oversight

Financial Statement Audits for Fiscal Years 2008 and 2007-Federal Student Aid.

Published by the Department of Education, Office of Inspector General on 2008-11-17.

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

Dear Federal Student Aid Colleagues, Partners and Customers:

I am pleased to present the 2008 Annual Report for
Federal Student Aid. This report showcases the many
accomplishments realized by our organization in
administering the federal student financial assistance
programs authorized under Title IV of the Higher
Education Act. This document also serves to highlight
the many challenges we faced in achieving these
successes and, frankly, those areas where we fell
short.

During the year, Federal Student Aid continued to
pursue systems integration efforts and cost reduction
strategies in an effort to improve program integrity,
efficiency and accuracy while reducing the cost to the
taxpayer and improving service to college-bound          James F. Manning
students and their families. We strengthened our         Acting Chief Operating
oversight and monitoring of program participants and     Officer
increased our employee training programs to ensure
the Federal Student Aid workforce is able and prepared to meet the evolving needs of
our customers.

This year, Federal Student Aid also faced unanticipated challenges, most notably when
the availability of federal student loans was put into question as a result of the global
credit crisis. Federal Student Aid worked with colleagues from across the federal
government to develop and implement programs to ensure that all eligible students
would have access to federal student loans by the mid-August peak student loan period.
These programs were launched on time and within budget and, to date, have funded
approximately 40% of Federal Family Education Loan disbursements for the 2008–09
academic year.

While meeting these challenges, Federal Student Aid delivered more aid to more
students and families in fiscal year 2008 than during any period in the history of these
programs. This would not have been possible without the hard work, commitment and
dedication of over 1,000 Federal Student Aid employees. Their passion to serve our
customers and fulfill our mission is evident in the work they do each day. On a personal
note, I would like to recognize and thank Larry Warder for his leadership and support
over the last year. I am honored to present this report on behalf of Federal Student Aid.


Sincerely,




James F. Manning
Acting Chief Operating Officer




                                            i
Table of Contents                                                                                                                                  FY 2008 Annual Report



              MANAGEMENT’S DISCUSSION AND ANALYSIS .................................................................. 1
                 MISSION AND ORGANIZATIONAL STRUCTURE ....................................................................................... 3
                 PERFORMANCE GOALS, OBJECTIVES AND RESULTS .............................................................................. 7
                 ANALYSIS OF FEDERAL STUDENT AID’S FINANCIAL STATEMENTS ..................................................... 18
                 ANALYSIS OF FEDERAL STUDENT AID’S SYSTEMS, CONTROLS AND LEGAL COMPLIANCE ............... 23
                 POSSIBLE FUTURE EFFECTS OF EXISTING EVENTS AND CONDITIONS............................................... 25
                 LIMITATIONS OF FINANCIAL STATEMENTS ........................................................................................... 26
              ANNUAL PROGRAM PERFORMANCE REPORT ..................................................................... 27
                 ANNUAL PROGRAM PERFORMANCE ........................................................................................................ 29
                 LEGISLATIVE AND REGULATORY RECOMMENDATIONS ......................................................................... 46
                 ANNUAL BONUS AWARDS ...................................................................................................................... 47
                 REPORT OF THE FEDERAL STUDENT AID OMBUDSMAN ....................................................................... 49
              FINANCIAL SECTION ....................................................................................................................... 51
                 MESSAGE FROM THE CHIEF FINANCIAL OFFICER ................................................................................. 53
                 PRINCIPAL FINANCIAL STATEMENTS AND NOTES TO PRINCIPAL FINANCIAL STATEMENTS .............. 55
                 …CONSOLIDATED BALANCE SHEET ....................................................................................................... 56
                 …CONSOLIDATED STATEMENT OF NET COST ...................................................................................... 57
                 …CONSOLIDATED STATEMENT OF CHANGES IN NET POSITION ......................................................... 58
                 …COMBINED STATEMENT OF BUDGETARY RESOURCES ...................................................................... 59
                 NOTES TO PRINCIPAL FINANCIAL STATEMENTS ................................................................................... 60
                 …NOTE 1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES .................................................. 60
                 …NOTE 2.     NON-ENTITY ASSETS ................................................................................................... 70
                 …NOTE 3.     FUND BALANCE WITH TREASURY ................................................................................. 70
                 …NOTE 4.     ACCOUNTS RECEIVABLE ............................................................................................... 71
                 …NOTE 5.     CASH AND OTHER MONETARY ASSETS ....................................................................... 72
                 …NOTE 6.     CREDIT PROGRAMS FOR HIGHER EDUCATION ............................................................ 72
                 …NOTE 7.     DEBT .............................................................................................................................. 84
                 …NOTE 8.     OTHER LIABILITIES ....................................................................................................... 85
                 …NOTE 9.     ACCRUED GRANT LIABILITY ......................................................................................... 86
                 …NOTE 10. NET POSITION............................................................................................................... 86
                 …NOTE 11. INTRAGOVERNMENTAL COST AND EXCHANGE REVENUE BY PROGRAM .................... 86
                 …NOTE 12. INTEREST EXPENSE AND INTEREST REVENUE ............................................................ 87
                 …NOTE 13. STATEMENT OF BUDGETARY RESOURCES ................................................................... 88
                 …NOTE 14. RECONCILIATION OF NET COST OF OPERATIONS TO BUDGET ................................. 90
                 …NOTE 15. CONTINGENCIES ........................................................................................................... 92
                 …NOTE 16. SUBSEQUENT EVENTS .................................................................................................. 93
                 REQUIRED SUPPLEMENTARY INFORMATION .......................................................................................... 94
                 REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION ................................................................ 96
                 OTHER ACCOMPANYING INFORMATION ................................................................................................. 98
              OFFICE OF INSPECTOR GENERAL TRANSMITTAL LETTER.......................................... 99
              REPORT OF INDEPENDENT AUDITORS................................................................................ 103
              REPORT ON INTERNAL CONTROL........................................................................................... 107
              REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS.................................. 119
              MANAGEMENT’S RESPONSE....................................................................................................... 123
              GLOSSARY OF ACRONYMS AND TERMS .............................................................................. 127
              AVAILABILITY OF FEDERAL STUDENT AID’S ANNUAL REPORT ........................... 131
FY 2008                                                                                   i                                      Federal Student Aid Annual Report
Management’s Discussion and Analysis                 Mission and Organizational Structure



              Management’s Discussion and Analysis




    FY 2008                              -1-          Federal Student Aid Annual Report
Management’s Discussion and Analysis         Mission and Organizational Structure




    FY 2008                            -2-    Federal Student Aid Annual Report
Management’s Discussion and Analysis                                               Mission and Organizational Structure




              Mission and Organizational Structure

              Federal Student Aid, a principal office of the U.S. Department of Education (the
              Department), seeks to ensure that all eligible individuals can benefit from federally
              funded or federally guaranteed financial assistance for education beyond high school.
              We consistently champion the promise of postsecondary education to all Americans –
              and its value to our society. Federal Student Aid plays a central and essential role in
              supporting postsecondary education. We partner with postsecondary schools, financial
              institutions and other participants in the Title IV student financial assistance programs
              (Title IV programs) to deliver programs and services that help students finance their
              education beyond high school. Today, Federal Student Aid is responsible for a range of
              critical functions that include, among others:

                 x   Processing millions of student financial aid applications.
                 x   Disbursing billions of dollars in aid funds to students through schools.
                 x   Enforcing financial aid rules and regulations.
                 x   Educating students and families on the process of obtaining aid.
                 x   Servicing millions of student loan accounts.
                 x   Securing repayment from borrowers who have defaulted on their loans.
                 x   Operating information technology systems and tools that manage billions in
                     student aid dollars.

              This is a complex, multifaceted mission that calls on a range of staff skills and demands
              coordination by all levels of management. Designated a Performance-Based
              Organization (PBO) by Congress in 1998, Federal Student Aid emphasizes tangible
              results and efficient performance, as well as the continuous improvement of the
              processes and systems that support our mission.

              Federal Student Aid Organizational Structure

              Federal Student Aid currently operates under a functional organizational structure that
              aligns our organization closely with our strategic drivers, business objectives and
              mission goals. This structure reinforces a key business goal: efficient, effective and
              productive interaction with our many stakeholders. This community of stakeholders
              includes students and parents, schools, lenders, guaranty agencies and taxpayers, as
              well as other federal entities and the Department itself. The following graphic illustrates
              the current functional organizational structure of Federal Student Aid.




    FY 2008                                                -3-                       Federal Student Aid Annual Report
Management’s Discussion and Analysis                                           Mission and Organizational Structure




              A Chief Operating Officer, who is appointed to a five-year term by the Secretary of
              Education, leads Federal Student Aid. In October 2008, the Secretary appointed James
              F. Manning as the Acting Chief Operating Officer. In fiscal year (FY) 2008, the
              organization operated on an annual administrative budget of approximately $629 million.
              Our staff of 1,043 is augmented by contractors who provide outsourced business
              operations. This workforce is based out of Washington, D.C., with ten regional offices
              located throughout the country.




              As a federally designated PBO, Federal Student Aid operates under a congressional
              mandate to achieve concrete mission results as we improve efficiency in operations and
              manage and mitigate risks in Title IV portfolio performance. Federal Student Aid has
              focused on innovations for upgrading student aid delivery and servicing operations,
              vendor and contract management, budgeting and cost control as well as financial and
              operational management. Much of the resulting operational performance improvement
              stems from business process reengineering and large-scale technology integration.


    FY 2008                                              -4-                     Federal Student Aid Annual Report
Management’s Discussion and Analysis                                             Mission and Organizational Structure



              Federal Student Aid is responsible for helping students manage the costs of education
              beyond high school. This duty includes administering the federal student financial
              assistance programs authorized under Title IV of the Higher Education Act (HEA) of
              1965, as amended. The Title IV programs collectively represent the nation’s largest
              source of financial aid for postsecondary students. In the paragraphs that follow, each of
              the major Title IV programs that deliver aid to students and their families are described.

              In FY 2008, Federal Student Aid delivered or supported the delivery of approximately
              $96 billion in grant, work-study and loan assistance to almost 11 million postsecondary
              students and their families. These students attend approximately 6,200 active
              institutions of postsecondary education accredited by dozens of agencies. Many of
              these students receive loans from approximately 3,100 lenders with 35 agencies
              guaranteeing those loans.

              The Federal Pell Grant (Pell Grant) Program helps ensure financial access to
              postsecondary education by providing grant aid to low- and middle-income
              undergraduate students. The most need-based awards from the Department’s student
              aid programs, Pell Grants, vary according to the financial circumstances of students and
              their families. For the 2007–08 award year, the Department disbursed $14.6 billion in
              Pell Grants averaging approximately $2,643 to 5.5 million students. The maximum Pell
              Grant award was $4,310 for the 2007–08 award year. The maximum Pell Grant award
              increased to $4,731 for the 2008–09 award year.

              The Academic Competitiveness Grant (ACG) and National Science and
              Mathematics Access to Retain Talent (SMART) Grant Programs were created by the
              Higher Education Reconciliation Act of 2005 (HERA), signed into law in 2006. The ACG
              is for full-time undergraduates, who are U.S. citizens and are eligible for a Pell Grant.
              The student must have completed a rigorous high school program, as determined by the
              state or local education agency and as recognized by the Secretary of Education. First-
              year students may receive an ACG award up to $750, whereas second-year students
              may receive up to $1,300 if they have maintained a cumulative grade point average of at
              least 3.0. The ACG award became available in the 2006–07 school year for first-year
              students who graduated high school after January 1, 2006, and second-year students
              who graduated high school after January 1, 2005. The ACG award is in addition to the
              student’s Pell Grant award. For the 2007–08 academic year, $311 million in ACG
              awards were disbursed to approximately 408,000 students.

              The National SMART Grant Program provides up to $4,000 to third- and fourth-year
              undergraduates studying full-time and majoring in physical, life or computer sciences,
              mathematics, technology, engineering or in a foreign language critical to national
              security. The student must be a U.S. citizen and meet eligibility requirements for a Pell
              Grant. The student must maintain a cumulative grade point average of at least a 3.0 for
              coursework required for the major. The grant award is in addition to the student’s Pell
              Grant award. A student cannot receive more than one ACG or National SMART Grant
              award in each academic year for which they are eligible. For the 2007–08 academic
              year, $205 million in National SMART grants were disbursed to approximately 73,000
              students.

              The Teacher Education Assistance for College and Higher Education (TEACH)
              Grant, authorized by the College Cost Reduction and Access Act of 2007 (CCRAA),
    FY 2008                                               -5-                      Federal Student Aid Annual Report
Management’s Discussion and Analysis                                               Mission and Organizational Structure



              provides up to $4,000 per year to students agreeing to teach math, science, or other
              specialized subjects in a high-poverty school for at least four years within eight years of
              their graduation. If students fail to fulfill the service requirements, grants convert to
              Unsubsidized Stafford Loans, with interest accrued from the time of the grant award.
              This grant program began in the 2008–09 school year, starting July 1, 2008. In
              FY 2008, the Department disbursed approximately 800 grants for almost $1.4 million
              under TEACH.

              The Federal Supplemental Educational Opportunity Grant (FSEOG), the Federal
              Work-Study (FWS) and the Federal Perkins Loan Programs are three campus-based
              programs through which the Department provides funds directly to eligible institutions,
              enabling them to offer grants, employment and low-interest loans to students based on
              need. For the 2007–08 award year, approximately $3.3 billion was disbursed through
              approximately 2.6 million campus-based awards.

              There are two state grant programs. The Leveraging Educational Assistance
              Partnership (LEAP) Program, authorized by Section 415A of the HEA, makes federal
              funds available to assist states in providing student financial assistance programs for
              individuals with substantial financial need. The Special Leveraging Educational
              Assistance Partnership (SLEAP) Program was added to the LEAP Program in the
              1998 Amendments to the HEA (Section 415E). SLEAP makes federal funds available to
              states to cover a third of the cost of supplementing their respective LEAP programs,
              supplementing their LEAP Community Service Work-Study programs, and/or providing
              Merit and Academic Achievement or Critical Careers Scholarships to students with
              substantial financial need. For the 2007–08 academic year, approximately $165 million
              in LEAP grants was disbursed to approximately 165,000 students.

              In fulfilling our program responsibilities, Federal Student Aid directly manages or
              oversees almost $556 billion in outstanding loans—representing almost 95 million
              student loans to more than 30 million borrowers.

              The William D. Ford Federal Direct Loan (Direct Loan sm) Program sm lends funds
              directly to students and parents through participating schools. This program is funded
              by borrowings from the U.S. Department of the Treasury (Treasury), as well as an
              appropriation for subsidy costs. In FY 2008, the Department made $21.8 billion 1 in net
              loans to 2.9 million recipients.

              Under the Federal Family Education Loan (FFEL sm) Program sm, students and parents
              can obtain loans through private lenders. Loan guaranty agencies insure these funds,
              and they are, in turn, reinsured by the federal government.

              During FY 2008, Federal Student Aid supported the delivery of $52.9 billion 2 in net loans
              to 6.0 million FFEL recipients. In addition, Federal Student Aid made gross payments of
              approximately $8.7 billion to lenders for interest and special allowance subsidies, and
              $10.6 billion to guaranty agencies for reinsurance claims and fees paid to guaranty
              agencies for loan processing, issuance and account maintenance.


              1
                  Excludes consolidation loans of $5.8 billion.
              2
                  Excludes consolidation loans of $9.3 billion.
    FY 2008                                                       -6-                Federal Student Aid Annual Report
Management’s Discussion and Analysis                                       Performance Goals, Objectives and Results




              Performance Goals, Objectives and Results

              Since Federal Student Aid became a PBO in 1998, we have introduced many substantial
              and measurable improvements in how we plan and report operational and portfolio
              performance in administering the federal student financial assistance programs.

              Strategic Planning and Reporting

              Several key strategic drivers form the scope and content of Federal Student Aid’s long-
              term goals and objectives:

                 x   HEA Legislation.
                 x   Federal Financial Management Laws and Regulations.
                 x   Customer Needs.
                 x   PBO Legislation.
                 x   The Department’s Strategic Plan.
                 x   The President’s Management Agenda (PMA).
                 x   The Department’s Management Challenges.

              The foundation of our long-term strategic planning is Federal Student Aid’s five core
              strategic objectives. Taken collectively, these objectives provide the framework for
              continuous improvement at Federal Student Aid, guiding us in managing our programs
              more effectively and providing clear strategic direction to all of Federal Student Aid’s
              internal and external constituencies.

              Our core strategic objectives are to:

                 x   Integrate Federal Student Aid systems and provide new technology solutions.
                 x   Improve program integrity to facilitate access to postsecondary education, while
                     reducing vulnerability of the federal student financial assistance programs to
                     fraud, waste, abuse and mismanagement.
                 x   Reduce program administration costs.
                 x   Improve human capital management.
                 x   Improve products and services to provide better customer service.

              Federal Student Aid’s long-term planning is outlined in its Five-Year Plan, a statement of
              strategic direction providing long-term guidance. Beginning with the FY 2006 – FY 2010
              Five-Year Plan, Federal Student Aid established and documented strategic performance
              standards to measure the organization’s success in meeting the stated long-term
              objectives. The Five-Year Plan aligns with Federal Student Aid’s annual, tactical
              business-level planning, tracking and implementation processes including the Annual
              Performance Plan.

              Tactical Performance Planning and Reporting

              Federal Student Aid’s Annual Performance Plan establishes specific tactical initiatives to
              achieve organizational strategic objectives outlined in the Five-Year Plan. Timelines,
              milestones and status are maintained in the Annual Performance Plan and evaluated on
    FY 2008                                               -7-                      Federal Student Aid Annual Report
Management’s Discussion and Analysis                                          Performance Goals, Objectives and Results



              a monthly basis to ensure their alignment with current business needs, the allocation of
              resources and capital, policy considerations, and statutory and regulatory requirements.

              The Annual Report provides the mechanism for reporting the organization’s annual
              performance results, including the organization’s audited financial statements, a
              summary of the organization’s progress in meeting tactical goals established in the
              Annual Performance Plan and detailed results of the organization’s success in meeting
              performance standards established in the Five-Year Plan. These documents—the Five-
              Year Plan, the Annual Performance Plan and the Annual Report—form the foundation of
              Federal Student Aid’s strategic planning, tactical implementation and reporting
              processes.

              Performance Management

              Federal Student Aid’s performance management is a critical component in our strategic
              vision, as well as our day-to-day operations. Our performance management initiatives
              are wide-ranging and influence every aspect of our business. As a result, Federal
              Student Aid has developed a range of tools to monitor and report on organizational
              performance on a weekly, monthly and annual basis. (Refer to the “Tactical
              Performance Planning and Reporting” section above for discussion of annual
              performance planning and reporting.)

              Federal Student Aid produces weekly and monthly project planning and reporting
              activities detailing the scope, schedule, cost, quality and overall status of key initiatives.
              Federal Student Aid’s budget management process and our unit-cost model provide cost
              identification, control and management. Federal Student Aid also tracks and reports
              enterprise-wide operational, human capital and performance metrics through a series of
              dashboard tracking reports.

              Program and Business Operations

              In addition to annual planning and reporting, Federal Student Aid's performance
              management is supported by several teams throughout the enterprise that help us to
              meet our five core objectives. Each of the groups described below play an integral part
              in ensuring Federal Student Aid performs effectively and efficiently.

                     x   Project Management Office

                     The Project Management Office, established in FY 2003, is the central point of
                     oversight for identified projects. Through the Project Management Office,
                     project activities are integrated within Federal Student Aid, linking them to
                     strategic objectives, priorities and available resources. It supports project
                     managers by establishing enterprise project management standards of practice,
                     advising on systems integration strategy, sharing information across projects
                     during the full life cycle of the projects through our Enterprise Change
                     Management Group and providing relevant reports and data to management.




    FY 2008                                                 -8-                       Federal Student Aid Annual Report
Management’s Discussion and Analysis                                        Performance Goals, Objectives and Results



                     x   Enterprise Risk Management Group

                     In 2006, Federal Student Aid established an enterprise risk management (ERM)
                     function to provide strategic direction for assessing, monitoring and managing
                     risk across the organization. The Enterprise Risk Management Group (ERMG) is
                     responsible for developing ERM strategy and implementing an ERM program at
                     Federal Student Aid, which is among the first of its kind in the federal
                     government. Federal Student Aid's ERM strategy is comprised of a three-phased
                     approach for implementation of the ERM program. When fully implemented, this
                     program will provide for a more strategic and integrated view of risk, link risks to
                     strategic and business unit goals and objectives, and enable senior management
                     to better anticipate, analyze and manage risks inherent in the federal student
                     financial assistance programs and develop strategies to address these risks. As
                     of September 30, 2008, ERMG was working to complete remaining activities in
                     the second phase of Federal Student Aid’s ERM program and beginning
                     activities associated with the third and final phase.

                     The ERMG also leads or participates in special projects or strategic initiatives at
                     the request of senior management; provides risk management guidance, training,
                     and standards to Federal Student Aid employees; conducts internal reviews and
                     risk assessments; and performs audit tracking and resolution services on behalf
                     of the entire organization. In 2008, at the request of Federal Student Aid’s Acting
                     Chief Operating Officer, ERMG managed an effort to evaluate the effectiveness
                     of the organization's regional workforce structure relating to Program Compliance
                     and Business Operations. In addition, ERMG's Internal Review Division
                     performed various reviews, assessments and quality control reviews within
                     Federal Student Aid including: the testing of various financial and operational
                     controls associated with the organization's efforts to comply with the
                     requirements of Appendix A of the Office of Management and Budget (OMB)
                     Circular A-123, Management’s Responsibility for Internal Control, an evaluation
                     of Federal Student Aid’s processes and efforts to comply with the Freedom of
                     Information Act; a quality control review of the Financial Partners Program
                     Review Standards; and a review of Federal Student Aid's Lender-Identification
                     assignment process.

              This collection of processes and programs provide management with an effective
              infrastructure to manage the organization’s strategic and tactical planning and reporting
              functions. While we continually strive to improve the alignment between these planning,
              tracking and reporting functions, we believe they fulfill Federal Student Aid’s
              responsibility for planning and reporting of PBO activities and comply with Title I, Part D
              of the HEA, as amended.

              Key Performance Goals and Results

              This section provides a high-level overview of Federal Student Aid’s FY 2008
              performance objectives and results. The information provides a summary of our
              achievements and our progress in meeting the organization’s stated performance
              standards.



    FY 2008                                                -9-                      Federal Student Aid Annual Report
Management’s Discussion and Analysis                                      Performance Goals, Objectives and Results



              In the FY 2006 – 2010 Five-Year Plan, Federal Student Aid established and documented
              strategic performance standards to measure the organization’s success in meeting the
              stated long-term objectives. In that plan, Federal Student Aid generally published the
              2006 and the 2010 targets. Because Federal Student Aid has not updated that plan,
              interim year targets – while developed – were not generally published for FY 2007 or
              FY 2008. In this report, Federal Student Aid will report its progress primarily against
              FY 2008 targets that until now may not have been previously published. All targets
              referenced in this report – whether previously published or not – are aligned with the
              2010 targets and gauge Federal Student Aid’s incremental progress in achieving its
              objectives.

              During FY 2008, Federal Student Aid made significant progress in meeting our
              performance standards as outlined in the Five-Year Plan. For the most recent data
              available, Federal Student Aid met targets for thirteen key measures, did not meet
              targets for nine measures, discontinued one measure, and measured performance for
              one measure that did not have standards or targets established. The organization
              continues to analyze the impact of portfolio performance on the Cumulative Lifetime
              Default Rate (CLTDR) before identifying future performance targets as noted below.

              The actual results for each performance standard are presented in conjunction with each
              objective. The respective tables present whether the actual result met or failed to meet
              the target. In some cases, establishing a baseline is the target and is recognized as met
              if the baseline was established. Note: because performance standards were
              established in the FY 2006 – 2010 Five-Year Plan, historical data may not be available
              for some of the indicated standards because the Department did not collect the data
              prior to FY 2006.

              Please see the Annual Program Performance Report section of this report for applicable
              footnotes and more specific accomplishments, by objective.




    FY 2008                                             - 10 -                    Federal Student Aid Annual Report
Management’s Discussion and Analysis            Performance Goals, Objectives and Results




    FY 2008                            - 11 -           Federal Student Aid Annual Report
Management’s Discussion and Analysis                                        Performance Goals, Objectives and Results



              FY 2008 Accomplishments

              Federal Student Aid achieved many successes and faced unprecedented challenges in
              FY 2008. As a result, priorities identified in the beginning of the year were reevaluated
              later in the year due to budgetary and human resource constraints.

              Loan Purchase Programs

              In early 2008, the Department began to notice the early stages of what would become a
              global financial crisis that could have impacted the availability of student loans. In May
              2008 Congress passed and the President signed the “Ensuring Continued Access to
              Student Loans Act of 2008” (Pub. L. No. 110-227) (ECASLA). The legislation provided
              the Department with new authority to address concerns about capital liquidity in the
              student loan market.

              Based on the authority granted her by the ECASLA, the Secretary announced a
              comprehensive plan to ensure that all eligible students (and their parents) have access
              to federal student loans for the upcoming academic year. That plan included four key
              components:

                 1. An offer to purchase FFEL Program loans from lenders for the 2008–09
                    academic year and to offer lenders access to short-term liquidity;

                 2. A pledge to work with the student lending community on forward-looking
                    solutions to ensure the FFEL Program and other student lending programs serve
                    the best interests of students and taxpayers for years to come;

                 3. An enhanced lender-of-last-resort program designed to provide access to FFEL
                    Program loans for those students who face difficulty obtaining conventional
                    loans; and

                 4. A more efficient Direct Loan Program with increased capacity.

              This plan included the development of the Loan Purchase Programs, two new programs
              to purchase FFEL Program loans or interests in FFEL Program loans from lenders for
              the 2008–09 academic year. (This offer was made in part to ease anxieties within the
              credit markets by providing a federal purchase guarantee.)

                 1. Loan Participation Purchase Program*

                     Under the Loan Participation Purchase Program the Department offers to
                     purchase “participation interests” in pools of FFEL loans made for the 2008–09
                     academic year through September 30, 2009. By September 30, 2009, lenders
                     must either re-purchase those loans or sell them outright to the Department.

              *Refer to reference on next page.




    FY 2008                                              - 12 -                     Federal Student Aid Annual Report
Management’s Discussion and Analysis                                        Performance Goals, Objectives and Results




                 2. Loan Purchase Commitment Program*

                     Under the Loan Purchase Commitment Program the Department offers to
                     purchase eligible FFEL loans made for the 2008–09 academic year through
                     September 30, 2009.

                     * The President recently signed H.R. 6889, the extension of the ECASLA,
                     extending these programs through the 2009–10 award year. At the time this
                     report was prepared, details of the extension had not been completed.

              Federal Student Aid, working with colleagues from across the Department and the
              federal government, developed the processes and systems necessary to launch these
              programs by the mid-August 2008 peak loan period. These programs were launched in
              August 2008 and through September 30, 2008 funded approximately 40% of FFEL
              disbursements for the 2008–09 academic year totaling over $5 billion. In addition, as of
              September 30, 2008, the Department had purchased outright, through the Loan
              Purchase Commitment Program, over 20,000 loans valued at approximately $61 million.

              In response to disruptions in the credit markets, Federal Student Aid worked with
              colleagues from across the Department to design, develop and implement programs to
              ensure access to federal student loans for the 2008-2009 academic year. In addition to
              the development of the Loan Purchase Programs described above, Federal Student Aid
              worked with guaranty agencies to ensure that the necessary Lender-of-Last-Resort
              (LLR) processes and plans were in place should they be needed. Federal Student Aid
              significantly increased capacity in its Direct Loan Program and revised procedures to
              expedite, if necessary, a school’s Direct Loan application and eligibility determination.

              Achievements in Support of Federal Student Aid Strategic Objectives

              Objective 1: Integrate Federal Student Aid Systems and Provide New Technology
              Solutions

              In FY 2008, Federal Student Aid continued to focus on revising the approach to business
              application integration and development and operational integration of information
              technology assets. With the award of contracts to pre-qualified development vendors,
              Federal Student Aid is positioned to implement a management and procurement
              approach that increases competition, improves product quality, reduces risk, and allows
              for continual program evaluation. With the consolidation of over 90% of our information
              technology (IT) assets to a single location, Federal Student Aid is integrating support
              processes, procedures and plans in order to maximize our assets from an enterprise
              perspective, thereby standardizing methods, reducing risk and reducing costs. As we
              pursue integration initiatives in the future, we continue to reevaluate existing strategies,
              as necessary, and explore new and innovative approaches and technology to help us
              achieve our goals.




    FY 2008                                               - 13 -                    Federal Student Aid Annual Report
Management’s Discussion and Analysis                                         Performance Goals, Objectives and Results



              Objective 2: Improve Program Integrity to Facilitate Access to Postsecondary
              Education, while Reducing the Vulnerability of the Federal Student Financial
              Assistance Programs to Fraud, Waste, Abuse and Mismanagement

              Federal Student Aid improved its oversight of schools and lenders participating in the
              FFEL Program, implementing new regulations to strengthen the rules around prohibited
              inducements and borrower choice and conducting comprehensive reviews of program
              participants to ensure those rules were being followed. Working with the Office of
              Inspector General (OIG), Federal Student Aid required audits of those lenders
              requesting special allowance subsidies at the 9.5 percent floor rate in order to verify the
              eligibility of the underlying loans.

              In response to disruptions in the credit markets, Federal Student Aid worked with
              colleagues from across the Department to design, develop and implement programs to
              ensure access to federal student loans for the 2008-2009 academic year. In addition to
              the development of the Loan Purchase Programs described above, Federal Student Aid
              worked with guaranty agencies to ensure that the necessary Lender of Last Resort
              processes and plans were in place should they be needed. Federal Student Aid
              significantly increased capacity in its Direct Loan Program and revised procedures to
              expedite, if necessary, a school’s Direct Loan application and eligibility determination.

              Objective 3: Reduce Program Administrative Costs

              Federal Student Aid continues to reduce the cost of administering the Title IV programs
              through strong financial and operational management; the reengineering of overly
              complex business processes; and simplification of the business application and
              computing environment. In 2008, cost reduction strategies resulted in the net unit cost
              reduction of over $26 million from 2007 related to processing aid applications, origination
              and disbursement of Pell Grants and Direct Loans and the servicing of Direct Loans.
              Federal Student Aid continued to reduce production of the paper form of the Free
              Application for Federal Student Aid (FAFSA sm), increase the accuracy of submitted
              applications and reduced the cost to process applications through the growth of the use
              of the electronic FAFSA to over 95 percent of total application volume. In addition, with
              the completion of the transition to the Virtual Data Center, we expect significant future
              savings.

              Objective 4: Improve Human Capital Management

              In FY 2008, Federal Student Aid began to develop and implement a succession strategy
              to “build leaders at all levels.” The organization dedicated itself to recruiting young
              leaders and training the workforce in the fundamentals of our business and other
              mission-critical areas, building a strong bench of current and future leaders, and aligning
              staff in organization structures designed for high performance.

              Objective 5: Improve Products and Services to Provide Better Customer Service

              In response to the Secretary of Education's call for accessibility, affordability and
              accountability in higher education, Federal Student Aid was charged with implementing
              key recommendations to make the financial aid process easier for students and
              families. In FY 2008, Federal Student Aid began to implement application
    FY 2008                                               - 14 -                     Federal Student Aid Annual Report
Management’s Discussion and Analysis                                       Performance Goals, Objectives and Results



              enhancements to the FAFSA and Free Application for Federal Student Aid forecaster
              (FAFSA4caster sm) to meet the needs of America's diverse population. Additionally,
              Federal Student Aid played a critical role in the development and launch of
              http://www.college.gov, a Web site designed by and for students to motivate and inspire
              them to pursue a postsecondary education and equip them with the information they
              need to go to college. To increase greater awareness about the availability of student
              financial assistance, Federal Student Aid established a series of public service
              announcements via a nationwide campaign. Through the Federal Student Aid
              Ombudsman, we continued to provide a problem resolution resource for student
              borrowers.

              The CCRAA established the TEACH Grant Program, which Federal Student Aid
              implemented in FY 2008, providing up to $4,000 per year to students agreeing to teach
              math, science, or other specialized subjects in a high-poverty school. Federal Student
              Aid continues to explore new ways to ensure that access, information and resources
              about student financial assistance meet the needs of today's students.

              Performance Reporting Limitations and Difficulties

              The underlying assumptions in Federal Student Aid’s performance planning and
              reporting processes are based on current budgetary, operational, and policy
              considerations. External events beyond our control can impact these underlying
              assumptions, potentially impacting the organization’s ability to plan, meet and report
              upon its objectives. As necessary, Federal Student Aid reevaluates and revises its
              performance planning and reporting processes to adapt to these external factors. This
              was especially evident in FY 2008 with the Credit Management initiatives that were
              implemented. In three months, Federal Student Aid, in collaboration with the agencies
              from across the government, developed and implemented two programs, the Loan
              Purchase Commitment Program and the Loan Participation Purchase Program, to
              provide financing to FFEL lenders to ensure they could meet the needs of students and
              families for the 2008–09 academic year. More information on the two programs can be
              found at http://www.federalstudentaid.ed.gov/ffelp.

              Data Validation and Verification

              The Federal Student Aid Annual Report is published six weeks after the end of the fiscal
              year. Since a wide variety of data are submitted by diverse systems and governed by
              agreements with state guaranty agencies, lenders, and servicers as well as grant and
              loan recipients, it is not possible in all cases to report complete data for the reporting
              period. In instances where fiscal year end data are not available, the most recently
              available data are presented. Effective decision making requires complete, accurate,
              timely and reliable data. Funding decisions are made and management actions are
              taken based on performance information. Reliable information is a prerequisite for
              effective management. In addition to performance data received from our FFEL and
              Direct Loan program participants, we deal with financial data. Our data-quality
              processes for financial data are reflected in our financial statements and accompanying
              notes.



    FY 2008                                              - 15 -                    Federal Student Aid Annual Report
Management’s Discussion and Analysis                                      Performance Goals, Objectives and Results



              Performance Data

              Federal Student Aid develops and uses such data for various purposes. Facing
              opportunities provided by the budget and performance management processes and
              activity-based management, Federal Student Aid recognizes the need to improve the
              accuracy, reliability and completeness of our data. Although immediate connections
              between specific performance and funding levels are sometimes challenging to make,
              Federal Student Aid is improving systems to yield reliable performance data to make
              informed budget and policy decisions. These systems will enhance our budget process
              and increase the accuracy and reliability of the information we receive from our FFEL
              and Direct Loan program participants.

              Federal Student Aid is engaged in a long-term effort to improve data quality by
              integrating its processes, data and systems. In 2007, Federal Student Aid formally
              established an Enterprise Data Management program to better support business
              objectives and to emphasize data as an enterprise asset. The goal of the Enterprise
              Data Management program is to consistently define data and make standardized data
              available across the enterprise by providing information services and data technology
              expertise to business owners, project managers and architects.

              OMB Circular A-11, Part 6, section 230.5, Assessing the Completeness and Reliability of
              Performance Data, requires each agency to design a procedure for verifying and
              validating data that it makes public in its annual performance plans and reports.
              Additionally, the Government Performance and Results Act of 1993 describes the means
              to be used to verify and validate measured values. Finally, the Reports Consolidation
              Act of 2000 requires that the transmittal letter included in annual performance reports
              contain an assessment by the agency head of the completeness and reliability of the
              performance data included in the reports.

              Federal Student Aid developed a matrix as guidance for data providers who have the
              responsibility for reporting data in performance measures to evaluate and provide issues
              of data integrity and credibility. The matrix provides a framework for validating and
              verifying performance data before it is collected and reported. The matrix is being used
              for select projects in FY 2008 and is used to evaluate data prior to publication.

              The data validation criteria require that:

                 x   The goal and measure are appropriate to the mission of the organization, and
                     measured performance has a direct relation to the goal.

                 x   The goal and measure are realistic and measurable, achievable in the time frame
                     established, and challenging in their targets.

                 x   The goal and measure are understandable to the lay person, language is
                     unambiguous, and terminology is adequately defined.

                 x   The goal and measure are used in decision making about the effectiveness of
                     the program and its benefit to the public.


    FY 2008                                                - 16 -                 Federal Student Aid Annual Report
Management’s Discussion and Analysis                                          Performance Goals, Objectives and Results



              Federal Student Aid’s objectives to integrate the aid delivery system, improve program
              integrity, reduce costs and improve services come directly from the PBO enabling
              legislation and are consistent with the core mission. In addition, these objectives
              balance the needs of the students who require financial assistance to continue their
              education and Title IV lending and educational institutions with the taxpayer who
              provides the resources. To effectively support the mission and achieve success, an
              additional objective related to human capital has been added to ensure that Federal
              Student Aid staff has the most up-to-date skill sets. These objectives were developed
              initially in 2003 and then augmented with the appropriate performance metrics and
              targets in 2005 for inclusion in the 2006 Five-Year Plan.

              The metrics employed to measure success are directly related to each of the objectives.
              As an example, under the improvement of program integrity objective, metrics measure
              success in increasing accountability and reducing vulnerabilities related to fraud, waste,
              abuse and mismanagement. The metrics measure integrity from all facets of program
              delivery from ensuring that all the dollars awarded to students, either directly from
              Federal Student Aid or through participating institutions, are accounted for properly, to
              limiting loan defaults, to collecting a sizeable portion of loans that default despite all the
              best efforts to minimize them. Targets for each of the metrics have been set at
              challenging, but realistic levels that are achievable within the time horizon.

              We believe that the goals for each objective and the associated performance metrics
              and targets are understandable however there are opportunities for improving the
              explanation of these relationships in future editions of our performance plans. A subset
              of the metrics and their outcomes have been used in the 2008 Program Assessment
              Rating Tool evaluation of the Student Aid Administration Account, the main funding
              source for Federal Student Aid activities.




    FY 2008                                                - 17 -                      Federal Student Aid Annual Report
Management’s Discussion and Analysis                              Analysis of Federal Student Aid’s Financial Statements




              Analysis of Federal Student Aid’s Financial Statements

              Federal Student Aid is committed to providing sound management, financial systems
              and controls to ensure that students receive aid and repay loans according to applicable
              laws and regulations. Federal Student Aid’s financial statements are prepared in
              accordance with established federal accounting standards. The financial statements are
              subject to an annual independent audit to ensure that they are reliable and fairly present
              our financial position.

              In FY 2008, Federal Student Aid achieved an unqualified audit opinion on its financial
              statements. The Independent Auditor’s Report cited no material weaknesses in internal
              controls.

              For FY 2008 and FY 2007, the Balance Sheet, Statement of Net Cost, and Statement of
              Changes in Net Position were prepared on a consolidated basis, and the Statement of
              Budgetary Resources was prepared on a combined basis as required by OMB Circular
              A-136, Financial Reporting Requirements. The Report of Independent Auditors (opinion)
              on these statements and accompanying Reports on Internal Control and Compliance
              with Laws and Regulations is included in this report.

              Appropriations are available to cover the subsidy cost of each loan program and
              administrative expenses. Subsidy expense covers the difference between the net
              present value of expected future cash flows and the face value of each loan portfolio.
              Appropriation authority is available as needed on a permanent basis to finance costs
              resulting from loans guaranteed in the years before FY 1992. The Pell Grant Program
              receives appropriations to cover actual grant disbursements.

              A comparison between significant line items reported in Federal Student Aid’s FY 2008
              and 2007 September financial statements is presented in the following table.




    FY 2008                                              - 18 -                      Federal Student Aid Annual Report
Management’s Discussion and Analysis                               Analysis of Federal Student Aid’s Financial Statements



              The Balance Sheet
              Composition of Federal Student Aid Assets

              The Consolidated Balance Sheet shows Federal Student Aid had total assets of $193.3
              billion, as of September 30, 2008. This represents an increase of approximately $18.2
              billion over the previous year’s total assets of $175.1 billion, as of September 30, 2007.
              The difference resulted primarily due to an increase in Credit Program Receivables and
              net increases and decreases to the various programs Fund Balance with Treasury.




              Fund Balance with Treasury decreased by $1.2 billion dollars from FY 2007 to FY 2008.
              The FFEL fund balance decreased as a result of increased payments to lenders net of
              cash borrowed to support the FFEL Loan Participation Purchase Program. The
              decrease in FFEL Fund Balance with Treasury was largely offset by increased fund
              balances for Direct Loans to support increased loan volume and for increased grant
              activity. The Treasury processes Federal Student Aid’s cash receipts, such as
              appropriation warrants, that provide cash for operations. Treasury also processes loan
              payment collections received from students. The Department of the Treasury also
              processes loan and grant disbursements and operating expenditures on behalf of
              Federal Student Aid.

              Credit Program Receivables, net of subsidy allowance, increased by $18.8 billion over
              the previous year’s total as of September 30, 2008. Credit Program Receivables are
              comprised primarily of principal and interest amounts owed by students for Direct Loans,
              TEACH Grants, FFEL loans under the Loan Participation Purchase and Loan Purchase
              Commitment Programs and defaulted guaranteed loans under the FFEL Program. As of
              September 30, 2008 the balance was $134.5 billion in Credit Program Receivables –
              the majority of which were for Direct Loan Program receivables, the Loan Participation
              Program which began disbursing funds in late FY 2008, and defaulted FFEL loans.

              Receivables, net of the allowance for subsidy, increased primarily due to two factors. As
              a result of the liquidity crisis in the financial markets, there has been a large influx of
              Direct Loan schools and the implementation of the Loan Participation Purchase Program
              – resulting in an increase of new loan originations. In addition, loan consolidation activity
              from the Direct Loan portfolio by the FFEL community has decreased significantly. A
              corresponding reduction in subsidy for the consolidated loans increased the net
    FY 2008                                               - 19 -                      Federal Student Aid Annual Report
Management’s Discussion and Analysis                                Analysis of Federal Student Aid’s Financial Statements



              Receivable balance. Subsidy allowance reduces the face value of the portfolio to the
              expected actual collections, at present value.

              Receivables of defaulted FFEL loans, net of allowance for subsidy, increased as a result
              of continued growth in the average amount of loans, growth in online campus schools,
              economic hardship and the expiration of Exceptional Performer designation, and the
              expiration of Voluntary Flexible Agreements. Receivables of defaulted Direct Loans, net
              of allowance for subsidy, increased as a result of continued growth in the average
              amount of loans, growth in online campus schools, and economic hardship.

              Composition of Federal Student Aid Liabilities

              Federal Student Aid had total liabilities, as of September 30, 2008, of $186.1 billion, an
              increase of $22.9 billion over the previous year’s total liabilities. The difference resulted
              primarily from an increase in Debt due to Treasury and Other Intragovernmental
              Liabilities offset by a decrease in the Liabilities for Loan Guarantees.

              Debt increased as a result of increased Direct Loan Program volume and new debt for
              the Loan Participation Purchase Program. Other Intragovernmental Liabilities increased
              as a result of the downward FFEL re-estimates and modifications of subsidy. Net
              subsidy-related transactions resulted in a reduction of the Liability for Loan Guarantees.

                                    Composition of Federal Student Aid Liabilities
                                             as of September 30, 2008


                                                                     Remaining Liabilities
                                                                            4%
                          Liabilities for Loan
                             Guarantees
                                   23%



                                                                                    Treasury Debt
                                                                                        69%
                         Other Intra-
                        Governmental
                            4%




    FY 2008                                                - 20 -                      Federal Student Aid Annual Report
Management’s Discussion and Analysis                                     Analysis of Federal Student Aid’s Financial Statements



              Statement of Net Cost

              Federal Student Aid had total net costs of $19.8 billion for FY 2008, an increase of $0.3
              billion over the previous year’s total net cost of $19.5 billion. This included a significant
              increase in net costs for the Direct Loan and grants programs, netted against a decrease
              in the FFEL Programs. The gross costs are primarily composed of subsidy expenses
              from the re-estimates of expense, loan modifications, and increased direct loan volume
              in response to loan liquidity concerns, as well as the funding of grants. Subsidy
              expenses are the estimated costs of funding the direct loans and loan guarantees. The
              amount of the subsidy expense equals the present value of estimated cash outflows
              over the life of the loans minus the present value of estimated cash inflows.


                           Composition of Federal Student Aid Net Cost for the
                                    Year Ended September 30, 2008
                                             (Dollars In Millions)
                                                                        Grant Programs
                    $20,000
                                                                           $17,410
                    $15,000

                    $10,000                         Direct Loans
                                                       $5,224
                     $5,000         FFEL                                                 Other Programs
                                   -$3,605                                                    $730
                         $0

                    -$5,000



              Statement of Changes in Net Position

              Federal Student Aid’s net position for the year ended September 30, 2008 was $7.2
              billion, a decrease of $4.6 billion over the previous year’s total net position of $11.8
              billion. The difference is primarily due to reduced net subsidy transactions.

              Statement of Budgetary Resources

              The Statement of Budgetary Resources compares the budgetary resources provided
              with the status or execution of those resources and details the composition of the
              resources and the status of the resources and shows the amount of net outlays. This
              statement shows that Federal Student Aid had $148.5 billion in combined budgetary
              resources, of which $28.6 billion remained unobligated and not available.

              Federal Student Aid had total net outlays for FY 2008 of $45.7 billion. There was an
              increase in total net outlays of $15.4 billion comparing September 2008 to September
              2007. Net Outlays increased primarily due to Direct Loans, with lesser increases for
              FFEL and the grant programs.



    FY 2008                                                    - 21 -                       Federal Student Aid Annual Report
Management’s Discussion and Analysis                            Analysis of Federal Student Aid’s Financial Statements



              Gross outlays for Federal Student Aid increased $12.9 billion comparing September
              2008 to September 2007 due to increased originations in Direct and Loan Participation
              Purchase programs and increased grant expenditures. Offsetting receipts decreased as
              a result of lower collections from the consolidations of Direct Loans by FFEL loan
              holders and net FFEL subsidy re-estimates and modifications.




    FY 2008                                            - 22 -                      Federal Student Aid Annual Report
                                                                                             Analysis of Federal Student Aid’s Systems,
Management’s Discussion and Analysis
                                                                                             Controls and Legal Compliance




              Analysis of Federal Student Aid’s Systems, Controls and Legal
              Compliance

              Internal control is a major part of managing an organization. It comprises the plans,
              methods and procedures used to meet missions, goals and objectives and, in doing so,
              supports performance-based management. Internal control also serves as the first line
              of defense in safeguarding assets and preventing and detecting errors and fraud. In
              short, internal control, which is synonymous with management control, helps
              government program managers achieve desired results through effective stewardship of
              public resources.

              Internal control should provide reasonable assurance that the objectives of the agency
              are being achieved in the following categories:

                  x    Effectiveness and efficiency of operations, including the use of the entity’s
                       resources.
                  x    Reliability of financial reporting, including reports on budget execution, financial
                       statements, and other reports for internal and external use.
                  x    Compliance with applicable laws and regulations. 3

              Federal Student Aid management is responsible for establishing and maintaining
              effective internal control and financial management systems that meet the objectives of
              Federal Managers’ Financial Integrity Act of 1982 (FMFIA). Federal Student Aid
              conducted its assessment of the effectiveness of internal control over the effectiveness
              and efficiency of its operations and compliance with applicable laws and regulations in
              accordance with OMB Circular A-123, Management’s Responsibility for Internal Control.
              Based on the results of this evaluation, Federal Student Aid reported to the
              Department’s management that its internal controls over the effectiveness and efficiency
              of its operations and compliance with applicable laws and regulations, as of September
              30, 2008, were operating effectively.

              In addition, Federal Student Aid, working with the Department’s management, conducted
              its current year assessment of the effectiveness of internal control over financial
              reporting, which includes safeguarding of assets and compliance with applicable laws
              and regulations, in accordance with the requirements of Appendix A of OMB Circular
              A-123, Management’s Responsibility for Internal Control. The scope of Federal Student
              Aid’s assessment included the following processes that impact the Department’s
              financial statements:



              3
                Government Accountability Office (GAO) Standards for Internal Control in the Federal Government, GAO/AIMD-00-
              21.3.1, November 1999, p. 4-5




    FY 2008                                                          - 23 -                            Federal Student Aid Annual Report
                                                                             Analysis of Federal Student Aid’s Systems,
Management’s Discussion and Analysis
                                                                             Controls and Legal Compliance




                 x   Direct Loan operations.
                 x   Direct Loan servicing.
                 x   Direct Loan consolidations.
                 x   Conditional Disability Discharge.
                 x   Debt collection.
                 x   Grant operations (Pell, Campus-based, ACG, and SMART).
                 x   Financial partner invoicing, services, and oversight.
                 x   Determining student and institutional eligibility.
                 x   Procurement management.
                 x   Funds control management.
                 x   Human resources management.
                 x   Financial closing and reporting.
                 x   General computer controls related to various agency systems.

              Based on the results of this evaluation, Federal Student Aid provided reasonable
              assurance to the Department’s management that its internal control over financial
              reporting as of June 30, 2008 was operating effectively and no material weaknesses
              were found in the design or operation of the internal control over financial reporting.

              In participating in the Department’s successful implementation of OMB Circular A-123,
              Appendix A, requirements, Federal Student Aid continues to build upon its internal
              control framework that will be used in continuing efforts to monitor and improve internal
              controls.

              Please refer to the Department’s Performance and Accountability Report (PAR) for
              information related to the Department’s compliance with the Federal Financial
              Management Improvement Act of 1996.




    FY 2008                                               - 24 -                    Federal Student Aid Annual Report
Management’s Discussion and Analysis                               Possible Future Effects of Existing Events and Conditions




              Possible Future Effects of Existing Events and Conditions

              Federal Student Aid’s ability to fully implement the initiatives described in this report is
              impacted by external factors, including budget and policy considerations and
              unanticipated events. Federal Student Aid works closely with the Department and OMB
              to develop our administrative budget and ensure appropriate resources are allocated to
              support our strategic objectives. Legislative and/or regulatory action may result in policy,
              resources or program changes requiring Federal Student Aid to revisit our current
              strategic plan. Specifically, the Higher Education Opportunity Act of 2008 was passed in
              the current fiscal year. As a result, Federal Student Aid will revise both our Annual
              Performance Plan and the Five-Year Plan to meet the new legislative and/or regulatory
              requirements.

              Other external factors could also affect our ability to achieve the organization's
              objectives. For example, in 2007, deteriorating credit markets began pressuring lender
              margins. As a result, in 2008, some lenders chose to scale back their participation in the
              FFEL Program or exit the program altogether. In May 2008 Congress passed and the
              President signed the ECASLA. The legislation provides the Department with new
              authority to address concerns about capital liquidity in the student loan market. Based
              on the authority granted her by the ECASLA, the Secretary announced a comprehensive
              plan to ensure that all eligible students and their parents have access to federal student
              loans for the upcoming academic year. In three months, Federal Student Aid, in
              collaboration with the agencies from across the government, developed and
              implemented two programs, the Loan Purchase Commitment Program and the Loan
              Participation Purchase Program, to provide financing to FFEL lenders to ensure they
              could meet the needs of students and families for the 2008–09 academic year. More
              information on the two programs can be found at
              http://www.federalstudentaid.ed.gov/ffelp. We are unable to anticipate the full impact of
              Federal Student Aid’s ability to achieve its strategic objectives included in the Five-Year
              Plan as a result of a long-term commitment to other similar unforeseen events.




    FY 2008                                               - 25 -                         Federal Student Aid Annual Report
Management’s Discussion and Analysis                                                Limitations of Financial Statements




              Limitations of Financial Statements

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

              While the statements have been prepared from the books and records of Federal
              Student Aid in accordance with generally accepted accounting principles 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.




    FY 2008                                               - 26 -                    Federal Student Aid Annual Report
Annual Program Performance Report                     Annual Program Performance


              Annual Program Performance Report




    FY 2008                             - 27 -    Federal Student Aid Annual Report
Annual Program Performance Report                Annual Program Performance




    FY 2008                         - 28 -   Federal Student Aid Annual Report
Annual Program Performance Report                                                      Annual Program Performance



              Annual Program Performance

              During FY 2008, Federal Student Aid achieved significant accomplishments, as well as
              made progress in meeting our performance standards as outlined in the Five-Year Plan.
              The information presented herein provides details of our achievements, by objective.
              Under each objective below, we have identified the corresponding Performance
              Standard, as well as the organization’s progress in meeting the stated target. A matrix
              providing information on the data quality and analysis of progress is also presented
              under each objective. Unless otherwise noted, these performance standards and their
              respective ratings are based on criteria established by Federal Student Aid.


                               Explanation of Documentation for Performance Results

              Tables.
              Provide trend data including the latest available reported data. The Performance
              Column shows the relationship between the new actual values and targets as follows:

                 o Target Met = Performance results met or exceeded the target.
                 o Target Not met = Performance results fell short of the target.
                 o Improved = Performance results improved over prior year but fell short of the
                     target.
                 o PM = Measured performance, standards and/or targets not established.
                 o T = Measure replaced or discontinued.
                 o NA = Data is not available.

              Analysis of Progress.
              Provides insight into Federal Student Aid’s progress.

              Data Quality.
              Incorporates information such as the universe included in the measure.

              Target Context.
              Explains the parameters or rationale for targets.



              Objective 1: Integrate Federal Student Aid systems and provide new
              technology solutions.

              Federal Student Aid will continue to improve efficiency and productivity and increase the
              usability of our systems. Federal Student Aid will continue to provide appropriate and
              integrated technology solutions that enable ongoing improvements for a more efficient
              and cost-effective delivery of the student financial assistance programs. The
              organization will take advantage of new technologies and continue to reassess existing
              systems to improve application processing, customer service, productivity and efficiency.

              In FY 2008, Federal Student Aid continued to focus on revising its business application
              integration approach and development and operational integration of information
    FY 2008                                              - 29 -                   Federal Student Aid Annual Report
Annual Program Performance Report                                                        Annual Program Performance


              technology assets. With the award of contracts to pre-qualified development vendors,
              Federal Student Aid is positioned to implement a management and procurement
              approach that increases competition, improves product quality, reduces risk, and allows
              for continual program evaluation. With the consolidation of over 90% of our IT assets to
              a single location, Federal Student Aid is integrating support processes, procedures and
              plans in order to maximize our assets from an enterprise perspective, thereby
              standardizing methods, reducing risk and reducing costs. As we pursue integration
              initiatives in the future, we continue to reevaluate existing strategies, as necessary, and
              explore new and innovative approaches and technology to help us achieve our goals.

              In FY 2008, Federal Student Aid successfully:

                 x   Completed the transition of the Virtual Data Center from two legacy contractors
                     and physical locations to a single vendor and location.
                 x   Established the first component of the new procurement and management
                     approach to business application development with the award of the Enterprise
                     Development Support Services contracts to five development providers.
                 x   Deployed new enterprise architectural components supporting Service Oriented
                     Architecture, including the Enterprise Service Bus and the Enterprise Portal
                     Infrastructure.
                 x   Implemented the “Employee View”, the first application using the portal
                     infrastructure and the Security Architecture.
                 x   Baselined a sequencing and deployment plan for the procurement, development
                     and deployment approach to achieve the objectives of the Target State Vision.
                 x   Developed security functions and processes to enhance the security posture of
                     Federal Student Aid systems and the data it houses including identification of a
                     “Two Factor Authentication” solution, implementation of a “virtual keyboard” and
                     identification of an “active confirmation” process for validating customer “super
                     users” of Federal Student Aid systems.
                 x   Launched http://www.college.gov, a Web product aimed at providing a single
                     source of inspiration and information for students and their support network about
                     the possibility of college.
                 x   Integrated four new applications with the Security Architecture infrastructure.
                 x   Developed a data integration service for use across the enterprise to increase
                     data quality and standardization.
                 x   Integrated an additional application into the e-authentication infrastructure.




    FY 2008                                               - 30 -                    Federal Student Aid Annual Report
Annual Program Performance Report                                                                                 Annual Program Performance


              Performance Standards and Results
              The following performance standards were established to measure Federal Student
              Aid’s success in achieving our key integration initiatives. Success is predicated on the
              timely completion of all scheduled project deliverables in the design, development and
              implementation phases of the four main systems integration initiatives as described
              below.

              Objective 1 Performance Metrics and Results




                                                  Objective 1 Performance Metrics and Results
              Data Quality: Data was achieved upon the completion of the prescribed phases of the corresponding projects.
              Analysis of Progress: As we reported in the FY 2007 Annual Report, while the objectives of several of Federal Student Aid’s
              integration projects will remain the same, the development and procurement strategies for them will change. Federal Student
              Aid discovered that large contracts requiring multiple business capabilities, and supporting a complex and multi-faceted
              business process, do not provide Federal Student Aid the best solution providers from the marketplace. In addition, the lack of
              post-award competition led to price, quality and innovation issues preventing Federal Student Aid from being able to quickly
              transition services, potentially putting our business at risk. It is important to reiterate that while Federal Student Aid has
              reevaluated components of its strategy to achieve its integration efforts, its Target State Vision remains the same and progress
              continues on our multi-year sequencing plan by focusing on major initiatives and activities that bring us closer to that vision.
              Target Context: In the FY 2006 – 2010 Five-Year Plan, Federal Student Aid established and documented strategic
              performance standards to measure the organization’s success in meeting the stated long-term objectives. In that plan, Federal
              Student Aid generally published the 2006 and the 2010 targets. Because Federal Student Aid has not updated that plan, interim
              year targets – while developed – were not generally published for FY 2007 or FY 2008. In this report, Federal Student Aid will
              report its progress primarily against FY 2008 targets that until now may not have been previously published. All targets
              referenced in this report – whether previously published or not – are aligned with the 2010 targets and gauge Federal Student
              Aid’s incremental progress in achieving its objectives.
              * Data is not available because 1) the Department was not collecting this data during the fiscal year indicated, 2) the
              project did not exist or 3) the performance standard had not been established.



              Objective 2: Improve program integrity to facilitate access to
              postsecondary education, while reducing vulnerability of the federal
              student financial assistance programs to fraud, waste, abuse and
              mismanagement.

              Federal Student Aid continues to ensure that student aid under the Title IV programs is
              delivered directly by Federal Student Aid and through school, lender and guarantor
              participants in a manner that reduces the vulnerability of these programs to fraud, waste,
              abuse and mismanagement. Federal Student Aid is continually working to improve
    FY 2008                                                             - 31 -                             Federal Student Aid Annual Report
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              program integrity and is committed to continued success in the management of the Title
              IV programs.

              In FY 2008, Federal Student Aid improved its oversight of schools and lenders
              participating in the Federal Family Education Loan Program, implementing new
              regulations to strengthen the rules around prohibited inducements and borrower choice
              and conducting comprehensive reviews of program participants to ensure those rules
              were being followed. Working with the OIG, Federal Student Aid required audits of
              those lenders requesting special allowance subsidies at the 9.5 percent floor rate in
              order to verify the eligibility of the underlying loans.

              In response to disruptions in the credit markets, Federal Student Aid worked with
              colleagues from across the Department to design, develop and implement programs to
              ensure access to federal student loans for the 2008-2009 academic year. In addition to
              the development of the Loan Purchase Programs described above, Federal Student Aid
              worked with guaranty agencies to ensure that the necessary Lender of Last Resort
              processes and plans were in place should they be needed. Federal Student Aid
              significantly increased capacity in its Direct Loan Program and revised procedures to
              expedite, if necessary, a school’s Direct Loan application and eligibility determination.

              In FY 2008, Federal Student Aid successfully:

                 x   Processed 99% of school compliance audits, 99% of school financial statements,
                     and 95% of financial institution audits on time.
                 x   Expanded monitoring of the financial performance of publicly-traded schools and
                     large school groups under common ownership.
                 x   Conducted targeted oversight of schools and lenders related to lender
                     inducements and borrower choice.
                 x   Completed Phase II of the school Program Review Standards as well as the
                     Program Review Standards for financial institutions.
                 x   Signed interagency agreement with the Federal Bureau of Investigation to
                     conduct joint campus security site visits to increase monitoring of this area.
                 x   Completed risk assessments of both school and financial institutions.
                 x   Reduced the FY 2007 FMFIA Financial Partner oversight material weakness to a
                     significant deficiency in FY 2008.
                 x   Implemented provisions of the ECASLA in FY 2008 to ensure liquidity in financial
                     markets so that eligible students and parents have access to federal student
                     loans for the 2008–09 academic year.
                 x   Achieved a “Green” progress and status score on the September 30, 2008 PMA
                     scorecards for Financial Performance, and a “Yellow” progress and status score
                     for Eliminating Improper Payments and a “Green” progress and “Yellow” status
                     score for Improved Credit Management. For more detailed information on
                     Eliminating Improper Payments, please refer to “Other Accompanying
                     Information” in the Department’s PAR.
                 x   Developed and published the CLDTR for the federal student loan portfolio for
                     FY 2002–2006.
                 x   Achieved a continued low rate of 5.2 percent for the FY 2006 CDR.
                 x   Achieved Direct Loan and FFEL default recovery goals for FY 2008.
                 x   Achieved unqualified financial statement audit opinion for FY 2008.

    FY 2008                                              - 32 -                    Federal Student Aid Annual Report
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                   x     Continued to conform to OMB Circular A-123, Appendix A, to demonstrate sound
                         financial management controls. In addition to complying with OMB requirements,
                         Federal Student Aid has established an internal control framework to be
                         leveraged for continuous internal control improvement.

              Performance Standards and Results
              The following performance standards were established to gauge Federal Student Aid’s
              success in improving program integrity, while reducing the vulnerability of the Title IV
              programs to fraud, waste and abuse. Our success relies on maintaining “green” status
              on the PMA, continuing to achieve low default rates and increasing the recovery rate.

              Objective 2 Performance Metrics and Results




              Data Quality: Indicates what year the data was reported. For example, during FY 2007, Federal Student Aid calculated
              the FY 2005 CDR.
              Analysis of Progress: Federal Student Aid continues to make progress in improving program integrity as defined by the
              identified performance standards above. In FY 2008, the organization met each target. In FY 2009, we anticipate
              reviewing the stated performance standards when we draft the next Five-Year Plan to better align identified performance
              standards and organizational achievements
              Target Context: In the FY 2006 – 2010 Five-Year Plan, Federal Student Aid established and documented strategic
              performance standards to measure the organization’s success in meeting the stated long-term objectives. In that plan,
              Federal Student Aid generally published the 2006 and the 2010 targets. Because Federal Student Aid has not updated
              that plan, interim year targets – while developed – were not generally published for FY 2007 or FY 2008. In this report,
              Federal Student Aid will report its progress primarily against FY 2008 targets that until now may not have been previously
              published. All targets referenced in this report – whether previously published or not – are aligned with the 2010 targets
              and gauge Federal Student Aid’s incremental progress in achieving its objectives.

              Refer to next page for notations “*”, “**”, “***”, and “****”.




    FY 2008                                                                    - 33 -                       Federal Student Aid Annual Report
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              * Data is not available because 1) the Department was not collecting this data during the fiscal year indicated, 2) the
              project did not exist or 3) the performance standard had not been established.
              **Indicates what year the data was reported. For example, during FY 2007, Federal Student Aid calculated the FY 2005
              CDR.
              ***See http://www.results.gov for definitions, trend and PMA scorecard support for both financial management and
              improper payments. Results reflect OMB Scorecard as of September 30, 2008.
              ****The CLTDR was first published in FY 2006. Since that time, Federal Student Aid has produced and published the FY
              2005, FY 2006 and FY 2007 calculations for the relevant preceding five-year periods, respectively. Federal Student Aid
              will continue to analyze the impact of portfolio performance on the CLTDR before identifying future performance targets.


              Objective 3: Reduce program administration costs.

              Federal Student Aid continued to focus on reducing costs through efficiency and
              productivity gains that can be achieved throughout the organization. Business process
              reengineering has resulted in an acquisition strategy that better aligns business
              objectives with procurement and we will continue to use activity-based costing to better
              manage costs and formulate budgets. Migrating more of our customers from paper to
              electronic processes also results in additional savings.

              In FY 2008, cost reduction strategies resulted in the net unit cost reduction of over $26
              million, when compared to FY 2007, related to the processing of aid applications, the
              origination and disbursement of Pell Grants and Direct Loans and the servicing of Direct
              Loans. Federal Student Aid continued to reduce production of paper FAFSAs, increase
              the accuracy of submitted applications and reduce the cost to process applications as
              adoption of the electronic FAFSA grew to over 95 percent of total application volume. In
              addition, with the completion of the transition to the Virtual Data Center, we expect
              significant future savings.

              In FY 2008, Federal Student Aid successfully:

                   x    Continued to expand the Activity Based Costing Model to facilitate reduction of
                        administrative costs, identify process improvement opportunities and assist in
                        budget formulation.
                   x    Improved financial management of Federal Student Aid contracts through more
                        precise analysis of contract costs, leading to more accurate tracking and
                        allocation of budgets.
                   x    Implemented strategic changes in how we procure services through award of
                        multiple vendor developmental contracts and increased small-business
                        participation in Federal Student Aid procurement.
                   x    Populated the Federal Student Aid cost library and used data in the library to
                        improve cost estimation, budget planning, fiscal management, and contract
                        negotiations.
                   x    Reduced bulk distribution of paper FAFSAs by providing paper FAFSAs to high
                        schools and colleges only upon request.




    FY 2008                                                             - 34 -                             Federal Student Aid Annual Report
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              Performance Standards and Results
              Performance standards were established to measure Federal Student Aid’s ability to
              control costs in an environment of increasing workloads. Success relies on achieving
              economies of scale in our application, delivery, servicing and collection activities.

              Objective 3 Performance Metrics and Results




              Data Quality: Unit costs are based on prior year data. For example, in FY 2008, the unit costs were based on data from
              FY 2007.
              Analysis of Progress: Federal Student Aid has made significant progress in its efforts to reduce the administrative unit
              costs. All measures are equal to or below the baseline amounts from FY 2006. Due to the nature of the cost calculation
              for Default Collections, it will be difficult to meet the target of $.12. This is due to the fact that this measure includes the
              costs for Private Collection Agency contracts, which increase in cost as the amount collected increases. While the unit
              cost of collecting one dollar in default is relatively steady, the actual amount collected has increased since the FY 2006
              baseline. We plan to reevaluate this standard when we produce the next Five-Year Plan.
              Target Context: In the FY 2006 – 2010 Five-Year Plan, Federal Student Aid established and documented strategic
              performance standards to measure the organization’s success in meeting the stated long-term objectives. In that plan,
              Federal Student Aid generally published the 2006 and the 2010 targets. Because Federal Student Aid has not updated
              that plan, interim year targets – while developed – were not generally published for FY 2007 or FY 2008. In this report,
              Federal Student Aid will report its progress primarily against FY 2008 targets that until now may not have been previously
              published. All targets referenced in this report – whether previously published or not – are aligned with the 2010 targets
              and gauge Federal Student Aid’s incremental progress in achieving its objectives. Targets were set in the FY 2006 – 2010
              Five-Year Plan. The targets are based on reductions from the baseline set in FY 2006.
              *Indicates year data was reported.
              ** Data is not available because 1) the Department was not collecting this data during the fiscal year indicated, 2) the
              project did not exist or 3) the performance standard had not been established.


              Objective 4: Improve human capital management.

              Human capital management is a critical component of Federal Student Aid’s current
              business operations and future initiatives. Federal Student Aid continues to grow as an
              organization that empowers individuals to perform at a high level of effectiveness and
              efficiency. Federal Student Aid is utilizing innovative hiring and employee development
              techniques aimed at attracting and retaining highly qualified individuals to create a more
              productive, results-oriented workforce. Additionally, the organization is committed to
              workforce development and training to ensure a skilled and highly qualified professional
              workforce.


    FY 2008                                                                - 35 -                               Federal Student Aid Annual Report
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              In FY 2008, Federal Student Aid began to develop and implement a succession strategy
              to “build leaders at all levels.” The organization dedicated itself to recruiting young
              leaders and training the workforce in the fundamentals of our business and other
              mission-critical areas, building a strong bench of current and future leaders, and aligning
              staff in organization structures designed for high performance.

              In FY 2008, Federal Student Aid successfully:

                 x   Developed a framework that defines leadership competencies needed for non-
                     supervisors, first-line supervisors, managers, and executives.
                 x   Continued to build leadership knowledge and skills at all levels of the
                     organization, training nearly all (96%) of our new supervisors in our “home
                     grown” Cornerstones of Supervision Program and nearly all (96%) of our
                     experienced managers in a range of leadership development programs, classes
                     or workshops.
                 x   Developed workshops, delivered by subject matter experts in the agency, to
                     provide employees a working knowledge of the awareness and application
                     phases of the Federal Student Aid process.
                 x   Examined and evaluated current organization structures to maximize mission
                     accomplishment and accountability in three major business units of Federal
                     Student Aid.
                 x   Developed and launched a study examining position classification in Federal
                     Student Aid, particularly in the Management Analyst series.
                 x   Developed and delivered training to Federal Student Aid supervisors to help
                     them manage and motivate employees and ensure accountability. Topics
                     included overviews of labor relations, and equal employment opportunity
                     functions, development of meaningful performance standards, delivery of
                     meaningful performance feedback and execution of time and attendance
                     responsibilities.
                 x   Facilitated focus group meetings with employees within the business unit
                     responsible for program compliance to identify ways to improve the conduct of
                     performance management activities and to develop business-specific
                     performance benchmarks.
                 x   Launched the development of an automated Web-based system for processing
                     employee applications to participate in teleworking activities that help balance
                     work/life challenges and improve the agency’s ability to manage and report on
                     the program effectively.




    FY 2008                                              - 36 -                     Federal Student Aid Annual Report
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              Performance Standards and Results

              The performance standard for improving human capital management measures Federal
              Student Aid’s ability to maintain a skilled and knowledgeable workforce. Specifically, the
              performance measures will identify our mission-critical competencies, identify where
              current or potential weaknesses exist and identify training plans for individuals to further
              develop competency/skills/knowledge.

              Objective 4 Performance Metrics and Results




              Refer to next page for notation “*”.




    FY 2008                                               - 37 -                     Federal Student Aid Annual Report
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              Data Quality: Data was obtained from training class rosters and attendance records.
              Analysis of Progress: Leadership training of new supervisors was successfully completed, in part, because of
              communications/marketing with both prospective participants and their supervisors; the program is on-site and discussions
              focus on real-time issues in the organization. Targets for training current supervisors were met/exceeded in part because
              off-site programs are supported by a central fund, certain business units arranged for training of intact management teams,
              and, in 2008, supervisors were required to attend customized training on internal controls. Training and certification
              requirements for acquisitions and project managers have recently been formalized – and increased – throughout the
              government community. Targets for acquisitions were met. Targets for project management were not met as project
              managers struggled to meet the new training requirements while at the same time carried the day-to-day project
              management workload that competes for their time and attention. Targets were not met for training in the business of
              Federal Student Aid; money was not available for some new regional employees to travel to headquarters for orientation;
              school officials had competing workload/ priorities that prevented them from attending training; and given the current
              workload, and the over-estimate of employees who would complete the on-line Federal Student Aid business overview
              course, the target of 50% for the general workforce was too high.
              Target Context: In the FY 2006 – 2010 Five-Year Plan, Federal Student Aid established and documented strategic
              performance standards to measure the organization’s success in meeting the stated long-term objectives. In that plan,
              Federal Student Aid generally published the 2006 and the 2010 targets. Because Federal Student Aid has not updated
              that plan, interim year targets – while developed – were not generally published for FY 2007 or FY 2008. In this report,
              Federal Student Aid will report its progress primarily against FY 2008 targets that until now may not have been previously
              published. All targets referenced in this report – whether previously published or not – are aligned with the 2010 targets
              and gauge Federal Student Aid’s incremental progress in achieving its objectives.
              * Data is not available because 1) the Department was not collecting this data during the fiscal year indicated, 2) the
              project did not exist or 3) the performance standard had not been established.



              Objective 5: Improve products and services to provide better customer
              service.

              Federal Student Aid is dedicated to improving products and services for students and
              their families and program participants such as schools, lenders and guaranty agencies.
              Being aware of the customer concerns is a critical component of our efforts to improve
              federal student aid products and services. Federal Student Aid is committed to reducing
              the complexity of our products and services ensuring compliance is maintained and
              promoting increased self-service opportunities for customers. In addition, Federal
              Student Aid will continue to develop strategies to provide integrated solutions for
              customers.

              In response to the Secretary of Education’s call for accessibility, affordability and
              accountability in higher education, Federal Student Aid has been charged with
              implementing key recommendations to make the financial aid process easier for
              students and families. In FY 2008, Federal Student Aid began to implement application
              enhancements to the FAFSA and FAFSA4caster to meet the needs of America's diverse
              population. Additionally, Federal Student Aid played a critical role in the development
              and launch of http://www.college.gov, a Web site designed by and for students to
              motivate and inspire them to pursue a postsecondary education and equip them with the
              planning and payment information they needed to get to college. To increase greater
              awareness about the availability of student financial assistance, Federal Student Aid
              also established a series of public service announcements via a nationwide campaign
              and continued to provide a problem resolution resource via our Federal Student Aid
              Ombudsman.

              The CCRAA established the TEACH Grant Program, which Federal Student Aid
              implemented in FY 2008, providing up to $4,000 per year to students agreeing to teach
              math, science, or other specialized subjects in a high-poverty school. Federal Student
              Aid continues to explore new ways to ensure that access, information and resources
              about student financial assistance meet the needs of today's students.

    FY 2008                                                             - 38 -                              Federal Student Aid Annual Report
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              In FY 2008, Federal Student Aid successfully:

                 x   Developed a Web site to provide guidance to participants in the Loan Purchase
                     Programs to ensure students and families can continue to access federal student
                     loans.
                 x   Implemented the TEACH Grant Program, providing up to $4,000 per year to
                     students agreeing to teach math, science, or other specialized subjects in a high-
                     poverty school for at least four years within eight years of their graduation.
                 x   Developed and launched http://www.college.gov, a unique student-focused Web
                     site that inspires and motivates high school students to go to college and
                     provides practical advice on planning and paying for college.
                 x   Implemented several enhancements to the FAFSA application to make it easier
                     for students and families, including a real-time Personal Identification Number, a
                     simplified Student Aid Report, a PDF FAFSA and Spanish versions of all FAFSA
                     materials.
                 x   Piloted the FAFSA on the Phone application for applicants with limited Internet
                     access.
                 x   Enhanced the FAFSA4caster to allow the applicant to transfer data from the
                     FAFSA4caster to the FAFSA for the students’ 2008–09 school year.
                 x   Launched a real-time American Customer Satisfaction Index (ACSI) survey from
                     FAFSA on the Web sm to provide real-time feedback to enhance the customer’s
                     application experience.
                 x   Developed a Natural Disaster Web site providing guidance to students and
                     schools in hurricane and other natural disaster-impacted areas.
                 x   Continued the multi-year enterprise communications strategy that was launched
                     in FY 2005 to better articulate the benefits of postsecondary education, raise
                     awareness of federal student financial assistance programs and improve
                     consistency across all communications to its many stakeholders, including
                     currently underserved communities.
                 x   Launched the “My Story” public service campaign in January 2008, resulting in
                     approximately 75,000 television airings generating nearly 890 million impressions
                     worth an estimated $32.2 million and over 90,000 radio airings generating over
                     250 million impressions worth almost $11.2 million.
                 x   Resolved 19,000 disputes through the Ombudsman’s office in FY 2008.
                 x   Scored in the “excellent” or “good” range in the FY 2008 ACSI ratings for Federal
                     Student Aid’s highest volume products and services – including Direct Loan
                     Servicing, FAFSA on the Web and the Lender Reporting System.




    FY 2008                                             - 39 -                    Federal Student Aid Annual Report
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              Performance Standards and Results
              The following performance standards were established to measure Federal Student
              Aid’s success in meeting and exceeding customer service goals. Specifically, success is
              realized with continuous improvement in customer satisfaction scores for the four main
              systems.

              Objective 5 Performance Metrics and Results




              Data Quality: The ACSI survey is conducted annually on Federal Student Aid’s major programs. The index provides a
              national, cross-industry, cross-public-and-private sector economic indicator, using widely accepted methodologies to obtain
              standardized customer satisfaction information. Survey scores are indexed on a 100-point scale. This index has been
              tracked annually since 1999, with the exception of FY 2002.
              Analysis of Progress: The FY 2008 ACSI ratings for Federal Student’s highest volume products and services – including
              Direct Loan Servicing, FAFSA on the Web, and the Lender Reporting System – score in the “Excellent” or “Good” range in
              comparison to other entities that appear in the ACSI index. According to Claes Fornell International Group who partners
              with National Quality Research Center and the American Society for Quality in conducting the survey, companies with
              “business to business” customers scoring between 75 and 84 points on the index and businesses with “business to
              consumer” customers scoring between 80 and 90 are considered “Excellent”. These categories include such companies
              as UPS, Amazon and Mercedes.
              Target Context: In the FY 2006 – 2010 Five-Year Plan, Federal Student Aid established and documented strategic
              performance standards to measure the organization’s success in meeting the stated long-term objectives. In that plan,
              Federal Student Aid generally published the 2006 and the 2010 targets. Because Federal Student Aid has not updated
              that plan, interim year targets – while developed – were not generally published for FY 2007 or FY 2008. In this report,
              Federal Student Aid will report its progress primarily against FY 2008 targets that until now may not have been previously
              published. All targets referenced in this report – whether previously published or not – are aligned with the 2010 targets
              and gauge Federal Student Aid’s incremental progress in achieving its objectives.
              *Since significant progress has been made in the School Origination and Disbursement metric, rising from an ACSI of 66
              in 2003 to an 81 in 2007, the ACSI tracking of School Origination and Disbursement was discontinued. As a result, we
              will not report on this metric in future performance reports.


              Major Obstacles

              During FY 2008, Federal Student Aid was faced with many challenges as the
              organization worked to fulfill its mission and meet its strategic objectives. Most notably
              was the disruption to the credit markets and its impact on FFEL Program lenders.
              However, there were several other planned and unplanned obstacles that diverted
              much-needed human and capital resources from our central mission. In addition to the
              Federal Student Aid related challenges outlined in the Inspector General’s Discussion of
              Management Challenges included in the Department’s PAR, the following is a brief
              summary of the major obstacles faced by Federal Student Aid in FY 2008.

              Disruption in Credit Markets

              In early 2008, the Department began to notice the early stages of what would become a
              global financial crisis that could have impacted the availability of student loans. In May
              2008 Congress passed and the President signed the ECASLA. The legislation provides
    FY 2008                                                             - 40 -                              Federal Student Aid Annual Report
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              the Department with new authority to address concerns about capital liquidity in the
              student loan market.

              Based on the authority granted her by the ECASLA, the Secretary of Education
              announced a comprehensive plan to ensure that all eligible students would have access
              to federal student loans for the upcoming academic year. That plan includes the
              development of the Loan Purchase Programs, two new programs to purchase FFEL
              Program loans or interests in FFEL Program loans from lenders for the 2008–09
              academic year. The President recently signed H.R. 6889, the extension of the ECASLA,
              extending these programs through the 2009–10 award year. At the time this report was
              prepared, details of the extension had not been completed.

              Federal Student Aid, working with colleagues from across the Department and the
              federal government, developed the processes and systems necessary to launch these
              programs by the mid-August peak loan period. These programs were launched in
              August and, to date, have funded approximately 40% of FFEL disbursements for the
              2008–09 academic year totaling over $5 billion through the end of the federal fiscal
              year.

              Another component of the Secretary's plan was an enhanced LLR program. Statutory
              and regulatory authority in the FFEL Program provides for loan access in extraordinary
              circumstances through a LLR Program. Under LLR, FFEL loans are made by existing
              FFEL lenders or by FFEL guaranty agencies using their own funds. In certain
              circumstances, there is authority to advance guaranty agencies federal funds from which
              they can make LLR loans. Federal Student Aid worked with guaranty agencies to
              ensure that the necessary processes and plans are in place. No LLR advances were
              made in FY 2008 and no advances are anticipated in FY 2009.

              9.5 Percent Special Allowance Payment

              Section 438 of the HEA authorizes a quarterly payment by the government to eligible
              FFEL Program lenders of a subsidy, called a special allowance payment (SAP), on
              certain FFEL loans. The HEA provides a separate SAP rate for certain loans that were
              "made or purchased with funds obtained by the holder from the issuance of obligations,
              the income from which is exempt from taxation under the Internal Revenue Code of
              1986 or with specific sources derived from those funds.” In general, the SAP rate for
              such loans is one-half the rate that would be paid on other loans. However, such loans
              are subject to a minimum SAP rate of 9.5 percent from which the applicable interest is
              subtracted.

              As interest rates began to fall, ultimately reaching historic lows in 2004, 9.5 percent SAP
              loans were earning returns in excess of other federal student loans. Because lenders
              generate earnings from the spread between the yield they receive on their student loan
              portfolio and the cost of funding these loans, when interest rates are low, 9.5 percent
              SAP loans provided greater returns than similar loans paid under the usual SAP rates.
              As a result, some lenders began to look for ways to expand their portfolio of loans
              eligible for this subsidy.

              In January 2007, the Department issued a Dear Colleague Letter (DCL) FP-07-01
              immediately suspending, effective October 1, 2006, any future 9.5 percent SAP
    FY 2008                                               - 41 -                    Federal Student Aid Annual Report
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              payments until the Department could verify the first-generation and second-generation
              eligibility of loans for which participating lenders were billing the Department for 9.5
              percent SAP subsidies. To identify those loans that met this eligibility criteria, the
              Department’s Offices of the General Counsel, Postsecondary Education and Federal
              Student Aid working with the OIG devised a way to identify which loans currently billed
              for SAP at the 9.5 percent rate could be considered eligible for SAP at that rate. In April
              2007, the Department issued DCL FP-07-06 outlining the OIG audit requirements a
              lender must follow in order to determine which loans were first-generation and second-
              generation loans and therefore eligible for 9.5 percent SAP for the quarter ending
              December 31, 2006 and subsequent quarters. The Department’s OIG drafted the
              Auditor’s Guide to implement the established methodology to identify first-generation
              and second-generation loans. As a result, 15 lenders submitted to an audit of their loan
              portfolio to determine which loans were first-generation and second-generation loans
              and therefore eligible for 9.5 percent subsidies for the quarter ending December 31,
              2006 and subsequent quarters. The OIG and Federal Student Aid worked with the
              auditors to provide technical and programmatic guidance, and have conducted oversight
              of the audit process by reviewing the audit reports and conducting quality control reviews
              of the auditors’ work. As a result, both the OIG and Federal Student Aid have expended
              considerable resources in FY 2008 providing oversight to ensure SAP was paid at the
              appropriate rate.

              Inducements and Borrower Choice

              Under the HEA a borrower attending a school that participates in the FFEL Program
              must be allowed to choose their FFEL lender. A school may not refuse to certify a FFEL
              loan based upon the borrower’s choice of lender or guaranty agency. A school may not
              coerce a borrower, directly or indirectly, to choose a particular lender. A FFEL lender
              may not have any agreements, or engage in activities, with a school in the FFEL
              Program that prevents or impedes a borrower from exercising the right to choose a
              FFEL lender. Also, under the HEA an eligible lender may not offer, directly or indirectly,
              points, premiums, payments, or other inducements to secure applicants for loans made
              under the FFEL Program.

              In October 2006, Federal Student Aid supported colleagues from the Office of
              Postsecondary Education in negotiating with representatives of the lending and higher
              education communities new rules that strengthened and created new regulations on
              prohibited inducements and ensuring a borrower’s choice of lender. In addition to the
              committee deliberations, Secretary of Education Margaret Spellings formed a Task
              Force in April 2007 that made specific recommendations to eliminate unethical practices
              and further safeguard the integrity of our student aid system. These recommendations
              led to strengthened regulations around “preferred lender lists” by requiring a minimum of
              three lenders and providing full disclosure of the method and criteria used to select
              lenders. These regulations were issued in November 2007 and became effective July 1,
              2008.

              In April 2007, Federal Student Aid began performing on-site reviews of 44 schools and
              26 lender/eligible lender trustee relationships for which inappropriate practices had been
              recently alleged to determine if there had, in fact, been violations of the anti-inducement
              provisions of the HEA.


    FY 2008                                               - 42 -                    Federal Student Aid Annual Report
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              In June 2007, Federal Student Aid sent letters to 921 schools where 80 percent or more
              of their FFEL loans were issued from one lender. This letter reminded the schools that
              the statutory and regulatory provisions governing the FFEL Program allow a borrower to
              choose their FFEL lender and prohibit a school from refusing to certify a FFEL loan
              based upon the borrower’s choice of lender or guaranty agency or from coercing, directly
              or indirectly, a borrower to choose a specific lender.

              In October 2007, Federal Student Aid mailed letters to 55 schools (from the list of 921
              schools) that had significant annual loan volume and a large percentage of the school’s
              loan volume with a single lender. Letters were also mailed to 23 FFEL lenders affiliated
              with those schools. In the letters to the schools and the lenders, we requested that they
              provide the Department with information about:

                 x   Agreements between the schools and other FFEL participants (lenders, guaranty
                     agencies or their subsidiaries or partners).
                 x   Remuneration paid to school officials by FFEL participants.
                 x   Financial transactions between schools and FFEL participants.
                 x   Program compliance policies and procedures.
                 x   Program decision making policies regarding preferred lender lists and school
                     incentives.

              These letters were sent to request information to help determine if there had been any
              violations of the prohibition against improper inducements or improper restrictions on the
              choice of lender by borrowers. Upon receipt and review of the information provided, we
              requested additional information. In most cases, we have determined that there had not
              been a violation of the statute or regulations that existed at the time. We continue to
              monitor lender and school relationships under the new regulations.

              Natural Disasters

              In August and September 2008, Hurricanes Gustav and Ike struck the Gulf Coast
              impacting students and schools in those regions. In preparation for these storms,
              Federal Student Aid published an electronic announcement on the Information for
              Financial Aid Professionals Web site http://www.ifap.ed.gov alerting schools that we
              were monitoring situations in the Gulf Coast region. We provided schools with contact
              information at the Department should they be impacted by the storm. We also
              announced the establishment of a Web site http://ww.ifap.ed.gov/disaster.html which
              schools could use to report alternate contact information as well as access updates on
              Departmental support and policy changes should they be necessary.

              In addition, for those counties in hurricane-affected areas designated for assistance by
              Federal Emergency Management Agency, Federal Student Aid automatically
              implemented requirements of DCL Gen-04-04 for any school that requested it. This
              included providing administrative relief in the form of an extension of September 30
              deadlines to close out Pell, ACG and SMART grant programs for the year as well as an
              extension to file their Fiscal Operations Report and Application to Participate. In
              addition, for any school that contacted the Department, we were authorized to provide
              an automatic loan deferment for students attending those schools.



    FY 2008                                              - 43 -                    Federal Student Aid Annual Report
Annual Program Performance Report                                                      Annual Program Performance


              In FY 2009, Federal Student Aid will develop a comprehensive strategy to better assist
              schools, students and borrowers impacted by eligible natural disasters.

              Budgetary Impact

              Funding for student aid administration totaled $696 million for FY 2008. Ensuring the
              uninterrupted availability of student loans through both increased Direct Loan volume
              and the creation of emergency loan purchase and participation initiatives resulted in
              substantial unanticipated administrative costs. To fund these unexpected activities, the
              Department reduced FY 2008 expenditures in other areas by deferring planned projects,
              enacting a hiring freeze, and eliminating discretionary initiatives. In addition, in July
              2008 the Administration submitted a budget amendment to Congress requesting an
              additional $50 million above the FY 2009 President’s Budget level to support student aid
              administrative activities. Under current estimates these additional funds would be more
              than offset by savings generated by the loan purchase and participation initiatives.




    FY 2008                                             - 44 -                    Federal Student Aid Annual Report
Annual Program Performance Report                                                       Annual Program Performance


              Performance Plan Items Reported as Incomplete or Cancelled

              Following is a summary of the items on the FY 2008 Performance Plan reported as
              incomplete or cancelled as of September 30, 2008.

                                                   FY 2008 Performance Plan
                               Projects Incomplete or Cancelled as of September 30, 2008
                     Project Name and Number                               Reason for “Red” Rating
              Assist in testing and implementing         Federal   Student  Aid terminated the Integrated Partner
              PM portion of IPM (Project 4.6)            Management development contract with Perot Systems
                                                         in late September, as the contractor was unable to
                                                         meet the implementation schedule.
              Update Federal Student Aid’s Five-         An FY 2008 update was not released as the strategy
              Year Performance Plan for FY 2008 –        was under review. However in FY 2009, Federal
              2012 and plan for the following year       Student Aid will issue a Five-Year Plan for FY 2009 –
              update, if appropriate (Project 9.5)       FY 2013.
              Provide high-quality, timely human         The Mission Critical Occupation hiring proficiency is
              resources operations support service       reported at 88%, the minimally successful range for the
              (Project 9.17)                             Principal Operating Component Assessment
                                                         Organizational scoring. Due to budget constraints, a
                                                         hiring freeze has been in effect since early July. Since
                                                         that time, all pending recruitment actions have been
                                                         cancelled.
              Provide Project Management                 Decision was made not to proceed with requirements
              Educational Opportunities (Project         training until a requirements management process was
              10.6)                                      in place. Funds were added to the training
                                                         development task order to have the vendor write a
                                                         requirements management process. Once approved,
                                                         work on the training material will resume.
              Implement the Integrated Partner           Federal Student Aid terminated the Integrated Partner
              Management Solution (Project 20.9)         Management development contract with Perot Systems
                                                         in late September, as the contractor was unable to
                                                         meet the implementation schedule.
              Implement the Master Person Record         Although the high-level integration strategy and
              Management Service (PRMS) (Project transition plan was completed in FY 2008, the
              20.18)                                     awarding of the initial component to build the detailed
                                                         requirements and design documents was not
                                                         completed in FY 2008 due to a lack of resources and
                                                         support.
              Implement EDSS Model (Project 20.28) Protests on the procurements delayed the process
                                                         significantly.
              Develop and implement Cyber Security Approval of cancellation request pending.
              Program (Project 20.27)
              Establish a new Business Liaison           Project was cancelled due to competing priorities and
              function within CIO (Project 20.25)        lack of available resources.
              Procure the Portfolio/Program/Project      Protests on the procurements delayed the process
              Management Support Vendor Pool             significantly.
              (component of Enterprise Development
              Support Services) (Project 20.31)


    FY 2008                                              - 45 -                    Federal Student Aid Annual Report
Annual Program Performance Report                                          Legislative and Regulatory Recommendations



              Legislative and Regulatory Recommendations

              Key among Federal Student Aid’s mission responsibilities is the task of developing
              legislative recommendations. These recommendations customarily center on improving
              and simplifying the Title IV programs, minimizing administrative costs and improving
              program integrity. Our recommendations inform the Department’s policymaking
              process, including its activities and decisions related to the reauthorization of the HEA
              and its reaction to the financing difficulties for the FFEL student lending programs.
              These activities are usually accomplished by direct contact with colleagues in the
              Department’s Office of Postsecondary Education and the Office of the Under Secretary
              at both the senior policy level and at a staff level. These efforts, while primarily carried
              out by Federal Student Aid’s Policy Liaison and Implementation Staff, also involve other
              Federal Student Aid offices and senior managers. While a portion of this policy advising
              is accomplished on an ongoing, informal daily basis, Federal Student Aid staff
              contributed to policy decision-making in a more formalized way related to among other
              things legislation to address student loan financing issues and development of a
              simplified federal student aid process as requested by the Secretary.




    FY 2008                                               - 46 -                     Federal Student Aid Annual Report
Annual Program Performance Report                                                             Annual Bonus Awards




              Annual Bonus Awards

              As of the end of FY2008, there were 49 Federal Student Aid senior managers. In
              addition, there were 12 Senior Executive Service staff. Three of the 49 senior managers
              and three of the 12 Senior Executive Service staff served on the Federal Student Aid
              Executive Leadership Team and reported directly to the Chief Operating Officer. The
              remaining 46 senior managers and nine Senior Executive Service staff served in a
              variety of senior positions and capacities within Federal Student Aid.

              In FY 2008, the Acting Chief Operating Officer achieved a performance rating of
              Outstanding. While the Acting COO received a salary for his role as the Department’s
              Chief Financial Officer, he did not receive any additional compensation for the
              responsibilities he assumed as Federal Student Aid’s Acting COO, and he did not
              receive a bonus for his work at Federal Student Aid.

              FY2008 performance ratings and awards for Federal Student Aid senior managers and
              Senior Executive Service staff were not finalized at the time this report was prepared.

              At the end of FY2007, there were 57 Federal Student Aid senior managers. In addition,
              there are 12 Senior Executive Service staff. Six of the 57 senior managers and two of
              the 12 Senior Executive Service staff served on the Federal Student Aid Executive
              Leadership Team and reported directly to the Chief Operating Officer. The remaining 51
              senior managers and 10 Senior Executive Service staff served in a variety of senior
              positions and capacities within Federal Student Aid.

              For FY2007, ratings and awards for 48 of the 51 senior managers who did not serve on
              the Executive Leadership Team last year were as follows: 17 achieved a performance
              rating of Outstanding, 20 achieved a performance rating of Highly Successful, 11
              achieved a performance rating of Fully Successful. Three senior managers were not
              eligible for a rating.

              Award amounts for those achieving an Outstanding rating ranged from a low of $5,791
              to a high of $15,245, with a median award of $9,892. Award amounts for those
              achieving a Highly Successful rating ranged from a low of $2,830 to a high of $10,000,
              with a median award of $6,844. Those receiving a rating of Fully Successful were not
              eligible for an award.

              FY 2007 approved ratings and awards for the eight members of the Executive
              Leadership Team and the remaining 10 Senior Executive Service staff were as follows:
              four achieved a performance rating of Outstanding, 11 achieved a performance rating of
              Highly Successful, and three received a performance rating of Fully Successful.




    FY 2008                                             - 47 -                    Federal Student Aid Annual Report
Annual Program Performance Report                                                            Annual Bonus Awards



              Award amounts for those achieving an Outstanding rating ranged from a low of $13,743
              to a high of $31,542, with a median award of $14,171. Award amounts for those
              achieving a Highly Successful rating ranged from a low of $7,187 to a high of $25,852,
              with a median award of $14,815. Those receiving a rating of Fully Successful were not
              eligible for an award.

              For additional information, please refer to:

              http://www.ed.gov/policy/highered/leg/hea98/sec101D.html.




    FY 2008                                                  - 48 -              Federal Student Aid Annual Report
Annual Program Performance Report                                        Report of the Federal Student Aid Ombudsman




              Report of the Federal Student Aid Ombudsman

              The Office of the Ombudsman in Federal Student Aid completed its ninth year of
              operation in FY 2008. Established by the HEA, the office uses informal dispute
              resolution processes to address complaints about Title IV financial aid programs. To
              effectively resolve problems identified by individual federal student aid recipients, the
              office applies a collaborative approach in working with institutions of higher education,
              lenders, guaranty agencies, loan servicers and other participants in student aid
              programs. Individual complaint data is compiled into the Ombudsman Case Tracking
              System. Information is summarized for internal and external reports for Federal Student
              Aid and the industry in general, and to identify systemic issues affecting Title IV
              programs. Implementation of systemic solutions can at times prevent problems, an
              approach preferable to resolving individual problems as they occur.

              Information on the existence and role of the Office of the Ombudsman is disseminated to
              the industry and borrowers throughout the student aid life cycle. A plain language
              approach to the office’s Web site, http://www.ombudsman.ed.gov, helps individuals
              resolve loan problems independently, learn about student aid information and resources,
              and submit issues or complaints electronically. The Office of the Ombudsman brochure
              is available electronically or in print, and is used by colleges and universities in helping
              students recognize the office as a resource after other service avenues are
              unsuccessful. The monthly Ombudsman Newsletter focuses on Ombudsman case
              activity and industry news.

              Coordination with guaranty agencies and others is a crucial element in the effective
              resolution of complaints. Establishment of the Student Loan Ombudsman Caucus in
              2007 provided an additional foundation for bringing interested parties together to discuss
              emerging industry trends, provide training, and develop aggregated information on
              systemic issues in 2008. In addition to meeting with Student Loan Ombudsman Caucus
              member agencies and others to identify and address issues common to the industry, the
              Office prepares tailored reports for individual agency use.

              Since its inception, the Office of the Ombudsman has handled more than 138,500
              complaints, including 19,006 in FY 2008, a 9% increase over FY 2007 and the highest
              number of new cases received in a fiscal year. The Office resolved more than 74% of
              FY 2008 issues within three days of the initial receipt, and took an average of
              approximately 120 days to resolve about 5,000 issues requiring additional research. Of
              the cases requiring additional effort, individual borrowers had an average of 12 loans.
              About 20% of those borrowers’ loans are in default, 35% of the loans have been in
              repayment less than five years, and 78% of those loans are FFEL. As of
              September 30, 2008, the office has 1,610 open research cases, all of which are
              expected to be resolved in FY 2009.

              In FY 2008, Loan Cancellation/Discharge issues represented the top problem area, and
              increased 20% over the previous fiscal year. Case analysis shows that more customers
              escalate Loan Cancellation/Discharge issues to Executive or Legislative offices than any
              other type of Ombudsman issue, demonstrating that more emphasis is needed on early
              resolution of these cases. The most common problem within the Loan Cancellation/
              Discharge category relates to Total and Permanent Disability (TPD) with more than 600
    FY 2008                                               - 49 -                    Federal Student Aid Annual Report
Annual Program Performance Report                                          Report of the Federal Student Aid Ombudsman



              individuals objecting to the handling of their disability discharge requests. Review of
              TPD cases reveals that undue process complexity, lack of transparency and applicant
              burden are significant problems. In FY 2008, Ombudsman representatives participated
              in a task force to evaluate and improve disability discharge procedures. The Conditional
              Disability Discharge Task Force used analyses of Ombudsman TPD cases to inform
              decisions on procedural changes. Ombudsman and Borrower Services staff met with
              the Social Security Administration to develop a better understanding of the disability
              benefits program and to explore ways in which elements of their process could be used
              in streamlining Federal Student Aid’s program. Significant increases in Federal Student
              Aid Ombudsman cases in three other issue areas suggest that current economic
              conditions may be adversely affecting student loan borrowers. When compared to last
              year, FY 2008 saw noticeable increases in cases relating to Default (+50%), Repayment
              Plans/Amounts (+28%), and Account Balance (+21%).

              Recent Congressional action appears to have contributed to a significant reduction in
              Ombudsman cases in the Loan Consolidation issue area. Loan Consolidation cases,
              the most common borrower issue in FY 2007, declined 62% in FY 2008. The number of
              customers who complained about deceptive business practices by consolidation loan
              marketers declined as did the number who wanted to reverse their consolidation loans.

              A key Ombudsman emphasis in FY 2008 was on producing periodic, in-depth analyses
              of specific issues such as General Assistance inquiries and Total and Permanent
              Disability cases to determine the issues’ root causes and to identify potential process
              improvements. In addition, the Ombudsman participated in ongoing communication with
              the Federal Trade Commission regarding deceptive student loan practices and
              collaborated with the Federal Trade Commission and other Federal Student Aid offices
              in developing the fact sheet “Student Loans: Avoiding Deceptive Offers”. This fact
              sheet can be found at http://www.ombudsman.ed.gov/CRE43-studentloans3.pdf.

              The Ombudsman also coordinated with other agencies in emphasizing comprehensive
              service as appropriate for specific needs. Specialized projects included finalizing
              student loan discharges for more than 100 Hurricane Katrina victims whose loans were
              overlooked in initial discharge efforts. Another emphasis was on enhancing the
              sensitivity and efficiency of all Federal Student Aid offices in working with military service
              members and their families.

              Throughout FY 2008, the Ombudsman responded to numerous inquiries received from
              Executive (i.e., White House, Secretary, Chief Operating Officer, etc.) and Legislative
              offices. New cases referred through Congressional offices increased by 40% from the
              previous year.

              The Federal Student Aid Ombudsman Office measures customer satisfaction, in part,
              through independently conducted telephone surveys following case closure. Closed
              cases are chosen at random, and customers are asked to rate service accessibility,
              Ombudsman representatives’ knowledge, timeliness of case resolution, level of
              satisfaction with the resolution, and overall service. On a scale of 1 - 5, with 5 the
              highest rating, survey results are calculated weekly and cumulatively for the fiscal year.
              Only ratings of 4.0 or higher meet the Ombudsman customer satisfaction performance
              goal. The average FY 2008 customer satisfaction rating was 4.46. Customers also
              write or call independently to express appreciation for assistance from the Office.
    FY 2008                                                - 50 -                     Federal Student Aid Annual Report
Financial Section




              Financial Section




    FY 2008                       - 51 -   Federal Student Aid Annual Report
Financial Section




    FY 2008         - 52 -   Federal Student Aid Annual Report
Financial Section                                                          Message from the Chief Financial Officer MM




              Message from the Chief Financial Officer

              During fiscal year 2008, Federal Student Aid
              continued efforts to maintain its high standards of
              financial management and fiscal reporting related to
              the postsecondary education programs. These
              efforts were made not only by our staff, but also by
              our schools, lenders, and guaranty agencies. All of
              us take great pride in helping so many people further
              their education, especially during the recent
              challenging economic times. Highlights of these
              successful efforts over the last year included:

                    o   An unqualified opinion was received on the
                        principal financial statements for the seventh
                        consecutive year, demonstrating a clear
                        pattern of financial accountability.
                    o   No material weaknesses were identified as
                        part of our Report on Internal Control for the
                        sixth consecutive year.
                    o   Reasonable assurance was provided of our                John W. Hurt, III
                        internal controls over financial reporting.          Chief Financial Officer
                    o   New loan access initiatives were and continue to be successfully implemented.

              The new loan access initiatives are being implemented in accordance with the Ensuring
              Continued Access to Student Loans Act of 2008 (ECASLA). ECASLA was enacted in
              response to student lending issues that arose and has resulted in a significant cash
              infusion to the student loan marketplace. These initiatives include the following:

                    o   FFEL Loan Participation Purchase Program.
                    o   FFEL Loan Purchase Commitment Program.

              These major loan access initiatives are being implemented thus far without an increase
              to our Student Aid Administration budget or staff levels. These same staff also
              supported the delivery of approximately $96 billion in grant, work-study, and loan
              assistance to almost 11 million postsecondary students and their families in FY 2008, an
              increase of over $13 billion in aid from last fiscal year.

              Through cooperative efforts among the Department’s Office of the Chief Financial
              Officer, Budget Service, and Federal Student Aid, the Department continued to correct
              the three significant deficiencies in credit reform estimation, program monitoring, and
              information systems controls that were identified by auditors in the FY 2007 “Report on
              Internal Controls”. As a result of these concerted efforts, in the FY 2008 Internal Control
              Report the auditors recognized improvements in all three areas and removed the
              program monitoring deficiency as a significant deficiency.

              During FY 2008, Federal Student Aid continued to support the process to provide a
              Department-wide assurance statement on the effectiveness of internal control over
              financial reporting. This integrated process was based upon the requirements of OMB
    FY 2008                                               - 53 -                    Federal Student Aid Annual Report
Financial Section                                                          Message from the Chief Financial Officer MM



              Circular A-123, Appendix A, and required Federal Student Aid to perform the following
              tasks:

                    o   Conduct internal risk assessments.
                    o   Update its documentation of organizational and process hierarchies.
                    o   Update its entity and process level control libraries.
                    o   Reassess the effectiveness of its controls over financial reporting.
                    o   Coordinate remediation activities and retesting.
                    o   Report on status and results to the Department.

              The successful results of this assessment effort are described further in the “Analysis of
              Federal Student Aid’s Systems, Controls and Legal Compliance” section. We are
              pleased to report that, as a part of this integrated process, Federal Student Aid provided
              to the Department an unqualified statement of assurance on its internal control over
              postsecondary education financial reporting, and we will continue to strive to improve
              and strengthen the integrity of our financial management and reporting procedures.




              John W. Hurt, III
              Chief Financial Officer
              November 17, 2008




    FY 2008                                                - 54 -                   Federal Student Aid Annual Report
                                                    Principal Financial Statements and Notes
Financial Section
                                                    to Principal Financial Statements




              Principal Financial Statements and Notes to Principal
              Financial Statements




    FY 2008                             - 55 -            Federal Student Aid Annual Report
Financial Section                                                                                               Consolidated Balance Sheet



              …Consolidated Balance Sheet

                                              United States Department of Education
                                                         Federal Student Aid
                                                     Consolidated Balance Sheet
                                                  As of September 30, 2008 and 2007
                                                                (Dollars in Millions)
                                                                         0

                                                                                              Fiscal Year           Fiscal Year
                                                                                                 2008                  2007

                 Assets:
                  Intragovernmental:
               1001 Fund Balance with Treasury (Note 3)                                  $          56,915      $         58,141
                   Total Intragovernmental                                                          56,915                58,141

               200 Cash and Other Monetary Assets (Note 5)                                          1,663                 1,103
               200 Accounts Receivable, Net (Note 4)                                                   83                    36
               200 Credit Program Receivables, Net (Note 6)                                       134,546               115,752
               200 General Property, Plant and Equipment, Net                                          43                    34
               200 Other Assets                                                                        37                     -

                 Total Assets (Note 2)                                                   $        193,287       $       175,066


                 Liabilities:
                  Intragovernmental:
               3001 Accounts Payable                                                      $             2       $             -
               3002 Debt (Note 7)                                                                 128,256               103,893
               3003 Guaranty Agency Federal and Restricted Funds Due to Treasury (Note 5)           1,663                 1,103
               3004 Payable to Treasury (Note 6)                                                    3,766                 5,351
               3005 Other Intragovernmental Liabilities (Note 8)                                    7,022                   190
                    Total Intragovernmental                                                       140,709               110,537

               400 Accounts Payable                                                                  1,128                   756
               400 Accrued Grant Liability (Note 9)                                                    862                 1,030
               400 Liabilities for Loan Guarantees (Note 6)                                         43,322                50,874
               400 Other Liabilities (Note 8)                                                           67                    23

                 Total Liabilities                                                       $        186,088       $       163,220

                    Commitments and Contingencies (Note 15)

                 Net Position:
                   Unexpended Appropriations                                             $          13,472 $              14,420
               600 Cumulative Results of Operations                                                 (6,273)               (2,574)

                 Total Net Position (Note 10)                                            $           7,199      $         11,846


                 Total Liabilities and Net Position                                      $        193,287       $       175,066

                                                                                                            0                     0



               The accompanying notes are an integral part of these statements.




    FY 2008                                                            - 56 -                       Federal Student Aid Annual Report
Financial Section                                                                                                Consolidated Statement of Net Cost



              …Consolidated Statement of Net Cost
                                                    United States Department of Education
                                                             Federal Student Aid
                                                      Consolidated Statement of Net Cost
                                              For the Years Ended September 30, 2008 and 2007
                                                                       (Dollars in Millions)
                                                                                0




                                                                                                   Fiscal Year           Fiscal Year
                                                                                                      2008                  2007
               Program Costs
                      Ensure Accessibility, Affordability, and Accountability of Higher
                      Education and Career and Technical Advancement
                  101 Gross Costs                                                              $           28,788 $              27,419
                  102 Less: Earned Revenue                                                                  9,029                 7,911
                      Net Program Costs                                                                    19,759                19,508

                 Total Program Costs                                                           $           19,759 $              19,508

                 Net Cost of Operations (Notes 11 & 14)                                        $           19,759 $              19,508




               The accompanying notes are an integral part of these statements.




    FY 2008                                                                     - 57 -                           Federal Student Aid Annual Report
Financial Section                                                                                         Consolidated Statement of Changes in Net Position




                                                          United States Department of Education
                                                                   Federal Student Aid
                                                    Consolidated Statement of Changes in Net Position
                                                    For the Years Ended September 30, 2008 and 2007
                                                                               (Dollars in Millions)
                                                                                        0
                                                                                              Fiscal Year                              Fiscal Year
                                                                                                 2008                                     2007

                                                                                Cumulative                                    Cumulative
                                                                                Results of               Unexpended           Results of         Unexpended
                                                                                Operations              Appropriations        Operations        Appropriations


               Beginning Balances                                          $                (2,574) $           14,420    $         (5,152) $          13,639
               Budgetary Financing Sources:
               4. Appropriations Received                                  $                  - $               28,549    $             - $             29,484
               5. Appropriations Transferred - in/out                                         -                      -                  -                   (1)
               6. Other Adjustments (rescissions, etc)                                       (3)                (1,300)                 -                 (844)
               7. Appropriations Used                                                    28,197                (28,197)            27,858              (27,858)
               9. Donations and Forfeitures of Cash and Cash Equivalents                      -                      -                  -                    -
               10Nonexpenditure Financing Sources - Transfers-Out                          (190)                     -                  -                    -


               Other Financing Sources:
               14. Imputed Financing from Costs Absorbed by Others         $                  8                      -    $              9 $                 -
               15. Others                                                               (11,952) $                   -              (5,781)                  -
               Total Financing Sources                                     $             16,060 $                 (948)   $        22,086 $               781
               Net Cost of Operations                                      $            (19,759)                     -    $        (19,508) $                -
               Net Change                                                  $                (3,699) $             (948)   $         2,578 $               781
               Ending Balances (Note 10)                                   $                (6,273) $           13,472    $         (2,574) $          14,420




                       The accompanying notes are an integral part of these statements.




    FY 2008                                                                          - 58 -                                    Federal Student Aid Annual Report
Financial Section                                                                                                            Combined Statement of Budgetary Resources




                                                                          United States Department of Education
                                                                                     Federal Student Aid
                                                                        Combined Statement of Budgetary Resources
                                                                      For the Years Ended September 30, 2008 and 2007
                                                                                        (Dollars in Millions)




                                                                                                            Fiscal Year                                        Fiscal Year
                                                                                                               2008                                               2007


                                                                                                                    Non-Budgetary Credit                                 Non-Budgetary Credit
                                                                                                                     Reform Financing                                     Reform Financing
                                                                                           Budgetary                     Accounts                  Budgetary                  Accounts

      Budgetary Resources:
      1. Unobligated balance, brought forward, October 1:                           $                     4,449 $                36,792    $                   4,387 $                46,490
      2. Recoveries of prior year Unpaid O bligations                                                     1,447                   3,115                        1,356                   3,043
      3. Budgetary Authority:
        3A. Appropriations                                                                              28,562                      151                    29,484                          0
        3B. Borr owing Authority (Note 13)                                                                   0                   57,743                         0                     19,570
        3D. Spending authority from offsetting collections (gross):
          3D1. Earned
            3D1a. Collected                                                                               1,638                  33,510                        1,691                  37,019
        3D2. Change in unfilled customer orders
            3D2b. Without advance from Federal Sources                                                       0                        0                          0                        (30)
          3E. Subtotal                                                              $                    30,200 $                 91,404   $                31,175 $                    56,559
      4. Nonexpenditure transfers, net, anticipated and actual                                               0                        0                         (1)                         0
      6. Permanently not available                                                                      (2,058)                 (16,835)                   (1,845)                    (19,429)
      7. Total Budgetary Resources (Note 13)                                        $                   34,038 $                114,476    $               35,072 $                    86,663

      Status of Budgetary Resources:
      8. Obligations incurred: (Note 13)
        8A. Direct                                                                  $                   30,418 $                 87,959    $               30,623 $                   49,871
        8C. Subtotal                                                                $                   30,418 $                 87,959    $               30,623 $                   49,871
      9. Unobligated Balances:
        9A. Apportioned                                                             $                    1,166 $                    396    $                2,504 $                      321
        9C. Subtotal                                                                $                    1,166 $                    396    $                2,504 $                      321
      10. Unobligated Balance not available                                                              2,454                   26,121                     1,945                     36,471
      11. Total Status of Budgetary Resources                                       $                   34,038 $                114,476    $               35,072 $                   86,663

      Change in Obligated Balance:
      12. Obligated balance, net
        12A. Unpaid obligations, brought forward, October 1                         $                   12,485 $                 14,425    $               11,584 $                   12,941
        12B. Uncollected customer payments from Federal Sources,
              brought forward, October 1                                                                    (0)                      (0)                        (0)                       (30)
        12c. Total, unpaid obligated balance, brought forward, net                  $                   12,485 $                 14,425    $                11,584 $                   12,911
      13. Obligation Incurred net (+/-)                                                                 30,418                   87,959                     30,623                     49,871
      14. Gross Outlays                                                                                (28,529)                 (58,112)                   (28,366)                   (45,344)
      16. Recover ies of pr ior year unpaid obligations, actual                                         (1,447)                  (3,115)                    (1,356)                    (3,043)
      17. Change in uncollected customer payments from Federal Sources (+/-)                                (0)                      (0)                        (0)                        30
      18. Obligated Balance, net, end of period
        18A. Unpaid Obligations                                                     $                   12,927 $                 41,157    $               12,485 $                   14,425
        18B. Uncollected customer payments from Federal Sources                                             (0)                      (0)                       (0)                        (0)
        18C. Total, unpaid obligated balance, net, end of period                    $                   12,927 $                 41,157    $               12,485 $                   14,425

      Net Outlays
      19. Net Outlays:
        19A. G ross Outlays                                                         $                   28,529 $                 58,112    $               28,366 $                    45,344
        19B. O ffsetting collections                                                                    (1,638)                 (33,510)                   (1,691)                    (37,019)
        19C. Distributed Offsetting receipts                                                               (28)                  (5,750)                      (35)                     (4,700)
      20. Net Outlays (Note 13)                                                     $                   26,863 $                 18,852    $               26,640 $                     3,625




      The accompanying notes are an integral part of these statements.




    FY 2008                                                                                   - 59 -                                           Federal Student Aid Annual Report
Financial Section                                                                   Notes to Principal Financial Statements




                                 Notes to Principal Financial Statements
                           For the Years Ended September 30, 2008 and 2007


              …Note 1.          Summary of Significant Accounting Policies
                    Reporting Entity
              Federal Student Aid was created as a PBO within the Department under the HEA from
              previously existing Department student financial assistance programs. Federal Student
              Aid operates under the PBO mandate to develop a management structure driven by
              strong incentives to manage for results. Federal Student Aid’s primary goal is to assist
              lower-income and middle-income students in overcoming the financial barriers that make
              it difficult to attend and complete postsecondary education. Federal Student Aid is
              responsible for administering direct loans, guaranteed loans, and grant programs.

              The Direct Loan Program, added to the HEA by the Student Loan Reform Act of 1993,
              enables Federal Student Aid to make loans directly to eligible undergraduate and
              graduate students and their parents through participating schools. Federal Student Aid
              borrows money from the Treasury to fund the loans. The program provides interest
              subsidies for eligible borrowers.

              The FFEL Program, initially authorized by the HEA, operates through state and private
              nonprofit guaranty agency agencies to provide loan guarantees and interest subsidies
              on loans made by lenders to eligible students.

              Under the Direct Loan and FFEL Programs, loans are made to individuals who meet
              statutorily set eligibility criteria and attend eligible institutions of higher education—public
              or private two- and four-year institutions, graduate schools, and vocational training
              schools. Students and their parents, based on eligibility criteria, receive loans
              regardless of income or credit rating. Student borrowers who demonstrate financial
              need also receive federal interest subsidies.

              The ECASLA amended the FFEL Program to authorize the Secretary to buy FFEL loans
              for the 2008–09 academic year. Within the existing FFEL Program, the Department has
              implemented two activities under this temporary loan purchase authority to purchase
              FFEL loans generally originated between July 1, 2008 and June 30, 2009. These two
              activities include: loan purchase commitments where the Department purchases loans
              directly from FFEL lenders and loan participation purchases in which the Department
              purchases participation interests in FFEL loans.




    FY 2008                                                 - 60 -                      Federal Student Aid Annual Report
Financial Section                                                               Notes to Principal Financial Statements


              The TEACH Grant Program was implemented beginning July 1, 2008. This program,
              added to the HEA by the CCRAA, awards annual grants to students who agree to teach
              in a high-need subject area in a public or private elementary or secondary school that
              serves low-income students.

              Grant appropriations funding the Pell Grant Program and campus-based student aid
              programs enable Federal Student Aid to provide educational grants and other financial
              assistance to eligible applicants. Grants are not repaid to the federal government. The
              Pell Grant Program provides grant aid to low-income and middle-income undergraduate
              students. Awards vary in proportion to the financial circumstances of students and their
              families. The campus-based student aid programs provide educational grants and other
              financial assistance to eligible applicants. These programs include the Supplemental
              Educational Opportunity Grant, FWS, and Federal Perkins Loan Programs. Campus-
              based programs are not material to these statements and have been included with other
              programs reported under grant programs.

                    Basis of Accounting and Presentation
              These financial statements have been prepared to report the financial position, net cost
              of operations, changes in net position and budgetary resources of the Federal Student
              Aid reporting group, as required by the Chief Financial Officers Act of 1990 and the
              Government Management Reform Act of 1994. The financial statements were prepared
              from the books and records of Federal Student Aid, in accordance with accounting
              principles generally accepted in the United States of America for federal entities, issued
              by the Federal Accounting Standards Advisory Board, and OMB Circular No. A-136
              Financial Reporting Requirements, as revised June 2008. These financial statements
              are different from the financial reports prepared by the Department pursuant to OMB
              directives that are used to monitor and control Federal Student Aid’s use of budgetary
              resources.

              Federal Student Aid’s financial statements represent the reporting group, Federal
              Student Aid, within the Department of Education, which is itself a component of the U.S.
              Government, a sovereign entity. One implication of this is that the liabilities cannot be
              liquidated without legislation providing resources and legal authority to do so.

              The accounting structure of federal agencies is designed to reflect both accrual and
              budgetary accounting transactions. Under the accrual method of accounting, revenues
              are recognized when earned, and expenses are recognized when a liability is incurred,
              without regard to receipt or payment of cash. Budgetary accounting facilitates
              compliance with legal constraints and controls over the use of federal funds.

              Transactions and balances among Federal Student Aid funds have been eliminated from
              the Consolidated Balance Sheet.




    FY 2008                                              - 61 -                     Federal Student Aid Annual Report
Financial Section                                                                Notes to Principal Financial Statements


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

              The Federal Credit Reform Act of 1990 (Credit Reform Act) underlies the proprietary and
              budgetary accounting treatment of direct and guaranteed loans. The long-term cost to
              the government for direct loans or loan guarantees, other than for general administration
              of the programs, is referred to as “subsidy cost.” Under the Credit Reform Act, subsidy
              costs for loans obligated beginning in FY 1992 are estimated at the net present value of
              projected lifetime costs in the year the loan is obligated. Subsidy costs are revalued
              annually through the re-estimate process.

              Estimates for credit program receivables and liabilities contain assumptions that have a
              significant impact on the financial statements. The primary components of this
              assumption set include, but are not limited to, collections (including loan consolidations),
              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 components may create
              significant changes to the estimate.

              Federal Student Aid and the Department estimate all future cash flows associated with
              the Direct Loan, FFEL, and TEACH Grant Programs. Projected cash flows are used to
              develop subsidy estimates. Subsidy cost can be positive or negative; negative subsidies
              occur when expected program inflows of cash (e.g., repayments and fees) exceed
              expected outflows. Subsidy cost is recorded as the initial amount of the loan guarantee
              liability when guarantees are made or as a valuation allowance to government-owned
              loans and interest receivable (i.e., direct and defaulted guaranteed loans).

              Federal Student Aid and the Department use a computerized cash flow projection
              Student Loan Model to calculate subsidy estimates for the Direct Loan, FFEL, and
              TEACH Grant Programs. Each year, the Department re-evaluates the estimation
              methods related to changing conditions. Federal Student Aid and the Department use a
              probabilistic technique to forecast interest rates based on different methods to establish
              the relationship between an event’s occurrence and the magnitude of its probability. The
              Department’s approach estimates interest rates under numerous scenarios and then
              bases interest rates on the average interest rates weighted by the assumed probability
              of each scenario occurring. Probabilistic methodology facilitates the modeling of the
              Department’s unique loan programs.

              For each program, cash flows are projected over the life of the loans, 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

    FY 2008                                               - 62 -                     Federal Student Aid Annual Report
Financial Section                                                                 Notes to Principal Financial Statements


              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 (for-profit) schools.

              Estimates reflected in these statements were prepared using assumptions developed for
              the FY 2009 Mid-Session Review, a government-wide exercise required annually by
              OMB. These estimates are based on the most current information available to Federal
              Student Aid and the Department at the time the financial statements were prepared.
              Assumptions and their impact are updated after the Mid-Session Review to account for
              significant subsequent changes in activity. Department management has a process to
              review these estimates in the context of subsequent changes in activity and
              assumptions, and to reflect the impact of changes, as appropriate.


              Federal Student Aid and the Department recognize that cash flow projections and the
              sensitivity of changes in assumptions can have a significant impact on estimates.
              Management has attempted to mitigate fluctuations in the estimates by using trend
              analysis to project future cash flows. Changes in assumptions could significantly affect
              the amounts reflected in these statements. For example, a minimal change in the
              projected long-term interest rate charged to borrowers could change the current subsidy
              re-estimate by a significant amount. (See Note 6)

                    Budget Authority
              Budget authority is the authorization provided by law for the Department and Federal
              Student Aid to incur financial obligations that will result in outlays. Federal Student Aid’s
              budgetary resources include (1) unobligated balances of resources from prior years, (2)
              recoveries of prior-year obligations, and (3) new resources, which include
              appropriations, authority to borrow from Treasury, and spending authority from
              collections.

              Unobligated balances associated with resources expiring at the end of the fiscal year
              remain available for five years after expiration only for upward adjustments of prior year
              obligations, after which they are canceled and may not be used. Unobligated balances
              of resources that have not expired at year-end are available for new obligations placed
              against them, as well as upward adjustments of prior year obligations.

              Authority to borrow from Treasury provides most of the funding for disbursements made
              under the Direct Loan Program, Loan Purchase Commitment Authority, Loan
              Participation Purchase Authority, and TEACH Grant Program. Subsidy and
              administrative costs of the programs are funded by appropriations. Budgetary resources
              from collections are used primarily to repay Federal Student Aid’s debt to Treasury.
              Major sources of collections include (1) principal and interest collections from borrowers,
              (2) related fees, and (3) interest from Treasury on balances in certain credit financing
              accounts that make and administer loans and guarantees.

              Borrowing authority is an indefinite budgetary resource authorized under the Credit
              Reform Act. This resource, when realized, finances the unsubsidized portion of the
    FY 2008                                               - 63 -                      Federal Student Aid Annual Report
Financial Section                                                              Notes to Principal Financial Statements


              Direct Loan Program, Loan Purchase Commitment Authority, Loan Participation
              Purchase Authority, and TEACH Grant Program. In addition, borrowing authority is
              requested in advance of expected collections to cover negative subsidy. Treasury
              prescribes the terms and conditions of borrowing authority and lends to the financing
              account amounts as appropriate. Amounts borrowed, but not yet disbursed, are
              included in uninvested funds and earn interest. Treasury uses the same weighted
              average interest rates for both the interest charged on borrowed funds and the interest
              earned on uninvested funds. The Department may carry forward borrowing authority to
              future fiscal years provided that cohorts are disbursing loans. All borrowings from
              Treasury are effective on October 1 of the current fiscal year, regardless of when the
              Department borrowed the funds, except for amounts borrowed to make annual interest
              payments.


                    Assets
              Assets are classified as either entity or non-entity assets. Entity assets are those that
              the Department has authority to use for its operations. Non-entity assets are those held
              by the Department but not available for use in its operations. The Department combines
              its entity and non-entity assets on the face of the balance sheet and discloses its non-
              entity assets in the notes. (See Note 2)

                    Fund Balance with Treasury
              The Fund Balance with Treasury includes general, revolving, and other funds available
              to pay current liabilities and finance authorized purchases, as well as funds restricted
              until future appropriations are received. Treasury processes cash receipts and cash
              disbursements for Federal Student Aid. Federal Student Aid’s records are reconciled
              with those of Treasury.

              A portion of the general fund is funded in advance by multi-year appropriations for
              obligations anticipated during the current and future fiscal years. Revolving funds
              conduct continuing cycles of business-like activity and do not require annual
              appropriations. Their fund balance is derived from borrowings, as well as collections
              from the public and other federal agencies. Other funds, which are non-budgetary,
              primarily consist of deposit funds.

              Available unobligated balances represent amounts that are apportioned for obligation in
              the current fiscal year. Unavailable unobligated balances represent amounts that are
              not apportioned for obligation during the current fiscal year and expired appropriations
              no longer available to incur new obligations. Obligated balances not yet disbursed
              include receivables for undelivered orders and unpaid expended authority. (See Note 3)




    FY 2008                                              - 64 -                    Federal Student Aid Annual Report
Financial Section                                                               Notes to Principal Financial Statements


                    Accounts Receivable
              Accounts Receivable are amounts due to Federal Student Aid from the public and other
              federal agencies. Receivables from the public result from overpayments to recipients of
              grants and other financial assistance programs, and disputed costs resulting from audits
              of educational assistance programs. Amounts due from other federal agencies result
              from reimbursable agreements entered into by Federal Student Aid with these agencies
              for various goods and services. Accounts receivable are reduced to net realizable value
              by an allowance for uncollectible amounts. Estimates for the allowance for loss on
              uncollectible accounts are based on historical data. (See Note 4)


                    Cash and Other Monetary Assets
              Cash and Other Monetary Assets consist of guaranty agency reserves that represent the
              federal government’s interest in the net assets of state and nonprofit FFEL Program
              guaranty agencies. Guaranty agency reserves are classified as non-entity assets with
              the public (See Notes 2 and 5) and are offset by a corresponding liability due to
              Treasury. Guaranty agency reserves include initial federal start-up funds, receipts of
              federal reinsurance payments, insurance premiums, guaranty agency share of
              collections on defaulted loans, investment income, administrative cost allowances, and
              other assets.

              Section 422A of the HEA required FFEL guaranty agencies to establish a Federal
              Student Loan Reserve Fund (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, in whole or in part with federal funds, are the property of the United
              States and reflected in the Budget of the United States Government. However, such
              ownership by the federal government is independent of the actual control of the assets.
              Payments to the Department from guaranty agency Federal Funds, which increase Fund
              Balance with Treasury, are remitted to Treasury at fiscal year-end.

              Federal Student Aid and the Department disburse funds to a guaranty agency. A
              guaranty agency, through its Federal Fund, pays lender claims and default aversion
              fees. The Operating Fund is the property of the guaranty agency except for amounts an
              agency borrows from the Federal Fund (as authorized under Section 422A of the HEA).
              The Operating Fund is used by the guaranty agency to fulfill responsibilities that include
              repaying money borrowed from the Federal Fund, and performing default aversion and
              collection activities.

                    Credit Program Receivables, Net and Liabilities for Loan Guarantees
              The financial statements reflect the Department’s estimate of the long-term cost of direct
              and guaranteed loans in accordance with the Credit Reform Act. Loans and interest
              receivable are valued at their gross amounts less an allowance for the present value of
              amounts not expected to be recovered and thus having to be subsidized—called
              “allowance for subsidy”. The difference is the present value of the cash flows to and
              from Federal Student Aid that are expected from the receivables over their projected

    FY 2008                                              - 65 -                     Federal Student Aid Annual Report
Financial Section                                                                Notes to Principal Financial Statements


              lives. Similarly, liabilities for loan guarantees are valued at the present value of the cash
              outflows from Federal Student Aid less the present value of related inflows. The
              estimated present value of net long-term cash outflows of Federal Student Aid for
              subsidized costs is net of recoveries, interest supplements, and offsetting fees. Federal
              Student Aid records all credit program loans and loan guarantees at their present values.

              Credit program receivables for the Loan Purchase Commitment Authority and Loan
              Participation Purchase Authority include the present value of future cash flows related to
              the participation agreements or purchased loans. Subsidy is transferred, which may be
              prior to purchasing loans, and is recognized as subsidy expense in the Statement of Net
              Cost. The cash flows of these authorities also include inflows and outflows associated
              with the underlying or purchased loans and other related activities including any positive
              or negative subsidy transfers.

              Components of subsidy costs for loans and guarantees include defaults (net of
              recoveries), contractual payments to third-party private loan collectors who receive a set
              percentage of amounts collected, and, as an offset, origination and other fees collected.
              For direct loans, the difference between interest rates incurred by the Department and
              Federal Student Aid on its borrowings from Treasury and interest rates charged to target
              groups is also subsidized (or may provide an offset to subsidy if the Department’s rate is
              less). The corresponding interest subsidy in loan guarantee programs is the payment of
              interest payment of interest supplements to third-party lenders in order to pay down the
              interest rates on loans made by those lenders. Subsidy costs are recognized when
              direct loans or guaranteed loans are disbursed to borrowers and re-estimated each year.
              (See Note 6)

                    General Property, Plant and Equipment
              In accordance with the Department’s policy, Federal Student Aid capitalizes single items
              of property and equipment with a cost of $50,000 or more that have an estimated useful
              life greater than two years. Additionally, Federal Student Aid 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 occurring within the same fiscal year that have an estimated
              useful life greater than two years. Property and equipment are depreciated over their
              estimated useful lives using the straight-line method of depreciation. Internal Use
              Software meeting the above cost and useful life criteria is also capitalized. Internal Use
              Software is either purchased off the shelf, internally developed, or contractor developed
              solely to meet the agency’s needs.




    FY 2008                                               - 66 -                     Federal Student Aid Annual Report
Financial Section                                                                           Notes to Principal Financial Statements


              The Department adopted the following useful lives for its major classes of depreciable
              property and equipment:

                                            Depreciable Property and Equipment
                                                                 (In Years)


                                                   Major Class                                           Useful Life
                Information Technology, Internal Use Software and Telecommunications Equipment               3
                Furniture and Fixtures                                                                       5


                    Liabilities
              Liabilities represent actual and estimated amounts to be paid as a result of transactions
              or events that have already occurred. However, no liabilities can be paid by Federal
              Student Aid or the Department without budget authority. Liabilities for which an
              appropriation has not been enacted are classified as liabilities not covered by budgetary
              resources, and there is no certainty the appropriation will be enacted. The government
              acting in its sovereign capacity can abrogate liabilities that arise from activities other
              than contracts. FFEL Program and Direct Loan Program liabilities are entitlements
              covered by permanent indefinite budget authority. (See Note 8)
                    Debt
              The Department borrows to provide funding for the Direct Loan Program, Loan Purchase
              Commitment Authority, Loan Participation Purchase Authority, and TEACH Grant
              Program. The liability to Treasury from borrowings represents unpaid principal at year-
              end. Federal Student Aid repays the principal based on available fund balances.
              Interest on the debt is calculated at fiscal year-end using rates set by Treasury, with
              such rates generally fixed based on the rate for 10-year Treasury securities. As
              discussed in Note 6, the interest received by Federal Student Aid from borrowers will
              vary from the rate paid to Treasury. Principal and interest payments to Treasury are
              made annually. (See Note 7)

                    Accrued Grant Liability
              Disbursements of grant funds are recognized as expenses at the time of disbursement.
              However, some grant recipients incur expenditures prior to initiating a request for
              disbursement based on the nature of the expenditures. A liability is accrued by Federal
              Student Aid for expenditures incurred by grantees prior to their receiving grant funds to
              cover the expenditures. The amount is estimated using statistical sampling techniques.
              (See Note 9)

                    Net Position
              Net position consists of unexpended appropriations and cumulative results of operations.
              Unexpended appropriations include undelivered orders and unobligated balances,
              except for federal credit financing and liquidating funds. Cumulative results of
              operations represent the net difference since inception between (1) expenses and (2)
              revenues and financing sources. (See Note 10)
    FY 2008                                                        - 67 -                        Federal Student Aid Annual Report
Financial Section                                                               Notes to Principal Financial Statements



                    Personnel Compensation and Other Employee Benefits
              Annual, Sick and Other Leave. The liability for annual leave, compensatory time off,
              and other vested 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 Retirement Benefits. Employees participate either in the
              Civil Service Retirement System (CSRS), a defined benefit plan, or in the Federal
              Employees Retirement System (FERS), a defined benefit and contribution plan. For
              CSRS employees, the Department contributes a fixed percentage of pay.

              FERS consists of Social Security, a basic annuity plan, and the Thrift Savings Plan. The
              Department and the employee contribute to Social Security and the basic annuity plan at
              rates prescribed by law. In addition, the Department is required to contribute to the Thrift
              Savings Plan a minimum of 1 percent per year of the basic pay of employees covered by
              this system and to match voluntary employee contributions up to 3 percent of the
              employee’s basic pay, and one-half of contributions between 3 percent and 5 percent of
              basic pay. For FERS employees, the Department also contributes the employer’s share
              of Medicare.

              Contributions for CSRS, FERS and other retirement benefits are insufficient to fully fund
              the programs, and are subsidized by the Office of Personnel Management (OPM). The
              Department imputes its share of the OPM subsidy, using cost factors provided by OPM,
              and reports the full cost of the programs related to its employees.

              Federal Employees’ Compensation Act. The Federal Employees’ Compensation Act
              (FECA) provides income and medical cost protection to covered federal civilian
              employees injured on the job, to employees who have incurred work-related
              occupational diseases, and to beneficiaries of employees whose deaths are attributable
              to job-related injuries or occupational diseases. The FECA Program is administered by
              the U.S. Department of Labor (Labor), which pays valid claims and subsequently seeks
              reimbursement from the Department for these paid claims.

              The FECA liability consists of two components. The first component is based on actual
              claims paid and recognized by the Department as a liability. Generally the Department
              reimburses Labor within two to three years once funds are appropriated. The second
              component is the estimated liability for future benefit payments based on unforeseen
              events such as death, disability, medical and miscellaneous costs. Labor determines
              this component annually, as of September 30, using a method that considers historical
              benefit payment patterns, wage inflation factors, medical inflation factors, and other
              variables. The projected annual benefit payments are discounted to present value using
              OMB economic assumptions for 10-year Treasury notes and bonds. To provide for the

    FY 2008                                               - 68 -                    Federal Student Aid Annual Report
Financial Section                                                                   Notes to Principal Financial Statements


              effects of inflation on the liability, wage inflation factors (i.e., cost-of-living adjustments)
              and medical inflation factors (i.e., consumer price index medical adjustments) are
              applied to the calculation of projected future benefit payments. These factors are also
              used to adjust historical benefit payments and to adjust future benefit payments to
              current-year constant dollars. A discounting formula is also used to recognize the timing
              of benefit payments as 13 payments per year instead of one lump sum payment per
              year.

              The estimated projections are evaluated by Labor to ensure that the resulting projections
              are reliable. The analysis is based on four tests: (1) a sensitivity analysis of the model to
              economic assumptions, (2) a comparison of the percentage change in the liability
              amount by agency to the percentage change in the actual incremental payments, (3) a
              comparison of the incremental paid losses per case (a measure of case-severity) in
              charge back year 2008 to the average pattern observed during the most recent three
              charge back years, and (4) a comparison of the estimated liability per case in the 2008
              projection to the average pattern for the projections of the most recent three years.

              A portion of the estimated liability for disability benefits assigned to the Department
              under the FECA Program is accrued by Federal Student Aid. The accrual is based on
              the present value of estimated net future payments by Labor.


                    Intragovernmental Transactions
              Federal Student Aid’s financial activities interact with and are dependent upon the
              financial activities of the centralized management functions of the federal government.
              Due to financial regulation and management control by OMB and Treasury, operations
              may not be conducted and financial positions may not be reported as they would if
              Federal Student Aid were a separate, unrelated entity.




    FY 2008                                                 - 69 -                      Federal Student Aid Annual Report
Financial Section                                                                                Notes to Principal Financial Statements



              …Note 2.              Non-Entity Assets
              As of September 30, 2008 and 2007, non-entity assets consisted of the following:
                                                              Non-Entity Assets
                                                                 (Dollars in Millions)

                                                                                                 2008                     2007
                     Non-Entity Assets
                       Intragovernmental
                           Fund Balance with Treasury                                    $                 8      $                  9
                             Total Intragovernmental                                                       8                         9
                        With the Public
                            Cash and Other Monetary Assets                                            1,663                    1,103
                            Accounts Receivable, Net                                                      4                        -
                            Credit Program Receivables, Net                                             186                      188
                               Total With the Public                                                  1,853                    1,291
                     Total Non-Entity Assets                                                          1,861                    1,300
                     Entity Assets                                                                  191,426                  173,766
                     Total Assets                                                        $          193,287       $          175,066


              Non-entity intragovernmental assets primarily consist of deposit fund balances. Non-
              entity assets with the public primarily consist of guaranty agency reserves and Federal
              Perkins Program Loan Receivables. (See Notes 5 and 6)

              …Note 3.              Fund Balance with Treasury
              The Fund Balance with Treasury, by fund type, as of September 30, 2008 and 2007,
              consisted of the following:


                                                               Fund Balances
                                                                 (Dollars in Millions)

                                                                                                    2008                   2007
                     General Funds                                                           $           14,874       $          15,829
                     Revolving Funds                                                                     42,024                  42,305
                     Special Funds                                                                            9                       -
                     Other Funds                                                                              8                       7
                     Fund Balance with Treasury                                              $           56,915       $          58,141




    FY 2008                                                    - 70 -                                   Federal Student Aid Annual Report
Financial Section                                                                                 Notes to Principal Financial Statements


              The Status of Fund Balance with Treasury, as of September 30, 2008 and 2007,
              consisted of the following:


                                                Status of Fund Balance with Treasury
                                                                  (Dollars in Millions)

                                                                                                     2008                  2007
                     Unobligated Balance
                       Available                                                              $            1,562       $       2,825
                       Unavailable                                                                        26,912              37,313
                     Obligated Balance, Not Yet Disbursed                                                 28,433              17,996
                     Non-Budgetary Fund Balance with Treasury                                                  8                   7
                     Fund Balance with Treasury                                               $           56,915       $      58,141




              …Note 4.           Accounts Receivable
              Accounts Receivable, as of September 30, 2008 and 2007, consisted of the following:
                                                            Accounts Receivable
                                                                  (Dollars in Millions)

                                                                                                  2008
                                                              Gross
                                                            Receivables                       Allowance             Net Receivables

                     Intragovernmental                  $                      -          $                 -      $                  -
                     With the Public                                       118                            (35)                    83

                     Accounts Receivable                $                  118            $               (35)     $              83


                                                                                                  2007
                                                              Gross
                                                            Receivables                       Allowance             Net Receivables

                     Intragovernmental                  $                      -          $                 -      $                  -
                     With the Public                                         53                           (17)                    36

                     Accounts Receivable                $                    53           $               (17)     $              36




    FY 2008                                                     - 71 -                                   Federal Student Aid Annual Report
Financial Section                                                                        Notes to Principal Financial Statements




              …Note 5.          Cash and Other Monetary Assets
              Cash and Other Monetary Assets consist of reserves held in the FFEL Guaranty Agency
              Federal Funds. Changes in the valuation of the Federal Fund increase or decrease the
              Department’s Cash and Other Monetary Assets with a corresponding change in the
              Payable to Treasury. The table below presents Cash and Other Monetary Assets for the
              years ended September 30, 2008 and 2007.


                                                   Cash and Other Monetary Assets
                                                                 (Dollars in Millions)

                                                                                             2008                2007
                     Beginning Balance, Cash and Other Monetary Assets                   $       1,103       $          566

                       Valuation Increase in Guaranty Agency Federal Funds                          722                 793
                       Less: Collections from Guaranty Agency Federal Funds
                              Statutory Recall Amounts Collected from GAs                             -                  82
                              Excess Collections                                                    162                 174
                              Collections Remitted to Treasury                                      162                 256

                     Ending Balance, Cash and Other Monetary Assets                      $       1,663       $      1,103



              The $560 million net increase in the Federal Fund from FY 2007 to FY 2008 reflects the
              impact of guaranty agencies’ ongoing operations. During FY 2008, $162 million was
              remitted to the Department by a guaranty agency whose agreement with the Department
              requires the agency to remit funds in excess of agreed-upon working capital levels.
              Remitted funds were returned to Treasury.

              …Note 6.          Credit Programs for Higher Education
              William D. Ford Federal Direct Loan Program. The federal government makes loans
              directly to students and parents through participating institutions of higher education
              under the Direct Loan Program. Direct Loans are originated and serviced through
              contracts with private vendors.
              The Department disbursed approximately $21.1 billion in Direct Loans to eligible
              borrowers in FY 2008 and approximately $15.7 billion in FY 2007. Loans typically are
              disbursed in multiple installments over an academic period; as a result, loan
              disbursements for an origination cohort year often cross fiscal years. Half of all loan
              volume is obligated in the fourth quarter of a fiscal year. Loan cohorts disburse over two
              years. Regardless of the fiscal year in which they occur, disbursements are tracked by
              cohort as determined by the date of obligation rather than disbursement.
              Approximately 10 percent of Direct Loan obligations made in an individual fiscal year are
              never disbursed. Loan obligations are established at a summary level based on
              estimates of schools’ receipt of aid applications. The loan obligation may occur before a
              student has been accepted by a school or begins classes. For Direct Loans obligated in
              the 2008 cohort, an estimated $3.2 billion will never be disbursed. Eligible schools may
              originate direct loans through a cash advance from the Department or by advancing their
              own funds in anticipation of reimbursement from the Department.
    FY 2008                                                    - 72 -                        Federal Student Aid Annual Report
Financial Section                                                               Notes to Principal Financial Statements


              The Department accrues interest receivable and records interest revenue on performing
              Direct Loans and, given the Department’s substantial collection rates, on defaulted
              Direct Loans.
              Federal Family Education Loan Program. Prior to FY 2008, the FFEL Program
              included only private lender loans to students and parents insured against default by the
              federal government. Nonprofit guaranty agencies act as intermediaries in administering
              the guarantees. In FY 2008, the FFEL Program also includes approximately $5.1 billion
              in direct federal assets.
              Beginning with FFEL loans first disbursed on or after October 1, 1993, FFEL lender
              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 reserves they hold in trust. FFEL lenders 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 Direct Loan and FFEL programs are identical.
              The temporary loan purchase authority was added to the FFEL Program by ECASLA,
              effective July 1, 2008 through September 30, 2009. The Department has implemented
              two activities under this authority for loans originated in academic year 2008–09: loan
              purchase commitments where the Department purchases loans directly from FFEL
              lenders and loan participations where the Department purchases participation interests
              in FFEL loans. A credit program receivable is established for loans purchased directly or
              through a participation interest.
              In loan participation transactions, lenders transfer to a custodian title of FFEL loans on
              which at least one disbursement has been made. The custodian sells financial
              certificates to the Department at the par value of these loans and remits the proceeds to
              lenders. Certificates bear an interest rate of the 91-day commercial paper rate plus 50
              basis points, reset quarterly, and must be redeemed by September 30, 2009. Funds to
              redeem certificates may be obtained by selling the underlying loans to the Department.
              The estimated FFEL liability for loan guarantees is reported as 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 loan cancellations. The same methodology is used to estimate the allowance on
              Direct Loan receivables.
              As of September 30, 2008 and 2007, total principal balances outstanding of guaranteed
              loans held by lenders were approximately $415 billion and $363 billion, respectively. As
              of September 30, 2008 and 2007, the estimated maximum government exposure on
              outstanding guaranteed loans held by lenders was approximately $405 billion and $359
              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 Fund. Payments by
              guaranty agencies do not reduce government exposure because they are made from the
              Federal Fund administered by the agencies but owned by the federal government.
              Approximately 13 percent of guaranteed loan commitments made in an individual fiscal
              year are never disbursed due to the nature of the loan commitment process. For
              guaranteed loans committed in the 2008 cohort, an estimated $9.5 billion will never be
              disbursed.

    FY 2008                                              - 73 -                     Federal Student Aid Annual Report
Financial Section                                                                Notes to Principal Financial Statements


              Guaranteed loans that default are initially turned over to guaranty agencies for collection,
              and interest receivable is accrued and recorded on the loans as the collection rate is
              substantial. After approximately four years, defaulted guaranteed loans not in
              repayment are turned over to the Department for collection. Accrued interest on the
              subrogated loan is calculated, but only realized upon collection.
              Federal Perkins Loan Program. The Federal Perkins Loan Program is a campus-
              based program providing financial assistance to eligible postsecondary school students.
              In some statutorily defined cases, funds are provided to reimburse schools for loan
              cancellations. For defaulted loans assigned to the Department, collections of principal,
              interest and fees, net of amounts paid by the Department to cover contract collection
              costs, are transferred to Treasury annually.
              TEACH Grant Program. Beginning July 1, 2008, the TEACH Grant Program awards
              annual grants up to $4,000 to eligible undergraduate and graduate students agreeing to
              serve as full-time mathematics, science, foreign language, bilingual education, special
              education, or reading teachers at high-need schools for four years within eight years of
              graduation. For students failing to fulfill the service requirement, grants are converted to
              Direct Unsubsidized Stafford Loans. Because grants could be converted to loans, for
              budget and accounting purposes the program is operated under the requirements of the
              Credit Reform Act.
              Loan Consolidations
              Borrowers may prepay existing loans without penalty through a new consolidation loan.
              Under the Credit Reform Act and requirements provided by OMB Circular No. A-11,
              Preparation, Submission, and Execution of the Budget, the retirement of Direct Loans
              being consolidated is considered a receipt of principal and interest. This receipt is offset
              by the disbursement related to the newly created consolidation loan. Underlying direct
              or guaranteed loans, performing or nonperforming, are paid off in their original cohort;
              new consolidation loans are originated in the cohort in which the activity occurs.
              Consolidation activity is taken into consideration in establishing subsidy rates for defaults
              and other cash flows. The cost of new consolidations is included in subsidy expense for
              the current-year cohort; the effect of prepayments on existing loans could contribute to
              re-estimates of prior cohort costs. The loan liability and net receivables include
              estimates of future prepayments of existing loans through consolidations; they do not
              reflect costs associated with anticipated future consolidation loans.
              Student loan consolidation disbursements for FY 2008 were $15 billion ($9 billion in
              FFEL and $6 billion in Direct Loans), a 70% reduction from FY 2007. This lower rate of
              consolidations is a continuation of the trend identified in FY 2007, which was 45% lower
              than FY 2006. This trend exists due to a number of technical, legislative and economic
              factors. In the student loan programs a borrower is generally limited to a one-time
              consolidation; the high level of consolidations between FY 2002 and FY 2006, $280
              billion, significantly reduced the existing pool of loans eligible for consolidation to
              generally those students currently in school. Recent legislative changes, particularly the
              establishment of fixed interest rates on new loans and the reduction of guaranteed
              lender returns, have significantly reduced both borrowers’ financial benefits from
              consolidations and lenders’ willingness to market consolidations through lower interest
              rates or other financial incentives. In FY 2008, economic conditions restricted the
              availability of capital, further reducing consolidation activity.



    FY 2008                                               - 74 -                     Federal Student Aid Annual Report
Financial Section                                                              Notes to Principal Financial Statements


              FY 2008 Modification
              The recorded subsidy cost of a loan is based on a set of assumed future cash flows.
              Government actions that change these assumed future cash flows change subsidy cost
              and are recorded as loan modifications. Loan modifications are recognized under the
              same accounting principle as subsidy re-estimates. Modification adjustment transfers
              are required to adjust for the difference between current discount rates used to calculate
              modification costs and the discount rates used to calculate cohort interest expense and
              revenue. Separate amounts are calculated for modification costs and modification
              adjustment transfers.
              The CCRAA included a number of provisions affecting the cost of existing loans. New
              income-based repayment and public service loan forgiveness programs were created;
              income-based repayment is available to existing borrowers in both FFEL and Direct
              Loans, while public service loan forgiveness is available to existing Direct Loan
              borrowers. (Existing FFEL borrowers may consolidate into Direct Loans to obtain the
              benefit.) The Act also made retroactive changes to loan deferment provisions for certain
              military personnel.
              The Act also eliminated the provision under which FFEL lenders designated as
              “exceptional performers” received a higher insurance rate on defaulted loans, reduced
              FFEL guaranty agencies’ account maintenance fees, and lowered the percentage
              guaranty agencies may retain on collections of certain defaulted loans.
              Loan modification savings of $2.5 billion were recorded in the FFEL Program and $4.1
              billion in modification costs were recorded in the Direct Loan Program. The FFEL
              Program also recognized a net modification adjustment transfer saving of $30 million
              and the Direct Loan Program recognized a net savings of $9 million.




    FY 2008                                              - 75 -                    Federal Student Aid Annual Report
Financial Section                                                                          Notes to Principal Financial Statements


              Credit Program Receivables
              Credit Program Receivables as of September 30, 2008 and 2007, consisted of the
              following:
                                                        Credit Program Receivables
                                                                   (Dollars in Millions)


                                                                                                   2008               2007
                     Direct Loan Program Loan Receivables, Net                                 $     109,850      $      99,002
                     FFEL Program
                       FFEL Guaranteed Loan Program, Net (Pre-1992)                                       3,591              4,036
                       FFEL Program (Post-1991):
                         FFEL Guaranteed Loan Program, Net                                            15,624             12,526
                         Temporary Loan Purchase Authority:
                            Loan Purchase Commitment, Net                                                   64                   -
                            Loan Participation Purchase, Net                                              5,230                  -
                     Federal Perkins Program Loan Receivables, Net                                         186                188
                     TEACH Grant Program Receivables, Net                                                    1                   -

                     Credit Program Receivables, Net                                           $     134,546      $     115,752


              William D. Ford Federal Direct Loan Program. The following schedule summarizes
              the principal and related interest receivables, net of the allowance for subsidy.


                                             Direct Loan Program Loan Receivables, Net
                                                                   (Dollars in Millions)

                                                                                                   2008               2007
                     Principal Receivable                                                  $        117,610       $     102,440
                     Interest Receivable                                                              5,983                  4,807
                     Receivables                                                                    123,593             107,247
                       Less: Allowance for Subsidy                                                   13,743                  8,245

                     Direct Loan Program Loan Receivables, Net                             $        109,850       $      99,002


              Of the $123.6 billion in receivables as of September 30, 2008, $10.3 billion in loan
              principal were in default, compared to $9.3 billion a year earlier. Defaulted Direct Loans
              are held in the Department’s Borrower Services Collections Group.




    FY 2008                                                      - 76 -                            Federal Student Aid Annual Report
Financial Section                                                                         Notes to Principal Financial Statements


              Federal Family Education Loan Program. The following schedule summarizes the
              principal and related interest receivables, net of the allowance for subsidy.
                                                FFEL Program Loan Receivables, Net
                                                              (Dollars in Millions)

                                                                                             2008               2007

                    FFEL Guaranteed Loan Program (Pre-1992)
                    Principal Receivable                                              $         7,587      $        8,208
                    Interest Receivable                                                           182                 224
                    Receivables                                                                 7,769               8,432
                       Less: Allowance for Subsidy                                              4,178               4,396
                    FFEL Guaranteed Loan Program Receivables, Net (Pre-1992)                    3,591               4,036

                    FFEL Program (Post-1991)

                    Principal Receivable
                      FFEL Guaranteed Loan Program                                             17,641              13,324
                      Temporary Loan Purchase Authority:
                         Loan Purchase Commitment                                                  59                   -
                         Loan Participation Purchase                                            5,036                   -

                    Interest Receivable
                       FFEL Guaranteed Loan Program                                             2,143               1,957
                       Temporary Loan Purchase Authority:
                         Loan Purchase Commitment                                                   -                   -
                         Loan Participation Purchase                                               11                   -
                    Receivables                                                                24,890              15,281

                    Less: Allowance for Subsidy
                      FFEL Guaranteed Loan Program                                              4,160               2,755
                      Temporary Loan Purchase Authority:
                        Loan Purchase Commitment                                                   (5)                  -
                        Loan Participation Purchase                                              (183)                  -

                    FFEL Guaranteed Loan Program, Net                                          15,624              12,526
                    Temporary Loan Purchase Authority:
                      Loan Purchase Commitment, Net                                                64                   -
                      Loan Participation Purchase, Net                                          5,230                   -

                    FFEL Program Loan Receivables, Net                                $         24,509      $      16,562


              All loans under the temporary loan purchase authority are federal assets; the loan
              receivable represents all outstanding loans. Loan participation interests were first
              purchased by the Department in August 2008. No participation interests were redeemed
              in FY 2008.




    FY 2008                                                 - 77 -                            Federal Student Aid Annual Report
Financial Section                                                                                       Notes to Principal Financial Statements


              Federal Perkins Loan Program. At September 30, 2008 and 2007, loans receivable,
              net of an allowance for loss, were $186 million and $188 million, respectively. These
              loans are valued at historical cost.
              TEACH Grant Program. At September 30, 2008, loans receivable, net of an allowance
              for loss, was $1 million. The TEACH Grant Program was established in FY 2008.


              Reconciliation of Allowance for Subsidy and Liability for Loan Guarantees
              William D. Ford Federal Direct Loan Program. The following schedule provides a
              reconciliation between the beginning and ending balances of the allowance for subsidy
              for the Direct Loan Program:


                                     Direct Loan Program Reconciliation of Allowance for Subsidy
                                                                            (Dollars in Millions)

                                                                                                        2008                     2007
                     Beginning Balance, Allowance for Subsidy                                       $          8,245         $          8,405
                     Components of Subsidy Transfers
                       Interest Rate Differential                                                              (1,540)                   (846)
                       Defaults, Net of Recoveries                                                                454                     422
                       Fees                                                                                      (487)                   (398)
                       Other                                                                                    1,498                   1,117
                     Current Year Subsidy Transfers                                                               (75)                   295
                     Components of Subsidy Re-estimates
                       Interest Rate Re-estimates1                                                               222                     (311)
                       Technical and Default Re-estimates                                                        946                     (483)
                     Subsidy Re-estimates                                                                      1,168                     (794)
                     Components of Loan Modifications
                       Loan Modification Costs                                                                 4,143                        -
                       Modification Adjustment Transfers                                                           (9)                      -
                     Loan Modifications                                                                        4,134                        -
                     Activity
                       Fee Collections                                                                           482                      448
                       Loan Cancellations2                                                                      (240)                    (154)
                       Subsidy Allowance Amortization                                                            456                      435
                       Other                                                                                    (427)                    (390)
                     Total Activity                                                                              271                     339
                     Ending Balance, Allowance for Subsidy                                          $        13,743          $          8,245

                        1
                            The interest rate re-estimate relates to subsidy associated with establishing a fixed rate for
                            the Department’s borrowing from Treasury.
                        2
                            Loan cancellations include write-offs of loans because the primary borrower died, became
                            disabled, or declared bankruptcy.




    FY 2008                                                              - 78 -                                Federal Student Aid Annual Report
Financial Section                                                                                       Notes to Principal Financial Statements


              Federal Family Education Loan Program. The following schedule provides
              a reconciliation between the beginning and ending balances of the liability for
              loan guarantee for the insurance portion of the FFEL Program:

                                 FFEL Program Reconciliation of Liabilities for Loan Guarantees
                                                                          (Dollars in Millions)

                                                                                                           2008                2007
                     Beginning Balance, FFEL Financing Accounts Liability for
                     Loan Guarantees                                                                $          50,731      $          52,350
                     Components of Subsidy Transfers
                       Interest Supplement Costs                                                                  1,212                7,580
                       Defaults, Net of Recoveries                                                                   43                  885
                       Fees                                                                                        (449)              (5,052)
                       Other1                                                                                       436                2,967
                     Current Year Subsidy Transfers                                                               1,242                6,380
                     Components of Subsidy Re-estimates
                       Interest Rate Re-estimates                                                                  (700)               1,286
                       Technical and Default Re-estimates                                                          (760)              (2,782)
                     Subsidy Re-estimates                                                                       (1,460)               (1,496)
                     Components of Loan Modifications
                       Loan Modification Costs                                                                  (2,464)                    -
                       Modification Adjustment Transfers                                                           (30)                    -
                     Loan Modifications                                                                         (2,494)                    -
                     Activity
                       Interest Supplement Payments                                                             (8,744)           (10,991)
                       Claim Payments                                                                           (8,029)            (5,924)
                       Fee Collections                                                                           4,107              4,036
                       Interest on Liability Balance                                                             1,372              1,616
                       Other2                                                                                    6,460              4,760
                     Total Activity                                                                             (4,834)               (6,503)
                     Ending Balance, FFEL Financing Account Liability for Loan
                     Guarantees                                                                     $          43,185      $          50,731
                     FFEL Liquidating Account Liability for Loan Guarantees                                        137                  143
                     Liabilities for Loan Guarantees                                                $          43,322      $          50,874
                         1
                             Subsidy primarily associated with debt collections and loan cancellations due to death,
                             disability, and bankruptcy.
                         2
                             Activity primarily associated with the transfer of subsidy for defaults; loan consolidation
                             activity; and loan cancellations due to death, disability, and bankruptcy.


              Financing Account Interest Expense and Interest Revenue
              Financing accounts borrow from Treasury to fund the unsubsidized portion of lending
              activities. The Department calculates and pays Treasury interest at the end of each
              year. During the year, interest is earned on outstanding direct loans, outstanding FFEL
              loans purchased by the Department, participation interests, and the Fund Balance with
              Treasury.
              Subsidy amortization is calculated, as required in Statement of Federal Financial
              Accounting Standards No. 2, Accounting for Direct Loans and Loan Guarantees, as the
              difference between interest revenue and interest expense. The allowance for subsidy is
              adjusted with the offset to interest revenue.
    FY 2008                                                              - 79 -                               Federal Student Aid Annual Report
Financial Section                                                                                   Notes to Principal Financial Statements


              William D. Ford Federal Direct Loan Program. The following schedule summarizes
              the Direct Loan financing account interest expense and interest revenue:


                                                             Direct Loan Program
                                                                    (Dollars in Millions)

                                                                                                    2008                       2007
                        Interest Expense on Treasury Borrowing                              $              6,190       $              5,675
                     Interest Expense                                                       $              6,190       $              5,675


                        Interest Revenue from the Public                                    $              5,277       $              4,859
                        Amortization of Subsidy                                                             (456)                      (435)
                        Interest Revenue on Uninvested Funds                                               1,369                      1,251
                     Interest Revenue                                                       $              6,190       $              5,675



              Payable to Treasury
              Payable to Treasury for the years ended September 30, 2008 and 2007 consisted of the
              following:
                                                            Payable to Treasury
                                                                  (Dollars in Millions)

                                                                                                      2008                     2007
                     Future Liquidating Account Collections, Beginning Balance                  $          4,108           $          4,555
                       Valuation of Pre-1992 Loan Liability and Allowance                                    250                       288
                       Capital Transfers to Treasury                                                         (592)                     (735)
                     Future Liquidating Account Collections, Ending Balance                     $          3,766       $              4,108
                     Collections on Guaranty Agency Federal Funds                                                  -                      2
                     Direct Loan Program Downward Subsidy Re-estimate                                              -                   498

                     FFEL Program Downward Subsidy Re-estimate                                                     -                   743
                     Payable to Treasury                                                        $          3,766           $          5,351


              The liquidating account, based on available fund balance, periodically transfers Fund
              Balance to Treasury’s account. The FFEL and Direct Loan financing accounts pay the
              liability related to downward subsidy re-estimates upon budget execution. Effective
              FY 2008, Treasury guidance requires that the liability resulting from downward subsidy
              re-estimates be included in Other Intragovernmental Liabilities on the Balance Sheet
              (see Note 8).




    FY 2008                                                      - 80 -                                    Federal Student Aid Annual Report
Financial Section                                                                        Notes to Principal Financial Statements


              Subsidy Expense

              William D. Ford Federal Direct Loan Program

                                             Direct Loan Program Subsidy Expense
                                                             (Dollars in Millions)

                                                                                           2008                2007
                     Components of Current Year Subsidy Transfers
                       Interest Rate Differential                                    $        (1,540)      $           (846)
                       Defaults, Net of Recoveries                                               454                    422
                       Fees                                                                     (487)                  (398)
                       Other                                                                   1,498                  1,117
                     Current Year Subsidy Transfers                                               (75)                  295
                       Subsidy Re-estimates                                                    1,168                   (794)
                       Loan Modification Costs                                                 4,143                      -
                     Direct Loan Subsidy Expense                                     $         5,236       $           (499)


              In the 2008 re-estimates, Direct Loan subsidy expense was increased by $1.2 billion.
              Changes in interest rates increased subsidy expense by $859 million, updated data on
              teacher loan forgiveness led to an additional increase of $481 million, and rising default
              rates increased subsidy expense by $194 million. These increases were partially offset
              by decreases due to reduced prepayments of $(606) million and changes in the rate at
              which loans enter repayment of $(261) million. The subsidy rate is sensitive to interest
              rate fluctuations. For example, a 1 percent increase in projected borrower base rates
              would reduce projected Direct Loan subsidy expense by $465 million.

              In the 2007 re-estimates, Direct Loan subsidy expense was decreased by $794 million.
              Changes in the income-contingent repayment assumption increased subsidy expense by
              $1 billion. This increase was more than offset by decreases in subsidy cost related to
              loan volume of $(924) million, statutory loan discharges of $(544) million, interest rates
              of $(348) million and other factors. The subsidy rate is sensitive to interest rate
              fluctuations. For example, a 1 percent increase in projected borrower base rates would
              reduce projected Direct Loan costs by $955 million.




    FY 2008                                                 - 81 -                           Federal Student Aid Annual Report
Financial Section                                                                        Notes to Principal Financial Statements


              Federal Family Education Loan Program

                                                   FFEL Program Subsidy Expense
                                                             (Dollars in Millions)


                                                                                           2008                2007
                     FFEL Guaranteed Loan Program
                       Components of Current Year Subsidy Transfers
                         Interest Supplement Costs                                   $         1,212       $          7,580
                         Defaults, Net of Recoveries                                              43                    885
                         Fees                                                                   (449)                 (5,052)
                         Other                                                                   436                  2,967
                       Current Year Subsidy Transfers                                          1,242                  6,380
                         Subsidy Re-estimates                                                  (1,460)                (1,496)
                         Loan Modification Costs                                               (2,464)                     -
                     FFEL Guaranteed Loan Program Subsidy Expense                    $         (2,682)     $          4,884

                     Temporary Loan Purchase Authority
                     Loan Purchase Commitment
                       Components of Current Year Subsidy Transfers
                         Interest Supplement Costs                                   $              (9)   $                -
                         Defaults, Net of Recoveries                                                 -                     -
                         Fees                                                                       2                      -
                         Other                                                                      5                      -
                     Loan Purchase Commitment Subsidy Expense                        $              (2)   $                -

                     Loan Participation Purchase
                       Components of Current Year Subsidy Transfers
                         Interest Supplement Costs                                   $            (292)   $                -
                         Defaults, Net of Recoveries                                                 5                     -
                         Fees                                                                     (476)                    -
                         Other                                                                    595                      -
                     Loan Participation Purchase Subsidy Expense                     $            (168)   $                -


                     FFEL Program Subsidy Expense                                    $         (2,852)     $          4,884


              In the 2008 re-estimates, FFEL subsidy expense was decreased by $1.5 billion.
              Changes in interest rate forecasts decreased subsidy expense by $8.7 billion. This
              decrease was partially offset by increases of $4.4 billion due to reduced prepayments,
              $2.5 billion due to changes in projected guaranty agency retention of collections on
              defaulted loans, and $1.3 billion due to greater use of teacher loan forgiveness benefits.
              The subsidy rate is sensitive to interest rate fluctuations. For example, a 1 percent
              increase in borrower interest rates and the guaranteed yield for lenders would increase
              projected FFEL costs by $16.3 billion.

              In the 2007 re-estimates, FFEL subsidy expense was decreased by $1.5 billion.
              Changes in the federal cost of loan deferments and forbearance increased subsidy
              expense by $2.3 billion. This increase was more than offset by changes in subsidy cost
              related to statutory loan discharges of $(1.4) billion, loan maturity and repayment rates of
              $(1.5) billion, loan volume of $890 million and other factors. The subsidy rate is

    FY 2008                                                 - 82 -                           Federal Student Aid Annual Report
Financial Section                                                                       Notes to Principal Financial Statements


              sensitive to interest rate fluctuations. For example, a 1 percent increase in borrower
              interest rates and the guaranteed yield for lenders would increase projected FFEL costs
              by $11.1 billion.
              In FY 2007 the Department restated the eligibility requirements specified by the HEA for
              lenders to receive SAP at the 9.5 percent minimum return rate on loans made or
              purchased with funds derived from tax-exempt obligations issued before October 1993,
              and implemented certain processes to validate eligibility. As a result of lenders’
              business decisions and audits performed in FYs 2007 and 2008, nearly two-thirds of
              lenders previously requesting this SAP have ceased requesting the payment in 2008.
              The Department decreased the FFEL subsidy by $269 million as a result.
              Subsidy Rates
              The subsidy rates applicable to the 2008 loan cohort year follow:


                                                    Subsidy Rates—Cohort 2008
                                                                 Interest
                                                               Differential/
                                                              Supplements      Defaults      Fees      Other      Total

                     Direct Loan Program                         (7.28%)        1.58%       (1.95%)    5.68%     (1.97%)
                     FFEL Program (Post-1991):
                       FFEL Guaranteed Loan Program              0.88%          0.53%       (3.57%)    2.15%     (0.01%)
                       Temporary Loan Purchase Authority:
                         Loan Purchase Commitment               (14.78%)        0.07%        2.66%     8.19%     (3.86%)
                         Loan Participation Purchase             (3.53%)        0.06%       (5.80%)    7.26%     (2.01%)


              The subsidy rate represents the subsidy expense of the program in relation to the
              obligations or commitments made during the fiscal year. 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 the
              Department disburses direct loans or third-party lenders disburse guaranteed loans.
              The subsidy expense reported in the current year also includes modifications and re-
              estimates. The subsidy rates shown above, which reflect aggregate negative subsidy in
              the FY 2008 cohort, cannot be applied to direct or guaranteed loans disbursed during
              the current reporting year to yield the subsidy expense, nor are these rates applicable to
              the portfolio as a whole.
              The costs of the Department’s student loan programs, especially the Direct Loan
              Program, are highly sensitive to changes in actual and forecasted interest rates. The
              formulas for determining program interest rates are established by statute; the existing
              loan portfolio has a mixture of borrower and lender rate formulas. Interest rate
              projections are based on probabilistic interest rate scenario inputs developed and
              provided by OMB.




    FY 2008                                                 - 83 -                          Federal Student Aid Annual Report
Financial Section                                                                                   Notes to Principal Financial Statements


              Administrative Expenses
              Administrative Expense for the years ended September 30, 2008 and 2007, consisted of
              the following:


                                                            Administrative Expense
                                                                       (Dollars in Millions)

                                                                2008                                                2007
                                                 Direct Loan                    FFEL           Direct Loan
                                                  Program                     Program           Program                    FFEL Program

                     Operating Expense               $        343         $           222       $            397               $         232
                     Other Expense                             14                        9                    16                           9
                     Administrative
                     Expenses                        $        357         $           231       $            413               $         241


              …Note 7.          Debt
              Debt to Treasury as of September 30, 2008 and 2007 consisted of the following:

                                                                              Debt
                                                                       (Dollars in Millions)
                                                                                               2008
                                                         Beginning              New                                            Ending
                                                          Balance             Borrowing             Repayments                 Balance
                     Treasury Debt
                     Direct Loan Program                 $ 103,893          $        28,172         $        (14,646)      $         117,419
                     FFEL Program
                       Loan Purchase Commitment                  -                       69                         -                     69
                       Loan Participation Purchase               -                   10,754                         -                 10,754
                     TEACH Grant Program                         -                       26                      (12)                     14
                     Total Treasury Debt                 $ 103,893          $        39,021         $        (14,658)      $         128,256


                                                                                               2007
                                                         Beginning              New                                            Ending
                                                          Balance             Borrowing             Repayments                 Balance
                     Treasury Debt
                     Direct Loan Program                 $ 105,430          $        17,892         $        (19,429)              $ 103,893
                     FFEL Program
                       Loan Purchase Commitment                  -                        -                         -                      -
                       Loan Participation Purchase               -                        -                         -                      -
                     TEACH Grant Program                         -                        -                         -                      -
                     Total Treasury Debt                 $ 105,430          $        17,892             $    (19,429)              $ 103,893



              The level of repayments on borrowings to Treasury is derived from many factors. For
              instance, beginning of the year cash balances, collections, and new borrowings have an
              impact on the cash available to repay Treasury. Cash is also held to cover future
              liabilities, such as contract collection costs and disbursements in transit.



    FY 2008                                                          - 84 -                                 Federal Student Aid Annual Report
Financial Section                                                                                             Notes to Principal Financial Statements


              …Note 8.            Other Liabilities
              Other liabilities include current and non-current liabilities. The non-current liabilities
              primarily relate of the student loan receivables of the Federal Perkins Loan Program,
              which when collected, will be returned to the General Fund of Treasury.
              The current liabilities covered by budgetary resources primarily consist of downward
              subsidy re-estimates, which when executed will be paid to Treasury. Effective FY 2008,
              Treasury guidance requires that the liability resulting from downward subsidy re-
              estimates be included in Other Intragovernmental Liabilities. In FY 2007 and prior, these
              amounts were included in Payable to Treasury. (See Note 6)
              Other Liabilities as of September 30, 2008 and 2007 consisted of the following:

                                                                     Other Liabilities
                                                                          (Dollars in Millions)

                                                                                              2008                                 2007
                                                                                Intragovern-              With the        Intragovern-       With the
                                                                                   mental                  Public            mental           Public
                     Liabilities Covered by Budgetary Resources
                       Current
                          Employer Contributions and Payroll Taxes               $            1       $              -    $        1      $             -
                          Liability for Deposit Funds                                             -                  8              -               8
                          Accrued Payroll and Benefits                                            -                  5              -               4
                          Deferred Revenue                                                        -             42                  -                   -
                          Liabilities in Miscellaneous Receipt Accounts                  6,834                       -              -                   -
                     Total Other Liabilities Covered by Budgetary
                     Resources                                                   $       6,835        $         55        $        1     $         12
                     Liabilities Not Covered by Budgetary Resources
                       Current
                          Accrued Unfunded Annual Leave                          $                -   $              8    $         -    $          7
                       Non-current
                          Accrued Unfunded FECA Liability                                     1                      -             1                    -
                          Liabilities in Miscellaneous Receipt Accounts                    186                       -           188                    -
                          Accrued FECA Actuarial Liability                                        -                  4              -               4
                     Total Other Liabilities Not Covered by Budgetary
                     Resources                                                   $         187        $         12        $      189     $         11

                     Other Liabilities                                           $       7,022        $         67        $      190     $         23



              Liabilities Not Covered by Budgetary Resources
              Liabilities not covered by budgetary resources include liabilities for which congressional
              action is needed before budgetary resources can be provided. Although future
              appropriations to fund these liabilities are likely, it is not certain that appropriations will
              be enacted to fund these liabilities. Liabilities not covered by budgetary resources
              totaled $199 million and $200 million as of September 30, 2008 and 2007, respectively.
              As of September 30, 2008 and 2007, liabilities on the Balance Sheet totaled $186.1
              billion and $163.2 billion respectively. Of this amount, liabilities covered by budgetary
              resources totaled $185.9 billion as of September 30, 2008, and $163.0 billion as of
              September 30, 2007.

    FY 2008                                                          - 85 -                                          Federal Student Aid Annual Report
Financial Section                                                                      Notes to Principal Financial Statements


              …Note 9.          Accrued Grant Liability
              Federal Student Aid’s accrued grant liability was $862 million and $1,030 million as of
              September 30, 2008 and 2007, respectively.

              …Note 10.         Net Position
              Unexpended appropriations as of September 30, 2008 and 2007 consisted of the
              following:

                                                  Unexpended Appropriations
                                                           (Dollars in Millions)

                                                                                        2008                 2007
                     Unobligated Balances
                       Available                                                   $         1,153     $          2,496
                       Not Available                                                           505                  659
                     Undelivered Orders                                                     11,814               11,265

                     Unexpended Appropriations                                     $        13,472      $       14,420


              Federal Student Aid had Cumulative Results of Operations of $(6,273) million as of
              September 30, 2008, and $(2,574) million as of September 30, 2007. Cumulative
              Results of Operations consists mostly of unfunded upward subsidy re-estimates, other
              unfunded expenses, and net investments of capitalized assets.

              …Note 11.         Intragovernmental Cost and Exchange Revenue by
                                Program
              As required by the Government Performance and Results Act of 1993, Federal Student
              Aid’s reporting organization has been aligned with Strategic Goal 3 presented in the U.S.
              Department of Education’s Strategic Plan 2007—2012. Strategic Goal 3, Ensure the
              Accessibility, Affordability, and Accountability of Higher Education, and Better Prepare
              Students and Adults for Employment and Future Learning, is a sharply defined directive
              that guides divisions to carry out the vision and programmatic mission of Federal
              Student Aid.

              The following table presents Federal Student Aid's gross cost and exchange revenue by
              program for FY 2008 and FY 2007. Gross costs and earned revenue are classified as
              intragovernmental (exchange transactions between Federal Student Aid and other
              entities within the federal government) or with the public (exchange transactions
              between Federal Student Aid and non-federal entities).




    FY 2008                                              - 86 -                            Federal Student Aid Annual Report
Financial Section                                                                                      Notes to Principal Financial Statements



                                         Gross Cost and Exchange Revenue by Program
                                                                     (Dollars in Millions)

                                                                                                          2008                      2007
                    Ensure Accessibility, Affordability, and Accountability of
                    Higher Education and Career and Technical Advancement
                      Intragovernmental Gross Cost                                                 $             6,903      $               5,561
                      Gross Costs with the Public                                                             21,885                       21,858

                     Total Program Costs                                                                      28,788                       27,419
                      Less: Intragovernmental Earned Revenue                                                     4,128                      3,452
                            Earned Revenue from the Public                                                       4,901                      4,459

                    Total Program Revenue                                                                        9,029                      7,911

                    Net Cost of Operations                                                         $          19,759        $          19,508




              …Note 12.        Interest Expense and Interest Revenue
              For FY 2008 and FY 2007, interest expense and interest revenue by program consisted
              of the following:

                                               Interest Expense and Interest Revenue
                                                                 (Dollars in Million)
                                                                                                   2008

                                                                      Expenses
                                                                                                                         Revenue


                                                      Federal             Non-          Total                              Non-
                                                                                                          Federal                    Total
                                                                         federal                                          federal


                    Direct Loan Program               $      6,190      $          -     $ 6,190          $      1,369   $ 4,821     $ 6,190
                    FFEL Program
                      FFEL Guaranteed Loan Program               -        1,372            1,372                 1,372          -      1,372
                      Loan Purchase Commitment                   3            -                3                     3          -          3
                      Loan Participation Purchase              492            -              492                   465         27        492
                    TEACH Grant Program                          1            -                1                     1          -          1
                    Total                             $      6,686      $ 1,372          $ 8,058          $      3,210    $ 4,848    $ 8,058




    FY 2008                                                     - 87 -                                     Federal Student Aid Annual Report
Financial Section                                                                            Notes to Principal Financial Statements



                                                                                            2007

                                                                   Expenses
                                                                                                               Revenue


                                                       Federal       Non-         Total                          Non-
                                                                                                   Federal                Total
                                                                    federal                                     federal


                      Direct Loan Program              $   5,675   $          -   $ 5,675          $   1,251   $ 4,424    $ 5,675
                      FFEL Program
                        FFEL Guaranteed Loan Program           -     1,616          1,616              1,616          -     1,616
                        Loan Purchase Commitment               -          -             -                  -          -         -
                        Loan Participation Purchase            -          -             -                  -          -         -
                      TEACH Grant Program                      -          -             -                  -          -         -
                      Total                            $   5,675   $ 1,616        $ 7,291          $   2,867    $ 4,424   $ 7,291


              Federal interest expense is recognized on the Department’s outstanding debt. Non-
              federal interest revenue is earned on the individual loans and participation interest in
              FFEL loans. Federal interest revenue is earned on the uninvested fund balance with
              Treasury.

              …Note 13.          Statement of Budgetary Resources
              The Statement of Budgetary Resources compares budgetary resources with the status
              of those resources. As of September 30, 2008, budgetary resources were $148,514
              million and net outlays were $45,715 million. As of September 30, 2007, budgetary
              resources were $121,735 million and net outlays were $30,265 million.


                    Permanent Indefinite Budget Authority
              The Direct Loan, FFEL, and TEACH Grant Programs have permanent indefinite budget
              authority through legislation. Part D of the Direct Loan Program and Part B of the FFEL
              Program, pursuant to the HEA pertain to the existence, purpose, and availability of this
              permanent indefinite budget authority.
                    Reauthorization of Legislation
              Funds for most Department programs are authorized, by statute, to be appropriated for a
              specified number of years, with an automatic one-year extension available under Section
              422 of the General Education Provisions Act. Congress may continue to appropriate
              funds after the expiration of the statutory authorization period, effectively reauthorizing
              the program through the appropriations process. The current Budget of the United
              States Government presumes all programs continue per congressional budgeting rules.




    FY 2008                                                   - 88 -                               Federal Student Aid Annual Report
Financial Section                                                                                  Notes to Principal Financial Statements


                    Obligations Incurred by Apportionment Category
              Obligations incurred by apportionment category, as of September 30, 2008 and 2007,
              consisted of the following:


                                          Obligations Incurred by Apportionment Category
                                                                   (Dollars in Millions)

                                                                                                  2008                        2007
                       Direct and Reimbursable:
                         Category A                                                        $                707       $                 722
                         Category B                                                                     117,665                      79,760
                         Exempt from Apportionment                                                            5                          12

                       Obligations Incurred                                                $            118,377       $              80,494


              Category A apportionments are those resources that can be obligated without restriction
              on the purpose of the obligation, other than to be in compliance with legislation
              underlying programs for which the resources were made available. Category B
              apportionments are restricted by purpose for which obligations can be incurred. In
              addition, some resources are available without apportionment by OMB.

                    Unused Borrowing Authority
              Unused borrowing authority, as of September 30, 2008 and 2007, consisted of the
              following:


                                               Unused Borrowing Authority
                                                         (Dollars in Millions)

                                                                                           2008                       2007
                Beginning Balance, Unused Borrowing Authority                         $          8,915            $         7,237
                Current Year Borrowing Authority                                                57,743                     19,570
                Funds Drawn From Treasury                                                      (39,021)                   (17,892)
                Borrowing Authority Withdrawn                                                   (1,987)                         -

                Ending Balance, Unused Borrowing Authority                            $        25,650             $        8,915


              Federal Student Aid is given authority to draw funds from Treasury to finance the Direct
              Loan, Loan Purchase Commitment Authority, Loan Participation Purchase Authority, and
              TEACH Grant Program. Unused Borrowing Authority is a budgetary resource and is
              available to support obligations. Federal Student Aid periodically reviews its borrowing
              authority balances in relation to its obligations and may cancel unused amounts.




    FY 2008                                                     - 89 -                                    Federal Student Aid Annual Report
Financial Section                                                                      Notes to Principal Financial Statements


                    Undelivered Orders at the End of the Period
              Undelivered orders, as of September 30, 2008 and 2007, consisted of the following:


                                                       Undelivered Orders
                                                           (Dollars in Millions)

                                                                                       2008                 2007
                       Budgetary                                                   $          11,839   $        11,290
                       Non-Budgetary                                                          40,338            13,908

                       Undelivered Orders (Unpaid)                                 $          52,177   $        25,198


              Undelivered orders at the end of the period, as presented above, will differ from the
              undelivered orders included in the Net Position, Unexpended Appropriations.
              Undelivered orders for federal credit financing and liquidating funds are not funded
              through appropriations and are not included in Net Position. (See Note 10)

                    Explanation of Differences Between the Statement of Budgetary Resources
                    and the Budget of the United States Government
              Budgetary accounting as shown in the President’s Budget includes a public enterprise
              fund that reflects the gross obligations by the FFEL Program for the estimated activity of
              the consolidated Federal Funds of the guaranty agencies. Ownership by the federal
              government is independent of the actual control of the assets. Since the actual
              operation of the Federal Fund is independent from the Department’s direct control,
              budgetary resources and obligations are estimated and disclosed in the President’s
              Budget to approximate the gross activities of the combined Federal Funds. Amounts
              reported on the FY 2007 Statement of Budgetary Resources for the Federal Fund are
              compiled through combining all guaranty agencies’ Annual Reports to determine a net
              valuation amount for the Federal Fund.

              …Note 14.           Reconciliation of Net Cost of Operations to Budget
              The Reconciliation of Net Cost of Operations (proprietary) to Budget provides
              information on how budgetary resources obligated during the period relate to the net
              cost of operations. The schedule presented in this footnote reconciles budgetary
              resources with the net cost of operations by (1) removing resources that do not fund net
              cost of operations and (2) including components of net cost of operations that did not
              generate or use resources during the year.




    FY 2008                                              - 90 -                            Federal Student Aid Annual Report
Financial Section                                                                            Notes to Principal Financial Statements


              Components Requiring or Generating Resources in Future Periods primarily result from
              subsidy re-estimates that will be executed in future periods. The Reconciliation of Net
              Cost of Operations to Budget as of September 30, 2008 and 2007, are presented below:


                                         Reconciliation of Net Cost of Operations to Budget
                                                                    (Dollars in Millions)

                     Resources Used to Finance Activities                                            2008            2007
                       Obligations Incurred                                                      $   (118,377)   $   (80,494)
                         Spending Authority from Offsetting Collections and Recoveries                 39,710         43,079
                         Offsetting Receipts                                                            5,778          4,735
                       Imputed Financing from Costs Absorbed by Others                                     (8)            (9)
                     Total Resources Used to Finance Activities                                       (72,897)       (32,689)
                     Resources Used to Finance Items Not Part of Net Cost of Operations
                       Change in Budgetary Resources Obligated for Goods, Services and
                       Benefits Ordered but Not Yet Provided (+/-)                                    (27,062)        (2,602)
                       Resources that Fund Expenses Recognized in Prior Period                         (1,104)        (3,306)
                       Credit Program Collections which Increase/Decrease Liabilities for Loan
                       Guarantees, or Credit Program Receivables, Net including Allowances
                       for Subsidy                                                                    29,692          33,894
                       Resources Used to Finance the Acquisition of Fixed Assets, or
                       Increase/Decrease Liabilities for Loan Guarantees or Credit Program
                       Receivables, Net in the Current or Prior Period                                (51,678)       (39,799)
                     Total Resources Used to Finance Items Not Part of the Net Cost of
                     Operations                                                                       (50,152)       (11,813)
                     Components Not Requiring or Generating Resources
                       Depreciation and Amortization                                                     (451)          (441)
                       Other (+/-)                                                                        290            907
                     Total Components of the Net Cost of Operations that Will Not Require
                     or Generate Resources                                                              (161)            466
                     Components Requiring or Generating Resources in Future Periods
                       Increase in Annual Leave Liability                                                   -             (7)
                       Upward/Downward Re-estimates of Credit Subsidy Expense                             513         (1,354)
                       Increase in Exchange Revenue Receivable from the Public                          2,607          2,302
                       Other (+/-)                                                                         27            (39)
                     Total Components of the Net Cost of Operations that Will Require or
                     Generate Resources in Future Periods                                               3,147            902

                     Net Cost of Operations                                                      $    (19,759)   $   (19,508)




    FY 2008                                                      - 91 -                          Federal Student Aid Annual Report
Financial Section                                                                  Notes to Principal Financial Statements




              …Note 15.         Contingencies
                    Guaranty Agencies
              Federal Student Aid can assist guaranty agencies experiencing financial difficulties by
              various 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 cannot be estimated with sufficient reliability.
                    Federal Perkins Loan Program Reserve Funds
              The Federal Perkins Loan Program is a campus-based program providing financial
              assistance to eligible postsecondary school students. In FY 2008, the Department
              provided funding of 83.01 percent of the capital used to make loans to eligible students
              through participating schools at 5 percent interest. The schools provided the remaining
              16.99 percent of program funding. For the latest academic year ended June 30, 2008,
              approximately 648 thousand loans were made, totaling approximately $1.4 billion at
              1,625 institutions, averaging $2,121 per loan. The Department’s share of the Federal
              Perkins Loan Program was approximately $6.5 billion as of June 30, 2008.
              In FY 2007, the Department provided funding of 84.3 percent of the capital used to make
              loans to eligible students through participating schools at 5 percent interest. The
              schools provided the remaining 15.7 percent of program funding. For the academic year
              ended June 30, 2007, approximately 722 thousand loans were made, totaling
              approximately $1.6 billion at 1,636 institutions, averaging $2,230 per loan. The
              Department’s share of the Federal Perkins Loan Program was approximately $6.5 billion
              as of June 30, 2007.
              Federal Perkins Loan Program 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, in nursing, or in family services—may
              receive partial loan forgiveness for each year of qualifying service. In these
              circumstances, a contingency is deemed to exist. Federal Student Aid may be required
              to compensate Federal Perkins Loan Program institutions for the cost of the partial loan
              forgiveness. Payments required under the Federal Perkins Loan partial forgiveness
              statutes do not have a material effect on Federal Student Aid’s financial statements.
                    Litigation and Other Claims
              The Department is involved in various lawsuits incidental to its operations. In the opinion
              of management, the ultimate resolution of pending litigation will not have a material
              effect on Federal Student Aid’s financial position.




    FY 2008                                                - 92 -                      Federal Student Aid Annual Report
Financial Section                                                              Notes to Principal Financial Statements


                    Other Matters
              Some portion of the current-year financial assistance expenses (grants) may include
              funded recipient expenditures that are 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 Federal Student Aid’s financial position.

              …Note 16.        Subsequent Events
              On October 7, 2008, President Bush signed P.L. 110-350, which extended the Secretary
              of Education’s authority to purchase FFEL loans. This authority, originally enacted in the
              ECASLA, would have otherwise expired on September 30, 2009; P.L. 110-350 extended
              the authority through September 30, 2010. The Administration recently announced
              plans to replicate the 2008-2009 loan purchase and participation options for the 2009-
              2010 award year. Other approaches to purchase outstanding FFEL loans are also
              under consideration, but specific terms and conditions have yet to be determined.




    FY 2008                                              - 93 -                    Federal Student Aid Annual Report
Financial Section                                                                                                           Required Supplementary Information



              Required Supplementary Information

                                                               United States Department of Education
                                                                        Federal Student Aid
                                                            Combining Statement of Budgetary Resources
                                                              For the Year Ended September 30, 2008
                                                                                   (Dollars in Millions)




                                                                                                                                                         Administrative
                                                                                                Combined               Direct Student Loan Program
                                                                                                                                                            Funds

                                                                                                     Non-Budgetary                    Non-Budgetary
                                                                                                     Credit Reform                    Credit Reform
                                                                                                       Financing                        Financing
                                                                                     Budgetary         Accounts        Budgetary        Accounts          Budgetary

               Budgetary Resources:
               1. Unobligated balance, brought forward, October 1:             $           4,449            36,792             36             3,563                   27
               2. Recoveries of prior year Unpaid Obligations                              1,447             3,115               -            2,870                   12
               3. Budgetary Authority:
                 3A. Appropriations                                                      28,562                151          5,302               123                708
                 3B. Borrowing Authority                                                       -            57,743              -            34,616                  -
                 3D. Spending authority from offsetting collections (gross):
                   3D1. Earned
                     3D1a. Collected                                                      1,638             33,510               -            17,353                 -
                   3E. Subtotal                                                $         30,200             91,404          5,302             52,092               708
               4. Nonexpenditure transfers, net, anticipated and actual                        -                 -               -                 -                 -
               6. Permanently not available                                              (2,058)           (16,835)              -           (16,765)              (37)
               7. Total Budgetary Resources                                    $         34,038            114,476          5,338             41,760               710

               Status of Budgetary Resources:
               8. Obligations incurred:
                 8A. Direct                                                    $         30,418             87,959          5,302            41,088                707
                 8C. Subtotal                                                  $         30,418             87,959          5,302            41,088                707
               9. Unobligated Balances:
                 9A. Apportioned                                               $          1,166                396              -                  -                  2
                 9C. Subtotal                                                  $          1,166                396              -                  -                  2
               10. Unobligated Balance not available                                      2,454             26,121            36                672                  1
               11. Total Status of Budgetary Resources                         $          34,038            114,476         5,338             41,760                710

               Change in Obligated Balance:
               12. Obligated balance, net
                12A. Unpaid obligations, brought forward, October 1            $         12,485             14,425               -            10,716               402
                12c. Total, unpaid obligated balance, brought forward, net     $         12,485             14,425              -             10,716               402
               13. Obligation Incurred net (+/-)                                         30,418             87,959          5,302             41,088               707
               14.Gross Outlays                                                         (28,529)           (58,112)        (5,302)           (28,501)             (701)
               16.Recoveries of prior year unpaid obligations, actual                    (1,447)             (3,115)             -             (2,870)             (12)
               18. Obligated Balance, net, end of period
                18A. Unpaid Obligations                                                   12,927             41,157              -            20,433                396
                18C. Total, unpaid obligated balance, net, end of period       $          12,927             41,157              -            20,433                396

               Net Outlays
               19. Net Outlays:
                19A. Gross Outlays                                             $         28,529             58,112          5,302             28,501               701
                19B. Offsetting collections                                              (1,638)           (33,510)             (0)          (17,353)               (0)
                19C. Distributed Offsetting receipts                                         (28)           (5,750)              0              (649)                0
               20. Net Outlays                                                 $          26,863             18,852         5,302             10,499               701




    FY 2008                                                                         - 94 -                                     Federal Student Aid Annual Report
Financial Section                                                                                                          Required Supplementary Information


                                                                United States Department of Education
                                                                          Federal Student Aid
                                                              Combining Statement of Budgetary Resources
                                                                For the Year Ended September 30, 2008
                                                                                 (Dollars in Millions)




                                                                                                                           Federal Family Education          Grant
                                                                                            Teach Grant Program
                                                                                                                                Loan Program               Programs

                                                                                                         Non-Budgetary                    Non-Budgetary
                                                                                                         Credit Reform                    Credit Reform
                                                                                                           Financing                        Financing
                                                                                       Budgetary           Accounts        Budge tary       Accounts       Budgetary

               Budgetary Resources:
               1. Unobligated balance, brought forward, October 1:                $                  -                -         1,296            33,229        3,090
               2. Recoveries of prior year Unpaid Obligations                                        -                -           682               245          753
               3. Budgetary Authority:
                 3A. Appropriations                                                                 7                -          3,457                28       19,088
                 3B. Borrowing Authority                                                             -             26               -            23,101            -
                 3D. Spen ding authority from offsettin g collections (gross):
                   3D1 . Earned
                     3D1a. Collected                                                                 -               2           1,638           16,155             -
                   3E. Su btotal                                                  $                 7               28           5,095           39,284       19,088
               4. Nonexpenditure transfers, net, anticipated and actual                              -                -              -                -            -
               6. Permanently not available                                                          -             (12 )        (1,431)             (58)        (590)
               7. Total Budgetary Resources                                       $                 7               16           5,642           72,700       22,341

               Status of Budgetary Resources:
               8. Obligations incurred:
                 8A. Direct                                                       $                 7              14           3,687            46,857       20,715
                 8C. Subtotal                                                     $                 7              14           3,687            46,857       20,715
               9. Unobligated Balances:
                 9A. Apportioned                                                  $                  -               -             10               396        1,154
                 9C. Subtotal                                                     $                  -               -              10              396        1,154
               10 . Unobligated Balance not available                                                -              2           1,945            25,447          472
               11 . Total Status of Budgetary Resources                           $                  7              16           5,642            72,700      22,341

               Cha nge in Obligated Balance:
               12 . Obligated balan ce, net
                 12A. Unpaid obligation s, broug ht forward, October 1            $                  -                -          1,946            3,709       10,137
                 12c. Total, unpaid ob ligated balance, brou ght forward, n et    $                  -                -          1,946            3,709       10,137
               13 . Obligation Incurred net (+/-)                                                   7              14            3,687           46,857       20,715
               14 .Gross Outlays                                                                     -              (1 )        (4,927)         (29,610)     (17,599)
               16 .Recoveries of prior year unpaid obligations, actual                               -                -           (682)            (245)        (753)
               18 . Obligated Balance, net, end of period
                 18A. Unpaid Obligations                                                             7              13              24           20,711       12,500
                 18C. Total, unpaid obligated balance, net, end of period         $                  7              13              24           20,711       12,500

               Net Outlays
               19 . Net Outlays:
                 19A. Gross Outlays                                               $                  -                1           4,927           29,610      17,599
                 19B. Offsetting collection s                                                        -              (2 )        (1,638)         (16,155)           -
                 19C. Distributed Offsetting receipts                                                -                -               -          (5,101)         (28)
               20 . Net Outlays                                                   $                  -              (1 )          3,289           8,354       17,571




    FY 2008                                                                       - 95 -                                      Federal Student Aid Annual Report
Financial Section                                                          Required Supplementary Stewardship Information




              Required Supplementary Stewardship Information

              Investment in Human Capital

              Human Capital investments are those expenses included in net cost for general public
              education and training programs that are intended to increase or maintain national
              economic productive capacity.

              Expenses incurred for human capital investments consisted of the following for FY 2008
              and the preceding four years:

                                          Summary of Human Capital Expenses
                                                  (Dollars in Millions)
                                                 2008          2007      2006        2005         2004
               Federal Student Aid Expense
                Direct Loan Subsidy         $    5,236 $ (499) $ 6,655           $  5,211     $  (543)
                FFEL Program Subsidy           (2,852)        4,884     28,062      9,863        8,516
                Grant Programs                 17,464        15,092     15,447     15,070       14,943
                Salaries & Administrative          189           173       172        164          186
                 Total                      $  20,037 $ 19,650 $ 50,336          $ 30,308     $ 23,102



              The Direct Loan Program is a direct-lending program in which loan capital is provided to
              students by the federal government through borrowings from the U.S. Treasury.

              The FFEL Loan Program 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 FFEL Loan Program expenses
              include the Loan Participation Purchase and Loan Purchase Commitment Programs
              expenses of ($168) million and ($2) million respectively. In FY 2008, the Department
              directly purchased over 20,000 loans valued at more than $61 million and acquired over
              $5.1 billion participation interest in FFEL loans.

              The TEACH Grant program, authorized by the CCRAA, awards annual grants to
              students who agree to teach in a high-need subject area in a public or private
              elementary or secondary school that serves low-income students. If the students do not
              satisfy their agreement to serve, the grants are converted to Direct Unsubsidized Loans
              (TEACH).

              The ECASLA authorized the Secretary to buy guaranteed student loans for the 2008–09
              award year. Within the existing FFEL Program, the Department is using this authority to
              purchase fully disbursed Stafford, Unsubsidized Stafford, and Parent Loans for
              Undergraduate Students generally originated between July 1, 2008 and June 30, 2009,
              referred to as the Loan Purchase Commitment Program. In addition to buying fully
              disbursed loans, the Department has established agreements with FFEL lenders to buy
              participation interests in fully or partially disbursed loans, referred to as the Loan
              Participation Purchase Program. A lender, through an approved sponsor, transfers the
              title of an eligible loan to a custodian who issues a participation certificate. The

    FY 2008                                                   - 96 -                        Federal Student Aid Annual Report
Financial Section                                                     Required Supplementary Stewardship Information



              Department purchases a participation interest issued by the custodian, who in turns
              remits funds to the lender. The participation interests must be redeemed and amounts
              provided under these agreements remitted to the Department. Lenders can obtain
              outside funding or opt to have the Department purchase fully disbursed loans that were
              part of the participation agreement. Loans purchased by the Department under the Loan
              Purchase Commitment Program and Loan Participation Purchase Program are loans
              owned directly by the federal government and serviced under the FFEL Program. The
              participation agreements and the Department’s commitment to purchase guaranteed
              loans will terminate September 30, 2009.

              Grant programs include the Pell Grant Program that awards direct grants through
              participating institutions to undergraduate students with financial need. Participating
              institutions either credit the appropriated funds to the student’s school account or pay the
              student directly once per term. Signed into law in 2006, the ACG and the SMART
              Programs are available to encourage eligible students to take more challenging courses
              in high school and to pursue college majors in high demand in the global economy.

              Federal Student Aid’s programs link with the overall initiatives of the Department in
              enhancing education – a fundamental stepping-stone to higher living standards for
              American citizens. While education is vital to national economic growth, 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.

              In the past, 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. Both individuals and society as a whole continue to
              place 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.

              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 investing in postsecondary education.




    FY 2008                                               - 97 -                    Federal Student Aid Annual Report
Financial Section                                                                   Other Accompanying Information




              Other Accompanying Information

              Improper Payment Information Act Reporting Details

              The Improper Payment Information Act of 2002 (IPIA) requires agencies to annually
              review all programs and activities to identify those susceptible to significant improper
              payments. The guidance defines significant improper payments as those in any
              particular program that exceed both 2.5 percent of program payments and $10 million
              annually. For each program identified as susceptible, agencies are required to report
              the annual amount of estimated improper payments, along with steps taken and actions
              planned to reduce them. OMB uses quarterly color-coded scorecards to monitor
              agencies’ status and progress toward attaining the PMA program initiative goals. In
              conjunction with the requirements of the IPIA, a relatively new key initiative, entitled
              “Eliminating Improper Payments”, summarizes the results of quarterly actions to ensure
              compliance with the IPIA. Federal Student Aid achieved a “Yellow” progress score and
              “Yellow” status score on the September 30, 2008, PMA scorecard for Eliminating
              Improper Payments.

              Federal Student Aid measures and reports annual improper payment estimates for the
              Pell Grant and FFEL Programs. OMB automatically considers programs previously
              required to report under OMB Circular A-11, Preparation, Submission and Execution of
              the Budget, Section 57, Information on Erroneous Payments, as susceptible to
              significant improper payments, regardless of the established thresholds. Risk
              assessments conducted in FY 2008 indicated that other programs administered by
              Federal Student Aid are not at significant risk of improper payments.

              On September 25, 2008, the OIG issued a final audit report that can be found at
              http://oigmis3.ed.gov/auditreports/a09h0015.pdf on Federal Student Aid’s estimation of
              improper payments in the FFEL Program. In response to several recommendations in
              the audit report, where applicable, corrective actions were included in the PAR. For
              more detail, please refer to the Department’s PAR.




    FY 2008                                             - 98 -                    Federal Student Aid Annual Report
Office of Inspector General Transmittal Letter




               Office of Inspector General Transmittal Letter




     FY 2008                                     - 99 -         Federal Student Aid Annual Report
Office of Inspector General Transmittal Letter




     FY 2008                                     - 100 -   Federal Student Aid Annual Report
Office of Inspector General Transmittal Letter




     FY 2008                                     - 101 -   Federal Student Aid Annual Report
Office of Inspector General Transmittal Letter




     FY 2008                                     - 102 -   Federal Student Aid Annual Report
Report of Independent Auditors



              Report of Independent Auditors




    FY 2008                              - 103 -   Federal Student Aid Annual Report
Report of Independent Auditors




    FY 2008                      - 104 -   Federal Student Aid Annual Report
Report of Independent Auditors




    FY 2008                      - 105 -   Federal Student Aid Annual Report
Report of Independent Auditors




    FY 2008                      - 106 -   Federal Student Aid Annual Report
Report on Internal Control



               Report on Internal Control




    FY 2008                                 - 107 -   Federal Student Aid Annual Report
Report on Internal Control




    FY 2008                  - 108 -   Federal Student Aid Annual Report
Report on Internal Control




    FY 2008                  - 109 -   Federal Student Aid Annual Report
Report on Internal Control




    FY 2008                  - 110 -   Federal Student Aid Annual Report
Report on Internal Control




    FY 2008                  - 111 -   Federal Student Aid Annual Report
Report on Internal Control




    FY 2008                  - 112 -   Federal Student Aid Annual Report
Report on Internal Control




    FY 2008                  - 113 -   Federal Student Aid Annual Report
Report on Internal Control




    FY 2008                  - 114 -   Federal Student Aid Annual Report
Report on Internal Control




    FY 2008                  - 115 -   Federal Student Aid Annual Report
Report on Internal Control




    FY 2008                  - 116 -   Federal Student Aid Annual Report
Report on Internal Control




    FY 2008                  - 117 -   Federal Student Aid Annual Report
Report on Internal Control




    FY 2008                  - 118 -   Federal Student Aid Annual Report
Report on Compliance with Laws and Regulations



              Report on Compliance with Laws and Regulations




    FY 2008                                      - 119 -   Federal Student Aid Annual Report
Report on Compliance with Laws and Regulations




    FY 2008                                      - 120 -   Federal Student Aid Annual Report
Report on Compliance with Laws and Regulations




    FY 2008                                      - 121 -   Federal Student Aid Annual Report
Report on Compliance with Laws and Regulations




    FY 2008                                      - 122 -   Federal Student Aid Annual Report
Management’s Response



              Management’s Response




    FY 2008                           - 123 -   Federal Student Aid Annual Report
Management’s Response




    FY 2008             - 124 -   Federal Student Aid Annual Report
Management’s Response




    FY 2008             - 125 -   Federal Student Aid Annual Report
Management’s Response




    FY 2008             - 126 -   Federal Student Aid Annual Report
Glossary of Acronyms and Terms



              Glossary of Acronyms and Terms




    FY 2008                             - 127 -   Federal Student Aid Annual Report
Glossary of Acronyms and Terms




    FY 2008                      - 128 -   Federal Student Aid Annual Report
Glossary of Acronyms and Terms



                      Acronym                          Description

                    ACG                 Academic Competitiveness Grant
                    ACSI                American Customer Satisfaction Index
                    CCRAA               College Cost Reduction and Access Act of 2007
                    CDR                 National Cohort Default Rate
                    CLTDR               Cumulative Lifetime Default Rate
                    Credit Reform Act   Federal Credit Reform Act of 1990
                    CSRS                Civil Service Retirement System
                    DCL                 Dear Colleague Letter
                    Department          U.S. Department of Education
                    Direct Loan         William D. Ford Federal Direct Loan Program
                    ECASLA              Ensuring Continued Access to Student Loans Act of 2008
                    ERM                 Enterprise Risk Management
                    ERMG                Enterprise Risk Management Group
                    FAFSA               Free Application for Federal Student Aid
                    FAFSA4caster        Free Application for Federal Student Aid forecaster
                    FECA                Federal Employees’ Compensation Act
                    Federal Fund        Federal Student Loan Reserve Fund
                    FERS                Federal Employees Retirement System
                    FFEL                Federal Family Education Loan Program
                    FMFIA               Federal Managers’ Financial Integrity Act
                    FSEOG               Federal Supplemental Educational Opportunity Grant
                    FWS                 Federal Work-Study Program
                    FY                  Fiscal Year
                    GAO                 Government Accountability Office
                    HEA                 Higher Education Act of 1965, as amended
                    HERA                Higher Education Reconciliation Act of 2005
                    IPIA                Improper Payments Information Act of 2002
                    IT                  Information Technology
                    Labor               U.S. Department of Labor
                    LEAP                Leveraging Educational Assistance Partnership Program
                    LLR                 Lender-of-Last-Resort
                    OIG                 Office of Inspector General
                    OMB                 Office of Management and Budget
                    OPM                 Office of Personnel Management
                    Opinion             Report of Independent Auditors
                    PAR                 Performance and Accountability Report
                    Pell Grant          Federal Pell Grant Program
                    PBO                 Performance-Based Organization
                    PMA                 President’s Management Agenda
                    SLEAP               Special Leveraging Educational Assistance Partnership
                                        Program
                    SMART               National Science and Mathematics Access to Retain
                                        Talent Grant Program
                    SAP                 Special Allowance Payment
                    TEACH               Teacher Education Assistance for College and Higher
                                        Education Grant Program
                    Title IV programs   Title IV Student Financial Assistance Programs
                    TPD                 Total and Permanent Disability
                    Treasury            U.S. Department of the Treasury




    FY 2008                                         - 129 -                     Federal Student Aid Annual Report
Glossary of Acronyms and Terms




    FY 2008                      - 130 -   Federal Student Aid Annual Report
Availability of Federal Student Aid’s Annual
Report




               Availability of Federal Student Aid’s Annual Report




     FY 2008                                   - 131 -        Federal Student Aid Annual Report
Availability of Federal Student Aid’s Annual
Report




     FY 2008                                   - 132 -   Federal Student Aid Annual Report
Availability of Federal Student Aid’s Annual
Report




               Federal Student Aid’s publicly available FY 2008 Annual Report is accessible on
               Federal Student Aid’s and the Department’s Web sites at:

                                          http://www.federalstudentaid.ed.gov

                                   http://www.ed.gov/about/reports/annual/index.html




     FY 2008                                            - 133 -                   Federal Student Aid Annual Report