantees or Allowance for Subsidy                      11,471,786            11,436,845                    -                   -               -            34,941               -              -                 -
Resources that Fund Expenses Recognized in Prior Periods                             (41,431)               (4,311)              (1,886)             (3,970)           (860)           (4,297)         (4,120)          (500)          (21,487)
Resources that Finance the
    Acquisition of Assets or Liquidation of Liabilities                           (35,192,107)         (35,171,087)                   -                   -                 -         (12,827)           (642)                -         (7,551)
Other Resources that Finance the
    Acquisition of Assets or Liquidation of Liabilities                             4,197,500            4,197,500                    -                   -                 -               -               -                 -                -

Total Resources That Do Not
     Fund Net Cost of Operations                                                 $(20,573,793)        $(16,445,779)       $(2,572,517)            $(580,643)      $(313,382)        $(426,190)      $(175,695)      $(38,830)         $(20,757)

Costs That Do Not Require Resources (Note 18)

Adjustments                                                                          $75,145              $11,503               $56,525              $7,951          $1,298            $1,674           $557             $47           $(4,410)

Total Costs That Do Not Require Resources                                            $75,145              $11,503               $56,525              $7,951          $1,298            $1,674           $557             $47           $(4,410)

Financing Sources Yet to be Provided (Note 18)                                    $5,919,944            $5,880,846               $1,751              $4,273           $957             $4,379          $4,482          $488            $22,768

Net Cost of Operations (Note 19)                                                 $39,807,963          $12,746,464        $13,947,813             $8,672,602      $1,549,502        $1,718,380       $603,784        $416,350          $153,068




   The accompanying notes are an integral part of these financial statements.                                   90
                                                               UNITED STATES DEPARTMENT OF EDUCATION
                                                                       Student Financial Assistance
                                                                       Consolidating Balance Sheet
                                                                         As of September 30, 2001
   SFA                                                                       (Dollars in Thousands)


                                                                                                                   Federal              Direct
                                                                                                               Family Education        Student          Grant
                                                                                            Consolidated        Loan Program        Loan Program      Programs
   Assets

               Intragovernmental Assets:
               Fund Balance with Treasury                                                       $17,196,330           $7,757,905          $785,901     $8,652,524
               Accounts Receivable, Net                                                               4,488                4,488                  -              -
               Interest Receivable                                                                         -                    -                 -              -
               Governmental Assets:
               Accounts Receivable, Net                                                             111,469              107,136             4,333              -
               Credit Program Receivables, Net                                                   80,315,862            5,586,788        74,729,074              -
               Advances                                                                              38,738               38,738                 -              -
               Cash and Other Monetary Assets                                                              -                    -                 -             -
               Property and Equipment                                                                17,307                7,602             8,938            767
               Other Governmental Assets                                                            258,006              257,973                 -             33
               Guaranty Agency Federal & Restricted Funds Receivable                              2,462,445            2,462,445                $0             $0

    Total Assets                                                                               $100,404,645          $16,223,075       $75,528,246     $8,653,324

    Liabilities
              Intragovernmental Liabilities:
              Accounts Payable                                                                       $3,410               $1,189            $2,045           $176
              Interest Payable                                                                           (0)                  (0)               (0)            (0)
              Borrowing from Treasury                                                            77,189,105                   (0)       77,189,105             (0)
              Guaranty Agency Federal & Restricted Funds Due To Treasury                          2,462,445            2,462,445                (0)            (0)
              Payable to Treasury                                                                 4,212,555            4,212,555                (0)            (0)
              Other Intragovernmental Liabilities                                                       980                  693               234             53
              Governmental Liabilities:
              Accounts Payable                                                                      516,097              141,791           287,409         86,897
              Accrued Grant Liability                                                               899,180                   (0)               (0)       899,180
              Liabilities for Loan Guarantees                                                     8,376,767            8,376,767                (0)            (0)
              Other Governmental Liabilities                                                        119,937               67,565            47,779          4,593

    Total Liabilities                                                                           $93,780,476          $15,263,005       $77,526,572       $990,899

    Net Position

           Unexpended Appropriations                                                             $8,738,794            $960,037          $116,784      $7,661,973
           Cumulative Results of Operations                                                      (2,114,625)                 33         (2,115,110)           452

    Total Net Position                                                                           $6,624,169            $960,070        ($1,998,326)    $7,662,425



    Total Liabilities and Net Position                                                         $100,404,645          $16,223,075       $75,528,246     $8,653,324




The accompanying notes are an integral part of these financial statements.            91
                                                               UNITED STATES DEPARTMENT OF EDUCATION
                                                                        Student Financial Assistance
                                                                    Consolidating Statement of Net Cost
                                                                   For the Year Ended September 30, 2001
                   SFA                                                       (Dollars in Thousands)
                                                                                                          Federal             Direct
                                                                                                      Family Education       Student         Grant
                                                                                 Consolidated          Loan Program       Loan Program     Programs


                   Program Costs
                     Intragovernmental

                          #   Interest Expense, Federal                                $5,561,878            $460,717         $5,101,161            $0
                          #   Other Production Expense                                          0                   0                  0             0
                          #   Contractual Service Expense                                  12,869               2,758              2,169        $7,942
                          #   Salaries and Administrative Expense                          95,518              36,655             36,040        22,823
                          #   Bad Debt & Write-offs                                             0                   0                  0             0

                      Governmental

                          #   Subsidy Expense                                             992,696             (314,305)        1,307,001              0
                          #   Grant Expense                                            10,812,779                    0                 0     10,812,779
                          #   Interest Expense, Non-Federal                                   358                  159               183             16
                          #   Contractual Service Expense                                 484,012              211,989           238,970         33,053
                          #   Salaries and Administrative Expense                         153,427               58,086            33,803         61,538
                          #   Other Program Expenses                                      194,805               73,884            86,902         34,019

                   Total Program Cost                                                 $18,308,342            $529,943         $6,806,229    $10,972,170

                   Less: Earned Revenues
                       # Interest, Federal                                             $1,522,188            $460,717         $1,061,471              ($0)
                       # Interest, Non-Federal                                          4,039,690                  (0)         4,039,690               (0)

                   Earned Revenues                                                     $5,561,878            $460,717         $5,101,161              ($0)


                   Net Cost of Operations                                             $12,746,464              $69,226        $1,705,068    $10,972,170




The accompanying notes are an integral part of these financial statements.            92
                                                              UNITED STATES DEPARTMENT OF EDUCATION
                                                                        Student Financial Assistance
                                                             Consolidating Statement of Changes in Net Position
                                                                  For the Year Ended September 30, 2001
            SFA                                                               (Dollars in Thousands)

                                                                                                                  Federal            Direct
                                                                                                              Family Education      Student          Grant
                                                                                            Consolidated       Loan Program      Loan Program      Programs



            11 Net Cost of Operations                                                         $(12,746,464)          $(69,226)      $(1,705,068)    $(10,972,170)

                  Financing Sources (Other than Exchange Revenues):
            21      Appropriations Used                                                        $13,466,364         $2,779,600        ($152,693)     $10,839,457
            #       Imputed Financing                                                              129,421              2,682             1,361         125,378
            #       Future Transfers Out due to Downward Subsidy Re-estimate                    (2,706,125)        (2,706,125)                ()               ()

                  Total Financing Sources                                                      $10,889,660             $76,157       $(151,332)      $10,964,835

                  Net Results of Operations                                                    $(1,856,804)            $6,931       $(1,856,400)         $(7,335)

            #     Prior Period Adjustments                                                         (48,343)                69                50          (48,462)

                  Net Change in Cumulative Results of Operations                               $(1,905,147)             $7,000      $(1,856,350)        $(55,797)

            60    Increase (Decrease) in Unexpended Appropriations                                (514,217)          (385,856)           (7,388)        (120,973)

                  Change in Net Position                                                       $(2,419,364)         $(378,856)      $(1,863,738)      $(176,770)

            80    Net Position - Beginning of Period                                             9,043,533          1,338,926         (134,588)        7,839,195

                  Net Position - End of Period                                                  $6,624,169           $960,070       ($1,998,326)     $7,662,425




The accompanying notes are an integral part of these financial statements.             93
                                                               UNITED STATES DEPARTMENT OF EDUCATION
                                                                        Student Financial Assistance
                                                                Combining Statement of Budgetary Resources
                                                                   For the Year Ended September 30, 2001
           SFA                                                               (Dollars in Thousands)

                                                                                                                Federal             Direct
                                                                                                            Family Education       Student         Grant
                                                                                           Combined          Loan Program       Loan Program     Programs



              Budgetary Resources

            1 Budget Authority                                                               $37,514,043          $3,454,474      $23,351,458     $10,708,111
            2 Unobligated Balance-Beginning of Period (Adjusted)                               9,879,072           8,180,062            4,991       1,694,019
              Spending Authority from Offsetting Collections (Adjusted)                       27,505,541          14,640,197       12,865,344                -
            4 Adjustments                                                                    (13,407,710)         (5,853,547)      (8,331,853)        777,690

              Total Budgetary Resources                                                      $61,490,946         $20,421,186      $27,889,940     $13,179,820

              Status of Budgetary Resources

            6 Obligations Incurred (Adjusted)                                                $54,749,795         $15,174,803      $27,879,824     $11,695,168
            7 Unobligated Balances-Available                                                   1,293,179               4,711              261       1,288,207
            8 Unobligated Balances-Not Available                                               5,447,972           5,241,672            9,855         196,445

              Total Status of Budgetary Resources                                            $61,490,946         $20,421,186      $27,889,940     $13,179,820

              Outlays
            # Obligations Incurred (Adjusted)                                                $54,749,795         $15,174,803      $27,879,824     $11,695,168
            # Less: Spending Authority from Offsetting Collections (Adjusted)                (33,697,223)        (15,443,193)     (17,430,715)       (823,315)
            # Obligated Balance, Net-Beginning of Period (Adjusted)                           17,466,300           3,708,214        7,231,442       6,526,644
              Less: Obligated Balance, Net-End of Period (Adjusted)                          (13,985,723)         (2,503,952)      (4,313,900)     (7,167,871)


              Total Outlays                                                                  $24,533,149            $935,872      $13,366,651     $10,230,626




The accompanying notes are an integral part of these financial statements.            94
                                                                UNITED STATES DEPARTMENT OF EDUCATION
                                                                         Student Financial Assistance
                                                                      Combining Statement of Financing
                                                                    For the Year Ended September 30, 2001
SFA

                                                                              (Dollars in Thousands)


                                                                                                                       Federal             Direct
                                                                                                                   Family Education       Student           Grant
                                                                                               Combined             Loan Program       Loan Program       Programs




Obligations and Nonbudgetary Resources

Obligations Incurred (Adjusted)                                                                   $54,749,795           $15,174,803       $27,879,824      $11,695,168
Spending Authority from Offsetting Collections and Adjustments (Adjusted)                         (33,697,223)          (15,443,193)      (17,430,715)        (823,315)
Financing Imputed for Cost Subsidies                                                                  129,421                 2,682             1,361          125,378
Financing Sources Transferred Out                                                                  (2,706,125)           (2,706,125)                 -                -
Exchange Revenue Not In the Entity's Budget                                                         4,824,026             1,738,457         3,085,569                 -
Other                                                                                                        -                     -                 -                -

Total Obligations and Nonbudgetary Resources                                                      $23,299,894           $(1,233,376)      $13,536,039      $10,997,231

Resources That Do Not Fund Net Cost of Operations

Change in Amount of Goods, Services, and Benefits
   Ordered But Not Yet Provided (Net Increases) Net Decreases                                      $3,095,274             $650,570         $2,477,101         $(32,397)
Credit Program Collections that Increase
    Liabilities for Loan Guarantees or Allowance for Subsidy                                       11,436,845             4,462,601          6,974,244                 -
Resources that Fund Expenses Recognized in Prior Periods                                               (4,311)               (4,294)               (16)               (1)
Resources that Finance the
    Acquisition of Assets or Liquidation of Liabilities                                           (35,171,087)          (10,932,311)       (24,237,862)           (914)
Other Resources that Finance the
    Acquisition of Assets or Liquidation of Liabilities                                                4,197,500          3,109,009          1,088,491                 -

Total Resources That Do Not
     Fund Net Cost of Operations                                                                 $(16,445,779)          $(2,714,425)      $(13,698,042)       $(33,312)

Costs That Do Not Require Resources

Adjustments                                                                                             $11,503              $1,529            $1,767           $8,207

Total Costs That Do Not Require Resources                                                               $11,503              $1,529            $1,767           $8,207

Financing Sources Yet to be Provided                                                               $5,880,846            $4,015,498        $1,865,304                $44

Net Cost of Operations                                                                            $12,746,464              $69,226         $1,705,068      $10,972,170




 The accompanying notes are an integral part of these financial statements.            95
Department of Education - FY 2001 Accountability Report




ATTACHMENTS
Report of Independent Auditors

Report on Internal Control

Report on Compliance with Laws and
Regulations




                          96
U.S. Department of Education - FY 2001 Accountability Report




APPENDIX A
Glossary
U.S. Department of Education - FY 2001 Accountability Report




                                         Glossary
          DLP                Direct Loan Program
          ED                 U.S. Department of Education
          EDA                Electronic Debit Account
          EDCAPS             Education Central Administrative Processing
                             System
          EFT                Electronic File Transfer
          ESEA               Elementary and Secondary Education Act
          FAFSA              Free Application for Federal Student Aid
          FASAB              Federal Accounting Standard Advisory Board
          FDLP               Federal Direct Loan Program
          FFEL               Federal Family Education Loan
          FFELP              Federal Family Education Loan Program
          FMFIA              Federal Managers Financial Integrity Act
          FMSS               Financial Management System Software
          GA                 Guaranty Agency
          GAAP               Generally Accepted Accounting Principles
          GAO                General Accounting Office
          GAPS               Grant and Administrative Payment System
          GED                General Education Degree
          GMRA               Government Management Reform Act
          GPRA               Government Performance and Results Act
          HBCU               Historically Black College and University
          HEA                Higher Education Act
          HHS                Department of Health and Human Services
          IASA               Improving America's Schools Act
          IPOS               Institutional Participation and Oversight Service
          IT                 Information Technology
          MIT                Management Improvement Team
          NDNH               National Directory of New Hires
          NAEP               National Assessment of Educational Progress
          NLE                National Library of Education
          OBEMLA             Office of Bilingual Education and Minority
                             Languages Affairs
          OESE               Office of Elementary and Secondary Education
          OERI               Office of Educational Research and
                             Improvement
          OIG                Office of the Inspector General
          OMB                Office of Management and Budget
          OPE                Office of Postsecondary Education
          OSEP               Office of Special Education Programs
          OSERS              Office of Special Education and Rehabilitative
                             Services
          OVAE               Office of Vocational and Adult Education
          PBO                Performance Based Organization
          SFA                Student Financial Assistance
U.S. Department of Education - FY 2001 Accountability Report




APPENDIX B
Department of Education
Web Sites
U.S. Department of Education - FY 2001 Accountability Report




Department of Education Offices Web Sites:

U.S. Department of Education                     http://www.ed.gov
Office of the General Counsel                    http://www.ed.gov/offices/OGC/
Office of Inspector General                      http://www.ed.gov/offices/OIG/
Office of Legislation and Congressional          http://www.ed.gov/offices/OLCA/
Affairs
Budget Office                                    http://www.ed.gov/offices/OUS/budget.html
Office of the Under Secretary Planning           http://www.ed.gov/offices/OUS/PES/
and Evaluation Services
Office of Management                             http://www.ed.gov/offices/OM/
Office of the Chief Information Officer          http://www.ed.gov/offices/OCIO/
Office of the Chief Financial Officer            http://www.ed.gov/offices/OCFO/
Office of Student Financial Assistance           http://www.ed.gov/offices/OSFAP/
Program
Direct Loans                                     http://www.ed.gov/offices/OSFAP/DirectLo
                                                 an/
Direct Consolidation Loan Program                http://loanconsolidation.ed.gov
Free Application for Student Aid                 http://www.fafsa.ed.gov
Office of Elementary and Secondary               http://www.ed.gov/offices/OESE/
Education
Office of Educational Research and               http://www.ed.gov/offices/OERI/
Improvement
Office of Vocational and Adult Education         http://www.ed.gov/offices/OVAE/
Office of Postsecondary Education                http://www.ed.gov/offices/OPE/
Office of Bilingual Education and                http://www.ed.gov/offices/OBEMLA/
Minority Languages Affairs
Office of Special Education and                  http://www.ed.gov/offices/OSERS/
Rehabilitative Services
Office for Civil Rights                          http://www.ed.gov/offices/OCR/
Office of Intergovernal and Interagency          http://www.ed.gov/offices/OIIA/
Affairs