oversight

Financial Statement Audits - Fiscal Years 2010 and 2009 - U.S. Department of Education

Published by the Department of Education, Office of Inspector General on 2010-11-15.

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

U.S. Department of Education
Arne Duncan
Secretary

Office of the Chief Financial Officer
Thomas Skelly
Delegated to perform the functions and duties of Chief Financial Officer



November 15, 2010

This report is in the public domain. Authorization to reproduce it in whole or in part is granted. While permission to
reprint this publication is not necessary, the citation should be: U.S. Department of Education, Agency Financial
Report, Washington D.C., 2010.

This report is available on the Department’s Web site at: http://www.ed.gov/about/reports/annual/index.html.

On request, this publication is available in alternative formats, such as Braille, large print or computer diskette. For
more information, please contact the Department’s Alternate Format Center at (202) 260-0852 or (202) 260-0818.

The Department’s Strategic Plan is available on the Web at: http://www.ed.gov/about/reports/strat/index.html.

Department annual plans and annual reports are available on the Web at:
http://www.ed.gov/about/reports/annual/index.html.

The Department welcomes all comments and suggestions on both the content and presentation of this report.
Please forward them to: PARcomments@ed.gov.



                                           Office of the Chief Financial Officer
                                             U.S. Department of Education
                                             Washington, D.C. 20202-0600



                           The following companies were contracted to assist in the preparation of the
                                U.S. Department of Education FY 2010 Agency Financial Report:

                           For general layout and Web design:    ICF Macro
                                          For database design:   Plexus Corporation
                                     For accounting services:    IBM Business Consulting Services
                                                                 FMR Consulting, Inc.
                                                                 Cotton & Company, LLP




                                                                                    FY 2010 Agency Financial Report—U.S. Department of Education
                                                                 Foreword
The United States Department of Education’s (the Department’s) Agency Financial Report (AFR) for fiscal year
(FY) 2010 provides to Congress, the President, and the American people an overview of the Department’s
financial performance and results and detailed information about our stewardship over the financial resources
entrusted to us. Additionally, the report provides information about our performance as an organization, our
accomplishments and initiatives, and our challenges as required by the Office of Management and Budget’s
Circulars A-11 and A-136.

The AFR is the first of three reports required under the Office of Management and Budget’s Program for
Alternative Approaches to Performance and Accountability Reporting. This is the second year that the
Department has participated in this voluntary program. The Department is participating in this alternative
approach in an effort to strengthen its annual reporting documents, to present more streamlined and timely
information, and to clarify the relationship between performance, budgetary resources, and financial reporting.
The Department’s goal is to provide a more meaningful, transparent, and easily understood analysis of
accountability over its resources. The report provides readers with an overview of the Department’s strengths
and challenges.

The Department’s FY 2010 annual reporting includes the following three documents:

  Agency Financial Report (AFR) [available November 15, 2010]

  The AFR is organized into three major sections:

  	    The Management’s Discussion and Analysis section provides executive-level information on the Department’s history,
        mission, organization, key activities, analysis of financial statements, systems, controls and legal compliance,
        accomplishments for the fiscal year, and management and performance challenges facing the Department.

  	    The Financial Details section provides a Message From the Chief Financial Officer, consolidated and combined financial
        statements, the Department’s notes to the financial statements, and the Report of the Independent Auditors.

  	    The Other Accompanying Information section provides Improper Payments Information Act reporting details and other
        statutory reporting requirements.


  Annual Performance Report (APR)                                            Summary of Performance and Financial Information
  [available February 7, 2011]                                               [available February 15, 2011]

  The APR is produced in conjunction with the FY 2012                        This document provides an integrated overview of
  President’s Budget Request and provides more detailed                      performance and financial information that consolidates
  performance information and analysis of performance                        the AFR and the APR into a user-friendly format.
  results.


  This report meets the following legislated reporting requirements:

  	    Federal Managers’ Financial Integrity Act of 1982 (FMFIA) requires a report on the status of internal controls and the agency’s most
        serious problems.
       Government Performance and Results Act of 1993 (GPRA) guides the agency’s strategic planning and annual planning and reporting.
       Government Management Reform Act of 1994 (GMRA) requires agency audited financial statements.
       Federal Financial Management Improvement Act of 1996 (FFMIA) requires an assessment of the agency’s financial systems for
        adherence to governmentwide requirements.
       Reports Consolidation Act of 2000 (RCA) requires the consolidated reporting of performance, financial, and related information.
       Improper Payments Information Act of 2002 (IPIA) requires reporting on agency efforts to identify and reduce erroneous payments.




                               All three reports will be available on the Department’s Web site at
                                   http://www.ed.gov/about/overview/focus/performance.html.

FY 2010 Agency Financial Report—U.S. Department of Education
                         Message From the Secretary
                                 November 15, 2010

                                 I am pleased to present the U.S. Department of
                                 Education’s Fiscal Year (FY) 2010 Agency Financial
                                 Report. This is the first of three integrated reporting
                                 components that are included in the alternative approach
                                 to the Performance and Accountability Report (PAR). The
                                 remaining two reports, the FY 2010 Annual Performance
                                 Report and the FY 2010 Summary of Performance and
                                 Financial Information, will be released in February 2011.

                                FY 2010 has been a transition year for the Department as
                                we move to a new strategic plan. We are still firmly
                                committed to our mission of promoting achievement and
                                preparation for global competitiveness by fostering
                                educational excellence and ensuring equal access. In
FY 2010, we faced significant challenges and achieved major milestones in promoting our
education goals.

We focused our efforts on the President’s goal of once again having the highest proportion
of college graduates in the world—a goal that drives accountability for improvement from
cradle to career. In order to achieve this goal as the end result of our education efforts, we
need to continue to support students at all levels of the education continuum. We must
begin with early learning, and we must do more to close the achievement gap before
children enter kindergarten and ensure success in school. We must provide our students
with competent and effective teachers. We must work to reduce dropout rates in our high
schools, promote college readiness, and make college more accessible and affordable.

We continue to work on the reauthorization of the Elementary and Secondary Education Act
of 1965. We need to ensure that states, districts, and schools are held accountable;
provide greater flexibility to enable innovation and improvement; and focus a greater
emphasis on schools and students most at risk.

We have already focused on these efforts in our current programs. Race to the Top,
authorized under the American Recovery and Reinvestment Act of 2009, has prompted
states and districts to remove obstacles to reform and encourage stakeholders to work
together toward shared goals. I recently conducted a Courage in the Classroom tour to
honor our nation’s unsung heroes—our teachers. The major complaint I heard from
teachers is that narrowly focused “bubble tests” pressure teachers to teach to the test. The
Race to the Top Assessment program provides funding to coalitions of states to develop
common assessments that measure real student knowledge and skills.

Our Investing in Innovation (i3) fund (authorized under the American Recovery and
Reinvestment Act of 2009) provides competitive grants to districts or consortia of schools to
expand innovation and evidence-based practices. Additionally, states all across America
are distributing School Improvement Grant (SIG) funds to districts to provide interventions
to their lowest-performing schools. And we are also distributing Teacher Incentive Fund
(TIF) grants to districts to try new compensation programs that reward effective teachers or
provide incentives for teachers to teach in hard-to-staff schools and subjects.


ii                                                    FY 2010 Agency Financial Report—U.S. Department of Education
                                                               MESSAGE FROM THE SECRETARY




To help students struggling to enter college, the Department provides low-interest loans
directly to students through the William D. Ford Federal Direct Loan Program and Pell
Grants to make college more affordable and accessible. We have reformed the student
loan program to save taxpayer dollars and now use private-sector companies chosen
competitively based upon effective performance to service student loans.

Over the last two years, the Department has been able to support education jobs through
stimulus funding provided by the American Recovery and Reinvestment Act of 2009.
Communities across America still face serious financial challenges. Our new Education
Jobs Fund is saving and creating education jobs. It requires school districts to pay the
salaries and benefits of teachers, school administrators, and other essential employees.

We are continuing to monitor our progress in areas of concern that would hinder efficiency,
effectiveness, and integrity in our programs and operations, and to identify actions needed
to address any deficiencies. Going forward into FY 2011, our Office of Inspector General
has identified four challenges that face the Department:

•     implementation of new programs and statutory changes to existing programs;
•     program oversight and monitoring;
•     data quality and reporting; and
•     information technology security.

Additionally, several new requirements related to reducing improper payments were
enacted in FY 2010. The Department must be able to provide assurances that the billions
of dollars entrusted to it are reaching the intended recipients.

Education is a civil right. That is why we are establishing the Equity and Excellence
Commission to examine how inequities in K-12 education contribute to the achievement
gap. We will ensure that all schools—traditional public schools, public charter schools, and
private schools—serve the children most in need.

Also, I have recently launched the TEACH Campaign to raise awareness of teaching as a
valuable profession. For more information, please visit our Web site, www.TEACH.gov.

Finally, the financial and performance data presented in this report are complete and
reliable, and provide an accurate and transparent accounting of the Department’s financial
situation and performance results. The report includes information and assurances about
the Department’s financial management systems and controls as required by the Federal
Managers’ Financial Integrity Act of 1982. I am pleased to report that for the ninth
consecutive year, the Department has earned a clean opinion from independent auditors on
its financial statements and that for the eighth consecutive year, no material weaknesses
were identified.

Sincerely,

/s/

Arne Duncan




FY 2010 Agency Financial Report—U.S. Department of Education                                   iii
                                                        Contents
Message From the Secretary ............................................................................................... ii

Management’s Discussion and Analysis
Mission and Organizational Structure.................................................................................. 2
Department of Education FY 2010 Highlights ...................................................................... 3
Performance Highlights ....................................................................................................... 5
Accomplishments for FY 2010 ............................................................................................ 9
Forward Looking Initiatives ............................................................................................... 16
Management Challenges .................................................................................................. 19
Financial Highlights ........................................................................................................... 20
Limitations of the Financial Statements ............................................................................. 24
Management’s Assurances ............................................................................................... 25

Financial Details
Message From the Chief Financial Officer ........................................................................ 28
Financial Summary ........................................................................................................... 30
Principal Financial Statements .......................................................................................... 31
Notes to Principal Financial Statements ............................................................................ 35
Required Supplementary Information ................................................................................ 78
Required Supplementary Stewardship Information ........................................................... 79

Report of the Independent Auditors .............................................................................. 83

Other Accompanying Information
Improper Payments Information Act of 2002 Reporting Details ........................................102
Summary of Financial Statement Audit and Management Assurances ............................110
Memorandum From the Office of Inspector General ........................................................111
Office of Inspector General’s Management Challenges for Fiscal Year 2011 ...................112


Appendices
Appendix A: Selected Department Web Links ..................................................................118
Appendix B: Glossary of Acronyms and Abbreviations .....................................................120




iv                                                                        FY 2010 Agency Financial Report—U.S. Department of Education
                                  Management’s
                                           Discussion
                                                               and
                                                 Analysis




FY 2010 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS




                   Mission and Organizational Structure
Mission. The U.S. Department of Education’s (the Department’s) mission is to promote
student achievement and preparation for global competitiveness by fostering educational
excellence and ensuring equal access.

History. The federal government recognized that furthering education was a national
priority in 1867, creating a federal education agency to collect and report statistical data.
The Department was established as a cabinet-level agency in 1979. For a chronology of
education legislation, go to: http://nces.ed.gov/pubs2010/2010013_4.pdf.

Our Public Benefit. The Department is committed to ensuring students develop the skills
they need to succeed in school, college, and the workforce, while recognizing the primary
role of states and school districts in providing a high-quality education, employing highly
qualified teachers and administrators, and establishing challenging content and
achievement standards. The Department is also setting high expectations for its own
employees and working to improve management practices, ensure fiscal integrity, and
develop a culture of high performance. For performance and budget overviews, go to:
http://www2.ed.gov/about/overview/focus/performance.html.

Our Organization. Education is the smallest Cabinet-level federal agency. The Required
Supplementary Stewardship Information section of this report contains a summary
statement of offices within the Department. For an interactive organizational chart, go to:
http://www2.ed.gov/about/offices/or/index.html.

What We Do. The Department engages in five major types of activities: establishing
policies related to federal education funding; administering distribution of funds and
monitoring their use; providing oversight on data collection and research on America’s
schools; identifying major issues in education and focusing national attention on them; and
enforcing federal laws prohibiting discrimination in programs that receive federal funds. For
details, go to: http://www2.ed.gov/about/what-we-do.html.

Who We Serve. During school year (SY) 2010–11, America's schools and colleges are
serving larger numbers of students as the population increases and enrollment rates rise.
As SY 2010–11 gets underway, nearly 49.4 million students attend public elementary and
secondary schools. Of these, 34.7 million are in pre-kindergarten through 8th grade and
14.7 million are in grades 9 through 12. An additional 5.8 million students attend private
schools.

Expenditures for public elementary and secondary schools will be about $540 billion for
SY 2010–11, excluding capital and interest. The national average current expenditure per
student is projected for SY 2010-11 at $10,792, up from $10,297 in actual expenditures in
SY 2007−08.

In fall 2010, a record 19.1 million students are expected to attend the nation’s 2-year and
4-year colleges and universities, an increase of about 3.8 million since fall 2000.

For back-to-school statistics and the sources, please see
http://nces.ed.gov/fastfacts/display.asp?id=372.




2                                                      FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                            MANAGEMENT’S DISCUSSION AND ANALYSIS




                              Department of Education FY 2010 Highlights

                         Civil Rights                                     P–12 Reform                       Communications
                         Enforcement
                                                              • Early learning                           • Responded to 62,015
               • Total number of                                outreach to 18 states                      calls
                 complaints resolved                            (including DC) and                       • Regional staff spoke
                 by the Office for Civil                        87 speaking                                at more than 150
                 Rights in FY 2010                              engagements                                different events
                 was 6,830, an                                • 36 states (including                       (over 36,400
                 increase of 11% above                          DC) have adopted                           stakeholders)
                 the 6,151 complaints                           the Common Core                          • 263,333 Information
                 resolved in FY 2009.                           State Standards                            Resource Center
                                                              • 41 states and the                          contacts received
                                                                District of Columia
                     Freedom of                                 are creating
                 Information Act of                             comprehensive,
                    1966 Requests                               statewide
               • Received 2,230                                 longitudinal data
               • Processed 1,921                                systems




                                                               Discretionary Grants

                         Awards ($ in millions)                                                          Number of Awards

                                                                      5,397        OESE            741
  OESE                                                                                           626
                  572

                                      2,336                                         OPE                                                       5,737
   OPE
                                        2,341                                                                                                 5,730

    OII                      1,644                                                    OII            974
                     833                                                                            916

                   638                                                             OSERS                         2,100
OSERS
                 527                                                                                         1,744

                     1,009                                                          Other                  1,490
  Other
                   782                                                                                       1,781

          $0      $1,000     $2,000      $3,000     $4,000   $5,000       $6,000            0    1,000     2,000     3,000    4,000   5,000   6,000

                               FY 2010          FY 2009                                                     FY 2010      FY 2009

OESE = Office of Elementary and Secondary Education.
OPE = Office of Postsecondary Education.
OII = Office of Innovation and Improvement.
OSERS = Office of Special Education and Rehabilitative Services.
Other = Institute of Education Sciences (IES), Office of English Language Acquisition (OELA), Office of Safe and Drug-
Free Schools (OSDFS), and Office of Vocational and Adult Education (OVAE).




           FY 2010 Agency Financial Report—U.S. Department of Education                                                                  3
MANAGEMENT’S DISCUSSION AND ANALYSIS




                                              Federal Student Aid (FSA)

                     Students Served                                             Aid Disbursed to Students
                       (in millions)                                                   ($ in millions)
    25                                                        $160,000
                                                21.4                                                               $133,862
                                     20.3                     $140,000
    20                                                                                                 $112,884
                                                              $120,000
                       14.1                                   $100,000
    15
              12.8
                                                                $80,000
    10                                                          $60,000
                                                                                           $29,103
                                                                $40,000
     5                                                                        $18,432*
                                                                $20,000
     0                                                                 $0
              Students Aided       FAFSA Applications                             Pell Grants                  Loans

                       FY 2009     FY 2010                                                FY 2009      FY 2010
                                                             * Reflects reported FY 2009 estimate of Pell disbursements;
                                                             in an FY 2010 update, these disbursements are now
                                                             estimated at $18,282.


                                                 FY 2010 Hiring Plan
     Principal         Workforce       Recruitments             # of              Hires        % Hires on           Attrition
      Office           Planned          Submitted           Recruitments           on          Board vs.             Rate
                                                              Pending             Board        Workforce             FY10
                                                                                                Planned
      All POCs
     (Excluding
        FSA)               566                 469               93                 342              60%              5.68%
         FSA               507                 489               18                 304              60%              5.80%
    Grand Total -
    End of FY10           1073                 958               111                646              60%              5.68%


                  Contracting Obligations                                   IES Research Applications
                       ($ in millions)                                              Received
    $2,000                                                       1,800
                          $1,832                                                                              1,640
    $1,800                                                       1,600
    $1,600       $1,506                                                                     +54%
                                                                 1,400
    $1,400
                                                                 1,200
    $1,200                                                                         1,067
                      +22%                                       1,000
    $1,000
                                               +12%                800
      $800
      $600                                                         600

      $400                                           $273          400
                                         $244
      $200                                                         200
         $0                                                           0
                      Total             Small Business                            FY 2009                   FY 2010
                       FY 2009      FY 2010




4                                                                     FY 2010 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




                                          Performance Highlights

National Measures of Success in Education

President Obama, in his first address to Congress, challenged America to meet an
ambitious goal for education: by 2020, we will once again have the highest proportion of
college graduates in the world. In order to achieve that goal, we must ensure that all
children in America receive a world-class education to prepare them to succeed in college
and careers. Reaching the President’s goal will require comprehensive education reforms
beginning early in a child’s life and supporting that child through postsecondary education,
ensuring each child becomes a lifelong learner who can adapt to changes in the
technology-driven workforce of the global economy.

Unfortunately, progress in improving student achievement in reading appears to be stalled.
In 2009, for reading, gains in overall average scores seen in earlier years did not continue
at grade 4 but did continue at grade 8. The results of the nation’s report card, the National
Assessment of Educational Progress (NAEP), indicate that while grade 4 performance was
higher in 2009 than in 1998, it was not higher than in 2007. Grade 8 performance was the
same in 2009 as in 1998.

For mathematics, gains in overall average scores also did not continue at grade 4 but did
continue at grade 8. While still higher than the scores in the assessment years from 1990 to
2005, the overall average score for fourth-graders in 2009 was unchanged from the score in
2007. The upward trend seen in earlier assessments for eighth-graders continued with a
2-point increase from 2007 to 2009.

We must ensure that students graduate from high school and are ready to succeed in
college and careers. Today, our high schools do not adequately prepare students for
success in college. As shown in the graphic on the next page, while improving somewhat in
2004, the averaged freshman high school graduation rate has declined moderately in more
recent years and continues to remain only in the mid-70 percent range for those students
who graduate 4 years after starting the 9th grade.

College completion rates remain unacceptably low. In 2008, for those students who
completed a certificate or bachelor’s degree at a 4-year institution, only 57.2 percent had
graduated within 6 years, up only about 3 percentage points from 2003. For those students
who completed their program at a 2-year institution, only 30.5 percent had finished within
3 years in 2008, representing a small decline from 2003, and a more significant decline
after an initial increase in the years in between.

In 2009, the percentage of adults 25 to 34 who held an associate degree or higher was only
41.1 percent, a modest increase from 38.7 percent in 2003.




FY 2010 Agency Financial Report—U.S. Department of Education                                      5
MANAGEMENT’S DISCUSSION AND ANALYSIS




    College Attainment, College Completion, High School Graduation, and NAEP Math
                         and Reading Rates, FY 2003–FY 2009




Sources:
College Attainment: U.S. Census Bureau, Current Population Survey (http://www.census.gov/hhes/socdemo/education/
data/cps/index.html).
College Completion: U.S. Department of Education, National Center for Education Statistics, Integrated Postsecondary Education
Data System (IPEDS) Graduation Rate Survey. (http://nces.ed.gov/ipeds/). 2003 Data: “Enrollment in Postsecondary Institutions, Fall
2003; Graduation Rates, 1997 and 2000 Cohorts; and Financial Statistics, Fiscal Year 2003,” Table 7
(http://nces.ed.gov/pubs2005/2005177.pdf) and “Enrollment in Postsecondary Institutions, Fall 2003; Graduation Rates, 1997 and
2000 Cohorts; and Financial Statistics, Fiscal Year 2003,” Table 8 (http://nces.ed.gov/pubs2005/2005177.pdf). 2004 Data: “Enrollment
in Postsecondary Institutions, Fall 2004; Graduation Rates, 1998 and 2001 Cohorts; and Financial Statistics, Fiscal Year 2004,” Table
5 (http://nces.ed.gov/pubs2006/2006155.pdf). 2005 Data: “Enrollment in Postsecondary Institutions, Fall 2005; Graduation Rates,
1999 and 2002 Cohorts; and Financial Statistics, Fiscal Year 2005,” Table 5 (http://nces.ed.gov/pubs2007/2007154.pdf). 2006 Data:
“Enrollment in Postsecondary Institutions, Fall 2006; Graduation Rates, 2000 and 2003 Cohorts; and Financial Statistics, Fiscal Year
2006,” Table 5 (http://nces.ed.gov/pubs2008/2008173.pdf). 2007 Data: “Enrollment in Postsecondary Institutions, Fall 2007;
Graduation Rates, 2001 and 2004 Cohorts; and Financial Statistics, Fiscal Year 2007,” Table 5 (http://nces.ed.gov/pubs2009/
2009155.pdf). 2008 Data: “Enrollment in Postsecondary Institutions, Fall 2008; Graduation Rates, 2002 and 2005 Cohorts; and
Financial Statistics, Fiscal Year 2008,” Table 5 (http://nces.ed.gov/pubs2010/2010152rev.pdf).
High School Graduation: U.S. Department of Education, National Center for Education Statistics, Common Core of Data
(http://nces.ed.gov/ccd/pdf/
Insdr07gen1a.pdf, http://nces.ed.gov/ccd/pdf/Insdr06gen1a.pdf, http://nces.ed.gov/ccd/pdf/ sdr051bgen.pdf, http://nces.ed.gov/
pubs2009/dropout07/tables/table_13.asp, and http://nces.ed.gov/pubs2006/2006606rev.pdf). Data are collected annually. Averaged
freshman graduation rate is a Common Core of Data measure that provides an estimate of the percentage of high school students
who graduate on time by dividing the number of graduates with regular diplomas by the size of the incoming class four years earlier.
NAEP Math and Reading: National Assessment of Educational Progress (http://nationsreportcard.gov/reading_2009/
nat_g4.asp?tab_id=tab2&subtab_id=Tab_1#tabsContainer and http://nationsreportcard.gov/reading_2009/nat_g8.asp?tab_id=tab2
&subtab_id=Tab_1#tabsContainer).




6                                                                           FY 2010 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




The Department’s Priority Performance Goals

As part of the fiscal year (FY) 2011 budget development process, senior management of all
cabinet-level federal agencies identified a small number of near-term, ambitious, outcome-
focused priority performance goals that have high direct value to the public.

Each of the Department’s priority goals focuses on a clear, measurable result that it is
working to achieve in a 12–24 month time period. The Department’s senior management
has designated a goal leader and a goal lieutenant to lead progress toward each goal’s
stated result.

Each goal leader has developed an action plan that charts the path to achieving the goal,
along with defined targets for each goal measure, quarterly milestones, and contextual
measures to provide insight into causal factors affecting the goal. Quarterly data-driven
reviews will enable goal leaders to analyze performance data to guide agency action.
Agencies will provide quarterly progress updates to the Office of Management and Budget
(OMB).

The priority goals will contribute to accomplishment of long-term strategic goals and the
agency’s mission. The goals are included in the agency’s strategic planning process.

The Department’s priority goals are:

•    College- and Career-Ready Standards: World Class College- and Career-Ready
     Standards in which all states collaborate to develop, and adopt internationally
     benchmarked college- and career-ready standards.

•    Evidence-Based Policy: Measuring Effectiveness and Investing in What Works to
     implement a comprehensive approach in using evidence to inform the Department’s
     policies and major initiatives to further decision-making and program improvement.

•    Effective Teaching: World-Class Teaching and Learning to increase the number of
     highly effective teachers of low income and minority students by 200,000 to teach in
     hard-to-staff subjects and ensure that all states have in place comprehensive teacher
     evaluation systems.

•    Struggling Schools Reform: to identify 500 of the persistently lowest achieving schools
     as national models that are initiating high-quality intensive reforms to improve student
     achievement.

•    Data-Driven Decisions: Improved Achievement and Decision-Making through Statewide
     Data Systems to have all states implement comprehensive statewide longitudinal data
     systems linking student achievement data, teacher performance data, higher education
     data, and workforce data.

•    Simplified Student Aid: Efficient and Effective Delivery of Student Loans to enable all
     participating higher education institutions and loan servicers ready to deliver federal
     student loans efficiently and effectively through simplified applications.

For more information on our priority goals, please go to
http://www.whitehouse.gov/omb/budget/fy2011/assets/management.pdf.



FY 2010 Agency Financial Report—U.S. Department of Education                                      7
MANAGEMENT’S DISCUSSION AND ANALYSIS




Challenges Linking Program Performance to Funding

Linking performance results, expenditures, and budget for Department programs is
complicated. Most of the Department’s funding is disbursed through grants and loans. Only
a portion of a given fiscal year’s appropriation is available to state, school, organization, or
student recipients during the fiscal year in which the funds are appropriated. The remainder
is available at or near the end of the appropriation year or in a subsequent year.

Funds for competitive grant programs are generally available when appropriations are
passed by Congress. However, the processes required for conducting grant competitions
often result in the award of grants near the end of the fiscal year with funding available to
grantees for future fiscal years.

Therefore, program results cannot be attributed solely to the actions taken related to
FY 2010 funds but to a combination of funds from across several fiscal years, as well as
state and local investments, and many external factors, including economic conditions.
Furthermore, the results of some education programs may not be apparent for several
years after the funds are expended. In addition, results may be due to the effects of multiple
programs.

Summary of Performance Results

During FY 2010, the Department drafted a new strategic plan and has subjected it to an
extensive review process, which was ongoing at the end of FY 2010. As of September 30,
the Department’s performance continued to be measured by the 2007–2012 Strategic Plan.

There are 81 performance measures in the 2007-2012 Strategic Plan measuring student
achievement, teacher quality, school environment, preparation for college, and college
access and attainment, as well as selected measures of the Department’s operations.

Because most of our grantees are unable to report in the same fiscal year in which they
were funded and because compilation adds time as well, most FY 2010 data will not be
available until later during FY 2011. In FY 2010, the Department met or exceeded targets
for 2 measures (2.5 percent), did not meet but showed improvement for 0 (0 percent)
measures, did not meet 7 (8.6 percent), and is awaiting data for 59 measures
(72.8 percent). The remaining 13 measures (16.1 percent) have no targets or data for
FY 2010.

In FY 2009, the year with the most available data, the Department met or exceeded targets
for 25 measures (31 percent), did not meet but showed improvement for 26 (32.1 percent),
did not meet 14 (17.2 percent), and is awaiting data for 10 measures (12.3 percent). The
remaining 6 measures (7.4 percent) have no targets or data for FY 2009.

As reported in the FY 2009 Annual Performance Report, in FY 2008, the Department met or
exceeded targets for 31 measures (38.3 percent), did not meet but showed improvement
for 26 measures (32.1 percent), did not meet 11 measures (13.6 percent), and was awaiting
data for 7 measures (8.6 percent). The remaining 6 measures (7.4 percent) had no targets
or data for FY 2008.




8                                                      FY 2010 Agency Financial Report—U.S. Department of Education
                                                                             MANAGEMENT’S DISCUSSION AND ANALYSIS




                                   Accomplishments for FY 2010

The American Recovery and Reinvestment Act of 2009

Overview

The American Recovery and Reinvestment Act of 2009 (Recovery Act) was signed into law
by President Barack Obama on February 17, 2009. It is an unprecedented effort to
jumpstart the economy, create or save millions of jobs, and put a down payment on
addressing long-neglected challenges so that the nation can thrive in the 21st century. To
see how Recovery Act funds are helping individual states, visit
http://www.ed.gov/policy/gen/leg/recovery/state-fact-sheets/index.html.

To learn more about the programs the Department administers under the Recovery Act,
visit http://www.ed.gov/recovery.

                                           Recovery Act Funding Summary
                                                   As of 09/30/10
                                                (Dollars in Millions)
$60,000



$50,000



$40,000                                                                                             Total
                                                                                                    Appropriations
                                                                                                    $97,407
                                                                                                    Total
$30,000                                                                                             Obligations
                                                                                                    $97,396
                                                                                                    Total Outlays
                                                                                                    $63,361
$20,000



$10,000



      $0
               State Fiscal    Student Financial         IDEA Funds   TITLE I (Formula)   Other *
            Stabilization Fund    Assistance
                (Formula)


* The Other category includes funds for Impact Aid, Rehabilitative Services and Disability Research,
School Improvement Programs, Higher Education, Investing in Innovation, Race to the Top, Institute
of Education Sciences, Innovation and Improvement, Student Aid Administration, School
Improvement Grants, and Office of Inspector General.




FY 2010 Agency Financial Report—U.S. Department of Education                                                         9
MANAGEMENT’S DISCUSSION AND ANALYSIS




               Percentage of Recovery Act Funding Disbursed As of 09/30/10
                (Cumulative Outlays as a Percent of Cumulative Obligations)

        120%
                                      95.8%
        100%
                    73.5%
         80%
                                                        49.8%         50.9%
         60%
         40%                                                                                             Total Percent Disbursed
                                                                                                         65.1%
         20%                                                                           6.8%
          0%
                State Fiscal   Student            IDEA Funds         TITLE I          Other*
                Stabilization Financial                             (Formula)
                   Fund       Assistance
                 (Formula)


* The Other category includes funds for Impact Aid, Rehabilitative Services and Disability Research,
School Improvement Programs, Higher Education, Investing in Innovation, Race to the Top, Institute
of Education Sciences, Innovation and Improvement, Student Aid Administration, School
Improvement Grants, and Office of Inspector General.

Recovery Act Recipient Reporting

Through a nationwide data collection process the Recovery Act requires recipients to
submit reports on the use of the funding, and estimates on the number of jobs created and
retained. The Department is firmly committed to the success of the reporting process and
has devoted considerable resources to this effort.

For the quarter ending September 30, 2010, grant recipients again reported that over
275,000 education jobs, such as teachers, principals, librarians, and counselors, were
saved or created with Recovery Act funding. In total, the Department funding supported
over 300,000 positions, including corrections officers, public health personnel, and
construction workers.

                                               Recipient-Reported ARRA Jobs
          800,000
                                                                                      749,597
          700,000                                                682,322                                    671,607
                      633,189
                                              608,078
          600,000
                                                                      468,047              451,598
          500,000
                            396,803               409,190                  409,220              394,844          337,123
          400,000
                                325,194               340,836
                                                                                                                       275,645
          300,000

          200,000

          100,000

                0
                    Reported Jobs for     Reported Jobs for     Reported Jobs for    Reported Jobs for    Reported Jobs for
                     2/17/09–9/30/09      10/1/09–12/31/09       1/1/10–3/31/10       4/1/10–6/30/10       7/1/10–9/30/10

                     Federal Jobs Reported         All Jobs Funded By Education Dollars       Education-Related Jobs



For more information on governmentwide recipient reporting, visit:
http://www.recovery.gov/Transparency/RecipientReportedData/Pages/RecipientLanding.aspx.



10                                                                              FY 2010 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




Education Jobs Fund

The Education Jobs Fund (Ed Jobs) program is a new federal program that provides
$10 billion in assistance to states to save or create education jobs for the 2010–11 school
year. Jobs funded under this program include those that provide educational and related
services for early childhood, elementary, and secondary education.




Ongoing Initiatives in Federal Student Aid

The Student Aid and Fiscal Responsibility Act
On March 30, 2010, the President signed the Health Care and Education Reconciliation
Act, which included the Student Aid and Fiscal Responsibility Act (SAFRA Act), requiring
that all new Federal Stafford, PLUS, and Consolidation loans be made through the William
D. Ford Federal Direct Loan Program beginning July 1, 2010.

FSA successfully supported the transition of approximately 2,500 schools to the Direct Loan
Program, almost doubling the number of participating schools; provided Direct Loan
Program training to almost 5,200 financial aid professionals at the annual Fall Conference;
processed over 10 million promissory notes, a 300 percent increase over the previous year;
and supported the origination of over 19 million Direct Loans, a 176 percent increase in
originations compared to the 2009–10 award year. As of September 30, 2010, 98 percent of
domestic schools that had participated in the federal student loan programs in the previous
two years had successfully originated a Direct Loan, and no school wishing to participate
has been unable to do so.

For more information on the Federal Student Aid office, go to:
http://www2.ed.gov/about/offices/list/fsa/index.html?src=oc

Free Application for Federal Student Aid Simplification

In FY 2009, the President called for all Americans to seek at least one year of
postsecondary education. 1 FSA’s response to this charge was to improve access to a
1
    http://www.whitehouse.gov/issues/education/




FY 2010 Agency Financial Report—U.S. Department of Education                                     11
MANAGEMENT’S DISCUSSION AND ANALYSIS




college education by making the Free Application for Federal Student Aid (FAFSA) easier
to complete. FSA continued these efforts during FY 2010. Specifically, FSA implemented
an improved 2010–11 FAFSA that utilizes enhanced skip logic and the expanded use of
data provided early in the application. Applicants are now presented with fewer questions
and a more customized application process. This improved version resulted in a simpler
experience for applicants. FSA began to coordinate with the Internal Revenue Service (IRS)
to allow some applicants to import their tax form data directly into the FAFSA. Of the almost
900,000 applicants and their parents eligible to transfer data from the IRS, over 30 percent
used this new functionality.

Ensuring Continued Access to Student Loans Act of 2008

Beginning in August 2008, the Department implemented a number of programs authorized
under the ECASLA to ensure credit market disruptions did not deny eligible students and
parents access to federal student loans for the 2008–09 academic year. The ECASLA
authority, which originally expired on September 30, 2009, was subsequently extended
through September 30, 2010, to administer the Loan Participation Purchase Program and
Loan Purchase Commitment Program. The Asset-Backed Commercial Paper (ABCP)
Conduit Program purchase option remains active until January 2014.

As of September 30, 2010, the Department has supplied approximately $107 billion to the
lending market, students, and families through the various ECASLA programs. Programs
authorized under ECASLA are summarized below:

Loan Participation Purchase Program

Under this program, lenders accessed capital to make new loans by selling the Department
participation interests in eligible FFEL loans. Participation interests on loans made for the
2008–09 academic year had to have been redeemed, with interest, by lenders no later than
October 15, 2009, either in cash or by selling the underlying loans to the Department; for
loans made for academic year 2009–10, the deadline for redemption is October 15, 2010.
For the 2008–09 loan period, the Department purchased over $33 billion in participation
interests. As part of the process of redeeming the participation interests, $31 billion of those
underlying loans were later sold to the Department. As of September 30, 2010, the
Department had purchased over $38 billion in participation interests for the 2009–10 loan
period. When the 2009–10 loan period ended October 15, 2010, participating lenders had
sold over $37 billion of those underlying loans to the Department as part of the process of
redeeming the participation interests.

Loan Purchase Commitment Program

Under this program, lenders accessed capital to make new loans by directly selling the
Department eligible FFEL loans. For the 2008–09 loan period, a total of over $48 billion in
loans was sold to the Department, $31 billion from the Loan Participation Purchase Program
and $17 billion directly. As of September 30, 2010, for the 2009–10 loan period, over
$33 billion in loans had been sold to the Department, with nearly $12 billion from the Loan
Participation Purchase Program and $21 billion directly. When the 2009–10 program ended
October 15, 2010, participating lenders sold approximately $60 billion of FFEL loans to the
Department, including approximately $37 billion from the Loan Participation Purchase




12                                                    FY 2010 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




Program, and approximately $23 billion directly. It is estimated that the 2009–10 volume
accounts for approximately 95 percent of the total FFEL Program loans made for the period.

ABCP Conduit Program

The ABCP Conduit Program was developed to provide additional liquidity to support new
lending. Under this program, which began operations in mid-2009, the Department entered
into forward purchase commitments with a conduit. The conduit issues commercial paper
backed by qualifying student loans made between October 1, 2003 and September 30, 2009.
If no other financing is available to retire this paper as it matures, the Department commits to
provide the needed funds by purchasing the underlying student loans. Lenders were able to
place loans into the conduit until June 30, 2010. By that time, a total of 25 lenders had
participated, and backed by their loans, the conduit issued a total of $41 billion in commercial
paper. Under the Put Agreement with the conduit, the Department purchases loans subject to
the occurrence of certain events. As of September 30, 2010, the Department had purchased
about $0.5 billion in delinquent loans from the conduit. The conduit has not yet put any other
loans to the Department. The option to sell loans to the Department ends January 2014. The
ABCP Conduit Program is the single remaining active ECASLA program.

Innovation

Race to the Top

During FY 2010, the Department awarded 12 Race to the Top grants, expected to directly
affect 13.6 million students and 980,000 teachers in 25,000 schools in Delaware, Florida,
Georgia, Hawaii, Maryland, Massachusetts, New York, North Carolina, Ohio, Rhode Island,
Tennessee, and the District of Columbia. These grants reward states that are leading the
way in comprehensive, coherent, statewide education reform in key areas:

•    adopting standards and assessments that prepare students to succeed in college and
     the workplace;
•    building data systems that measure student growth and success, and inform teachers
     and principals how to improve instruction; and
•    recruiting, developing, rewarding, and retaining effective teachers and principals,
     especially where they are needed most.
http://www2.ed.gov/programs/racetothetop/index.html

To provide ongoing feedback to teachers during the course of the school year, measure
annual student growth, and move beyond narrowly-focused bubble tests, the Department
awarded two groups of states grants to develop a new generation of tests. The tests will
assess students’ knowledge of mathematics and English language arts from third grade
through high school.
http://www2.ed.gov/programs/racetothetop-assessment/index.html

Investing in Innovation Fund
The Department made grant awards to 49 applicants from a pool of nearly 1,700. The
Investing in Innovation Fund, established under the Recovery Act, provides funding to
support local educational agencies (LEAs) and nonprofit organizations in partnership with



FY 2010 Agency Financial Report—U.S. Department of Education                                     13
MANAGEMENT’S DISCUSSION AND ANALYSIS




one or more LEAs or a consortium of schools. The purpose of this program is to provide
competitive grants to applicants with a record of improving student achievement and
attainment in order to expand the implementation of, and investment in, innovative practices
that are demonstrated to have an impact on improving student achievement or student
growth, closing achievement gaps, decreasing dropout rates, increasing high school
graduation rates, or increasing college enrollment and completion rates.
http://www2.ed.gov/programs/innovation/index.html.

Teacher Incentive Fund
In FY 2010, the Department awarded in Teacher Incentive Fund (TIF) grants to states,
school districts, nonprofit organizations, and institutions of higher education to develop and
implement performance-based teacher and principal compensation systems in high-need
schools. The winning applicants represent rural and urban school districts, as well as
nonprofit groups and state education organizations from 27 states.

The TIF program seeks to strengthen the education profession by rewarding excellence,
attracting teachers and principals to high-need schools, and providing all teachers and
principals with the feedback and support they need to succeed.
http://www2.ed.gov/programs/teacherincentive/index.html.

State Fiscal Stabilization Fund
The State Fiscal Stabilization Fund (SFSF) provides resources for states to advance
student-focused education reforms from early learning through postsecondary education,
including: college- and career- ready standards and high-quality, valid, and reliable
assessments for all students; development and use of pre-K through post-secondary and
career data systems; increasing teacher effectiveness and ensuring an equitable
distribution of qualified teachers; and turning around the lowest-performing schools.

State Fiscal Stabilization Fund Phase II awards continued through FY 2010, with the states
and the District of Columbia receiving a portion of stabilization funds totaling $11.5 billion.
http://www2.ed.gov/policy/gen/leg/recovery/factsheet/stabilization-fund.html.

High School Graduation Initiative
The U.S. Department of Education’s High School Graduation Initiative supports activities
such as early warning systems designed to identify students at risk of dropping out,
rigorous academic programs and support services to engage students and implement
dropout prevention, credit recovery programs, and targeted re-engagement programs that
identify out-of-school youth and encourage them to reenter school. The Initiative targets
high schools with high dropout rates and middle schools that feed into schools with high
dropout rates. In FY 2010, 29 states and districts were awarded $46.6 million under the
High School Graduation Initiative.
http://www2.ed.gov/programs/dropout/index.html.




14                                                    FY 2010 Agency Financial Report—U.S. Department of Education
                                                                             MANAGEMENT’S DISCUSSION AND ANALYSIS




Customer Satisfaction With the Department of Education

The American Customer Satisfaction Index (ACSI) is the national indicator of customer
evaluations of the quality of goods and services, and is the only uniform benchmarking
measure of customer satisfaction across government agencies and private industry. The
customer satisfaction index is a weighted average of three questions that measure overall
satisfaction, satisfaction compared to expectations, and satisfaction compared to an “ideal”
organization.

In FY 2010, the Department transitioned to a survey that focused exclusively on metrics of
satisfaction among its grantees in order to evaluate program performance and to align with
metrics of customer satisfaction in its Organizational Assessment. A total of 15 Department
programs participated in the FY 2010 Grantee Satisfaction Survey. This year, the
Department received its biggest gain in satisfaction with a score of 72, placing it 3 points
above the current federal government average of 69. Grantee satisfaction with the
Department’s services continues its upward trend with a 2-point improvement in 2008, a
3-point improvement in 2009, and a 4-point improvement in 2010 over the previous year.
For complete information, see the full report at
http://www2.ed.gov/about/reports/annual/gss/index.html.

                                              Customer Satisfaction Index
                                                     2005–2010

                                                                                                          72
    2010                                                                                                           77
                                                                                                     69
                                                                                                    68

                                                                                                    68
    2009                                                                                                      73
                                                                                                66
                                                                                              64

                                                                                               65
    2008                                                                                                 70
                                                                                              63
                                                                                     59

                                                                                              63
    2007                                                                                            68
                                                                                         61
                                                                                    58

                                                                                          62
    2006                                                                                           67
                                                                                         60
                                                                                    57

                                                                                              63
    2005                                                                                             69
                                                                                         61
                                                                                    57

           0            10            20            30         40       50          60              70             80   90

                                       ACSI score for the Department of Education
                                       How satisfied are you with ED's products and services
                                       How well ED's products and services meet expectations
                                       How well ED compares with ideal products and services




FY 2010 Agency Financial Report—U.S. Department of Education                                                             15
MANAGEMENT’S DISCUSSION AND ANALYSIS




                          Forward Looking Initiatives

Implementation of Changes in Federal Student Aid

The SAFRA Act, which was enacted as part of the Health Care and Education
Reconciliation Act of 2010, ended the origination of new FFEL loans after June 30, 2010.
This means that students previously served by the FFEL Program now receive loans under
the Direct Loan Program. The Department’s challenge has been to expand its capacity to
originate and service the increased Direct Loan volume; train and monitor schools new to
the program; and continue oversight of FFEL lenders and guaranty agencies that service
the outstanding portfolios. The Department has taken actions to ensure a smooth transition,
including providing outreach and technical support to schools, enhancing the key
information systems, contracting with additional loan servicers, hiring additional staff, and
developing contingency plans.

Over the longer term, there are opportunities for FSA to improve its rapid-response
capabilities. First, FSA will further develop its ability to anticipate changes by having an ear
to the ground in the marketplace, at schools, and in policy discussions. Second, FSA will
improve its resourcing model to ensure that it has highly capable personnel and vendors
who are available to respond to unforeseen events.

The growth in the government held Direct Lending portfolio will require FSA to procure
broader support from private and nonprofit entities to service outstanding Direct Loans. In
addition to Direct Loan origination and servicing, FSA will need help reaching out to
customers and promoting financial literacy.

The Department has taken contractual actions to expand the Direct Loan Program’s
capacity to both originate and service the increased loan volume, including contract
monitoring practices and appropriate system testing to ensure that systems perform
adequately under increased processing requirements.

Data Quality and Reporting

The Department, its grantees, and subrecipients must have controls in place to ensure that
accurate, reliable data are reported. Data are used by the Department to make funding
decisions, evaluate program performance, and support management decisions. Reported
data provides transparency and allows the public to see how funds are being spent.

State educational agencies (SEAs) collect data annually from local educational agencies
(LEAs). The Department has identified a number of weaknesses in the quality of its
reported data and is recommending improvements at the SEA and LEA levels to establish
adequate controls over data accuracy and reliability and to develop consistent data
definitions and terminology. The Department continues to provide guidance and clarify
requirements through the development of consistent definitions for data terms to enhance
reporting accuracy. The Department recommends that the General Education Provisions
Act, which applies to data reporting requirements for grant applicants, be amended to
require management certifications of the validity and reliability of submitted data, along with
assurances that the systems maintaining the data have adequate controls in place to
ensure accuracy and comparability of data that are reported to the public, Congress, and
the American people.



16                                                     FY 2010 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




Oversight and Monitoring

The Department is committed to effective oversight and monitoring of programs and
operations to ensure that funds are used for the purposes intended, that programs are
achieving goals and objectives, and that the Department is obtaining the products and level
of services for which it has contracted. The complexity of factors for this initiative include
the numbers of different entities and programs requiring monitoring and oversight, the
amount of funding that flows through the Department, and the impact that ineffective
monitoring could have on the students and taxpayers.

Four areas are highlighted for action:

For FSA program participants, the Department will improve oversight and monitoring, risk
assessment, and control activities including audits of loan eligibility, program reviews at
guaranty agencies, and identification of improper payments for recovery.

For distance education, the Department has initiated program reviews at high-risk schools
based on risk indicators and schools identified as participating in federal aid programs that
may not be complying with program requirements, including schools offering distance
education, which have had recent, significant increases in enrollment numbers and funding.

For grantees, the Department is developing financial monitoring training for program staff,
exploring the establishment of a dedicated group of financial monitoring experts, evaluating
alternatives for improving information sharing about monitoring, and developing a technical
assistance plan and training curricula to provide enhanced guidance and training to state
and local officials.

For contractors, the Department is implementing a procedure to monitor all new and
existing contracts and to develop a training program reinforcing the Department’s
contracting processes, applicable laws, and regulations. Program offices were directed to
implement immediate steps and take personal responsibility for ensuring that contracts are
awarded properly and effectively monitored.

Information Technology Security

The Department will continue to address security and control weaknesses disclosed in audit
reports or identified in internal assessments. The Department is working internally and
partnering with other government agencies to address identified security challenges.

The Department has:

•    revised its Incident Handling Procedures Handbook and its online security awareness
     training to address actions employees should take regarding a variety of incident
     scenarios;

•    developed and published a Plan of Action and Milestones Guide to set forth the process
     for handling system vulnerabilities; and

•    adopted Federal Student Aid’s Operational Vulnerability Management System as the
     departmental standard for collection of information on all systems in the Department’s




FY 2010 Agency Financial Report—U.S. Department of Education                                     17
MANAGEMENT’S DISCUSSION AND ANALYSIS




     FISMA reportable inventory, including a central repository for all reported incidents, as
     well as tracking and auditing functions.

The Department has entered into an interagency agreement for certification and
accreditation support services with the Federal Aviation Administration’s Enterprise
Services Center, which has begun re-certifying existing systems and certifying new systems
in the Department's inventory in accordance with federal standards, including Privacy
Impact Assessments for any system that stores, processes, or transmits personally
identifiable information.

The Department has participated in Einstein, an intrusion detection system developed by
the Department of Homeland Security that monitors government network gateways, as well
as in a shared services agreement with the Federal Aviation Administration’s Cyber
Security Management Center; and is using National Institute Standards and Technology
guidelines and recommendations for server baseline security configurations.

Implementation of these actions going forward will support governmentwide security and
enhance awareness within the Department.

Data Privacy Safeguards

The Department will continue to build a robust privacy safeguards program with a culture of
responsibility, accountability, and transparency in protecting personal data of the millions of
individuals, including students and their parents. The Department is working internally and
partnering with other government agencies to adopt governmentwide best practices and to
implement policies and procedures that strengthen the public’s trust.

The Department has:

•    prepared revisions to its privacy data external notification policies and procedures that
     will simplify and expedite its analysis of potential risk of harm to affected individuals,
     enabling more efficient and accurate notification, as appropriate, to affected individuals,
     including the media and Members of Congress.

•    launched two major initiatives to heighten the visibility of privacy protection
     requirements and to strengthen employee and contractor awareness and knowledge:
     1) an aggressive communications and outreach program; and 2) an expanded training
     program of mandatory and position-specific training.




18                                                     FY 2010 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




                                         Management Challenges
The Office of Inspector General (OIG) works to promote efficiency, effectiveness, and
integrity in the programs and operations of the Department. Through its audits, inspections,
investigations, and other reviews, OIG continues to identify areas of concern within the
Department’s programs and operations, and recommend actions the Department should
take to address these weaknesses. The Reports Consolidation Act of 2000 requires OIG to
identify and summarize the most significant management challenges facing the Department
each year.

Last year, OIG reported three management challenges: the Recovery Act; student financial
assistance (SFA) programs, with a focus on the ECASLA; and information security and
management. All three have been updated as challenges for FY 2011, and Data Quality
and Reporting, previously a subarea, is presented as a separate challenge. The FY 2011
management challenges are:

•    Implementation of New Programs/Statutory Changes, including the Recovery Act and
     changes to the SFA loan programs;

•    Oversight and Monitoring, including SFA program participants, distance education,
     grantees, and contractors;

•    Data Quality and Reporting, including program data and Recovery Act reporting
     requirements; and

•    Information Technology Security.

The Executive Summary of Management Challenges for FY 2011 is included in the Other
Accompanying Information section of this report and the full report is published by the
Department’s Office of Inspector General. To view the full report, go to:
http://www2.ed.gov/about/offices/list/oig/managementchallenges.html.




FY 2010 Agency Financial Report—U.S. Department of Education                                     19
MANAGEMENT’S DISCUSSION AND ANALYSIS




                               Financial Highlights
The Department consistently produces accurate and timely financial information that is
used by management to inform decision-making and drive results in key areas of operation.
For the ninth consecutive year, the Department achieved an unqualified (clean) opinion
from independent auditors on the annual financial statements. Since 2003, the auditors
have found no material weaknesses in the Department’s internal control over financial
reporting. In accordance with OMB’s Circular No. A-123, Management’s Responsibility for
Internal Control, the Department continues to test and evaluate findings and risk
determinations uncovered in management’s internal control assessment.

Sources of Funds

The Department managed
                                       FY 2010 Department of Education's Budget
a budget in excess of
$63 billion during FY 2010,                                    1%
of which 75 percent                                         7%
supported elementary and                           17%
secondary education grant
programs. Postsecondary
education grants and
administration of student                                                  75%
financial assistance
accounted for 17 percent,
including loan program
costs that helped almost
14 million students and
their parents to better             Administrative Expenses
afford higher education             Elementary and Secondary Grants
during FY 2010. An
                                    Postsecondary Grants and Loan Administration Program Costs
additional 7 percent went
toward programs and                 Research, Improvement, and Rehabilitation Grants
grants encompassing
research, development, and dissemination, as well as vocational rehabilitation services.
Administrative expenditures were less than 1 percent of the Department’s appropriations.

Nearly all of the Department’s non-administrative appropriations support three primary lines
of business: grants, guaranteed loans, and direct loans. The original principal balances of
the Federal Family Education Loan (FFEL) Program guaranteed loans and William D. Ford
Federal Direct Loan (Direct Loan) Program loans, which compose a large share of federal
student financial assistance, are funded by commercial banks and borrowings from the
Treasury, respectively. Effective July 1, 2010, no new student loans will be made under the
FFEL Program. However, if the first disbursement of a FFEL loan was made by a FFEL
lender on or before June 30, 2010, that lender is obligated to make subsequent
disbursements after June 30, 2010. As of the end of September 2010, the total principal
balance of outstanding guaranteed loans held by lenders was approximately $390 billion.
The government’s estimated maximum exposure for defaulted FFEL guaranteed loans was
approximately $382 billion.




20                                                  FY 2010 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




The Department’s four largest grant programs are SFSF (a one-time appropriation under
the Recovery Act), Title I grants for elementary and secondary education, Pell Grants for
postsecondary financial aid, and Special Education Grants to States under the Individuals
with Disabilities Education Act.

The Ensuring Continued Access to Student Loans Act of 2008 (ECASLA) authorized the
Secretary to purchase or enter into forward commitments to purchase FFEL loans. The
Department has implemented three activities under this temporary loan purchase authority.
These activities are: (1) loan purchase commitments under which the Department agrees to
purchase loans directly from FFEL lenders; (2) loan participation interest purchases in
which the Department purchases participation interests in FFEL loans; and (3) an Asset-
Backed Commercial Paper (ABCP) Conduit program in which the Department enters into a
forward commitment to purchase FFEL loans from a student loan-backed conduit, as
needed, to allow the conduit to repay short-term liquidity loans used to refinance maturing
commercial paper.

The Direct Loan Program, created by the Student Loan Reform Act of 1993, provides
Federal loans directly to students. This program uses Treasury funds to provide loan capital
directly to eligible undergraduate and graduate students and their parents through
participating schools. These schools then disburse loan funds to students. As of September
30, 2010, the value of the Department’s Direct Loan portfolio was $228.2 billion.

Financial Position

The Department’s financial statements are prepared in accordance with established federal
accounting standards, as promulgated by the Federal Accounting Standards Advisory
Board (FASAB), and are audited by the independent accounting firm of Ernst & Young,
LLP. The audit is overseen by the OIG. Financial statements and footnotes for FY 2010
appear on pages 31–77. An analysis of the principal financial statements follows.

Balance Sheet. The
Balance Sheet presents, as
of a specific point in time,                   Assets and Liabilities
the recorded value of                 $600,000
assets and liabilities                            $503,664
retained or managed by the            $500,000
                                                         $416,062
                                                                    $405,945
Department. The difference            $400,000
                                                  Millions




between assets and                                                         $278,885
                                      $300,000                                          Assets
liabilities represents the net
position of the Department.           $200,000                                          Liabilities
The Balance Sheet
                                      $100,000
displayed on page 31
reflects total assets of                    $0
$503.7 billion, a 24 percent                      September 2010   September 2009
increase over FY 2009. The
vast majority of this
increase is due to Credit Program Receivables. Credit Program Receivables increased by
$133.7 billion, a 57 percent increase over FY 2009. This increase is largely due to Direct
Loan disbursements, as well as activity related to loan purchase commitments and loan
participation purchases under the FFEL program. Much of this loan portfolio is principal and



FY 2010 Agency Financial Report—U.S. Department of Education                                     21
MANAGEMENT’S DISCUSSION AND ANALYSIS




interest owed by students on Direct Loans. The remaining balance is related to defaulted
guaranteed loans on which the Department paid reinsurance and which are now held by the
Department and to loan purchase commitments and loan participation purchases under the
FFEL Program as authorized by ECASLA. The net portfolio for Direct Loans increased
$75.4 billion due to Direct Loan disbursements net of borrower principal and interest
collections. FFEL Program loans increased by $57.9 billion during FY 2010, due primarily to
loan volume and activity related to loan purchase commitments and loan participation
purchases. The Fund Balance with Treasury decreased by $35.8 billion, a 21 percent
decrease from FY 2009. This decrease is largely due to Recovery Act disbursements
during FY 2010.

Total Liabilities for the Department increased by $137.2 billion, a 49 percent increase over
FY 2009. The increase is the result of increased borrowing for the Direct Loan Program and
to provide funds for the loan purchase commitments and loan participation purchases
activities under the FFEL Program. Liabilities for Loan Guarantees for the FFEL Program
decreased by $6 billion, a 30 percent decrease that is primarily due to FFEL defaulted
claims payments and the subsidy re-estimate. These liabilities present the estimated costs,
on a present-value basis, of the net long-term cash outflows due to loan defaults net of
offsetting fees.

The Department’s Net Position as of September 30, 2010, was $87.6 billion, a $39.5 billion
decrease from the $127.1 billion Net Position as of September 30, 2009. This decrease is
largely due to Recovery Act disbursements during FY 2010.

Statement of Net Cost. The
Statement of Net Cost                          Total Net Cost of Operations
presents the components of
                                       $120,000
the Department’s net cost,
which is the gross cost                                    $99,674
                                       $100,000
incurred less any revenues
earned from the                         $80,000
Department’s activities. The
                                    Millions




Department’s total program              $60,000
net costs, as reflected on the                                                      $44,161
Statement of Net Cost,                  $40,000
page 32, were $99.7 billion, a
126 percent increase from               $20,000
September 30, 2009. This
                                              $0
change largely reflects the
                                                        September 2010           September 2009
$44 billion Recovery Act and
Education Jobs Fund
disbursements and the $23.6 billion reduction in negative subsidy related costs. These
costs include downward modifications, downward re-estimates, and negative subsidy
transfers. For FY 2010 re-estimated subsidy cost, Direct Loan subsidy cost was increased
by $4.7 billion and FFEL Guaranteed subsidy cost was reduced by $12.7 billion. For 2009
re-estimated subsidy cost, Direct Loan subsidy cost was decreased by $5.2 billion and
FFEL Guaranteed subsidy cost was reduced by $21.7 billion. The $6 billion increase in
earned revenue is primarily the result of interest revenue associated with a loan portfolio
that was larger than in FY 2009.




22                                                    FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                 MANAGEMENT’S DISCUSSION AND ANALYSIS




The Statement of Net Cost is presented to be consistent with the Department’s strategic
goals. As required by the Government Performance and Results Act of 1993, each of the
Department’s Reporting Organizations has been aligned with the major goals presented in
the Department’s Strategic Plan 2007–2012.



                                                             Reporting
           Net Cost Program                                                                      Strategic Goal
                                                        Organizations/Groups

                                                        Office of Federal Student Aid      3. Ensure the accessibility,
                                                                                              affordability, and
  Ensure Accessibility, Affordability, and
                                                               Office of Postsecondary        accountability of higher
  Accountability of Higher Education
                                                                      Education               education, and better
  and Career and Technical
                                                                                              prepare students and adults
  Advancement
                                                        Office of Vocational and Adult        for employment and future
                                                                   Education                  learning


                                                           Office of Elementary and
                                                            Secondary Education            1. Improve student
                                                                                              achievement, with the focus
                                                          Office of English Language          on bringing all students to
                                                                  Acquisition                 grade level in reading and
  Promote Academic Achievement in
                                                                                              mathematics by 2014
  Elementary and Secondary Schools
                                                        Office of Safe and Drug-Free       2. Increase the academic
                                                                   Schools                    achievement of all high
                                                                                              school students
                                                                  Hurricane Relief



                                                       Institute of Education Sciences     1. Improve student
                                                                                              achievement, with the focus
  Transformation of Education                                                                 on bringing all students to
                                                               Office of Innovation and       grade level in reading and
                                                                     Improvement              mathematics by 2014




                                                       Office of Special Education and     Cuts across Strategic Goals 1,
  Special Education
                                                            Rehabilitative Services        2, and 3




                                                           American Recovery and
  American Recovery and                                      Reinvestment Act              Cuts across Strategic Goals 1,
  Reinvestment Act and Education Jobs
                                                                                           2, and 3
  Fund
                                                                Education Jobs Fund




FY 2010 Agency Financial Report—U.S. Department of Education                                                            23
MANAGEMENT’S DISCUSSION AND ANALYSIS




Strategic Goals 1, 2, and 3 are sharply defined directives that guide the Department’s
reporting organizations to carry out the vision and programmatic mission, and the net cost
programs can be specifically associated with these three strategic goals. The Department
has a cross-goal strategy on management, which is considered a high-level premise on
which the Department establishes its foundation for the three goals. As a result, we do not
assign specific programs to the cross-goal strategy for presentation in the Statement of Net
Cost.

Statement of Budgetary Resources. This statement provides information about the
provision of budgetary resources and their status as of the end of the reporting period. The
statement displayed on page 34 shows that the Department had $362.5 billion in total
budgetary resources for the 12 months ended September 30, 2010. These budgetary
resources were composed of $130.4 billion in appropriated budgetary resources and
$232.1 billion in non-budgetary credit reform resources that primarily consist of borrowing
authority for the loan programs. Of the $22.2 billion that remained unobligated for the period
ended September 30, 2010, $17.7 billion represents funding provided in advance for
activities in future periods that were not available at year end. These funds will become
available during the next, or future, fiscal years.

                Limitations of the Financial Statements
Management has prepared the accompanying financial statements to report the financial
position and operational results for the U.S. Department of Education for FY 2010 and
FY 2009, pursuant to the requirements of Title 31 of the United States Code, section
3515(b).

While these statements have been prepared from the books and records of the Department
in accordance with generally accepted accounting principles for federal entities and the
formats prescribed by OMB, these 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 a component of the U.S.
Government, a sovereign entity. One implication of this is that the liabilities presented
herein cannot be liquidated without the enactment of appropriations and ongoing operations
are subject to the enactment of future appropriations.




24                                                   FY 2010 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




                                       Management’s Assurances

Federal Managers’ Financial Integrity Act

As required under the Federal Managers’ Financial Integrity Act of 1982 (FMFIA), the
Department reviewed its internal control system. Internal controls are an integral
component of an organization’s management that provide reasonable assurance that the
following objectives are being achieved:

•    Obligations and costs are in compliance with applicable laws.
•    Assets are safeguarded against waste, loss, unauthorized use, or misappropriation.
•    The revenues and expenditures applicable to agency operations are properly recorded
     and accounted for to permit the preparation of accounts and reliable financial and
     statistical reports, and maintain accountability over assets.
•    Programs are efficiently and effectively carried out in accordance with applicable laws
     and management policy.

Managers throughout the Department are responsible for ensuring that effective internal
controls are implemented in their areas of responsibility. Individual assurance statements
from senior management serve as the primary basis for the Department’s assurance that
the controls are adequate. The assurance statement provided on page 25 is the result of
our annual assessment and is based upon each senior officer’s evaluation of controls.

Offices within the Department that identify material weaknesses are required to submit
plans for correcting the cited weaknesses. These corrective action plans, combined with the
individual assurance statements, provide the framework for continual monitoring and
improving the Department’s internal controls.

Inherent Limitations on the Effectiveness of Controls. Department management does
not expect that our disclosure on controls over financial reporting will prevent all errors and
all fraud. A control system, no matter how well conceived and operated, can only provide
reasonable—not absolute—assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource
constraints. The benefits of the controls must be considered relative to their associated
cost. Because of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.

Federal Financial Management Improvement Act

The Secretary has determined that the Department is in compliance with the Federal
Financial Management Improvement Act of 1996 (FFMIA), although the auditors have
identified instances in which the Department’s financial management systems did not
substantially comply with the Act.

The Department is cognizant of its auditor’s concerns relating to instances of non-
compliance with FFMIA, as noted in the Compliance with Laws and Regulations Report
located on pages 97–99 of this report. The Department continues to strengthen and
improve its financial management systems.




FY 2010 Agency Financial Report—U.S. Department of Education                                     25
MANAGEMENT’S DISCUSSION AND ANALYSIS




FFMIA requires that agencies’ financial management systems provide reliable financial data
in accordance with generally accepted accounting principles and standards. Under FFMIA,
the financial management systems substantially comply with the three following
requirements under FFMIA—federal financial management system requirements,
applicable federal accounting standards, and the use of the U.S. Government Standard
General Ledger at the transaction level.

              Federal Managers’ Financial Integrity Act


     Management at the Department of Education is responsible for establishing and
     maintaining effective internal control and financial management systems that
     meet the intent and objectives of the Federal Managers’ Financial Integrity Act
     of 1982 (FMFIA). The Department conducted its assessment of the
     effectiveness of internal control over the effectiveness and efficiency of
     operations and compliance with applicable laws and regulations in accordance
     with OMB Circular No. A-123, Management’s Responsibility for Internal Control.
     Based on the results of this evaluation, the Department of Education can
     provide reasonable assurance that its internal control over the effectiveness and
     efficiency of operations and compliance with applicable laws and regulations as
     of September 30, 2010, was operating effectively and no material weaknesses
     were found in the design or operations of the internal controls.

     In addition, the Department conducted an 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 the Office of Management and Budget’s Circular
     No. A-123. In accordance with the results of this assessment, the Department
     of Education can provide reasonable assurance that its internal control over
     financial reporting as of June 30, 2010, was operating effectively, and that no
     material weaknesses were found in the design or operation of the internal
     control over financial reporting.



                                            /s/

                                     Arne Duncan
                                   November 15, 2010




26                                                  FY 2010 Agency Financial Report—U.S. Department of Education
                                               Financial
                                                    Details




FY 2010 Agency Financial Report—U.S. Department of Education
FINANCIAL DETAILS




                Message From the Chief Financial Officer
The Department of Education continued its high standard of
financial management and reporting during FY 2010. The
Department’s excellence in financial management has been a
joint effort of its managers, employees, and business
partners. In FY 2010, we:

•    Strengthened management’s controls over cash
     management activities and non-routine grant accrual
     procedures related to the Recovery Act funding, resulting
     in the removal of a deficiency noted in last year’s “Report
     on Internal Controls;”
•    Continued to implement financial reporting requirements
     for the Recovery Act. The Department prepares detailed
     Recovery Act-related financial information that is
     submitted and posted to Recovery.gov on a weekly basis;
•    Continued to implement initiatives to ensure accessibility of federal student loans to
     eligible students and parents;
•    Received an unqualified opinion on the principal financial statements for the ninth
     consecutive year, continuing a clear pattern of financial accountability;
•    Continued to have no material weaknesses identified by our auditors as part of our
     Report on Internal Control; and
•    Continued to provide reasonable assurance of the effectiveness of the Department’s
     internal controls.

In FY 2010, the Department also took steps to address the two remaining significant
deficiencies identified in the “Report on Internal Controls” for FY 2009: credit reform and
information systems.

Regarding credit reform, the Department improved its communication with both internal and
external partners—re-instituting formal credit reform work group meetings among senior
managers, as well as holding monthly student loan meetings with OMB. Additionally, the
Department undertook a significant review and documentation effort of the assumptions
used in the Student Loan Model and also enhanced the cohort analysis.

Steps on information systems included continued efforts to address security and control
weaknesses identified in audit reports and internal assessments. The Department is
working internally and partnering with other government agencies to address identified
security challenges. Internally, the Department has revised employee procedures for
identifying and addressing vulnerabilities and has adopted Federal Student Aid’s
Operational Vulnerability Management System as the departmental standard for collection
of information on all systems. The Department has partnered with the Federal Aviation
Administration on system certifications and security management, participated in
Department of Homeland Security’s Einstein program, and implemented security
configurations for servers in accordance with National Institute of Standards and
Technology guidelines.

During FY 2010, the Department also assessed the effectiveness of its internal controls
over financial reporting. This review was based on the requirements of OMB Circular A-123


28                                                    FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                      FINANCIAL DETAILS
                                                               MESSAGE FROM THE CHIEF FINANCIAL OFFICER


(Appendix A), Management’s Responsibility for Internal Control. We are pleased to report
that the Department can give an unqualified statement of assurance on its internal control
over financial reporting. This examination provided a valuable opportunity to review and
improve internal controls and ensure integrity in financial management and reporting.

/s/



Thomas P. Skelly
Delegated to perform the functions and duties of Chief Financial Officer
November 15, 2010




FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                                     29
FINANCIAL DETAILS



                                                                                   Financial Summary
                                                                                            Dollars in Millions

                                                                                         Balance Sheet
                                                                               As of September 30, 2010, 2009, 2008, 2007
                                                                                        % Change
                                                                                        2010/2009         FY 2010                FY 2009            FY 2008            FY 2007
 Fund Balance with Treasury                                                               -21%           $ 132,259               $ 168,032      $     94,899       $     97,532
 Credit Program Receivables, Net                                                          +57%             367,904                 234,254           134,725            115,904
 Other                                                                                     -4%               3,501                   3,659              1,949              1,202
Total Assets                                                                                               503,664                 405,945           231,573            214,638

Debt                                                                                       +59%             374,335                235,385            128,668           104,287
Liabilities for Loan Guarantees                                                            -30%              14,479                 20,543             43,322            50,874
Other                                                                                      +19%              27,248                 22,957             16,247             9,896
Total Liabilities                                                                                           416,062                278,885            188,237           165,057

 Unexpended Appropriations                                                                -26%              94,371                 127,269             49,506            52,047
 Cumulative Results of Operations                                                        +3,139%            (6,769)                   (209)            (6,170)           (2,466)
 Total Net Position                                                                                         87,602                 127,060             43,336            49,581
Total Liabilities and Net Position                                                                       $ 503,664               $ 405,945      $     231,573      $    214,638


                                $600
                                       $503.7
                                $500
          Dollars in Billions




                                                 $416.1                                $405.9
                                $400
                                                                                            $278.9
                                $300
                                                                                                                  $231.6                     $214.6
                                                                                                                           $188.2
                                                                Net Position




                                $200                                                               $127.1                                                $165.1
                                                  Liabilities




                                                                               $87.6
                                        Assets




                                $100                                                                                             $43.3                    $49.6

                                  $0
                                        FY 2010                                         FY 2009                    FY 2008                    FY 2007

                                                                                   Statement of Net Cost
                                                 For the Periods Ended September 30, 2010, 2009, 2008, 2007
                                                                                        % Change
                                                                                        2010/2009         FY 2010              FY 2009           FY 2008             FY 2007
 Gross Cost                                                                              +111%           $ 116,953           $    55,412        $  74,034          $   72,316
 Earned Revenue                                                                           +54%             (17,279)              (11,251)           (9,217)             (8,032)
Total Net Cost of Operations                                                                             $ 99,674            $    44,161        $ 64,817           $   64,284

Net Cost Based on Program                                                                                  FY 2010               FY 2009
Prog. 1 Ensure the Accessibility, Affordability, and Accountability
        of Higher Education and Career and Technical
        Advancement                                                 $ 15,414                                                 $     (17,451)
Prog. 2 Promote Academic Achievement in Elementary and
        Secondary Schools                                             23,149                                                        23,150
Prog. 3 Transformation of Education                                    1,670                                                         1,632
Prog. 4 Special Education                                             15,362                                                        15,212
RA/JF American Recovery and Reinvestment Act and Education
        Jobs Fund                                                     44,079                                                        21,618

Total Net Cost of Operations                                                                              $ 99,674           $      44,161



30                                                                                                                 FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                                     FINANCIAL DETAILS
                                                                                       PRINCIPAL FINANCIAL STATEMENTS


                                          United States Department of Education
                                               Consolidated Balance Sheet
                                                As of September 30, 2010 and 2009
                                                               (Dollars in Millions)



                                                                                           FY 2010            FY 2009
Assets:
  Intragovernmental:
      Fund Balance with Treasury (Note 3)                                              $      132,259     $      168,032
      Accounts Receivable (Note 4)                                                                  1
      Other Intragovernmental Assets (Note 8)                                                     102                141
  Total Intragovernmental                                                                     132,362            168,173

 Cash and Other Monetary Assets (Note 5)                                                        2,965              2,414
 Accounts Receivable, Net (Note 4)                                                                239                520
 Credit Program Receivables, Net (Note 6)                                                     367,904            234,254
 General Property, Plant and Equipment, Net (Note 7)                                               28                 38
 Other Assets (Note 8)                                                                            166                546
Total Assets (Note 2)                                                                  $      503,664     $      405,945


Liabilities:
  Intragovernmental:
      Accounts Payable                                                                 $            1
      Debt (Note 9)                                                                           374,335     $      235,385
      Guaranty Agency Federal and Restricted Funds Due to Treasury (Note 5)                     2,965              2,414
      Payable to Treasury (Note 6)                                                              2,424              3,569
      Other Intragovernmental Liabilities (Note 10)                                            12,958             11,503
  Total Intragovernmental                                                                     392,683            252,871

 Accounts Payable                                                                               4,810              1,919
 Accrued Grant Liability (Note 11)                                                              3,744              2,962
 Liabilities for Loan Guarantees (Note 6)                                                      14,479             20,543
 Other Liabilities (Note 10)                                                                      346                590
Total Liabilities                                                                      $      416,062     $      278,885

  Commitments and Contingencies (Note 21)

Net Position:
  Unexpended Appropriations
     Other Funds                                                                       $       94,371     $      127,269
  Cumulative Results of Operations
     Earmarked Funds (Note 20)                                                                      4                  8
     Other Funds                                                                               (6,773)              (217)

Total Net Position (Note 12)                                                           $       87,602     $      127,060

Total Liabilities and Net Position                                                     $      503,664     $      405,945




The accompanying notes are an integral part of these statements.



FY 2010 Agency Financial Report—U.S. Department of Education                                                        31
FINANCIAL DETAILS
PRINCIPAL FINANCIAL STATEMENTS

                                   United States Department of Education
                                    Consolidated Statement of Net Cost
                               For the Years Ended September 30, 2010 and 2009
                                                     (Dollars in Millions)



                                                                                                    FY 2010                      FY 2009
Program Costs

     Ensure Accessibility, Affordability, and Accountability of Higher Education
     and Career and Technical Advancement
        Gross Costs                                                                            $          32,530            $          (6,344)
        Less: Earned Revenue                                                                              17,116                       11,107
        Net Program Costs                                                                                 15,414                      (17,451)

     Total Program Costs                                                                       $           15,414           $         (17,451)


     Promote Academic Achievement in Elementary and Secondary Schools
        Gross Costs                                                                            $          23,247            $          23,239
        Less: Earned Revenue                                                                                  98                           89
        Net Program Costs                                                                                 23,149                       23,150

     Total Program Costs                                                                       $           23,149           $          23,150


     Transformation of Education
        Gross Costs                                                                            $            1,711           $               1,667
        Less: Earned Revenue                                                                                   41                              35
        Net Program Costs                                                                                   1,670                           1,632

     Total Program Costs                                                                       $            1,670           $               1,632


     Special Education
        Gross Costs                                                                            $          15,386            $          15,232
        Less: Earned Revenue                                                                                  24                           20
        Net Program Costs                                                                                 15,362                       15,212

     Total Program Costs                                                                       $           15,362           $          15,212


     American Recovery and Reinvestment Act and Education Jobs Fund
       Gross Costs                                                                             $           44,079           $          21,618
       Less: Earned Revenue
       Net Program Costs                                                                                  44,079                       21,618

     Total Program Costs                                                                       $           44,079           $          21,618


Net Cost of Operations (Notes 13 &16)                                                          $           99,674           $          44,161




The accompanying notes are an integral part of these statements.



32                                                                           FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                                                   FINANCIAL DETAILS
                                                                                                     PRINCIPAL FINANCIAL STATEMENTS

                                      United States Department of Education
                                 Consolidated Statement of Changes in Net Position
                                      For the Years Ended September 30, 2010 and 2009
                                                                   (Dollars in Millions)


                                                                            FY 2010                                     FY 2009
                                                                   Cumulative                                  Cumulative
                                                                   Results of     Unexpended                   Results of     Unexpended
                                                                   Operations    Appropriations                Operations    Appropriations


Beginning Balances
      Earmarked Funds                                          $                8                          $             17
      All Other Funds                                          $             (217) $           127,269     $         (6,187) $      49,506
Budgetary Financing Sources:
  Appropriations Received
     Earmarked Funds
     All Other Funds                                                                   $        92,900                         $   164,927
  Appropriations Transferred - in/out
     Earmarked Funds
     All Other Funds                                                                                                                      1
  Other Adjustments (rescissions, etc)
     Earmarked Funds
     All Other Funds                                           $                 (2)             (1,292)   $              2            (302)
  Appropriations Used
     Earmarked Funds
     All Other Funds                                                      124,506              (124,506)             86,863         (86,863)
  Nonexchange Revenue
     Earmarked Funds
     All Other Funds                                                            12
  Nonexpenditure Financing Sources
  Transfers-Out
     Earmarked Funds
     All Other Funds                                                           (19)                                     (18)
Other Financing Sources:
  Imputed Financing from Costs Absorbed by
  Others
     Earmarked Funds
     All Other Funds                                           $                30                         $            32
  Others
     Earmarked Funds
     All Other Funds                                                     (31,413)                                   (36,757)
Total Financing Sources
      Earmarked Funds
      All Other Funds                                          $          93,114       $       (32,898)    $        50,122     $    77,763
Net Cost of Operations
      Earmarked Funds                                          $              (4)                          $             (9)
      All Other Funds                                          $         (99,670)                          $        (44,152)
Net Change
      Earmarked Funds                                          $               (4)                         $            (9)
      All Other Funds                                          $           (6,556) $           (32,898)    $         5,970 $        77,763
Ending Balances (Note 12)
      Earmarked Funds                                          $                4                          $              8
      All Other Funds                                          $           (6,773)         $     94,371    $           (217)   $    127,269



The accompanying notes are an integral part of these statements.



FY 2010 Agency Financial Report—U.S. Department of Education                                                                         33
FINANCIAL DETAILS
PRINCIPAL FINANCIAL STATEMENTS

                                   United States Department of Education
                                 Combined Statement of Budgetary Resources
                                  For the Years Ended September 30, 2010 and 2009
                                                          (Dollars in Millions)


                                                                             FY 2010                                   FY 2009
                                                                               Non-Budgetary                             Non-Budgetary
                                                                                Credit Reform                             Credit Reform
                                                                                  Financing                                 Financing
                                                                    Budgetary     Accounts                     Budgetary    Accounts
Budgetary Resources:
Unobligated balance, brought forward, October 1                     $     36,601            $      9,994       $      4,307         $    26,847
Recoveries of prior year Unpaid Obligations                                1,077                   4,436              1,012               8,038
Budgetary Authority:
    Appropriations                                                        96,823                      2            164,934                  132
    Borrowing Authority (Note 15)                                                               183,079                                 200,265
    Spending authority from offsetting collections (gross):
      Earned
         Collected                                                         1,613                  51,979              1,701              45,536
         Change in Receivables from Federal Sources                           (2)                      3                  1                  (3)
       Change in unfilled customer orders
         Advance Received                                                                              0               4                       0
         Without advance from Federal Sources                                                         4                1                     10
Subtotal                                                            $  98,434               $   235,067        $ 166,641            $   245,940
Temporarily not available pursuant to Public Law                         (561)                         0            (887)                      0
Permanently not available                                              (5,204)                  (17,355)            (980)               (13,141)
Total Budgetary Resources (Note 15)                                 $ 130,347               $   232,142        $ 170,093            $   267,684

Status of Budgetary Resources:
Obligations incurred: (Note 15)
    Direct                                                          $ 123,731               $   216,488        $ 133,398            $   257,690
    Reimbursable                                                           90                        (0)              94                     (0)
Unobligated Balances:
    Apportioned                                                     $   2,351               $     1,433        $  33,263           $        474
Unobligated Balance not available                                       4,175                    14,221            3,338                  9,520
Total Status of Budgetary Resources                                 $ 130,347               $   232,142        $ 170,093            $   267,684

Change in Obligated Balance:
Obligated balance, net:
    Unpaid obligations, brought forward, October 1                  $     95,488            $   133,797        $    49,875          $    41,440
    Uncollected customer payments from Federal Sources,
    brought forward, October 1                                                (4)                     (7)               (2)                   (0)
    Total, unpaid obligated balance, brought forward, net           $     95,484            $    133,790       $    49,873          $     41,440
Obligations Incurred, net (+/-)                                          123,821                 216,488           133,492               257,690
Gross Outlays                                                           (123,539)               (195,018)          (86,867)             (157,295)
Recoveries of prior year unpaid obligations, actual                       (1,077)                 (4,436)           (1,012)               (8,038)
Change in uncollected customer payments from Federal
Sources (+/-)                                                                     2                    (7)                (2)                    (7)
Obligated Balance, net, end of period:
    Unpaid Obligations                                              $     94,693            $   150,831        $    95,488          $   133,797
    Uncollected customer payments from Federal Sources                        (2)                   (14)                (4)                  (7)
Total, Unpaid Obligated Balance, Net, End of Period                 $     94,691            $   150,817        $    95,484          $   133,790

Net Outlays:
    Gross Outlays                                                   $ 123,539               $   195,018        $    86,867          $   157,295
    Offsetting collections                                             (1,613)                  (51,979)            (1,705)             (45,536)
    Distributed Offsetting receipts                                   (29,046)                                     (31,763)
Net Outlays (Note 15)                                               $ 92,880                $   143,039        $    53,399          $   111,759


The accompanying notes are an integral part of these statements.



34                                                                                FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                  FINANCIAL DETAILS




                  Notes to the Principal Financial Statements
              For the Years Ended September 30, 2010 and 2009

Note 1. Summary of Significant Accounting Policies
Reporting Entity
The U.S. Department of Education (the Department), a Cabinet-level agency of the Executive
Branch of the U.S. Government, was established by the Congress under the Department of
Education Organization Act (Public Law 96-88), which became effective on May 4, 1980. The
Department is responsible, through the execution of its congressionally enacted budget, for
administering direct loans, guaranteed loans, and grant programs.
The Department administers the William D. Ford Federal Direct Loan (Direct Loan) Program,
the Federal Family Education Loan (FFEL) Program, the Federal Pell Grant (Pell Grant)
Program, and the campus-based student aid programs to help students finance the costs of
higher education. The Direct Loan Program, added to the Higher Education Act of 1965 (HEA)
in 1993 by the Student Loan Reform Act of 1993, authorizes the Department to make loans
directly to eligible undergraduate and graduate students and their parents through participating
schools. The FFEL Program, authorized by the HEA, operates through state and private
nonprofit guaranty agencies to provide loan guarantees and interest subsidies on loans made
by private lenders to eligible students. Under these programs, the 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 while the students are in school or in a deferment period.
The Ensuring Continued Access to Student Loans Act of 2008 (ECASLA) authorized the
Secretary to purchase or enter into forward commitments to purchase FFEL loans. This
temporary loan purchase authority was to expire on September 30, 2009; however, Public Law
(P.L.) 110-350 extended the authority through September 30, 2010. The Department
implemented three activities under this temporary loan purchase authority. These activities are:
(1) loan purchase commitments under which the Department purchases loans directly from
FFEL lenders; (2) loan participation purchases in which the Department purchases participation
interests in FFEL loans; and (3) an Asset-Backed Commercial Paper (ABCP) Conduit in which
the Department enters into a forward commitment to purchase FFEL loans from a conduit, as
needed, to allow the conduit to repay short-term liquidity loans used to re-finance maturing
commercial paper.
The Student Aid and Fiscal Responsibility Act (SAFRA), which became effective July 1, 2010,
was included in the Health Care and Education Reconciliation Act of 2010 (HCERA). SAFRA
provides that no FFEL reinsurance or other benefits will be paid on loans made by private
lenders after June 30, 2010. However, FFEL lenders are still obligated to make the
subsequent disbursements after June 30, 2010 if the first disbursement of a FFEL loan was
made by the FFEL lender on or before June 30, 2010.
The Teacher Education Assistance for College and Higher Education Grant (TEACH) Program
was implemented beginning July 1, 2008. This program, added to the HEA by the College Cost
Reduction and Access Act (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.
The Federal Pell Grant Program provides need-based grants to low-income undergraduate and
certain post-baccalaureate students to promote access to postsecondary education.

FY 2010 Agency Financial Report—U.S. Department of Education                                     35
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Additionally, the Department administers numerous other grant programs and facilities loan
programs. Grant programs include grants to state and local entities for elementary and
secondary education; special education and rehabilitative services; educational research and
improvement; and grants for needs of the disadvantaged. Through the facilities loan programs,
the Department administers low-interest loans to institutions of higher education for the
construction and renovation of facilities.
The American Recovery and Reinvestment Act of 2009 (Recovery Act), enacted on February
17, 2009 as P.L. 111-5, provided funding to the Department for improving schools, raising
students’ achievement, driving reform, and producing better results for children and young
people for the long-term health of the nation. Approximately 55 percent of the Department’s
Recovery Act funding was appropriated for the creation of a new State Fiscal Stabilization Fund
with the goal to stabilize state and local government budgets to avoid reductions in education
and other essential public services while driving education reform. The Department was tasked
with promptly disbursing these funds through a variety of existing and new grant programs,
while ensuring the transparency and accountability of every dollar spent.
P.L. 111-226, enacted on August 10, 2010, created the Education Jobs Fund, which provided
funding to the Department to assist in saving and creating jobs for the 2010-11 school year.
The Department was authorized to disburse these funds promptly to states through formula
grants, while ensuring transparency and accountability overall.
The Department is organized into 10 reporting organizations that administer the loan and grant
programs. The financial reporting structure of the Department presents operations based on
five major reporting groups. The reporting organizations and the major reporting groups are
shown below.
Reporting Organizations
     •Federal Student Aid (FSA)                     •   Institute of Education Sciences (IES)
     •Office of Elementary and Secondary            •   Office of English Language Acquisition
      Education (OESE)                                  (OELA)
   • Office of Special Education and                •   Office of Safe and Drug-Free Schools
      Rehabilitative Services (OSERS)                   (OSDFS)
   • Office of Vocational and Adult                 •   Office of Innovation and Improvement
      Education (OVAE)                                  (OII)
   • Office of Postsecondary Education              •   Office of Management (OM)
      (OPE)
Major Reporting Groups
     •   Federal Student Aid                        •   Office of Special Education and
     •   Office of Elementary and Secondary             Rehabilitative Services
         Education                                  •   Other
     •   American Recovery and Reinvestment
         Act and Education Jobs Fund (RA/JF)


The FSA, IES, OESE, OII, and OSERS reporting organizations are responsible for the
administration of Recovery Act funds. The OESE reporting organization is responsible for
administration of the Education Jobs Fund. Recovery Act and Education Jobs Fund activities
are reported under the “American Recovery and Reinvestment Act and Education Jobs Fund”
major reporting group. (See Notes 11, 13, 18 and 19) The major reporting group “Other”



36                                                      FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                          FINANCIAL DETAILS
                                                               NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


includes the IES, OELA, OII, OM, OPE, OSDFS, and OVAE reporting organizations and
Hurricane Education Recovery (HR) activities. (See Notes 11, 13 and 20)
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 Department, 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 the Department,
in accordance with accounting principles generally accepted in the United States of America for
federal entities, issued by the Federal Accounting Standards Advisory Board (FASAB), and the
Office of Management and Budget (OMB) Circular No. A-136, Financial Reporting
Requirements, as revised September 2010. These financial statements are different from the
financial reports prepared by the Department pursuant to OMB directives that are used to
monitor and control the Department’s use of budgetary resources.
The Department’s financial 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 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.
Intradepartmental transactions and balances have been eliminated from the consolidated
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 re-estimated annually.
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 are prepared. Minor adjustments to any
of these components may create significant changes to the estimate and the amounts
recorded.
The Department estimates all future cash flows associated with the Direct Loan, FFEL, and
TEACH 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

FY 2010 Agency Financial Report—U.S. Department of Education                                             37
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


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).
The Department uses a computerized cash flow projection Student Loan Model to calculate
subsidy estimates for the Direct Loan, FFEL, and TEACH Programs. Each year, the
Department re-evaluates the estimation methods related to changing conditions. The
Department uses 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 loan was obligated
or a loan was guaranteed, regardless of the timing of disbursements. Risk categories include
two-year colleges, freshmen and sophomores at four-year colleges, juniors and seniors at four-
year colleges, graduate schools, and proprietary (for-profit) schools.
Estimates reflected in these financial statements were prepared using assumptions developed
for the FY 2011 Mid-Session Review, a government-wide exercise required annually by OMB.
These estimates are based on the most current information available to 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. 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.
The Department recognizes 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 financial
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 to incur financial
obligations that will result in outlays. The Department’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 the U.S. Department
of the Treasury (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, the TEACH Program, and activities under the temporary loan
purchase authority. Subsidy and administrative costs of the programs are funded by
appropriations. Budgetary resources from collections are used primarily to repay the
Department’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 loan guarantees.

38                                                       FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                          FINANCIAL DETAILS
                                                               NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Borrowing authority is an indefinite budgetary resource authorized under the Credit Reform Act.
This resource, when realized, finances the unsubsidized portion of the Direct Loan Program,
the TEACH Program, and activities under the temporary loan purchase authority. In addition,
borrowing authority is requested in advance of expected collections to cover negative subsidy
cost. Treasury prescribes the terms and conditions of borrowing authority and lends to the
credit 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 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, trust, special, 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 the Department. The Department’s records are reconciled with those of
Treasury.
A portion of the general funds 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.
Trust funds generally consist of donations for the hurricane relief activities. Other funds, which
are non-budgetary, primarily consist of deposit and receipt funds and clearing accounts.
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 undelivered
orders and unpaid expended authority.
The Fund Balance with Treasury also includes funds received for grants during FY 2009 and
FY 2010, which are statutorily not available for obligation until the following fiscal year. Since
this is a deferral made in law, it reduces total budgetary resources. (See Notes 3 and 12)
Accounts Receivable
Accounts Receivable are amounts due to the Department 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 federal agencies result from reimbursable agreements
entered into by the Department with other agencies to provide various goods and services.
Accounts receivable are reduced to net realizable value by an allowance for uncollectible
amounts. The estimate of an allowance for loss on uncollectible accounts is based on the



FY 2010 Agency Financial Report—U.S. Department of Education                                             39
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Department’s experience in the collection of receivables and an analysis of the outstanding
balances. (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 Federal Fund assets of state and nonprofit FFEL
Program guaranty agencies. Guaranty agency Federal Fund 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.
Sections 422A and 422B 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 the Fund Balance with Treasury, are remitted to
Treasury.
The Department disburses 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 and 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 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 between the gross amount and the allowance for subsidy is the present value of the
cash flows to and from the Department that are expected from the receivables over their
projected lives. Similarly, liabilities for loan guarantees are valued at the present value of the
cash outflows from the Department less the present value of related inflows. The estimated
present value of net long-term cash outflows of the Department for subsidized costs is net of
recoveries, interest supplements, and offsetting fees. The Department records all credit
program loans and loan guarantees at their present values.
Credit program receivables for activities under the temporary loan 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 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 supplements to third-party lenders in order to pay down the

40                                                       FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                                         FINANCIAL DETAILS
                                                                              NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


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
The Department 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, the Department
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 Department’s needs.
(See Note 7)
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


Other Assets
Other assets include assets not reported separately on the balance sheet. The Department’s
other intragovernmental assets primarily consist of advance payments to federal agencies as
part of interagency agreements for various goods and services. The Department’s other assets
(with the public) consist of payments made to grant recipients in advance of their expenditures
and in-process disbursements of interest benefits and special allowance payments for the
FFEL Program. (See Note 8)
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 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 that an
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 10)
Debt
The Department borrows to provide funding for the Direct Loan, FFEL, and TEACH Programs.
The liability to Treasury from borrowings represents unpaid principal at year-end. The
Department 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. In addition, the Federal Financing Bank (FFB) holds
bonds issued by a designated bonding authority, on behalf of the Department, for the
Historically Black Colleges and Universities Capital Financing Program. The Department


FY 2010 Agency Financial Report—U.S. Department of Education                                                            41
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


reports the corresponding liability for full payment of principal and accrued interest on bonds as
a payable to the FFB. (See Note 9)
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 the Department for
expenditures incurred by grantees prior to their receiving grant funds to cover the expenditures.
The amount is estimated using statistical sampling. (See Note 11)
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, and trust funds. Cumulative results of operations
represent the net difference since inception between (1) expenses and (2) revenues and
financing sources. (See Note 12)
Earmarked Funds
Earmarked funds are recorded as specially identified resources, often supplemented by other
financing sources, which remain available over time. These funds are required by statute to be
used for designated recipients. The Department’s earmarked funds are primarily related to the
2005 Hurricane Relief efforts. (See Note 20)
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. (See Note 10) Sick
leave and other types of non-vested leave are expensed as taken.
Retirement Plans and Other Retirement Benefits. Employees participate in either 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 (DOL), which


42                                                       FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                          FINANCIAL DETAILS
                                                               NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


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
DOL 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 as determined by DOL annually. (See Note 10)
Intragovernmental Transactions
The Department’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 the Department were a separate,
unrelated entity.
Additional Comparative Information
Certain additional FY 2009 information is presented in the FY 2010 notes to the principal
financial statements to conform to the current year presentation. (See Note 6)




FY 2010 Agency Financial Report—U.S. Department of Education                                             43
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Note 2. Non-Entity Assets
As of September 30, 2010 and 2009, non-entity assets consisted of the following:
                                              Non-Entity Assets
                                                 (Dollars in Millions)

                                                                                 2010                          2009
       Non-Entity Assets
         Intragovernmental
            Fund Balance with Treasury                                   $                93            $               45
              Total Intragovernmental                                                     93                            45
         With the Public
            Cash and Other Monetary Assets                                            2,965                        2,414
            Accounts Receivable, Net                                                     21                           16
            Credit Program Receivables, Net                                             183                          184
               Total With the Public                                                  3,169                        2,614
       Total Non-Entity Assets                                                        3,262                        2,659
       Entity Assets                                                                500,402                      403,286
       Total Assets                                                       $         503,664             $        405,945


Non-entity intragovernmental assets consist of deposit fund and clearing account 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, 2010 and 2009, consisted
of the following:
                                               Fund Balances
                                                 (Dollars in Millions)

                                                                                  2010                         2009

       General Funds                                                         $       98,792              $       130,533
       Revolving Funds                                                               33,351                        37,431
       Trust Funds                                                                          5                             9
       Special Funds                                                                      18                            14
       Other Funds                                                                        93                            45

       Fund Balance with Treasury                                            $     132,259               $       168,032




44                                                                  FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                                             FINANCIAL DETAILS
                                                                                  NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


The Status of Fund Balance with Treasury, as of September 30, 2010 and 2009, consisted of
the following:
                                              Status of Fund Balance with Treasury
                                                                   (Dollars in Millions)

                                                                                                   2010                      2009

           Unobligated Balance
              Available                                                                    $              3,784     $           33,737
              Unavailable                                                                              15,431                   10,444
           Obligated Balance, Not Yet Disbursed                                                       112,390                  122,919
           Authority Temporarily Precluded from Obligation                                                  561                     887
           Non-Budgetary Fund Balance with Treasury                                                          93                      45

           Fund Balance with Treasury                                                      $          132,259       $          168,032



Note 4. Accounts Receivable
Accounts Receivable, as of September 30, 2010 and 2009, consisted of the following:
                                                             Accounts Receivable
                                                                   (Dollars in Millions)

                                                                                                    2010
                                                                 Gross
                                                               Receivables                         Allowance            Net Receivables

           Intragovernmental                             $                   1                 $                -   $                 1
           With the Public                                                416                               (177)                   239

           Accounts Receivable                           $               417                   $            (177)   $               240



                                                                                                     2009
                                                                 Gross
                                                               Receivables                         Allowance            Net Receivables

           Intragovernmental                             $                    -                $                -   $                 -
           With the Public                                                693                               (173)                   520

           Accounts Receivable                           $                693                  $            (173)   $               520




FY 2010 Agency Financial Report—U.S. Department of Education                                                                              45
FINANCIAL DETAILS
NOTES TO THE 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 Payable to
Treasury. The table below presents Cash and Other Monetary Assets for the periods ended
September 30, 2010 and 2009.
                                      Cash and Other Monetary Assets
                                                    (Dollars in Millions)

                                                                                         2010                      2009
       Beginning Balance, Cash and Other Monetary Assets                           $         2,414           $         1,663
         Increase in Guaranty Agency Federal Funds, net                                         989                       751
         Less: Collections Remitted to Treasury                                                 438                          -

       Ending Balance, Cash and Other Monetary Assets                              $         2,965           $         2,414


The $551 million net increase in the Federal Fund in FY 2010 reflects the impact of guaranty
agencies’ operations. During FY 2010, $438 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. Those 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 William
D. Ford Federal Direct Loan Program, referred to as the Direct Loan Program. Direct loans are
originated and serviced through contracts with private vendors.
The Department disbursed approximately $75 billion in Direct Loans to eligible borrowers in
FY 2010 and approximately $38 billion in FY 2009. 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. Regardless of the fiscal year in which they occur, disbursements are tracked by cohort as
determined by the date of obligation rather than disbursement. The substantial increase in
Direct Loan Program disbursements during FY 2010 resulted from the increased use of the
Direct Loan Program in accordance with the changes made by SAFRA.
Approximately 11 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 2010 cohort, an estimated
$11.7 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.
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.
In FY 2008, the Department began administering activities under the temporary loan purchase
authority by purchasing FFEL loans and participation interests in those loans directly from


46                                                                     FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                          FINANCIAL DETAILS
                                                               NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


lenders. As a result, the FFEL Program includes approximately $103 billion and $52 billion in
direct federal assets as of September 30, 2010 and 2009, respectively.
ECASLA gave the Department temporary authority to purchase FFEL loans and interest in
those loans. This authority was to expire on September 30, 2009; however, P.L. 110-350
extended the authority through September 30, 2010. The Department implemented three
activities under this authority: loan purchase commitments; purchases of loan participation
interests; and a put, or forward purchase commitment, with an ABCP Conduit. Credit Program
Receivables are established for loans and participation interests in loans acquired through
these activities.
Under the loan purchase activity, lenders have the option to sell directly to the Department fully
disbursed loans originated for academic years 2007-08, 2008-09, or 2009-10. As of September
30, 2010, only loans originated for the 2009-10 academic year remain eligible for future
purchase.
In loan participation transactions, lenders transfer to a custodian FFEL loans originated in
academic years 2008-09 or 2009-10 on which at least one disbursement has been made. The
custodian issues participation certificates to the lender that conveys a participation interest in
the loans. The lender sells the participation interest in the loans to the Department at the par
value of these loans. The Department remits the proceeds through the custodian to the
lenders. Participation interests earn a yield payable from the lender to the Department at the
rate of the 91-day commercial paper rate plus 50 basis points and reset quarterly. Funds to
redeem these loans from the Department's participation interest may be obtained by selling the
underlying loans to the Department or by other means.
The terms of these two purchase activities permit lenders to sell loans and participation
interests in loans to the Department and require them to redeem the participated loans.
Lenders must commit to redeem the certificates and sell loans by September 30; the
Department must finalize all related transactions by October 15. As of September 30, 2010, the
Department had $27 billion in notices of intent to sell from lenders in the purchase commitment
and loan participation purchase activities.
During FY 2009, the Department, Treasury, and OMB established the terms on which the
Department would support an ABCP Conduit to provide liquidity to the student loan market. An
ABCP Conduit issues short-term commercial paper to investors; this paper is backed by
student loans pledged to the conduit. The conduit used the proceeds of sales of its commercial
paper to acquire from lenders interests in student loans. Lenders must have used a portion of
conduit payments to make new loans. Though the intent is for the conduit to meet demands on
maturing paper by reissuing commercial paper, the Department, using its ECASLA authority,
will purchase loans from the conduit as needed to ensure the conduit will be able to meet the
demands on its paper if it is unable to refinance maturing commercial paper. The Department
purchases those pledged loans that become more than 210 days delinquent. The conduit has
sold to the Department approximately $544 million of these delinquent loans as of September
30, 2010. Under the terms of the Put Agreement with the conduit, the Department may
purchase pledged loans 45 days prior to the Put Agreement expiration on January 19, 2014. As
required by the Credit Reform Act, all cash flows to and from the Government resulting from its
transactions with the ABCP Conduit are recorded in a non-budgetary credit financing account.
Amounts in this account are a means of financing and are not included in budget totals. Loans
originated in academic years 2004-05 through 2007-08 are eligible to be purchased through the
ABCP Conduit.
As of September 30, 2010, the Department has $70 billion in obligations to cover any buyer-of-
last-resort activities and potential purchases of underlying student loans under the ABCP
Conduit. These obligations are supported by available borrowing authority. In FY 2009, the

FY 2010 Agency Financial Report—U.S. Department of Education                                             47
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Department estimated approximately $4 billion in negative subsidy. The conduit, a separate
legal entity, has approximately $39 billion in commercial paper outstanding.
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
their Federal Fund, which consists of Federal resources held in trust by the agency. 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 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.
The Department guaranteed $24 billion and $80 billion in gross non-consolidation loans to
FFEL recipients during FY 2010 and FY 2009, respectively. In 2010, lenders disbursed $20
billion in FFEL loans from the 2009 and 2010 cohorts; in 2009, lenders disbursed $63 billion in
FFEL loans from the 2008 and 2009 cohorts. As of September 30, 2010 and 2009, total
principal balances outstanding of guaranteed loans held by lenders were approximately $390
billion and $457 billion, respectively. As of September 30, 2010 and 2009, the estimated
maximum government exposure on outstanding guaranteed loans held by lenders was
approximately $382 billion and $445 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 17 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 2010 cohort, an estimated $4.0 billion will never be disbursed.
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 assigned to
the Department, which then collects them directly. Interest continues to accrue on assigned
loans, but is only realized upon collection.
Under provisions of SAFRA, new loans under the FFEL Program were virtually ended as of
July 1, 2010, giving the Department full responsibility for originating all federal student loans as
of July 1, 2010. The new legislation effectively requires a transition from guaranteed student
loans to full direct lending through the Department under the Direct Loan Program. Federal
guarantees on FFEL Program loans and commitments remain in effect for loans made before
July 1, 2010 until the loan is sold to the Department through an ECASLA program, consolidated
into a direct loan, or otherwise disposed of. The FFEL Program will continue to be accounted
for under credit reform accounting.
The Direct Loan Program operates as a public-private partnership leveraging the federal
government's lower cost of capital with the expertise of the private sector. While the
Department provides the capital for new loans through borrowing from the Treasury, private
sector partners may disburse, service, and/or collect the loans. Approximately 5,000 domestic
schools participating in the federal student loan programs have successfully transitioned to the


48                                                        FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                          FINANCIAL DETAILS
                                                               NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Direct Loan Program. The Department continues to work closely with higher education
institutions to complete the transition to direct lending.
Federal Perkins Loan Program. The Federal Perkins Loan Program is a campus-based
program providing low interest loans 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 Program. The Department 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 can
be converted to direct loans, for budget and accounting purposes the program is operated
under the Credit Reform Act.
Facilities Loan Programs. The Department administers the College Housing and Academic
Facilities Loan Program, the College Housing Loan Program and the Higher Education
Facilities Loan Program. From 1952 to 1993, these programs provided low-interest financing to
institutions of higher education for the construction, reconstruction, and renovation of housing,
academic, and other educational facilities.
The Department also administers the Historically Black Colleges and Universities (HBCU)
Capital Financing Program. Since 1992, this program has given HBCUs access to financing for
the repair, renovation, and, in exceptional circumstances, the construction or acquisition of
facilities, equipment, and infrastructure through federally insured bonds. The Department has
authorized a designated bonding authority to make the loans to eligible institutions, charge
interest, and collect principal and interest payments. In compliance with statute, the bonding
authority maintains an escrow account to pay the principal and interest on bonds for loans in
default.
In FY 2006, Congress passed the Emergency Supplemental Appropriations Act for Defense,
the Global War on Terror, and Hurricane Recovery (P.L. 109-234). Section 2601 of this Act
created a new sub-program within the HBCU Capital Financing Program under the HEA to
provide loans on advantageous terms to HBCUs affected by Hurricanes Rita and Katrina.
Under this sub-program, the interest rate charged on loans is capped at 1 percent, fees
associated with the program are less than fees for the rest of the program, and institutions are
not required to participate in the program’s pooled escrow account. In addition, principal and
interest payments on loans already made to affected HBCUs can be deferred for up to 3 years,
with the Department making any payments that come due during this period. The statute gives
the Department authority to make loans under the new sub-program in excess of the overall
program loan caps. The Department has made four loans under the new sub-program and has
assumed one default and no recoveries in making initial subsidy estimates. Based on these
forecast assumptions and the expected cash flows for the new sub-program, the estimated
subsidy rate for the sub-program is 76 percent. The current subsidy estimate for the sub-
program is $304 million on a loan volume of $400 million.
Loan Consolidations
Student and parent 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


FY 2010 Agency Financial Report—U.S. Department of Education                                             49
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


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 new, consolidation loan was
obligated. 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.
Direct Loan Program consolidations increased from $12.5 billion as of September 30, 2009 to
$17.1 billion as of September 30, 2010. Under credit reform accounting, the subsidy costs of
new consolidation loans are not reflected until the future fiscal year in which they are disbursed.
The effect of the early pay-off of the existing loans – those being consolidated – is recognized
in the future projected cash flows of the past cohort year those loans were originated. FFEL to
Direct Loan consolidations are part of the $17.1 billion.
Modification of Subsidy Cost
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
Department modified loans in FY 2009, but not during FY 2010.
FY 2009 Modification. ECASLA and its subsequent extension contained provisions
authorizing the Secretary to purchase certain categories of outstanding FFEL loans. Two
programs were implemented under ECASLA during FY 2008 and FY 2009, both for loans from
academic years 2008-09 and 2009-10: 1) a standard put program in which the Department
purchases loans directly from lenders, and 2) a loan participation purchase program, under
which the Department purchases participation interests in loans that holders must redeem and
which they may do by sale to the Department of the underlying loans. In FY 2009, the standard
put program was expanded to allow the sale of loans originated for the 2007-08 academic year.
In FY 2009, the Department also implemented the ABCP Conduit program under which the
Department issued a five-year commitment to purchase from the conduit loans it acquires from
lenders. This program allows lenders to secure private financing from the conduit at favorable
rates. The Department’s purchase commitment to the ABCP Conduit applies to loans acquired
by the conduit and made from October 2003 through academic year 2008-09. Additionally, in
response to disruptions in the commercial paper market, the Secretary used authority to
approve a temporary change in the basis for calculating special allowance payments to and
from loan holders for the first quarter of FY 2009.
The net effect of changes related to loan modifications executed in FY 2009 was a downward
cost of $2.6 billion in the FFEL Program with a corresponding effect on the Liability for Loan
Guarantees. Of this amount, $526 million related to the standard loan put authority for award
year 2007-08, $778 million related to the ABCP Conduit authority, and $1.3 billion related to the
temporary change in the special allowance payment basis. The FFEL Program also recognized
a net modification adjustment transfer loss of $130 million.




50                                                        FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                                       FINANCIAL DETAILS
                                                                            NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Credit Program Receivables
Credit Program Receivables as of September 30, 2010 and 2009, consisted of the following:
                                                  Credit Program Receivables, Net
                                                               (Dollars in Millions)


                                                                                               2010             2009
           Direct Loan Program Loan Receivables, Net                                       $    228,208     $   152,771
           FFEL Program
              FFEL Guaranteed Loan Program, Net (Pre-1992)                                        2,419           3,480
              FFEL Program (Post-1991):
                FFEL Guaranteed Loan Program, Net                                                24,030          20,399
                Temporary Loan Purchase Authority:
                   Loan Purchase Commitment, Net                                                 42,279          17,032
                   Loan Participation Purchase, Net                                              69,686          39,996
                   ABCP Conduit, Net                                                                  468              47
           Federal Perkins Program Loan Receivables, Net                                              183          184
           TEACH Program Receivables, Net                                                             137              50
           Facilities Loan Programs Loan Receivables, Net                                             494          295

           Credit Program Receivables, Net                                                 $    367,904     $   234,254


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)

                                                                                               2010             2009
           Principal Receivable                                                        $       220,522      $   149,437
           Interest Receivable                                                                   9,655            7,370
           Receivables                                                                         230,177          156,807
              Less: Allowance for Subsidy                                                        1,969            4,036

           Direct Loan Program Loan Receivables, Net                                   $       228,208      $   152,771


Of the $230.2 billion in receivables as of September 30, 2010, $14.0 billion in loan principal
was in default, compared to $11.5 billion a year earlier.




FY 2010 Agency Financial Report—U.S. Department of Education                                                                51
FINANCIAL DETAILS
NOTES TO THE 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 Receivables, Net
                                                (Dollars in Millions)

                                                                                    2010                       2009

       FFEL Guaranteed Loan Program (Pre-1992)
       Principal Receivable                                                   $         6,681            $         7,100
       Interest Receivable                                                                223                        223
       Receivables                                                                      6,904                      7,323
          Less: Allowance for Subsidy                                                   4,485                      3,843
       FFEL Guaranteed Loan Program, Net (Pre-1992)                                     2,419                      3,480

       FFEL Program (Post-1991)
       FFEL Guaranteed Loan Program:
         Principal Receivable                                                          26,358                     22,403
         Interest Receivable                                                            2,436                      2,305
         Receivables                                                                   28,794                     24,708
            Less: Allowance for Subsidy                                                 4,764                      4,309
       FFEL Guaranteed Loan Program, Net                                               24,030                     20,399


       Temporary Loan Purchase Authority:
         Loan Purchase Commitment:
           Principal Receivable                                                       36,623                      14,293
           Interest Receivable                                                          1,400                         379
           Receivables                                                                38,023                      14,672
              Less: Allowance for Subsidy                                             (4,256)                     (2,360)
         Loan Purchase Commitment, Net                                                42,279                      17,032
         Loan Participation Purchase:
           Principal Receivable                                                       62,931                      37,020
           Interest Receivable                                                          1,665                         259
           Receivables                                                                64,596                      37,279
              Less: Allowance for Subsidy                                             (5,090)                     (2,717)
         Loan Participation Purchase, Net                                             69,686                      39,996
         ABCP Conduit:
           Principal Receivable                                                            544                         50
           Interest Receivable                                                              26                          2
           Receivables                                                                     570                         52
              Less: Allowance for Subsidy                                                  102                          5
         ABCP Conduit, Net                                                                 468                         47

       FFEL Program Receivables, Net                                          $      138,882             $        80,954


All loans and participation interests in loans purchased by the Department under the temporary
loan purchase authority are federal assets; the loan receivable represents all outstanding loans
and participation interests. Approximately $36 billion and $9 billion in participation interests
were redeemed by selling the underlying loans to the Department during FY 2010 and
FY 2009, respectively.



52                                                                 FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                                          FINANCIAL DETAILS
                                                                               NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Federal Perkins Loan Program. At September 30, 2010 and 2009, loan receivables, net of an
allowance for loss, were $183 million and $184 million, respectively. These loans are valued at
historical cost.
TEACH Program. At September 30, 2010 and 2009, loan receivables, net of an allowance for
subsidy, were $137 million and $50 million, respectively.
Facilities Loan Programs
                                         Facilities Loan Programs Loan Receivables
                                                                  (Dollars in Millions)

                                                                                                     2010                   2009
           Principal Receivable                                                               $              785       $           651
           Interest Receivable                                                                                 9                     9
           Receivables                                                                                       794                   660
              Less: Allowance for Subsidy                                                                    300                   365

           Facilities Loan Programs Loan Receivables, Net                                     $              494       $           295



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)

                                                                                                  2010                     2009
           Beginning Balance, Allowance for Subsidy                                       $          4,036         $          13,743
           Components of Subsidy Transfers
             Interest Rate Differential                                                            (11,708)                   (7,785)
             Defaults, Net of Recoveries                                                              1,307                     1,070
             Fees                                                                                   (1,067)                     (551)
             Other                                                                                    5,158                     2,863
           Current Year Subsidy Transfers                                                           (6,310)                   (4,403)
           Components of Subsidy Re-estimates
             Interest Rate Re-estimates1                                                             3,547                      (322)
             Technical and Default Re-estimates                                                      1,196                    (4,878)
           Subsidy Re-estimates                                                                      4,743                    (5,200)
           Activity
             Fee Collections                                                                         1,056                          628
             Loan Cancellations2                                                                     (388)                        (432)
             Subsidy Allowance Amortization                                                          (500)                           40
             Other                                                                                   (668)                        (340)
           Total Activity                                                                                (500)                    (104)

           Ending Balance, Allowance for Subsidy                                          $          1,969         $           4,036
               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 2010 Agency Financial Report—U.S. Department of Education                                                                              53
FINANCIAL DETAILS
NOTES TO THE 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 guarantees for the
insurance portion of the FFEL Program:
                     FFEL Program Reconciliation of Liabilities for Loan Guarantees
                                                            (Dollars in Millions)

                                                                                              2010                        2009
       Beginning Balance, FFEL Financing Account Liability for
       Loan Guarantees                                                                $          20,448            $          43,185
       Components of Subsidy Transfers
         Interest Supplement Costs                                                                 (733)                        (632)
         Defaults, Net of Recoveries                                                                 212                          494
         Fees                                                                                      (960)                      (3,495)
         Other1                                                                                      878                        2,108
       Current Year Subsidy Transfers                                                              (603)                      (1,525)
       Components of Subsidy Re-estimates
         Interest Rate Re-estimates                                                                   59                       (147)
         Technical and Default Re-estimates                                                     (12,727)                    (21,542)
       Subsidy Re-estimates                                                                     (12,668)                    (21,689)
       Components of Loan Modifications
         Loan Modification Costs                                                                         -                    (2,641)
         Modification Adjustment Transfers                                                               -                        130
       Loan Modifications                                                                                -                    (2,511)
       Activity
         Interest Supplement Payments                                                            (3,881)                      (5,389)
         Claim Payments                                                                          (8,987)                      (8,634)
         Fee Collections                                                                           3,736                        4,115
         Interest on Liability Balance                                                             (152)                          337
         Other2                                                                                  16,514                       12,559
       Total Activity                                                                              7,230                       2,988

       Ending Balance, FFEL Financing Account Liability for Loan
       Guarantees                                                                                14,407                       20,448
       FFEL Liquidating Account Liability for Loan Guarantees                                        72                           95
       Liabilities for Loan Guarantees                                                $          14,479           $           20,543
          1
              Subsidy primarily associated with debt collections and loan cancellations due to death, disability, and bankruptcy.
          2
              Activity primarily associated with negative special allowance payments; also composed of the transfer of subsidy for
              defaults; loan consolidation activity; and loan cancellations due to death, disability, and bankruptcy.




54                                                                             FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                                       FINANCIAL DETAILS
                                                                            NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


The following schedules provide reconciliations between the beginning and ending balances of
the allowance for subsidy for the Loan Purchase Commitment component and the Loan
Participation Purchase component of the FFEL Program. These FFEL components are
accounted for using credit reform accounting methodology and affect credit program
receivables accordingly.
                    Loan Purchase Commitment Reconciliation of Allowance for Subsidy
                                                               (Dollars in Millions)

                                                                                           2010               2009
           Beginning Balance, Allowance for Subsidy                                    $     (2,360)      $            (5)
           Components of Subsidy Transfers
             Interest Costs                                                                  (4,548)            (3,157)
             Defaults, Net of Recoveries                                                         178                102
             Fees                                                                                520                268
             Other                                                                             1,647              1,179
           Current Year Subsidy Transfers                                                    (2,203)            (1,608)
           Subsidy Re-estimates                                                               1,737                  (245)
           Activity
             Fee Disbursements                                                                    (644)              (370)
             Subsidy Allowance Amortization                                                       (314)              (296)
             Direct Asset Activities and Other                                                    (472)                164
           Total Activity                                                                    (1,430)                 (502)

           Ending Balance, Allowance for Subsidy                                       $     (4,256)      $     (2,360)



                    Loan Participation Purchase Reconciliation of Allowance for Subsidy
                                                               (Dollars in Millions)

                                                                                           2010               2009
           Beginning Balance, Allowance for Subsidy                                    $     (2,717)      $          (183)
           Components of Subsidy Transfers
             Interest Costs                                                                  (3,662)            (6,419)
             Defaults, Net of Recoveries                                                         254                253
             Fees                                                                              (693)              (275)
             Other                                                                             2,194              3,281
           Current Year Subsidy Transfers                                                    (1,907)            (3,160)
           Subsidy Re-estimates                                                               1,300                   930
           Activity
             Fee Disbursements                                                                    (837)              (250)
             Subsidy Allowance Amortization                                                       (673)               (91)
             Direct Asset Activities and Other                                                    (256)                 37
           Total Activity                                                                    (1,766)                 (304)

           Ending Balance, Allowance for Subsidy                                       $     (5,090)      $     (2,717)

For FY 2010, the Loan Participation Purchase net upward re-estimate of $1.3 billion is
composed of an upward cost interest rate re-estimate of $2.6 billion along with a downward
cost technical and default re-estimate of $1.3 billion. The Loan Purchase Commitment net
upward re-estimate of $1.7 billion is composed of an upward cost interest rate re-estimate of
$1.3 billion along with an upward cost technical and default re-estimate of $0.4 billion.




FY 2010 Agency Financial Report—U.S. Department of Education                                                                 55
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Financing Account Interest Expense and Interest Revenue
The Department borrows from Treasury to fund the unsubsidized portion of lending activities.
The Department calculates and pays Treasury interest on its borrowing 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, in accordance with Statement of Federal Financial
Accounting Standards No. 2, Accounting for Direct Loans and Loan Guarantees, as the
difference between interest revenue and interest expense. For direct loans, the allowance for
subsidy is adjusted with the offset to interest revenue. For guaranteed loans, the liability for
loan guarantees is adjusted with the offset to interest expense.
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)

                                                                                     2010                         2009
          Interest Expense on Treasury Borrowing                             $           10,514           $             7,094
       Interest Expense                                                      $           10,514           $             7,094


          Interest Revenue from the Public                                   $            7,352           $             5,669
          Amortization of Subsidy                                                           500                           (40)
          Interest Revenue on Uninvested Funds                                            2,662                         1,465
       Interest Revenue                                                      $           10,514           $             7,094


Payable to Treasury
Payable to Treasury for the years ended September 30, 2010 and 2009 consisted of the
following:
                                                 Payable to Treasury
                                                     (Dollars in Millions)

                                                                                       2010                        2009
       Future Liquidating Account Collections, Beginning Balance                 $        3,569               $         3,766
         Valuation of Pre-1992 Loan Liability and Allowance                                (717)                           465
         Capital Transfers to Treasury                                                     (428)                          (662)
       Future Liquidating Account Collections, Ending Balance                             2,424                         3,569
       Payable to Treasury                                                       $        2,424               $         3,569




56                                                                      FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                                       FINANCIAL DETAILS
                                                                            NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Subsidy Expense
William D. Ford Federal Direct Loan Program
                                             Direct Loan Program Subsidy Expense
                                                               (Dollars in Millions)

                                                                                           2010              2009
           Components of Current Year Subsidy Transfers
             Interest Rate Differential                                                $   (11,708)     $      (7,785)
             Defaults, Net of Recoveries                                                      1,307              1,070
             Fees                                                                           (1,067)              (551)
             Other                                                                            5,158              2,863
           Current Year Subsidy Transfers                                                   (6,310)            (4,403)
             Subsidy Re-estimates                                                             4,743            (5,200)

           Direct Loan Subsidy Expense                                                 $    (1,567)     $      (9,603)


William D. Ford Direct Loan re-estimated subsidy cost increased $4.7 billion in FY 2010. The
majority of this increase was related to discount rate changes increasing costs $2.2 billion.
Changes in assumptions for income-based repayments and public service loan forgiveness
increased subsidy cost $611 million. Rising default rates increased subsidy cost $226 million.
Changes in other interest components, probabilistic methodology for estimating, and an uptick
in consolidated weighted rates increased costs $887 million. Other assumption updates
produced offsetting costs with the remainder attributable to interest on the re-estimate. 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 cost $662 million.
Re-estimated costs only include those cohorts that are 90 percent disbursed; cohort years
1994-2009.
For 2009 re-estimated subsidy cost, Direct Loan subsidy cost was decreased $5.2 billion.
Changes in the assumption for income-based repayments decreased subsidy cost by
$3.7 billion. Rising default rates increased subsidy cost $374 million, interest rate changes
increased costs $350 million, and changes in deferments and forbearance rates increased
costs $313 million. Other assumption updates produced offsetting costs with the remainder
attributable to interest on the re-estimate. 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 cost $455 million. Re-estimated costs only include those cohorts
that are 90 percent disbursed; cohort years 1994-2008.




FY 2010 Agency Financial Report—U.S. Department of Education                                                             57
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Federal Family Education Loan Program
                                   FFEL Program Subsidy Expense
                                                (Dollars in Millions)

                                                                                   2010                        2009
       FFEL Guaranteed Loan Program
         Components of Current Year Subsidy Transfers
           Interest Supplement Costs                                         $         (733)             $         (632)
           Defaults, Net of Recoveries                                                   212                         494
           Fees                                                                        (960)                     (3,495)
           Other                                                                         878                       2,108
         Current Year Subsidy Transfers                                                (603)                     (1,525)
           Subsidy Re-estimates                                                     (12,668)                    (21,689)
           Loan Modification Costs                                                         -                     (2,641)
       FFEL Guaranteed Loan Program Subsidy Expense                                 (13,271)                    (25,855)

       Temporary Loan Purchase Authority
       Loan Purchase Commitment
         Components of Current Year Subsidy Transfers
           Interest Costs                                                             (4,548)                     (3,157)
           Defaults, Net of Recoveries                                                    178                         102
           Fees                                                                           520                         268
           Other                                                                        1,647                       1,179
         Current Year Subsidy Transfers                                               (2,203)                     (1,608)
           Subsidy Re-estimates                                                         1,737                       (245)
       Loan Purchase Commitment Subsidy Expense                                         (466)                     (1,853)

       Loan Participation Purchase
         Components of Current Year Subsidy Transfers
           Interest Costs                                                             (3,662)                     (6,419)
           Defaults, Net of Recoveries                                                    254                         253
           Fees                                                                         (693)                       (275)
           Other                                                                        2,194                       3,281
         Current Year Subsidy Transfers                                               (1,907)                     (3,160)
           Subsidy Re-estimates                                                         1,300                         930
       Loan Participation Purchase Subsidy Expense                                      (607)                     (2,230)

       ABCP Conduit
         Components of Current Year Subsidy Transfers
           Interest Costs                                                                    -                         (6)
           Defaults, Net of Recoveries                                                       -                           1
           Fees                                                                              -                         (3)
           Other                                                                             -                           6
       ABCP Conduit Subsidy Expense                                                          -                         (2)

       FFEL Program Subsidy Expense                                          $      (14,344)             $      (29,940)


FFEL Guaranteed re-estimated subsidy cost decreased $12.7 billion in FY 2010. The change in
consolidated weighted rates decreased subsidy cost $6.6 billion. Interest rates and probabilistic
methodology for estimating decreased subsidy costs $3.7 billion. ECASLA and other volume
adjustments decreased subsidy cost $1.7 billion. Loan deferment increases produced an
increase in subsidy cost of $1 billion. Other assumption updates produced offsetting costs with

58                                                                 FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                                       FINANCIAL DETAILS
                                                                            NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


the remainder attributable to interest on the re-estimate. 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 $17 billion. Re-estimated
costs only include those cohorts that are 90 percent disbursed; cohort years 1992-2009.

FFEL Participation Purchase subsidy components reported in last year’s schedule were
reclassified to more accurately disclose components of subsidy transfers. No change in overall
subsidy expense, or allowance for subsidy, resulted from this change as of, and for the year
ended, September 30, 2009.

For 2009 re-estimated subsidy cost, FFEL Guaranteed subsidy cost was decreased
$21.7 billion. Interest rate changes related to updated economic assumptions accounted for
approximately $18 billion in decreased subsidy cost. A $1.5 billion increase in subsidy cost
related to changes in deferment and forbearance rates was offset by other changes in
assumptions such as $966 million decreased cost for changes in repayment rates; loan volume
changes produced a decreased subsidy cost of $790 million. Other assumption updates
produced offsetting costs with the remainder attributable to interest on the re-estimate. 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 $16.4 billion. Re-estimated costs only include those cohorts that are 90 percent
disbursed; cohort years 1992-2008.

Subsidy Rates
The subsidy rates applicable to the 2010 loan cohort year follow:
                                                     Subsidy Rates—Cohort 2010
                                                                  Interest
                                                                Differential/
                                                               Supplements      Defaults    Fees      Other     Total

           Direct Loan Program                                  (13.43%)        1.58%      (1.48%)   6.18%    (7.15%)
           TEACH Program                                         6.00%          0.53%      0.00%     7.10%    13.63%
           FFEL Program (Post-1991):
             Guaranteed Loan Program                             (1.71%)        0.05%      (1.53%)   1.40%    (1.79%)
             Temporary Loan Purchase Authority:
               Loan Purchase Commitment                         (12.40%)        1.22%      3.01%     2.87%    (5.30%)
               Loan Participation Purchase                      (15.01%)        1.57%      3.07%     6.41%    (3.96%)


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 may include modifications and re-estimates. The subsidy rates shown above, which reflect
aggregate negative subsidy in the FY 2010 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 2010 Agency Financial Report—U.S. Department of Education                                                            59
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Administrative Expenses
Administrative Expense for the years ended September 30, 2010 and 2009, consisted of the
following:
                                               Administrative Expense
                                                        (Dollars in Millions)

                                                         2010                                                 2009
                                      Direct Loan                      FFEL                   Direct Loan                 FFEL
                                       Program                       Program                   Program                  Program
     Operating Expense                     $      536                  $        314               $     458            $       269
     Other Expense                                 22                            13                      23                      13

     Administrative Expenses           $          558                 $         327            $        481            $       282


Note 7. General Property, Plant, and Equipment
General Property, Plant, and Equipment, as of September 30, 2010 and 2009, consisted of the
following:
                                  General Property, Plant, and Equipment
                                                            (Dollars in Millions)

                                                                                                  2010
                                                                                               Accumulated                  Net Asset
                                                                       Cost                    Depreciation                  Value

       Information Technology, Internal Use Software,
       and Telecommunications Equipment                         $               172           $         (144)           $             28
       Furniture and Fixtures                                                       3                      (3)                          -

       General Property, Plant, and Equipment                   $               175           $         (147)           $             28



                                                                                                  2009
                                                                                               Accumulated                  Net Asset
                                                                       Cost                    Depreciation                  Value

       Information Technology, Internal Use Software,
       and Telecommunications Equipment                         $               160           $         (122)           $             38
       Furniture and Fixtures                                                         3                    (3)                          -

       General Property, Plant, and Equipment                   $                163          $         (125)           $             38


The majority of the asset costs relate to financial management systems and other information
technology and communications improvements.
Leases
The Department leases information technology and telecommunications equipment as part of a
contractor-owned contractor-operated services contract. Lease payments associated with the
equipment are classified as operating leases and as such are expensed as incurred. The non-
cancelable lease term is one year, with the Department holding the right to extend the lease
term by exercising additional one-year options.
The Department leases office space from the General Services Administration (GSA). The
lease contracts with GSA for privately and publicly owned buildings are operating leases.

60                                                                                FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                                        FINANCIAL DETAILS
                                                                             NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Future lease payments are not accrued as liabilities, but expensed as incurred. Estimated
future minimum lease payments for the privately owned buildings are presented below.
                                                                  Leases
                                                               (Dollars in Millions)

                                 2010                                                                         2009


           Fiscal Year                   Lease Payment                                      Fiscal Year               Lease Payment
           2011                      $              48                                      2010                     $          44
           2012                                     48                                      2011                                48
           2013                                     45                                      2012                                53
           2014                                     47                                      2013                                55
           2015                                     54                                      2014                                58
           After 2015                               56                                      After 2014                          60

           Total                     $                 298                                  Total                    $         318


Note 8. Other Assets
Other Intragovernmental Assets primarily consist of advance payments to the Department of
Interior's Bureau of Indian Education under terms of an interagency agreement. Other
Intragovernmental Assets were $102 million and $141 million as of September 30, 2010 and
2009, respectively.
Other Assets With the Public consist of payments made to grant recipients in advance of their
expenditures and in-process invoices for interest benefits and special allowances for the FFEL
Program. Other Assets With the Public were $166 million and $546 million as of September 30,
2010 and 2009, respectively.
Note 9. Debt
Debt as of September 30, 2010 and 2009 consisted of the following:
                                                                      Debt
                                                                (Dollars in Millions)

                                                                                            2010
                                                  Beginning       Accrued                 New                                 Ending
                                                   Balance        Interest              Borrowing         Repayments          Balance
          Treasury Debt
          Direct Loan Program                      $ 154,218      $          -          $      91,192     $     (8,220)       $ 237,190
          FFEL Program
             Guaranteed Loan Program                   1,474                 -                 9,285               (29)          10,730
             Loan Purchase Commitment                 24,877                 -                21,744            (1,416)          45,205
             Loan Participation Purchase              53,977                 -                32,206            (6,606)          79,577
             ABCP Conduit                                244                 -                   650               (90)             804
          TEACH Program                                   68                 -                    98               (16)             150
          Facilities Loan Program                         71                 -                     -               (10)              61
          Total Treasury Debt                        234,929                 -               155,175           (16,387)         373,717
          Debt to the FFB
          HBCU                                           456                2                    171               (11)             618
          Total Debt to the FFB                          456                2                    171               (11)             618
          Total                                    $ 235,385      $         2           $    155,346      $    (16,398)       $ 374,335




FY 2010 Agency Financial Report—U.S. Department of Education                                                                          61
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


                                                         Debt
                                                   (Dollars in Millions)

                                                                               2009
                                       Beginning    Accrued                  New                                      Ending
                                        Balance     Interest               Borrowing          Repayments              Balance
      Treasury Debt
      Direct Loan Program              $ 117,419     $         -           $    47,179         $    (10,380)          $ 154,218
      FFEL Program
         Guaranteed Loan Program              -              12                  1,462                     -              1,474
         Loan Purchase Commitment            69               -                 24,811                   (3)             24,877
         Loan Participation Purchase     10,754               -                 43,223                     -             53,977
         ABCP Conduit                         -               -                    250                   (6)                244
      TEACH Program                          14               -                     56                   (2)                 68
      Facilities Loan Program                75               -                      -                   (4)                 71
      Total Treasury Debt               128,331              12                116,981              (10,395)            234,929
      Debt to the FFB
      HBCU                                   337              4                    120                   (5)                456
      Total Debt to the FFB                  337              4                    120                   (5)                456
      Total                            $ 128,668     $       16            $   117,101         $    (10,400)          $ 235,385


The amount available for 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.




62                                                                   FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                                             FINANCIAL DETAILS
                                                                                  NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Note 10. Other Liabilities
Other liabilities include current and non-current liabilities. The non-current liabilities primarily
relate to 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.
Other Liabilities as of September 30, 2010 and 2009 consisted of the following:
                                                               Other Liabilities
                                                                 (Dollars in Millions)

                                                                                2010                              2009
                                                                      Intragovern-   With the          Intragovern-    With the
                                                                         mental       Public              mental        Public
    Liabilities Covered by Budgetary Resources
      Current
        Advances From Others                                           $            96       $     -   $        96    $           -
        Employer Contributions and Payroll Taxes                                     5             -             4                -
        Liability for Deposit Funds and Clearing
          Accounts                                                                 8              86            (5)           52
        Accrued Payroll and Benefits                                               -              25              -           21
        Deferred Revenue                                                           -             182              -          467
        Liabilities in Miscellaneous Receipt Accounts                         12,663               -        11,221             -
    Total Other Liabilities Covered by
    Budgetary Resources                                                       12,772             293        11,316           540


    Liabilities Not Covered by Budgetary Resources
      Current
        Accrued Unfunded Annual Leave                                                    -        37              -           34
      Non-current
        Accrued Unfunded FECA Liability                                             3              -             3             -
        Liabilities in Miscellaneous Receipt Accounts                             183              -           184             -
        Accrued FECA Actuarial Liability                                            -             16             -            16
    Total Other Liabilities Not Covered by
    Budgetary Resources                                                           186             53           187            50

    Other Liabilities                                                  $      12,958         $   346   $    11,503    $      590


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 $239 million and $237 million
as of September 30, 2010 and 2009, respectively.
As of September 30, 2010 and 2009, liabilities on the Balance Sheet totaled $416.1 billion and
$278.9 billion respectively. Of this amount, liabilities covered by budgetary resources totaled
$415.9 billion as of September 30, 2010, and $278.7 billion as of September 30, 2009.




FY 2010 Agency Financial Report—U.S. Department of Education                                                                      63
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Note 11. Accrued Grant Liability
The accrued grant liability by major reporting groups as of September 30, 2010 and 2009,
consisted of the following:
                                             Accrued Grant Liability
                                                     (Dollars in Millions)

                                                                                     2010                          2009
       FSA                                                                   $              2,016           $              1,295
       OESE                                                                                   281                            265
       OSERS                                                                                  182                            263
       RA/JF                                                                                1,070                            860
       Other                                                                                  195                            279

       Accrued Grant Liability                                               $              3,744           $              2,962


Note 12. Net Position
Unexpended appropriations as of September 30, 2010 and 2009, consisted of the following:
                                           Unexpended Appropriations
                                                     (Dollars in Millions)

                                                                                      2010                         2009
       Unobligated Balances
         Available                                                               $           2,323          $             33,243
         Not Available                                                                       1,181                           770
       Undelivered Orders, end of period                                                    90,306                        92,369
       Authority Temporarily Precluded from Obligation                                          561                          887

       Unexpended Appropriations                                                 $          94,371          $          127,269


The Cumulative Results of Operations - Earmarked Funds of $4 million as of September 30,
2010, and $8 million as of September 30, 2009, represent donations from foreign governments,
international entities and individuals to support Hurricane Katrina relief and recovery efforts that
have not yet been used. (See Note 20)
The Cumulative Results of Operations - Other Funds of $(6,773) million as of September 30,
2010, and $(217) million as of September 30, 2009, consists mostly of unfunded upward
subsidy re-estimates, other unfunded expenses, and net investments of capitalized assets.




64                                                                      FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                                 FINANCIAL DETAILS
                                                                      NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Note 13. Intragovernmental Cost and Exchange Revenue by Program
As required by the Government Performance and Results Act of 1993, each of the
Department’s Reporting Organizations has been aligned with the major goals presented in the
Department’s Strategic Plan 2007–2012.
                                                                 Reporting
                                                               Organizations/
                          Net Cost Program                        Groups                      Strategic Goal

                                                                    FSA         3. Ensure the accessibility, affordability,
         Ensure Accessibility, Affordability, and
                                                                   OPE             and accountability of higher education,
         Accountability of Higher Education and Career
                                                                   OVAE            and better prepare students and adults
         and Technical Advancement
                                                                                   for employment and future learning


         Promote Academic Achievement in Elementary               OESE          1. Improve student achievement, with the
         and Secondary Schools                                     OELA            focus on bringing all students to grade
                                                                  OSDFS            level in reading and mathematics by
                                                                    HR             2014

                                                                                2. Increase the academic achievement of
                                                                                   all high school students


         Transformation of Education                                IES         1. Improve student achievement, with the
                                                                    OII            focus on bringing all students to grade
                                                                                   level in reading and mathematics by
                                                                                   2014


         Special Education                                        OSERS           Cuts across Strategic Goals 1, 2, and 3

         American Recovery and Reinvestment Act and
                                                                   RA/JF          Cuts across Strategic Goals 1, 2, and 3
         Education Jobs Fund


Strategic Goals 1, 2, and 3 are sharply defined directives that guide the Department’s reporting
organizations to carry out the vision and programmatic mission, and the net cost programs can
be specifically associated with these three strategic goals. The Department has a Cross-Goal
Strategy on Management, which is considered a high-level premise on which the Department
establishes its foundation for the three goals. As a result, we do not assign specific programs to
the Cross-Goal Strategy for presentation in the Statement of Net Cost.
The goals of the Recovery Act and Education Jobs Fund are consistent with the Department’s
current Strategic Goals and programs. For reporting purposes, a net cost program called
American Recovery and Reinvestment Act and Education Jobs Fund has been created.
The following table presents the gross cost and exchange revenue by program for the
Department for September 30, 2010 and 2009. Gross costs and earned revenue are classified
as intragovernmental (exchange transactions between the Department and other entities within
the federal government) or with the public (exchange transactions between the Department and
non-federal entities).




FY 2010 Agency Financial Report—U.S. Department of Education                                                                  65
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Gross Cost and Exchange Revenue by Program
Gross Cost and Exchange Revenue by Program, as of September 30, 2010 and 2009,
consisted of the following:
                           Gross Cost and Exchange Revenue by Program
                                                   (Dollars in Millions)

                                                                                    2010

                                                 FSA           OESE            OSERS       RA/JF        Other         Total


       Ensure Accessibility, Affordability, and Accountability of Higher Education and Career and Technical
       Advancement
         Intragovernmental Gross Cost            $ 16,286 $          - $       -   $     - $      80 $ 16,366
         Public Gross Cost                         11,542            -         -         -     4,622    16,164
            Total Gross Program Costs              27,828            -         -         -     4,702    32,530
         Intragovernmental Earned Revenue           5,862            -         -         -        12     5,874
         Public Earned Revenue                     11,209            -         -         -        33    11,242
            Total Program Earned Revenue           17,071            -         -         -        45    17,116
       Total Program Cost                          10,757            -         -         -     4,657    15,414

       Promote Academic Achievement in Elementary and Secondary Schools
         Intragovernmental Gross Cost              -       141         -                           -         15           156
         Public Gross Cost                         -    21,664         -                           -      1,427        23,091
            Total Gross Program Costs              -    21,805         -                           -      1,442        23,247
         Intragovernmental Earned Revenue          -         -         -                           -         72            72
         Public Earned Revenue                     -        20         -                           -          6            26
            Total Program Earned Revenue           -        20         -                           -         78            98
       Total Program Cost                          -    21,785         -                           -      1,364        23,149

       Transformation of Education
         Intragovernmental Gross Cost                   -                  -          -            -         80            80
         Public Gross Cost                              -                  -          -            -      1,631         1,631
            Total Gross Program Costs                   -                  -          -            -      1,711         1,711
         Intragovernmental Earned Revenue               -                  -          -            -          3             3
         Public Earned Revenue                          -                  -          -            -         38            38
            Total Program Earned Revenue                -                  -          -            -         41            41
       Total Program Cost                               -                  -          -            -      1,670         1,670

       Special Education
         Intragovernmental Gross Cost                   -                  -        43             -            -          43
         Public Gross Cost                              -                  -    15,343             -            -      15,343
            Total Gross Program Costs                   -                  -    15,386             -            -      15,386
         Intragovernmental Earned Revenue               -                  -         2             -            -           2
         Public Earned Revenue                          -                  -        22             -            -          22
            Total Program Earned Revenue                -                  -        24             -            -          24
       Total Program Cost                               -                  -    15,362             -            -      15,362

       American Recovery and Reinvestment Act and Education Jobs Fund
         Intragovernmental Gross Cost              -          -                       -         89              -          89
         Public Gross Cost                         -          -                       -     43,990              -      43,990
            Total Gross Program Costs              -          -                       -     44,079              -      44,079
         Intragovernmental Earned Revenue          -          -                       -          -              -           -
         Public Earned Revenue                     -          -                       -          -              -           -
            Total Program Earned Revenue           -          -                       -          -              -           -
       Total Program Cost                          -          -                       -     44,079              -      44,079

       Net Cost of Operations                  $ 10,757       $ 21,785         $ 15,362    $44,079     $ 7,691       $ 99,674




66                                                                    FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                                             FINANCIAL DETAILS
                                                                                  NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


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

                                                                                                    2009

                                                                 FSA          OESE          OSERS          RA/JF       Other         Total


           Ensure Accessibility, Affordability, and Accountability of Higher Education and Career and Technical
           Advancement
             Intragovernmental Gross Cost                       $10,079      $          -   $        -     $       -   $       80   $10,159
             Public Gross Cost                                  (21,141)                -            -             -        4,638   (16,503)
                Total Gross Program Costs                       (11,062)                -            -             -        4,718    (6,344)
             Intragovernmental Earned Revenue                      4,644                -            -             -            3      4,647
             Public Earned Revenue                                 6,435                -            -             -           25      6,460
                Total Program Earned Revenue                      11,079                -            -             -           28     11,107
           Total Program Cost                                   (22,141)                -            -             -        4,690   (17,451)

           Promote Academic Achievement in Elementary and Secondary Schools
             Intragovernmental Gross Cost                               -           180              -             -           16       196
             Public Gross Cost                                          -        21,472              -             -        1,571    23,043
                Total Gross Program Costs                               -        21,652              -             -        1,587    23,239
             Intragovernmental Earned Revenue                           -             -              -             -           70        70
             Public Earned Revenue                                      -            15              -             -            4        19
                Total Program Earned Revenue                            -            15              -             -           74        89
           Total Program Cost                                           -        21,637              -             -        1,513    23,150

           Transformation of Education
             Intragovernmental Gross Cost                               -               -            -             -           88        88
             Public Gross Cost                                          -               -            -             -        1,579     1,579
                Total Gross Program Costs                               -               -            -             -        1,667     1,667
             Intragovernmental Earned Revenue                           -               -            -             -            1         1
             Public Earned Revenue                                      -               -            -             -           34        34
                Total Program Earned Revenue                            -               -            -             -           35        35
           Total Program Cost                                           -               -            -             -        1,632     1,632

           Special Education
             Intragovernmental Gross Cost                               -               -           44             -            -        44
             Public Gross Cost                                          -               -       15,188             -            -    15,188
                Total Gross Program Costs                               -               -       15,232             -            -    15,232
             Intragovernmental Earned Revenue                           -               -            2             -            -         2
             Public Earned Revenue                                      -               -           18             -            -        18
                Total Program Earned Revenue                            -               -           20             -            -        20
           Total Program Cost                                           -               -       15,212             -            -    15,212

           American Recovery and Reinvestment Act and Education Jobs Fund
             Intragovernmental Gross Cost                               -               -            -           -              -         -
             Public Gross Cost                                          -               -            -      21,618              -    21,618
                Total Gross Program Costs                               -               -            -      21,618              -    21,618
             Intragovernmental Earned Revenue                           -               -            -           -              -         -
             Public Earned Revenue                                      -               -            -           -              -         -
                Total Program Earned Revenue                            -               -            -           -              -         -
           Total Program Cost                                           -               -            -      21,618              -    21,618

           Net Cost of Operations                              $(22,141)     $ 21,637       $ 15,212       $21,618         $7,835   $ 44,161




FY 2010 Agency Financial Report—U.S. Department of Education                                                                                 67
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Note 14. Interest Expense and Interest Revenue
For FY 2010 and FY 2009, interest expense and interest revenue by program consisted of the
following:
                                 Interest Expense and Interest Revenue
                                                  (Dollars in Millions)
                                                                                   2010
                                                     Expenses                                           Revenue
                                                       Non-                                               Non-
                                        Federal                           Total           Federal                     Total
                                                      federal                                            federal


      Direct Loan Program              $ 10,514       $          -    $10,514             $    2,662    $ 7,852     $10,514
      FFEL Program
         Guaranteed Loan Program             474           (152)             322                 322           -         322
         Loan Purchase Commitment          1,771               -           1,771                 631       1,140       1,771
         Loan Participation Purchase       3,397               -           3,397               1,222       2,175       3,397
         ABCP Conduit                         41               -              41                  29          12          41
      TEACH Program                            7               -               7                   3           4           7
      Other Programs                          18               -              18                  12          37          49

      Total                            $ 16,222       $    (152)      $16,070             $ 4,881       $ 11,220    $16,101


                                                                                   2009
                                                     Expenses                                           Revenue
                                                       Non-                                               Non-
                                        Federal                           Total           Federal                     Total
                                                      federal                                            federal

      Direct Loan Program               $ 7,094       $          -    $ 7,094                 $ 1,465   $ 5,629     $ 7,094
      FFEL Program
         Guaranteed Loan Program              32             337             369                 369          -          369
         Loan Purchase Commitment            861               -             861                 563        298          861
         Loan Participation Purchase       1,876               -           1,876               1,410        466        1,876
         ABCP Conduit                          6               -               6                   5          1            6
      TEACH Program                            2               -               2                   1          1            2
      Other Programs                          17               -              17                   2         36           38

      Total                            $   9,888      $      337      $10,225             $ 3,815        $ 6,431    $10,246


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


Note 15. Statement of Budgetary Resources
The Statement of Budgetary Resources (SBR) compares budgetary resources with the status
of those resources. As of September 30, 2010, budgetary resources were $362,489 million and
net outlays were $235,919 million. As of September 30, 2009, budgetary resources were
$437,777 million and net outlays were $165,158 million.
Permanent Indefinite Budget Authority
The Direct Loan, FFEL, and TEACH Programs have permanent indefinite budget authority
through legislation. Part D of the William D. Ford Federal Direct Loan Program and Part B of


68                                                                    FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                                       FINANCIAL DETAILS
                                                                            NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


the Federal Family Education Loan 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.
Obligations Incurred by Apportionment Type and Category
Obligations incurred by apportionment type and category, as of September 30, 2010 and 2009,
consisted of the following:
                            Obligations Incurred by Apportionment Type and Category
                                                               (Dollars in Millions)

                                                                                           2010              2009
           Direct:
              Category A                                                               $       1,547   $         1,385
              Category B                                                                     338,668           389,623
              Exempt from Apportionment                                                            4                80
                                                                                             340,219           391,088
           Reimbursable:
             Category A                                                                            -                 -
             Category B                                                                            -                 -
             Exempt from Apportionment                                                            90                94
                                                                                                  90                94

           Obligations Incurred                                                        $     340,309   $       391,182


Obligations incurred can be either direct or reimbursable. Reimbursable obligations are those
financed by offsetting collections received in return for goods and services provided, while all
other obligations are direct. 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.




FY 2010 Agency Financial Report—U.S. Department of Education                                                          69
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Unused Borrowing Authority
Unused borrowing authority, as of September 30, 2010 and 2009, consisted of the following:
                                     Unused Borrowing Authority
                                                (Dollars in Millions)
                                                                                2010                          2009
       Beginning Balance, Unused Borrowing Authority                     $           106,355           $            25,930
       Current Year Borrowing Authority                                              183,079                       200,265
       Funds Drawn From Treasury                                                   (155,346)                     (117,101)
       Borrowing Authority Withdrawn                                                   (968)                        (2,739)

       Ending Balance, Unused Borrowing Authority                        $          133,120            $          106,355


The Department is given authority to draw funds from Treasury to finance the Direct Loan,
FFEL, and TEACH Programs. Unused Borrowing Authority is a budgetary resource and is
available to support obligations. The Department periodically reviews its borrowing authority
balances in relation to its obligations and may cancel unused amounts.
Undelivered Orders at the End of the Period
Undelivered orders, as of September 30, 2010 and 2009, consisted of the following:
                                           Undelivered Orders
                                                (Dollars in Millions)

                                                                               2010                           2009
       Budgetary                                                        $            90,281           $            92,035
       Non-Budgetary                                                                147,260                       132,500

       Undelivered Orders (Unpaid)                                      $           237,541           $           224,535


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 trust
funds, reimbursable agreements, and federal credit financing and liquidating funds are not
funded through appropriations and are not included in Net Position. (See Note 12)
Distributed Offsetting Receipts
The majority of the Distributed Offsetting Receipts line item on the SBR represents amounts
paid from the Direct Loan Program and FFEL Program financing accounts to general fund
receipt accounts for downward re-estimates and negative subsidies.




70                                                                 FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                                          FINANCIAL DETAILS
                                                                               NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Explanation of Differences Between the Statement of Budgetary Resources and the
Budget of the United States Government
The FY 2012 Budget of the United States Government (President’s Budget) presenting the
actual amounts for the year ended September 30, 2010, has not been published as of the issue
date of these financial statements. The FY 2012 President’s Budget is scheduled for release in
February 2011. A reconciliation of the FY 2009 SBR to FY 2011 President’s Budget (FY 2009
actual amounts) for budgetary resources, obligations incurred, distributed offsetting receipts,
and net outlays is presented below.
                                     SBR to Budget of the United States Government
                                                                  (Dollars in Millions)
                                                                                                   Distributed
                                                               Budgetary            Obligations    Offsetting
                                                               Resources             Incurred       Receipts     Net Outlays

           Combined Statement of Budgetary
           Resources                                            $ 437,777             $ 391,182    $   31,763     $ 165,158
              Expired Funds                                       (1,377)                  (630)             -             -
              Amounts included in the President’s
              Budget                                               11,787                 11,787             -             -
             Funds excluded from President’s
             Budget and Rounding                                        (3)                   2            (4)             -
           Budget of the United States
           Government*                                         $ 448,184              $ 402,341    $   31,759     $ 165,158

           *Amounts obtained from the Appendix, Budget of the United States Government, FY 2011.



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 2009 SBR for the Federal Fund are compiled through combining
all guaranty agencies’ annual reports to determine a net valuation amount for the Federal Fund.




FY 2010 Agency Financial Report—U.S. Department of Education                                                               71
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Note 16. 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 note 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.
Components Requiring or Generating Resources in Future Periods includes subsidy
re-estimates that will be executed in future periods. The Reconciliation of Net Cost of
Operations to Budget as of September 30, 2010 and 2009, are presented below:
                                Reconciliation of Net Cost of Operations to Budget
                                                                 (Dollars in Millions)

 Resources Used to Finance Activities                                                                         2010                     2009
     Obligations Incurred                                                                                $     (340,309)          $     (391,182)
     Spending Authority from Offsetting Collections and Recoveries                                                59,110                   56,300
     Offsetting Receipts                                                                                          29,046                   31,763
     Imputed Financing from Costs Absorbed by Others                                                                 (30)                     (32)
 Total Resources Used to Finance Activities                                                                    (252,183)                (303,151)
 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 (+/-)                                                                                         (13,755)                (137,170)
   Resources that Fund Expenses Recognized in Prior Period                                                        10,883                    1,091
     Credit Program Collections which Increase/Decrease Liabilities for Loan Guarantees, or Credit
       Program Receivables, Net including Allowances for Subsidy                                                  43,806                   39,495
     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                       (180,400)                (147,800)
 Total Resources Used to Finance Items Not Part of the Net Cost of Operations                                  (139,466)                (244,384)
 Components Not Requiring or Generating Resources
   Depreciation and Amortization                                                                                    1,469                      325
   Other (+/-)                                                                                                          -                      448
 Total Components of the Net Cost of Operations that Will Not Require or Generate
 Resources                                                                                                          1,469                      773
 Components Requiring or Generating Resources in Future Periods
   Increase in Annual Leave Liability                                                                                  (3)                       -
   Upward/Downward Re-estimates of Credit Subsidy Expense                                                           5,785                  10,883
   Increase in Exchange Revenue Receivable from the Public                                                          5,868                   2,957
   Other (+/-)                                                                                                        (76)                     (7)
 Total Components of the Net Cost of Operations that Will Require or Generate Resources in
 Future Periods                                                                                                   11,574                   13,833
 Net Cost of Operations                                                                                  $      (99,674)          $      (44,161)




72                                                                                       FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                          FINANCIAL DETAILS
                                                               NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Note 17. Incidental Custodial Collections
The Department administers certain activities associated with the collection of non-exchange
revenues. The Department collects these amounts in a custodial capacity and transfers the
amounts collected to the General Fund of the Treasury at the end of each fiscal year. These
collections primarily consist of penalties on accounts receivable and are considered incidental
to the primary mission of the Department. During FY 2010 and FY 2009, the Department
collected $0.6 million and $1.0 million, respectively, in custodial revenues.


Note 18. American Recovery and Reinvestment Act of 2009
The Recovery Act provided $97,407 million to the Department in supplemental appropriations
for job preservation and state and local fiscal stabilization. This investment was made available
for use in saving jobs, supporting states and local school districts, and advancing reforms and
improvements in the education of our nation’s children and youth from early learning programs
through postsecondary education.
The Recovery Act created the State Fiscal Stabilization Fund (SFSF), a new program in which
the Department awards grants to governors to help save jobs and drive education reform. The
majority of SFSF funding was provided for awards made by formula in exchange for a
commitment to advance essential education reforms to benefit children and youth from early
learning through postsecondary education, increasing teacher effectiveness and ensuring an
equitable distribution of qualified teachers, and turning around the lowest-performing schools.
There are also two competitive programs within the SFSF: Race to the Top and Investing in
Innovation. Race to the Top grants are being awarded to states that are leading the way with
ambitious yet achievable plans for implementing coherent, compelling, and comprehensive
education reform. Innovation and Improvement awards will support the development,
validation, and expansion of revolutionary approaches to improving student achievement.
Recovery Act funding also was provided for several of the Department’s key programs,
including Student Financial Assistance, Education for the Disadvantaged, Special Education,
School Improvement Programs, Rehabilitation Services and Disability Research, Institute of
Education Sciences, Innovation and Improvement, Impact Aid, and Higher Education. In
addition, Recovery Act funding was provided for Student Aid Administration and to the Office of
Inspector General.




FY 2010 Agency Financial Report—U.S. Department of Education                                             73
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


The status of Recovery Act funding as of September 30, 2010 and 2009 are presented below:
                            American Recovery and Reinvestment Act of 2009
                                                          (Dollars in Millions)

                                                                         Cumulative Totals as of September 30, 2010

                                                                  Appropriations             Obligations                 Outlays
       State Fiscal Stabilization Fund:
         SFSF Formula Grants                                       $          48,600         $      48,600           $        35,709
         Investing in Innovation and Race to the Top                           5,000                 5,000                         8
         Subtotal                                                             53,600                53,600                    35,717

       Student Financial Assistance:
         Federal Pell Grants                                                  15,640                15,640                    14,950
         Mandatory Add-on Pell Grants*                                           643                   643                       643
         Federal Work Study Grants                                               200                   200                       199
         Subtotal                                                             16,483                16,483                    15,792

       Education for the Disadvantaged:
         Title I Targeted/ Finance Incentive Grants                           10,000                10,000                     5,089
         School Improvement Grants                                             3,000                 3,000                        44
         Subtotal                                                             13,000                13,000                     5,133

       Special Education:
         IDEA Part B Grants to States                                         11,300                11,300                     5,660
         IDEA Part B Preschool Grants                                            400                   400                       167
         IDEA Part C Grants for Infants and Families                             500                   500                       253
         Subtotal                                                             12,200                12,200                     6,080

       School Improvement Programs:
         Enhancing Education through Technology                                   650                   650                      218
         Education for Homeless Children and Youths                                70                    70                       35
         Subtotal                                                                 720                   720                      253

       Rehabilitation Services and Disability Research:
         Vocational Rehabilitation                                                540                   540                      230
         Independent Living Centers                                                88                    88                       10
         Services for Older Blind Individuals                                      34                    34                       11
         State Grants                                                              18                    18                        7
         Subtotal                                                                 680                   680                      258

       Institute of Education Sciences                                            250                   250                         2
       Innovation & Improvement                                                   200                   200                        23

       Impact Aid:
         Section 8007(a) Formula Grants                                            40                    40                        40
         Section 8007(b) Competitive Grants                                        60                    60                         6
         Subtotal                                                                 100                   100                        46

       Higher Education                                                          100                   100                         2
       Student Aid Administration                                                 60                    60                        52
       Office of Inspector General                                                14                     3                         3
       Total                                                      $           97,407           $    97,396               $    63,361

       * An additional $831 million provided by the Recovery Act was to be made available during FY 2010; however, this
         funding was repealed by HCERA, effective July 1, 2010.




74                                                                           FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                                       FINANCIAL DETAILS
                                                                            NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


                                   American Recovery and Reinvestment Act of 2009
                                                               (Dollars in Millions)

                                                                              Cumulative Totals as of September 30, 2009

                                                                       Appropriations         Obligations          Outlays
           State Fiscal Stabilization Fund:
             SFSF Formula Grants                                        $          48,600    $     35,429      $       12,433
             Investing in Innovation and Race to the Top                            5,000               -                   -
             Subtotal                                                              53,600          35,429              12,433

           Student Financial Assistance:
             Federal Pell Grants                                                   15,640           7,854               6,300
             Mandatory Add-on Pell Grants                                             643             643                 549
             Federal Work Study Grants                                                200             200                  55
             Subtotal                                                              16,483           8,697               6,904

           Education for the Disadvantaged:
             Title I Targeted/ Finance Incentive Grants                            10,000           9,936                  804
             School Improvement Grants                                              3,000               -                    -
             Subtotal                                                              13,000           9,936                  804

           Special Education:
             IDEA Part B Grants to States                                          11,300          11,300                  729
             IDEA Part B Preschool Grants                                             400             400                   18
             IDEA Part C Grants for Infants and Families                              500             500                   44
             Subtotal                                                              12,200          12,200                  791

           School Improvement Programs:
             Enhancing Education through Technology                                    650            641                    1
             Education for Homeless Children and Youths                                 70             70                    6
             Subtotal                                                                  720            711                    7

           Rehabilitation Services and Disability Research:
             Vocational Rehabilitation                                                 540            539                    21
             Independent Living Centers                                                 88              -                     -
             Services for Older Blind Individuals                                       34             34                     -
             State Grants                                                               18             18                     1
             Subtotal                                                                  680            591                    22

           Institute of Education Sciences                                             250              -                     -
           Innovation & Improvement                                                    200              1                     -

           Impact Aid:
             Section 8007(a) Formula Grants                                             40             40                    40
             Section 8007(b) Competitive Grants                                         60              -                     -
             Subtotal                                                                  100             40                    40

           Higher Education                                                           100               -                   -
           Student Aid Administration                                                  60              29                   1
           Office of Inspector General                                                 14               1                   1
           Total                                                       $           97,407     $    67,635          $   21,003




FY 2010 Agency Financial Report—U.S. Department of Education                                                                  75
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Note 19. Education Jobs Fund
P.L. 111-226, enacted on August 10, 2010, created an Education Jobs Fund which allows the
Department to provide assistance in saving and creating education jobs. This investment of
$10 billion was made available to states through formula grants for use in the 2010-2011
school year for teachers and other employees of our nation’s children and youth from early
learning programs through secondary education. As of September 30, 2010, $9,007 million has
been obligated and $1,232 million has been expended to support states and local school
districts in their effort to save jobs.


Note 20. 2005 Hurricane Relief
The Hurricane Education Recovery Act (P.L. 109-148, Division B, Title IV), enacted on
December 30, 2005, and the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and
Iraq Accountability Appropriations Act, 2007, appropriated funds to the Department to provide
needed assistance to reopen schools and help educate the estimated 370,000 students
affected by Hurricanes Katrina and Rita. As of September 30, 2010, $1,945 million has been
appropriated to the Department, of which $1,939 million has been obligated to assist local
educational agencies and non-public schools, and $1,845 million has been expended. As of
September 30, 2009, $1,945 million had been appropriated to the Department, of which $1,941
million had been obligated to assist local educational agencies and non-public schools, and
$1,818 million has been expended.
Earmarked Funds Donated for Hurricane Relief
In the aftermath of Hurricane Katrina, a number of foreign governments, international entities,
and individuals made donations of financial assistance to the U.S. Government to support
Katrina relief and recovery efforts. These donations were received by the U.S. Department of
State as an intermediary. Subsequently, $61 million was transferred to the Department to
finance educational initiatives in Louisiana and Mississippi under a Memorandum of
Understanding issued in March 2006. As of September 30, 2010, $61 million has been
obligated from the earmarked funds to assist in the relief and recovery efforts and $57 million
has been expended. As of September 30, 2009, $61 million has been obligated from the
earmarked funds to assist in the relief and recovery efforts and $53 million has been expended.


Note 21. Contingencies
Guaranty Agencies
The Department 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 2010, the Department provided funding of
82.5 percent of the capital used to make loans to eligible students through participating schools
at 5 percent interest. The schools provided the remaining 17.5 percent of program funding. For
the latest academic year ended June 30, 2010, approximately 441 thousand loans were made,
totaling approximately $816.4 million at 1,540 institutions, averaging $1,852 per loan. The
Department’s share of the Federal Perkins Loan Program was approximately $6.6 billion as of
June 30, 2010.

76                                                       FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                          FINANCIAL DETAILS
                                                               NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


In FY 2009, the Department provided funding of 82.4 percent of the capital used to make loans
to eligible students through participating schools at 5 percent interest. The schools provided the
remaining 17.6 percent of program funding. For the academic year ended June 30, 2009,
approximately 494 thousand loans were made, totaling approximately $954.8 million at 1,607
institutions, averaging $1,934 per loan. The Department’s share of the Federal Perkins Loan
Program was approximately $6.5 billion as of June 30, 2009.
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. The
Department may be required to compensate Federal Perkins Loan Program institutions for the
cost of the partial loan forgiveness.
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 the
Department’s financial position.
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 Department’s financial position.




FY 2010 Agency Financial Report—U.S. Department of Education                                             77
                                                                                                         United States Department of Education
                                                                                                      Combining Statement of Budgetary Resources
                                                                                                        For the Year Ended September 30, 2010
                                                                                                                                         Dollars in Millions

                                                                                                                                                                                                                                           American Recovery and
                                                                                                                                               Office of Elementary and Secondary            Office of Special Education and           Reinvestment Act and Education
                                                                             Combined                           Federal Student Aid                         Education                             Rehabilitive Services                          Jobs Fund                                     Other

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

Budgetary Resources:
Unobligated balance, brought forward, October 1                 $       36,601      $         9,994     $        5,659        $        9,690 $                 790                   0 $               60                      0 $           29,772                       0 $            320       $         304
Recoveries of prior year Unpaid Obligations                              1,077                4,436                401                 4,434                   519                   0                 24                      0                 13                       0              120                   2
Budgetary Authority:
      Appropriations                                                    96,823                   2              38,309                                  22,547                       0             16,310                      0             10,831                       0            8,826                   2
      Borrowing Authority (Note 15)                                                        183,079                                  182,901                                          0                                         0                      0                   0                    0             178
      Spending authority from offsetting collections (gross):                                                                                                                        0                                         0                      0                   0                    0
         Earned                                                                                                                                                                      0                                         0                      0                   0                    0
             Collected                                                    1,613             51,979               1,499                51,912                                         0                   5                     0                      0                   0              109                  67
             Change in Receivables from Federal Sources                      (2)                 3                       0                 3                                         0                   (1)                   0                      0                   0                (1)
          Change in unfilled customer orders                                                                                                                                         0                     0                   0                      0                   0
             Without advance from Federal Sources                                                 4                      0                 4                                         0                     0                   0                      0                   0
     Subtotal                                                   $       98,434      $      235,067      $       39,808        $     234,820 $            22,547                          $         16,314                          $         10,831                           $        8,934       $         247
Temporarily not available pursuant to Public Law                           (561)                   0               (561)                    0                                                                                                                                                                    0
Permanently not available                                                (5,204)            (17,355)             (4,002)             (17,333)              (205)                                      (35)                                     (831)                                    (131)                 (22)

Total Budgetary Resources (Note 15)                             $      130,347      $      232,142      $        41,305       $     231,611 $           23,651       $           0       $         16,363      $               0   $         39,785       $           0       $        9,243       $         531

Status of Budgetary Resources:
Obligations incurred: (Note 15)
      Direct                                                    $      123,731      $      216,488      $       37,131        $     216,202 $           22,774                           $         16,314                          $         38,781                           $        8,731       $         286
      Reimbursable                                                          90                                                                                                                          2                                                                                 88
Unobligated Balances:
      Apportioned                                                         2,351              1,433                 192                 1,433                   838                                     13                                       996                                      312                   (0)
Unobligated Balance not available                                         4,175             14,221               3,982                13,976                    39                                     34                                         8                                      112                 245

Total Status of Budgetary Resources                             $      130,347      $      232,142      $       41,305        $     231,611 $            23,651      $           (0) $             16,363      $           (0) $             39,785       $          (0) $             9,243       $         531

Change in Obligated Balance:
Obligated balance, net:
      Unpaid obligations, brought forward, October 1            $       95,488      $      133,797      $       15,909        $     133,575 $            14,705                          $          8,168                          $         46,632                           $       10,074       $         222
      Uncollected customer payments from Federal Sources,
      brought forward, October 1                                              (4)                 (7)                   (0)                3                                                            (1)                                                                                (3)                (10)
      Total, unpaid obligated balance, brought forward, net     $        95,484     $       133,790     $        15,909       $      133,578 $           14,705                          $          8,167                          $         46,632                           $       10,071       $         212
Obligation Incurred, net                                                123,821             216,488              37,131              216,202             22,774                                    16,316                                    38,781                                     8,819                286
Gross Outlays                                                          (123,539)           (195,018)            (34,746)            (194,738)           (21,622)                                  (15,323)                                  (43,590)                                   (8,258)              (280)
Recoveries of prior year unpaid obligations, actual                       (1,077)             (4,436)              (401)               (4,434)             (519)                                       (24)                                     (13)                                     (120)                 (2)
Change in uncollected customer payments from Federal Sources                   2                  (7)                 (0)                  (7)                                                           1                                                                                  1
Obligated Balance, net, end of period:
      Unpaid Obligations                                        $       94,693      $      150,831 $            17,893        $     150,605 $            15,338                          $          9,137                          $         41,810                           $       10,515       $         226
      Uncollected customer payments from Federal Sources                     (2)                (14)                                      (4)                                                                                                                                              (2)                (10)

Total, unpaid obligated balance, net, end of period             $        94,691     $      150,817      $       17,893        $     150,601 $            15,338      $           (0) $              9,137      $           (0) $             41,810       $          (0) $            10,513       $         216

Net Outlays:
      Gross Outlays                                             $      123,539      $      195,018 $             34,746       $     194,738 $            21,622                          $         15,323                          $         43,590                           $        8,258       $         280
      Offsetting collections                                             (1,613)            (51,979)              (1,499)            (51,912)                                                           (5)                                       (0)                                   (109)                 (67)
      Distributed Offsetting receipts                                   (29,046)                                (28,787)                   (0)                                                          (0)                                       (0)                                   (259)                   (0)

Net Outlays (Note 15)                                           $       92,880      $      143,039 $             (4,460)      $     142,826 $            21,622      $           (0) $             15,318      $           (0) $             43,590       $          (0) $             7,890       $         213
                                                                             FINANCIAL DETAILS




 REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

Stewardship Expenses

In the Department of Education, discretionary spending constitutes the majority of the
budget and includes nearly all programs, the notable exceptions being student loans and
rehabilitative services. Although spending for entitlement programs is usually a function of
the authorizing statutes creating the programs and is not generally affected by
appropriations laws, spending for discretionary programs is decided in the annual
appropriations process.

Education in the United States is primarily a state and local responsibility. States,
communities, and public and private organizations establish schools and colleges, develop
curricula, and determine requirements for enrollment and graduation. The structure of
education finance in America reflects this. The Department’s FY 2010 appropriations of
$63.1 billion represent less than 2 percent of the federal government’s $3.6 trillion FY 2010
budget.

Investment in Human Capital

The Department of Education invests in human capital through its grant and loan programs,
research, leadership, and technical assistance.

Office of Federal Student Aid. The Office of Federal Student Aid administers need-based
financial assistance programs for students pursuing postsecondary education and makes
available federal grants, direct loans, guaranteed loans, and work-study funding to eligible
undergraduate and graduate students. See more detail at:
http://www.ed.gov/about/offices/list/fsa/index.html?src=oc.

Office of Elementary and Secondary Education. The Office of Elementary and
Secondary Education provides leadership, technical assistance, and financial support to
state and local educational agencies for reform, strategic investment, and innovation in
preschool, elementary, and secondary education. Financial assistance programs support
services for children in high-poverty schools, institutions for neglected and delinquent
children, homeless children, certain Native American children, children of migrant families,
and children who live on or whose parents work on federal property. Funding also is
provided to increase the academic achievement of students by ensuring that all teachers
are highly qualified. See more detail at:
http://www.ed.gov/about/offices/list/oese/index.html?src=oc.

Office of Special Education and Rehabilitative Services. The Office of Special
Education and Rehabilitative Services supports state and local programs that assist in
educating children, youth, and adults with special needs to increase their level of
employment, productivity, independence, and integration into the community. Funding also
is provided for research to improve the quality of their lives. See more detail at:
http://www.ed.gov/about/offices/list/osers/index.html?src=oc.

Office of Safe and Drug-Free Schools. The Office of Safe and Drug-Free Schools
supports efforts to create safe and violence-free schools, respond to crises, prevent drug
and alcohol abuse, ensure the health and well-being of students, and teach students good
citizenship and character. Grants emphasize coordinated, collaborative responses to



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REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION


develop and maintain safe, disciplined, and drug-free learning environments. See more
detail at: http://www.ed.gov/about/offices/list/osdfs/index.html?src=oc.

Office of Innovation and Improvement. The Office of Innovation and Improvement makes
strategic investments in educational practices through grants to states, schools, and
community and nonprofit organizations. The office leads the movement for greater parental
options such as charter schools. The office also supports special grants designed to raise
student achievement by improving teachers’ knowledge and understanding of and
appreciation for traditional U.S. history. See more detail at:
http://www.ed.gov/about/offices/list/oii/index.html?src=oc.

Institute of Education Sciences. Established by the Education Sciences Reform Act of
2002, the Institute of Education Sciences is the research arm of the Department of
Education. Its mission is to expand knowledge and provide information on the condition of
education, practices that improve academic achievement, and the effectiveness of federal
and other education programs. Its goal is the transformation of education into an evidence-
based field in which decision makers routinely seek out the best available research and
data before adopting programs or practices that will affect significant numbers of students.
See more detail at: http://www.ed.gov/about/offices/list/ies/index.html?src=oc.

Office of English Language Acquisition. The Office of English Language Acquisition
directs programs designed to enable students with limited English proficiency to become
proficient in English and meet state academic content and student academic achievement
standards. Enhanced instructional opportunities are provided to children and youths of
Native American, Alaska Native, Native Hawaiian, Pacific Islander, and immigrant
backgrounds who are limited English proficient. See more detail at:
http://www.ed.gov/about/offices/list/oela/index.html?src=oc.

Office of Vocational and Adult Education. The Office of Vocational and Adult Education
provides leadership, technical assistance, and funding for adult education and career and
technical education to state and local agencies to help students improve their literacy skills
and prepare them for postsecondary education and careers through strong high school
programs and career and technical education. The office ensures the equal access of
minorities, women, individuals with disabilities, and disadvantaged persons to career and
technical education and adult education and ensures that career and technical education
students are held to the same challenging academic content and academic achievement
standards established by the state under the Elementary and Secondary Education Act of
1965. Funding is also provided to promote identification and dissemination of effective
practices in raising student achievement in high schools, community colleges, and adult
education programs and support targeted research investments. See more detail at:
http://www.ed.gov/about/offices/list/ovae/index.html?src=oc.

Office of Postsecondary Education. The Office of Postsecondary Education provides
grants to colleges and universities, as well as to nonprofit organizations, to promote reform,
innovation, and improvement in postsecondary education; increase access to and
completion of postsecondary education by disadvantaged students; strengthen the capacity
of colleges and universities that serve a high percentage of minority and disadvantaged
students; and improve teacher and student development resources. The international
programs promote international education and foreign language studies and research. The
office administers the accrediting agency recognition process and coordinates activities with




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                                                                 REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION


states that affect institutional participation in federal financial assistance programs.
See more detail at: http://www.ed.gov/about/offices/list/ope/index.html?src=oc.



                                            Summary of Human Capital Expenses

(Dollars in Millions)                                          2010          2009          2008         2007           2006
Federal Student Aid Expense
 Direct Loan Subsidy                                $     (1,567)     $    (9,603)   $     5,236   $    (499)    $     6,655
 FFEL Program Subsidy                                    (14,344)         (29,940)       (2,852)        4,884         28,062
 Grant Programs                                            26,799           17,302       17,464        15,092         15,447
 Salaries and Administrative                                  208              186          189          173            172
   Subtotal                                               11,096          (22,055)       20,037        19,650         50,336
Other Departmental
 Elementary and Secondary Education                       21,608           21,443        21,583        21,199         21,710
 Special Education and Rehabilitative                     15,227           15,075        15,730        15,402        15,215
 Services
 American Recovery and Reinvestment
                                                          44,019           21,616
 and Education Jobs Fund
 Other Departmental Programs                               7,067            7,150         4,911         5,109          5,353
 Salaries and Administrative                                 502              472           491           467            467
   Subtotal                                               88,423           65,756        42,715        42,177         42,745
                Grand Total                          $    99,519      $    43,701    $   62,752    $   61,827    $    93,081




Program Outcomes

Education is the
stepping stone to                                          Unemployment Rate by Educational Level
higher living standards
for American citizens,
and it is vital to national                 16%                                                                 No High School
                                            14%                                                                 Degree
economic growth.
                                            12%
However, education
                                            10%
can lead to more than                        8%                                                                 High School
increased productivity                       6%                                                                 Degree
and incomes.                                 4%
Education can help                           2%
improve health,                              0%
                                                                                                                College Degree
promote social change,                                   2005 2006 2007 2008 2009 2010
and open doors to a
better future for children
and adults.




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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 have placed increased emphasis on
educational attainment as the workplace has become increasingly technological, and
employers now seek employees with the highest level of skills. For prospective employees,
the focus on higher-level skills means investing in learning or developing skills through
education. Like all investments, developing higher-level skills involves costs and benefits.

Returns, or benefits, of investing in education come in many forms. While some returns
accrue for the individual, others benefit society and the nation in general. Returns related to
the individual include higher earnings, better job opportunities, and jobs that are less
sensitive to general economic conditions. Returns related to the economy and society
include reduced reliance on welfare subsidies, increased participation in civic activities, and
greater productivity. Over time, the returns of developing skills through education have
become evident. Statistics illustrate the rewards of completing high school and investing in
postsecondary education.

Unemployment Rate. Individuals with lower levels of educational attainment are more
likely to be unemployed than those who had higher levels of educational attainment. The
September 2010 unemployment rate for adults (25 years old and over) who had not
completed high school was 15.4 percent, compared with 10.0 percent for those with four
years of high school and 4.4 percent for those with a bachelor’s degree or higher. Younger
people with only high school diplomas tended to have higher unemployment rates than
adults 25 and over with similar levels of education.

Annual Income. As of July 2010, the annualized median income for adults (25 years old
and over) varied considerably by education level. Men with a high school diploma earned
$37,128, compared with $68,172 for men with a college degree. Women with a high school
diploma earned $28,184, compared with $51,636 for women with a college degree. Men
and women with college degrees earned 81 percent more than men and women with high
school diplomas. These returns of investing in education directly translate into the
advancement of the American economy as a whole.




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                                                       of the
               Independent Auditors




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AUDIT TRANSMITTAL




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DEPARTMENT RESPONSE TO AUDITOR REPORT




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                                                       Other
                                 Accompanying
                                        Information




FY 2010 Agency Financial Report—U.S. Department of Education
OTHER ACCOMPANYING INFORMATION




      Improper Payments Information Act Reporting Details
The recently enacted Improper Payments Elimination and Recovery Act of 2010 (IPERA)
(Public Law 111-204), which amends the Improper Payments Information Act of 2002 (IPIA)
(Public Law 107-300), and the Office of Management and Budget’s (OMB) Circular A-123,
Appendix C, Requirements for Effective Measurement and Remediation of Improper
Payments, define requirements to reduce improper/erroneous payments made by the
federal government. OMB also has established specific reporting requirements for agencies
with programs that possess a significant risk of erroneous payments and for reporting on
the results of recovery auditing activities. Agencies are required to annually review and
assess all programs and activities to identify those susceptible to significant improper
payments. The guidance in OMB Circular A-123, Appendix C, defines a significant improper
payment 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 and
determined to be at risk, agencies are required to report to the President and the Congress
the annual amount of estimated improper payments, along with steps taken and actions
planned to reduce them.

The Department has divided its improper payment activities into the following segments:
Student Financial Assistance Programs; ESEA Title I, Part A Program; Other Grant
Programs; and Recovery Auditing.

Student Financial Assistance Programs

Risk Assessment

As required by the IPIA, Federal Student Aid (FSA) inventoried its programs during FY
2010 and reviewed program payments made during FY 2009 (the most recent complete
fiscal year available) to assess the risk of improper payments. The review identified and
then focused on the following key Title IV programs: William D. Ford Federal Direct Loan
(Direct Loan) Program, Federal Family Education Loan (FFEL) Program, to include the
legacy FFEL Program, the Ensuring Continued Access to Student Loans Act (ECASLA)
programs, and servicing of FFEL loans acquired through ECASLA, and the Federal Pell
Grant Program.

The ACG/SMART Grant Programs were deemed to be low risk programs for FY2010.
These programs are budgeted together and have a five-year life, ending with the academic
school year 2010-2011. A risk assessment was completed for the ACG/SMART Programs
in FY 2009, and was not repeated in FY 2010 because of the prior favorable results (i.e.,
estimated improper payment rates of .0045 percent and .00001 percent, respectfully), and
upcoming program termination. The FY 2009 improper payment risk assessment
methodology is described in the FY 2009 Agency Financial Report. No further information
on these programs is included herein.

In addition to the A-123 guidance, the criteria for determining susceptible risk within the
programs were defined as those programs with annual outlays that exceed $200 million or




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                                                           IMPROPER PAYMENTS INFORMATION ACT REPORTING DETAILS


programs that were previously required to report improper payment information under OMB
Circular A-11, Budget Submission, former Section 57.2. 2

Risk-Susceptible Programs

The Title IV programs that were deemed to be potentially susceptible to the risk of
significant improper payments based on OMB criteria described above include Direct Loan,
FFEL, and Pell Grant.

As data becomes available, the Teacher Education Assistance for College and Higher
Education (TEACH) Grant Program will be assessed. It is anticipated that the first
assessment will take place in 2011.

Direct Loan Program. A risk assessment was completed for the Direct Loan Program in
FY 2010. There were no changes to the sampling process from prior years. The overall
improper payment rate, based on this risk analysis, was 0.30 percent. Since this rate is
below the threshold for reporting on improper payments, no further information on the Direct
Loan Program is included herein.

FFEL Program (Legacy). The FFEL legacy programs include Special Allowance Payment
(SAP), Interest Benefits, Lender Fees, Origination Fees, Consolidation Loan Rebate Fees,
Claims Paid, Account Maintenance Fee, VFA Payments, Loan Processing & Issuance
Fees, and various other payments/collections to/from Guaranty Agencies (GAs). The FFEL
SAP risk analyses that were undertaken last year in lieu of a measurement and described
in the Department’s FY 2009 AFR did not yield any result that could help inform decisions
on improper payment measurement and were suspended. Accordingly, FSA did not use
these risk analyses to calculate an FY 2010 error rate and no estimate of FY 2010 improper
payments is provided.

FFEL Program (ECASLA; Servicing of FFEL loans acquired through ECASLA). In
FY 2008, the lack of liquidity in financial markets impacted the ability of FFEL lenders and
secondary markets to find cost-effective financing. As a result, Congress passed the
ECASLA, which was signed by the President on May 8, 2008. This gave the Department
authority to purchase FFEL loans from lenders to ensure liquidity in the FFEL. The following
three programs were developed under the ECASLA mandate:

     •     The Loan Purchase Commitment Program,
     •     Loan Participation Purchase Program, and
     •     Asset-Backed Commercial Paper (ABCP) Conduit Program.

FSA determined that each of these, as well as the servicing of acquired FFEL loans,
constitute a risk-susceptible program. A risk assessment for each of these components and

2
  The four original programs identified in OMB Circular A–11, Section 57, were Student Financial
Assistance (now Federal Student Aid), ESEA, Title I, Special Education Grants to States, and
Vocational Rehabilitation Grants to States. Subsequently, after further review of the program risk,
OMB removed Special Education Grants to States and Vocational Rehabilitation Grants to States
from the list. OMB considers Section 57 programs susceptible to significant improper payments
regardless of the established thresholds. OMB Circular A-136 also applies.




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IMPROPER PAYMENTS INFORMATION ACT REPORTING DETAILS


in the aggregate was completed during FY 2010. The overall improper payment rate, based
on the risk analysis, was 0.000011 percent. Since this rate is below the threshold of
reporting on improper payments, no further information on ECASLA or servicing of FFEL
loans acquired through ECASLA is included herein.

Pell Grant Program. A risk assessment was completed for Pell Grant Program in FY 2010.
There were no changes to the sampling process from prior years. The overall improper
payment rate, based on this risk analysis, was 3.12 percent.

Statistical Sampling

The size and complexity of the student aid programs make it difficult to consistently define
“improper” payments. The legislation and OMB guidance use the broad definition: “Any
payment that should not have been made or that was made in an incorrect amount under
statutory, contractual, administrative, or other legally applicable requirement.” Federal
Student Aid has a wide array of programs, each with unique objectives, eligibility
requirements, and payment methods. Consequently, each program has its own universe (or
multiple universes) of payments that must be identified, assessed for risk, and, if
appropriate, statistically sampled to determine the extent of improper payments.

FFEL Program (Legacy). The FFEL SAP risk analyses that were undertaken last year in
lieu of a measurement as described in the FY 2009 Agency Financial Report did not yield
any result that could help inform decisions on improper payment estimation. Accordingly,
FSA did not use these risk analyses to calculate an FY 2010 error rate and no estimate of
FY 2010 improper payments is provided.

In FY 2009, Federal Student Aid worked with OMB to target their improper payment
analysis using data mining techniques to identify potential improper payments, with
particular focus on special allowance payments (SAP) to lenders. In recent years, SAP has
been among the largest categories of payments to lenders or guarantors. However, the
College Cost Reduction Act of 2007 reduced SAP rates and, combined with a historically
low interest rate environment, has resulted in SAP amounts due to the Department
beginning in FY 2007. This substantial decline, coupled with a significant increase in the
Direct Loan Program versus FFEL and the move to 100 percent Direct Loans at the end of
FY 2010, have resulted in an improving risk profile related to the potential for FFEL
improper payments.

Pell Grant Program. The Department conducts studies with the IRS using FAFSA data.
Data provided by the IRS study are used to estimate improper payments for the Pell Grant
Program. The methodology for the Pell Grant did not change in FY 2010 and additional
details about the study can be found in the FY 2009 AFR, under Corrective Actions.

Corrective Actions

FFEL Program. In addition to the payment data analyses mentioned above, FSA has a
number of existing internal controls integrated into its systems and activities. Program
reviews, independent audits, and Inspector General audits of guaranty agencies, lenders,
and servicers are some of its key management oversight controls. Other control
mechanisms include the following:




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•    System Edits—The system used by guaranty agencies, lenders, and servicers to submit
     bills and remit payments includes “hard” and “soft” edits to prevent erroneous
     information from being entered into the system and prevent potential erroneous
     payments. The hard edits require correction before proceeding with payment
     processing. The soft edits alert the user and FSA to potential errors. FSA reviews these
     warnings prior to approval of payment.

•    Reasonability Analysis—Data reported by guaranty agencies to the National Student
     Loan Data System are used to determine payment amounts for account maintenance
     and loan issuance processing fees. FSA also performs trend analysis of previous
     payments to guaranty agencies and lenders as a means of evaluating reasonableness
     of changes in payment activity and payment levels.

•    Focused Monitoring and Analysis—FSA targets specific areas of FFEL payment
     processing that are at an increased risk for improper payments as areas of focus for
     increased monitoring and oversight. In FY 2009, FSA completed a series of audits of
     guaranty agencies’ establishment of the federal and operating funds in 1998 in
     response to an OIG recommendation. Those audits are in the resolution process.

Pell Grant Program. FSA implemented the 2009-10 Internal Revenue Service (IRS) data
retrieval process, as a pilot on January 28, 2010, as planned. As of June 2010, over
600,000 users had gone to the IRS Web site to retrieve their income information.
Approximately half of those users then transferred their income tax return data to the
FAFSA on the Web (FOTW) application.

As a follow up to the successful 2009–10 pilot, the IRS data retrieval process for initial and
renewal applications is enabled on the 2010–2011 FOTW site. This went live in September
2010. The IRS data retrieval process again enables Title IV student aid applicants and
parents of dependent applicants to transfer certain tax return information from an IRS Web
site directly to their 2010–2011 FOTW application. For 2010–2011, FSA is also expanding
the availability of the IRS data retrieval process to include applicants using the Spanish
version of the FOTW application. For the 2011–12 cycle year, the data match will be
implemented in late January 2011 with hopes that the 2011–12 applicants and parents of
dependent students can access and transfer IRS data earlier in the year directly into their
2011–12 FOTW.

FSA will continue to explore ways to facilitate the detection of error, based on the results of
the FAFSA/IRS Data Statistical Study. Additionally, FSA continues to simplify the
application process, which now includes real-time access for applicants and their parents to
previously filed IRS tax information. These enhancements, coupled with improved error
detection, should allow FSA to further reduce improper payments.




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       IMPROPER PAYMENTS INFORMATION ACT REPORTING DETAILS


       Federal Student Aid Improper Payment Reporting Summary

       The following table presents the improper payments outlook for the primary Federal Student
       Aid programs.

                    FY 2010 Actual             FY 2011 Estimated          FY 2012 Estimated              FY 2013 Estimated             FY 2014 Estimated


Program       Outlays $   IP %       IP $   Outlays $   IP %    IP $   Outlays $     IP %     IP $    Outlays $   IP %     IP $    Outlays $      IP %   IP $

Pell
     (1)       32,215     3.12   1,005       32,454     3.3    1,071    35,058        3.3    1,157     35,630      3.3     1,176     36,639       3.3    1,209
Grant



       (1)
         The source of FY 2010 Pell outlays reflects total expenditures from FMSS. These
       numbers are considered estimates because the Pell rate is preliminary.

       The chart above uses a preliminary Pell improper payment (IP) percentage for FY 2010.
       The FY 2010 IP percentage is scheduled to be finalized after issuance of the Department’s
       AFR. The target 3.3 IP percentage used for 2011–2014 is based on potential improvements
       over the FY 2009 rate. Analysis of the FY 2010 data will be performed through early 2011
       to determine whether the decrease from FY 2009 is statistically significant, and if so, what
       caused it. The IRS data retrieval study may affect the rate in FY 2012, but should not affect
       the rate for FY 2011 because the process went live late in the award year.

       Note: The final Pell error rate for FY 2009 was 3.5 percent. This 3.5 percentage rate was
       reported as “preliminary” in the FY 2009 AFR; however, it did not change.

       Recovery Efforts

       For Pell, recovery is achieved through assessments made during program reviews and
       compliance reviews. Pell also makes recoveries when overpayments to students are
       assigned to Federal Student Aid for collection. Pell recoveries for the period 2005 through
       September 30, 2010, are presented in the following table.

                                                            Pell Recoveries
                                                          (Dollars in Millions)
             2005                2006                    2007                    2008                    2009                      2010
             11.2                    13.6                14.2                    10.8                     6.6                       6.7

       Statutory and Regulatory Barriers

       There are currently no identified barriers which may limit Federal Student Aid’s corrective
       actions in reducing improper payments.




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                                                                               OTHER ACCOMPANYING INFORMATION
                                                           IMPROPER PAYMENTS INFORMATION ACT REPORTING DETAILS


Elementary and Secondary Education Act of 1965, Title I, Part A
Program

The Department performed a risk assessment of the Elementary and Secondary Education
Act of 1965 Title I Grants to Local Educational Agencies, during FY 2010. The assessment,
based on FY 2008 single audit data (the most recent available), yielded an estimated
improper payment rate of 0.04 percent or $4.7 million. This confirms previously reported
data indicating that the risk of improper payments under current statutory requirements is
very low. To validate the assessment data, the Department conducts on-site monitoring
reviews on a three-year review cycle that encompass all states and territories receiving
Title I funds. There were no findings in the monitoring reviews with questioned costs that
contradicted the data in the risk assessment.

Risk Assessment for Other Grant Programs

The Department’s approach to the risk assessment process for non-Federal Student Aid
grant programs was to develop a methodology to produce statistically valid measures that
could be applied uniformly across the Department’s programs. The intent was to use the
same methodology across all non-Federal Student Aid grant programs to establish a level
of quality control for all programs and, at the same time, produce a cost-effective measure.
The Department deemed it cost effective to utilize the results of the thousands of single
audits already being conducted by independent auditors on grant recipients.

In FY 2010, the Department worked with the Department of Energy’s Oak Ridge National
Laboratory to perform data mining on information available in the Federal Audit
Clearinghouse’s Single Audit Database, the Department’s Grant Administration and
Payment System, and the Department’s Audit Accountability and Resolution Tracking
System to assess the risk of improper payments in its remaining grant programs. To
conduct the risk assessment screening, Oak Ridge National Laboratory augmented the
Audit Accountability and Resolution Tracking System database with imputed values for the
likely questioned costs for grants that were not audited. The imputed and real questioned
costs could then be tabulated to provide a reasonable upper-bound estimate of the rate of
erroneous payments for each of the functional programs of interest.

The most striking result of the analysis was the generally low rate of questioned costs. The
key finding of this analysis was that for the most recent year for which data were available
(FY 2008), none of the functional programs exceed the threshold value of 2.5 percent.
Consequently, none of the programs would be labeled as susceptible to significant
erroneous payments.

Managing Risk in Discretionary Grants. In FY 2010, the Department managed more than
10,000 discretionary grant awards. Due to the vast legislative differentiation and the
complexity of the Department’s grant award programs, ensuring that program staff are fully
aware of potentially detrimental issues relating to individual grantees is a significant
challenge. Program offices designate specific grants as high risk in accordance with
Departmental regulations. The Department uses the Grants High-Risk Module housed
within the Department’s Grant Administration and Payment System, to track grants and
grantees that are designated high risk. Program office staff are required to review and
certify their awareness of the high-risk status of applicable grantees before making awards.




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OTHER ACCOMPANYING INFORMATION
IMPROPER PAYMENTS INFORMATION ACT REPORTING DETAILS


Manager Accountability. The Department categorized OMB Circular A-133 single audit
findings to provide feedback to program managers regarding the frequency and type of
findings within their programs. This assists managers in tailoring their program monitoring
efforts to the type of findings that most frequently occur. Additionally, post-audit follow-up
courses have been developed to associate audit corrective actions with monitoring to
minimize future risk and audit findings. Managerial compliance with monitoring procedures
is reviewed and tested during the assurance process under OMB Circular A-123,
Management’s Responsibility for Internal Control.

Planned Corrective Actions. In addition to the actions previously outlined under the
Student Financial Assistance Programs, the Department will periodically update any
corrective action plans based on the results of the initiatives outlined above. The
Department will record and maintain corrective action plans as required, which will include
due dates, process owners, and task completion dates.

Information Systems and Infrastructure. The Department has submitted budget requests
of $250,000 for FY 2011 and FY 2012 for information system infrastructure improvements.
A portion of the funds will be used to continue the refinement of data mining efforts and the
possible extension of recapture auditing efforts. It is also anticipated that the Department
will incur costs related to mitigation activities.

American Recovery and Reinvestment Act (Recovery Act) Programs. For FY 2009 and
FY 2010, the Recovery Act supplemented the Department of Education’s appropriations by
$97.4 billion. The law created the new $53.6 billion State Fiscal Stabilization Fund grant
program. The Recovery Act also supplemented existing programs, including ESEA Title I
and IDEA Part B and Part C, nearly doubling the funds available for some major grant
programs at the Department. Immediately following the enactment of the Recovery Act, the
Department conducted a systematic assessment of the risks presented by the law and
concluded that recipient expenditures under all Recovery Act grants should be monitored
because of the high level of funding. Further, the Department concluded that the State
Fiscal Stabilization Fund program should receive a particularly high level of oversight
because the program is both new and funded at an extremely high level.

The Department has established an elevated level of oversight for Recovery Act grants in
order to avoid improper payments. Monitoring for potential excessive draws against these
grants began immediately after the Department made the funds available to grantees. The
Department quickly automated this process so that the finance system automatically
notifies the Federal program officer any time a grantee requests payment of a large sum or
a large proportion of a grant. The program officer then contacts the grantee to ensure the
payment is in compliance with program rules and federal financial assistance management
requirements. The program officer approves the large payment requests before they are
processed.

The Department has also automated the review of the expenditure and activities data that
recipients are reporting into FederalReporting.gov under the requirements of Recovery Act
Section 1512. The staff across the Department is reviewing exception reports for
inconsistencies between expenditures reported by recipients and the information in the
Department’s finance system. The staff is also reviewing the reports to gauge the
reasonableness of reported expenditures and the relationship of prime recipient draws on




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                                                                               OTHER ACCOMPANYING INFORMATION
                                                           IMPROPER PAYMENTS INFORMATION ACT REPORTING DETAILS


their grants to the amount expended by their subrecipients, to monitor for cash
management issues.

Recovery Auditing Progress

To effectively address the risk of improper administrative payments, the Department
continued a recovery auditing initiative to review contract payments. The Department
performed a review on a statistical sample of payment transactions. No improper payments
were indicated in the review. The following chart presents the results of the Department’s
recovery auditing program.

                                                     Recovery Auditing Summary
                                                            (in millions)
                                    Actual                                                          Cumulative
                   Amount                        Amounts                   Amounts
                                   Amount                                                            Amounts      Cumulative
                  Subject to                     Identified     Amounts    Identified    Amounts
 Agency                           Reviewed                                                           Identified    Amounts
                   Review                           for        Recovered      for       Recovered
Component                            and                                                                for       Recovered
                    for CY                       Recovery         CY       Recovery        PYs
                                  Reported                                                           Recovery     (CY + PYs)
                  Reporting                         CY                        PYs
                                     CY                                                             (CY + PYs)


      All           $1,033          $19.1            $0           $0         $0.3         $0.1         $0.3         $0.1


Summary

The Department is enhancing its efforts for identifying and reducing the potential for
improper payments to comply with the IPERA. Although there are still challenges to
overcome, the Department is committed to ensuring the integrity of its programs.

The Department is focused on identifying and managing the risk of improper payments and
mitigating the risk with adequate control activities. In FY 2011, we will continue to work with
OMB and the Inspector General to explore additional opportunities for identifying and
reducing potential improper payments and to ensure compliance with the IPERA.




FY 2010 Agency Financial Report—U.S. Department of Education                                                        109
OTHER ACCOMPANYING INFORMATION




      Summary of Financial Statement Audit and Management
                           Assurances
The following tables provide a summarized report on the Department’s financial statement
audit and its management assurances. For more details the auditor’s report can be found
on pages 83–100 and the Department’s Management assurances on pages 25–26.

                                  Summary of Financial Statement Audit

 Audit Opinion                                                       Unqualified
 Restatement                                                             No
                                   Beginning                                                                 Ending
 Material Weaknesses                                 New              Resolved        Consolidated
                                    Balance                                                                  Balance

 Total Material Weaknesses             0               0                  0                  0                   0

                                  Summary of Management Assurances
 Effectiveness of Internal Control over Financial Reporting - Federal Managers’ Financial Integrity Act
                                               (FMFIA) 2

 Statement of Assurance                                              Unqualified
                                 Beginning                                                                    Ending
 Material Weaknesses                           New     Resolved       Consolidated        Reassessed
                                  Balance                                                                     Balance

 Total Material Weaknesses            0          0         0                  0                  0                   0

 The Department had no material weaknesses in the design or operation of the internal control over financial
 reporting.
                     Effectiveness of Internal Control over Operations - FMFIA 2

 Statement of Assurance                                              Unqualified
                                 Beginning                                                                    Ending
 Material Weaknesses                           New     Resolved       Consolidated        Reassessed
                                  Balance                                                                     Balance

 Total Material Weaknesses            0          0         0                  0                  0                   0

                 Conformance with Financial Management System Requirements - FMFIA 4

                                      The Department systems conform to financial management system
 Statement of Assurance
                                                              requirements.

 Non-Conformance                 Beginning                                                                    Ending
                                               New     Resolved       Consolidated        Reassessed
                                  Balance                                                                     Balance

 Total Non-Conformance                0          0         0                  0                  0                   0

                    Compliance with Federal Financial Management Improvement Act

                                                           Agency                                  Auditor
 Overall Substantial Compliance                                Yes                                   No

 1.   System Requirements                                      Yes                                   No

 2.   Federal Accounting Standards                             Yes                                   Yes
 3.   United States Standard General Ledger
                                                               Yes                                   Yes
      at Transaction Level




110                                                             FY 2010 Agency Financial Report—U.S. Department of Education
                                                               OTHER ACCOMPANYING INFORMATION




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OTHER ACCOMPANYING INFORMATION




      Office of Inspector General’s Management Challenges for
                 Fiscal Year 2011 Executive Summary
The Office of Inspector General (OIG) works to promote efficiency, effectiveness, and
integrity in the programs and operations of the U.S. Department of Education (Department).
Through our audits, inspections, investigations, and other reviews, we continue to identify
areas of concern within the Department’s programs and operations and recommend actions
the Department should take to address these weaknesses. The Reports Consolidation Act
of 2000 requires OIG to identify and summarize the most significant management
challenges facing the Department each year.

Last year, we reported three management challenges: the American Recovery and
Reinvestment Act of 2009 (Recovery Act); student financial assistance (SFA) programs,
with a focus on the Ensuring Continued Access to Student Loans Act of 2008; and
information security and management. All three have been updated as challenges for
FY 2011, and Data Quality and Reporting, previously a sub-area, is presented as a
separate challenge. The FY 2011 management challenges are:

      (1) Implementation of New Programs/Statutory Changes, including the Recovery Act
          and changes to the SFA loan programs;
      (2) Oversight and Monitoring, including SFA program participants, distance education,
          grantees, and contractors;
      (3) Data Quality and Reporting, including program data and Recovery Act reporting
          requirements; and
      (4) Information Technology Security.

Implementation of New Programs and Statutory Changes

New programs or changes to existing programs often require the development of new
guidance, grant applications, or other documents, new competitions, and other activities.
Technical assistance and outreach activities are needed to ensure that recipients and/or
other program participants understand the new requirements and any new responsibilities.
Internal training efforts are required to ensure that responsible U.S. Department of
Education (Department) staff fully understand the requirements. These activities often must
take place within very short timeframes and generally without additional resources. This
places a strain on Department staff to absorb the increased workload.

Recovery Act. The Recovery Act provided significant additional funding to help improve
the economy and enhance education reforms. This included funding for new educational
programs and existing programs. The Office of Inspector General (OIG) and the
Government Accountability Office (GAO) have conducted significant amounts of work at the
Department, State agencies, and Local Educational Agencies (LEAs). This work identified a
number of control weaknesses related to the use of funds, cash management, subrecipient
monitoring, and impacts on maintaining levels of funding for education programs. We made
recommendations to improve implementation of Recovery Act programs. The Department
has taken proactive measures to coordinate the effective implementation of the Recovery
Act and to provide technical assistance to recipients. Additional oversight and monitoring
could enhance the Department’s ability to ensure that Federal funds are effectively
managed and that deficiencies noted in audits and other reviews are corrected timely.
Congress recently authorized an additional $10 billion for the Education Jobs Fund to be


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                                       OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2011


administered by the Department. The Department must provide further guidance and
assistance to recipients on this new program, which includes Recovery Act reporting
provisions as well as the previously authorized Recovery Act programs, identify and obtain
additional resources for program monitoring, and take timely corrective actions to address
issues noted in audits and other reviews.

Changes to the SFA Loan Programs. The Student Aid and Financial Responsibility Act
(SAFRA) prohibited the making (origination) of new Federal Family Education Loan
Program (FFELP) loans after June 30, 2010. New loans will be originated under the William
D. Ford Federal Direct Loan (Direct Loan) Program. The Department’s challenge is to
expand its capacity to originate and service the increased Direct Loan volume, train and
monitor schools new to the program, and continue oversight of FFELP lenders and
guaranty agencies that service the existing portfolios. If the Department’s implementation of
SAFRA is not successful, the availability and delivery of student loans may be disrupted,
impacting students and their families. The Department has taken actions to prepare for the
transition, including providing outreach and technical support to schools, enhancing the key
information systems, contracting with additional loan servicers, hiring additional staff, and
developing contingency plans. We suggested that the Department establish effective
contract monitoring practices and require appropriate system testing to ensure that systems
perform adequately under the increased loan volume.

Oversight and Monitoring

Effective oversight and monitoring of the Department’s programs and operations are critical
to ensure that funds are used for the purposes intended, programs are achieving goals and
objectives, and the Department is obtaining the products and level of services for which it
has contracted. This is a significant responsibility for the Department given the numbers of
different entities and programs requiring monitoring and oversight, the amount of funding
that flows through the Department, and the impact that ineffective monitoring could have on
the students and taxpayers. Four areas are included in this management challenge—SFA
program participants, distance education, grantees, and contractors.

SFA Program Participants. Effective oversight and monitoring of participants in the SFA
programs under Title IV of the Higher Education Act of 1965, as amended (HEA) are
needed to ensure that the programs are not subject to fraud, waste, abuse, and
mismanagement. Under the President’s budget, the Department expects to provide more
than $173.6 billion in grants, loans, and work-study assistance in FY 2011. Each year,
approximately 14.8 million students and their families—47 percent of all students and
62 percent of full-time undergraduates—rely on the SFA programs to help fund their
postsecondary educations. Participants in the SFA programs include postsecondary
institutions, lenders, guaranty agencies, and third-party servicers. Our work has identified
weaknesses in the Department’s oversight and monitoring of these participants. The
Department has taken corrective actions to address many of the recommendations
contained in our prior reports. However, the Department needs to continue to assess and
improve its oversight and monitoring of program participants and take effective actions
when problems are identified.

Distance Education. Distance education refers to courses or programs offered through
telecommunication, such as through Internet connection with a postsecondary institution.
The flexibility offered is popular with students pursuing education on a non-traditional



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OTHER ACCOMPANYING INFORMATION
OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2011


schedule. Many institutions offer distance education programs as a way to increase their
enrollment. Management of distance education programs presents a challenge for the
Department and school officials because of limited or no physical contact to verify the
student’s identity or attendance. OIG audit work has found that for distance education
programs, schools face a challenge in determining when a student attends, withdraws from,
or drops a course. Attendance is critical because it is used to determine the student’s
eligibility for Federal student aid and to calculate the return of Federal student aid if the
student withdraws from or drops out. Our investigative work has also found that those
interested in defrauding the Federal student aid programs find it easier to enroll numerous
times under different names, to falsify information on the Free Application for Federal
Student Aid, and to initiate other schemes to receive funds illegally. Also, some program
requirements for residential programs do not translate clearly for distance education
programs, and guidance is not available to address these issues. The Department needs to
develop requirements specific to distance education and to increase its oversight of schools
providing programs through distance education.

Grantees. Effective monitoring and oversight is essential to ensure that grantees meet
grant requirements and achieve program goals and objectives. Our work has identified a
number of weaknesses in grantee oversight and monitoring. We have found pervasive
fiscal control weaknesses among a number of grantees, weaknesses in grant payback
programs, as well as fraud committed by LEA and charter school officials. The Department
is responsible for monitoring the activities of grantees to ensure compliance with applicable
Federal requirements and achievement of performance goals. The Department has taken
corrective actions to address many of the recommendations contained in our reports.
However, the Department needs to continue to assess and improve its oversight and
monitoring of grantees and take effective actions when issues are identified.

Contractors. The Department relies heavily on contractor support to accomplish its mission
and to ensure the effective operations of its many systems and activities. The Department
spends more than $1 billion each year on contracts for products and services. Once a
contract is awarded, the Department must effectively monitor performance to ensure that it
receives the quality and quantity of products or services for which it is paying. OIG reports
have indentified numerous deficiencies in the area of contract monitoring and
recommendations for corrective action. The Department has taken action to address many
of the issues noted. A critical issue hampering significant improvement, however, is the
shortage of appropriately qualified staff to adequately monitor contractor performance. The
Department needs to ensure its human capital plans address this critical area.

Data Quality and Reporting

The Department, its grantees, and subrecipients must have controls in place and effectively
operating to ensure that accurate, reliable data are reported. Data are used by the
Department to make funding decisions, to evaluate program performance, and to support a
number of management decisions. Under the Recovery Act, data reported provide
transparency and allow access by the general public as to how funds are being spent. Two
areas are included in this management challenge—program data reporting and Recovery
Act reporting requirements.

Program Data Reporting. State educational agencies (SEAs) annually collect data from
LEAs and report various program data to the Department. The Department evaluates



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                                       OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2011


program data to make critical funding and other management decisions. Our work has
identified a variety of weaknesses in the quality of reported data and recommended
improvements at the SEA and LEA level, as well as actions the Department can take to
clarify requirements and provide additional guidance. Establishing more consistent
definitions for data terms will enhance reporting accuracy and comparability.

Recovery Act Reporting Requirements. The Recovery Act places a heavy emphasis on
accountability and transparency, including reporting requirements related to the awarding
and use of funds. All recipients and subrecipients are mandated to provide information
about their awards on www.federalreporting.gov, a publicly available Web site authorized
by the statute. The new reporting requirements required Federal, State, and local agencies
to quickly develop the systems and infrastructure to collect and report the required
information. The Department must educate recipients about the reporting requirements,
assess the quality of the reported information, and use the collected information effectively
to monitor and oversee Recovery Act programs and performance. Our initial work has
noted a number of weaknesses in controls over data quality and reporting, both externally
at SEAs and LEAs, and internally at the Department. Ensuring that accurate and complete
data are reported is critical to achieving the transparency goals of the Recovery Act.

Information Technology Security

The Department collects, processes, and stores a large amount of personally identifiable
information regarding employees, students, and other program participants. OIG has
identified repeated problems in IT security and noted increasing threats and vulnerabilities
to Department systems and data. For the last 3 years, OIG’s IT audits have identified
management, operational, and technical security controls that need improvement to
adequately protect the confidentiality, integrity, and availability of Department systems and
data. We have identified security weaknesses in the incident handling process and
procedures, personnel security controls, and configuration management. Compromise of
the Department’s data would cause substantial harm and embarrassment to the
Department and may lead to identity theft or other fraudulent use of the information.

An Additional Area of Emphasis—Improper Payments

One additional area will be a focus of Department and OIG activity for FY 2011 and
beyond—improper payments. Across the Federal Government, agencies reported nearly
$100 billion in improper payments for FY 2009. The Department must be able to ensure
that the billions of dollars entrusted to it are reaching the intended recipients. A number of
new requirements related to improper payments were issued in FY 2010. In November
2009, the President signed an Executive Order entitled, Reducing Improper Payments and
Eliminating Waste in Federal Programs, to reduce improper payments by holding agencies
accountable. In March 2010, a Presidential Memorandum entitled, Finding and Recapturing
Improper Payments, was issued to expand the use of recovery audits. In July, the Improper
Payments Elimination and Recovery Act of 2010 was passed to amend the Improper
Payments Information Act of 2002, incorporating changes to requirements for identifying
and reporting improper payments. In addition to actions required by the Department, there
are new requirements for OIG to monitor and evaluate Department activities related to
improper payments. To view the full report, go to:
http://www2.ed.gov/about/offices/list/oig/managementchallenges.html




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OTHER ACCOMPANYING INFORMATION
OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2011




116                                               FY 2010 Agency Financial Report—U.S. Department of Education
                                         Appendices




FY 2010 Agency Financial Report—U.S. Department of Education
APPENDICES




             Appendix A: Selected Department Web Links
The American Recovery and Reinvestment Act

•     Important Recovery Act Reference Sites
       Recovery.Gov
       Department Weekly and Communication Reports
       http://www2.ed.gov/about/overview/budget/budget11/index.html
       American Recovery and Reinvestment Act of 2009: Frequently Asked Questions

Department Evaluation Studies

The Department designs evaluation studies to produce rigorous scientific evidence on the
effectiveness of education programs and practices.

http://ies.ed.gov/ncee/projects/evaluation/index.asp

http://www.ed.gov/about/offices/list/opepd/ppss/reports.html

Performance Data

EDFacts is a Department initiative to put performance data at the center of policy,
management, and budget decisions for all K-12 educational programs.

http://www.ed.gov/about/inits/ed/edfacts/index.html

Projections of Education Statistics to 2018

For the 50 states and the District of Columbia, the tables, figures, and text contain data on
projections of public elementary and secondary enrollment and public high school
graduates to the year 2018. The report includes a methodology section describing models
and assumptions used to develop national and state-level projections.

http://nces.ed.gov/pubsearch/pubsinfo.asp?pubid=2009062

Discretionary Grant Programs for FY 2009–2010

This site lists Department grant competitions previously announced, as well as those
planned for later announcement, for new awards organized according to the Department's
principal program offices.

http://www.ed.gov/fund/grant/find/edlite-forecast.html

Open Government Initiative

The Department’s Open Government Initiative is designed to improve the way the
Department shares information, learns from others, and collaborates to develop the best
solutions for America's students.

http://www2.ed.gov/about/open.html



118                                                    FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                 APPENDICES
                                                               SELECTED DEPARTMENT W EB LINKS


Research and Statistics

The Education Sciences Reform Act of 2002 established the Institute of Education
Sciences (IES) within the Department to provide research, evaluation, and statistics to our
nation’s education system.

http://ies.ed.gov/

National Assessment of Educational Progress

The National Assessment of Educational Progress assesses samples of students in
grades 4, 8, and 12 in various academic subjects. Results of the assessments are reported
for the nation and states in terms of achievement levels—basic, proficient, and advanced.

http://nationsreportcard.gov/

Government Accountability Office

The GAO supports Congress in meeting its constitutional responsibilities and helps improve
the performance and accountability of the federal government for the benefit of the
American people.

http://www.gao.gov/docsearch/agency.php

Office of Inspector General

The OIG has four primary business functions: audit, investigation, cyber security, and
evaluation and inspection.

http://www.ed.gov/about/offices/list/oig/index.html

For a list of recent reports, go to:

http://www.ed.gov/about/offices/list/oig/areports.html




FY 2010 Agency Financial Report—U.S. Department of Education                              119
APPENDICES




       Appendix B: Glossary of Acronyms and Abbreviations
ABCP         Asset-Backed Commercial Paper

ACG          Academic Competitiveness Grant

ACSI         American Customer Satisfaction Index

AFR          Agency Financial Report

AGI          Adjusted Gross Income

APR          Annual Performance Report

ARRA         American Recovery and Reinvestment Act of 2009 (Recovery Act)

ATA          Assistive Technology Act of 2004

CAROI        Cooperative Audit Resolution and Oversight Initiative

CCRAA        College Cost Reduction and Access Act

CFAAA        Compact of Free Association Amendments Act of 2003

CFDA         Catalog of Federal Domestic Assistance

CRA          Civil Rights Act of 1964

CSPR         Consolidated State Performance Report

CSRS         Civil Service Retirement System

CTEA         Carl D. Perkins Career and Technical Education Act of 2006

ECASLA       Ensuring Continued Access to Student Loans Act of 2008

EDA          Education of the Deaf Act of 1986

EDEN         Education Data Exchange Network

EFC          Expected Family Contribution

EMAPS        EDFacts Metadata and Process System

ESEA         Elementary and Secondary Education Act of 1965

ESRA         Education Sciences Reform Act of 2002

ESS          EDEN Submission System

FAFSA        Free Application for Federal Student Aid

FASAB        Federal Accounting Standards Advisory Board

FECA         Federal Employees’ Compensation Act



120                                                 FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                          APPENDICES
                                                               GLOSSARY OF ACRONYMS AND ABBREVIATIONS


FERS               Federal Employees Retirement System

FFB                Federal Financing Bank

FFEL               Federal Family Education Loan

FFMIA              Federal Financial Management Improvement Act of 1996

FISMA              Federal Information Security Management Act of 2002

FMFIA              Federal Managers’ Financial Integrity Act of 1982

FOTW               FAFSA on the Web

FSA                Federal Student Aid

FY                 Fiscal Year

GA                 Guaranty Agency

GAPS               Grant Administration and Payment System

GPRA               Government Performance and Results Act of 1993

GSA                General Services Administration

HBCUs              Historically Black Colleges and Universities

HC                 Human Capital

HCERA              Health Care and Education Reconciliation Act of 2010

HCMS               Human Capital Management Staff

HEA                Higher Education Act of 1965

HPPG               High Priority Performance Goals (Priority Goals)

HR                 Human Resources

IDEA               Individuals with Disabilities Education Act

IES                Institute of Education Sciences

IP                 Improper Payments

IPERA              Improper Payments Elimination and Recovery Act

IPIA               Improper Payments Information Act of 2002

IRS                Internal Revenue Service

i3                 Investing in Innovation fund

IT                 Information Technology




FY 2010 Agency Financial Report—U.S. Department of Education                                      121
APPENDICES
GLOSSARY OF ACRONYMS AND ABBREVIATIONS


IUS         Internal Use Software

IV&V        Independent Verification and Validation

LEA         Local Educational Agency

LLR         Lender of Last Resort

MD&A        Management’s Discussion and Analysis

MECEA       Mutual Educational and Cultural Exchange Act of 1961

NAEP        National Assessment of Educational Progress

NCLB        No Child Left Behind Act of 2001

NLA         National Literacy Act of 1991

OA          Organizational Assessment

OCR         Office for Civil Rights

OECD        Organization for Economic Cooperation and Development

OELA        Office of English Language Acquisition

OESE        Office of Elementary and Secondary Education

OIG         Office of Inspector General

OII         Office of Innovation and Improvement

OM          Office of Management

OMB         Office of Management and Budget

OPE         Office of Postsecondary Education

OPM         Office of Personnel Management

OSDFS       Office of Safe and Drug-Free Schools

OSERS       Office of Special Education and Rehabilitative Services

OVAE        Office of Vocational and Adult Education

PAR         Performance and Accountability Report

PBO         Performance-Based Organization

PIC         Performance Improvement Council

PII         Personally Identifiable Information

PIO         Performance Improvement Officer




122                                                   FY 2010 Agency Financial Report—U.S. Department of Education
                                                                                          APPENDICES
                                                               GLOSSARY OF ACRONYMS AND ABBREVIATIONS


PIRLS              Progress in International Reading Literacy Study

PLUS               Parent Loans for Undergraduate Students

RA/JF              American Recovery and Reinvestment Act of 2009 (Recovery Act)/Education
                   Jobs Fund

RMS                Risk Management Service

SAFRA              Student Aid Fiscal Responsibility Act (SAFRA Act)

SAP                Special Allowance Payment

SEA                State Educational Agency

SFSF               State Fiscal Stabilization Fund

SIG                School Improvement Grant

SOF                Statement of Financing

SY                 School Year

TASSIE             Title I Accountability Systems and School Improvement Efforts

TIF                Teacher Incentive Funds

TIMSS              Trends in International Mathematics and Science Study

USC                United States Code

VPS                Visual Performance Suite

VR                 Vocational Rehabilitation

WWC                What Works Clearinghouse




FY 2010 Agency Financial Report—U.S. Department of Education                                      123
OUR MISSION IS TO PROMOTE STUDENT ACHIEVEMENT AND PREPARATION FOR
 GLOBAL COMPETITIVENESS BY FOSTERING EDUCATIONAL EXCELLENCE AND
                     ENSURING EQUAL ACCESS.

                       WWW.ED.GOV