oversight

Financial Statement Audits for Fiscal Years 2010 and 2009-Federal Student Aid

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 | Federal Student Aid
Annual Report
                                2010
Dear Federal Student Aid Colleagues, Partners and Customers:

Federal Student Aid experienced an extraordinary year in
2010. The passage and enactment of the Health Care and
Education Reconciliation Act of 2010 ushered in sweeping
reforms to the federal student financial assistance
programs, resulting in tens of billions of dollars in increased
funding for low-income college-bound students. Federal
Student Aid continued to update its systems and increase
capacity to prepare for an exponential increase in Direct
Loan volume. We provided training to thousands of financial
aid professionals from schools across the world to assist
them in preparing for this transition. I am pleased to report
that Federal Student Aid met these challenges, successfully
welcoming millions of students and thousands of schools
into the Direct Loan Program. We also delivered a record
level of support under the Pell Grant Program.

This past year, we further simplified the Free Application for
Federal Student Aidsm (FAFSAsm), making it easier for
millions of students to access postsecondary education.
Federal Student Aid also piloted an initiative, modeled after
a successful program in Chicago, to increase FAFSA                   William J. Taggart
completion in several school systems across the country.          Chief Operating Officer
Federal Student Aid continues to partner with agencies from across the federal government,
including the Securities and Exchange Commission, the Department of Labor, and the Federal
Bureau of Investigation, to improve program compliance and monitor customer complaints.

We accomplished all of this while delivering more aid to more students than at any other time in
the history of the Title IV Programs. In FY 2010, Federal Student Aid delivered $134 billion
through 6,200 schools to 14 million students and their families.

The year also provided Federal Student Aid an opportunity to reflect on its business, past
practices and priorities in order to chart its future path. We redefined Federal Student Aid’s
vision, core values, and mission in an effort to articulate a clear and common purpose: Funding
America’s Future, One Student at a Time. Achieving this mission demanded that we develop a
long-term strategy to guide the organization in pursuit of this common goal. We developed a
new Five-Year Strategic Plan for FY 2011–15 with concrete goals to help our organization meet
the needs of the evolving educational landscape. We realigned Federal Student Aid’s
organizational structure to better position its business and its employees to achieve the goals
outlined in the Strategic Plan.

In the year ahead, with the new FY 2011–15 Strategic Plan as our guide, we will strengthen
Federal Student Aid’s focus on the customer to ensure that the Title IV Programs and those that
participate in them serve - first and foremost - the interests of students and their families. We
will enhance our risk management strategies and augment our compliance functions to improve
the integrity of the student aid programs. We will continue to refine our processes and
procedures to efficiently meet the evolving needs of students and financial aid administrators
while minimizing the cost to the American taxpayer.
Our success over the past year is attributed to the dedication, expertise, and professionalism of
our workforce. I want to thank our staff for their public service and commitment to our mission of
Funding America’s Future, One Student at a Time. I am honored to represent them, and I am
proud to present the 2010 Federal Student Aid Annual Report on their behalf.

Sincerely,




William J. Taggart
Chief Operating Officer
    Table of Contents                                                                                                                   FY 2010 Annual Report


           MANAGEMENT’S DISCUSSION AND ANALYSIS ........................................................................... 1
              MISSION AND ORGANIZATIONAL STRUCTURE....................................................................................... 3
              PERFORMANCE GOALS, OBJECTIVES, AND RESULTS ......................................................................... 12
                   KEY PERFORMANCE GOALS AND RESULTS ............................................................................... 13
                   ACHIEVEMENTS IN SUPPORT OF FEDERAL STUDENT AID STRATEGIC GOALS .............................. 16
                   QUALITY OF PERFORMANCE DATA ........................................................................................... 17
              ANALYSIS OF FEDERAL STUDENT AID‘S FINANCIAL STATEMENTS ....................................................... 19
              ANALYSIS OF FEDERAL STUDENT AID‘S SYSTEMS, CONTROLS AND LEGAL COMPLIANCE ..................... 24
              POSSIBLE FUTURE EFFECTS OF EXISTING EVENTS AND CONDITIONS ................................................. 26
              LIMITATIONS OF FINANCIAL STATEMENTS .......................................................................................... 27
           ANNUAL PROGRAM PERFORMANCE REPORT .......................................................................... 29
              ANNUAL PROGRAM PERFORMANCE .................................................................................................. 31
                   OBJECTIVE 1: INTEGRATE FEDERAL STUDENT AID SYSTEMS AND PROVIDE NEW TECHNOLOGY
                   SOLUTIONS. ............................................................................................................................ 31
                   OBJECTIVE 2: IMPROVE PROGRAM INTEGRITY TO FACILITATE ACCESS TO POSTSECONDARY
                   EDUCATION, WHILE REDUCING THE VULNERABILITY OF THE FEDERAL STUDENT FINANCIAL
                   ASSISTANCE PROGRAMS TO FRAUD, WASTE, ABUSE AND MISMANAGEMENT. ................................ 35
                   OBJECTIVE 3: REDUCE PROGRAM ADMINISTRATION COSTS. ...................................................... 39
                   OBJECTIVE 4: IMPROVE HUMAN CAPITAL MANAGEMENT. ........................................................... 41
                   OBJECTIVE 5: IMPROVE PRODUCTS AND SERVICES TO PROVIDE BETTER CUSTOMER SERVICE. .... 45
                   CHANGES TO FEDERAL STUDENT AID‘S PERFORMANCE PLAN OVER THE YEAR .......................... 51
              LEGISLATIVE AND REGULATORY RECOMMENDATIONS ........................................................................ 52
              ANNUAL BONUS AWARDS ................................................................................................................. 53
              REPORT OF THE FEDERAL STUDENT AID OMBUDSMAN ...................................................................... 55
           FINANCIAL SECTION ...................................................................................................................... 59
              MESSAGE FROM THE CHIEF FINANCIAL OFFICER ............................................................................... 61
              PRINCIPAL FINANCIAL STATEMENTS AND NOTES TO PRINCIPAL FINANCIAL STATEMENTS ..................... 63
                   CONSOLIDATED BALANCE SHEET ............................................................................................. 65
                   CONSOLIDATED STATEMENT OF NET COST .............................................................................. 66
                   CONSOLIDATED STATEMENT OF CHANGES IN NET POSITION ..................................................... 67
                   COMBINED STATEMENT OF BUDGETARY RESOURCES ............................................................... 68
              NOTES TO PRINCIPAL FINANCIAL STATEMENTS ................................................................................. 69
                   NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ................................................. 69
                   NOTE 2. NON-ENTITY ASSETS ............................................................................................. 78
                   NOTE 3. FUND BALANCE WITH TREASURY ............................................................................ 78
                   NOTE 4. ACCOUNTS RECEIVABLE ........................................................................................ 79
                   NOTE 5. CASH AND OTHER MONETARY ASSETS ................................................................... 80
                   NOTE 6. CREDIT PROGRAMS FOR HIGHER EDUCATION ......................................................... 80
                   NOTE 7. GENERAL PROPERTY, PLANT, AND EQUIPMENT ....................................................... 95
                   NOTE 8. OTHER ASSETS ..................................................................................................... 95
                   NOTE 9. DEBT .................................................................................................................... 96
                   NOTE 10. OTHER LIABILITIES ................................................................................................ 97
                   NOTE 11. ACCRUED GRANT LIABILITY ................................................................................... 98
                   NOTE 12. NET POSITION ....................................................................................................... 98
                   NOTE 13. INTRAGOVERNMENTAL COST AND EXCHANGE REVENUE BY PROGRAM ..................... 99
                   NOTE 14. INTEREST EXPENSE AND INTEREST REVENUE ....................................................... 100
                   NOTE 15. STATEMENT OF BUDGETARY RESOURCES ............................................................ 100
                   NOTE 16. RECONCILIATION OF NET COST OF OPERATIONS TO BUDGET ................................ 103
                   NOTE 17. AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009 ..................................... 104
                   NOTE 18. CONTINGENCIES.................................................................................................. 105
              REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION .............................................................. 106
              REQUIRED SUPPLEMENTARY INFORMATION..................................................................................... 109
              OTHER ACCOMPANYING INFORMATION ........................................................................................... 113

FY 2010                                                                            i                                    Federal Student Aid Annual Report
Table of Contents                                                                                                                      FY 2010 Annual Report


          OFFICE OF INSPECTOR GENERAL TRANSMITTAL LETTER ................................................... 115
          REPORT OF INDEPENDENT AUDITORS ..................................................................................... 119
          REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING BASED ON AN AUDIT OF
          FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING
          STANDARDS .................................................................................................................................. 123
          REPORT ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL
          STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING
          STANDARDS .................................................................................................................................. 135
          MANAGEMENT’S RESPONSE ...................................................................................................... 141
          GLOSSARY OF ACRONYMS AND TERMS .................................................................................. 145
          AVAILABILITY OF FEDERAL STUDENT AID’S ANNUAL REPORT ........................................... 149




FY 2010                                                                           ii                                  Federal Student Aid Annual Report
Management’s Discussion and Analysis




          Management’s Discussion and Analysis




   FY 2010                             -1-       Federal Student Aid Annual Report
Management’s Discussion and Analysis




   FY 2010                             -2-   Federal Student Aid Annual Report
Management’s Discussion and Analysis                                          Mission and Organizational Structure



          Mission and Organizational Structure

          Federal Student Aid (FSA), a principal office of the United States (U.S.) Department of
          Education (Department), seeks to ensure that all eligible individuals can benefit from
          federal financial assistance for education beyond high school. FSA is responsible for
          implementing and overseeing federal student financial assistance programs, authorized
          under Title IV of the Higher Education Act (HEA) of 1965, as amended (Title IV).

          In order to execute the Title IV Programs, FSA is responsible for a range of functions
          across the student aid lifecycle, which includes:

             Educating students and families about the process of obtaining aid;
             Processing millions of student financial aid applications;
             Disbursing billions of dollars in student aid;
             Insuring billions of dollars in existing student loans;
             Enforcing financial aid rules and regulations;
             Servicing millions of student loans;
             Securing repayment from borrowers who have defaulted on their loans; and
             Partnering with schools, financial institutions, and guaranty agencies to prevent
              program fraud, waste, and abuse.

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

          FSA Stakeholders

          The community of stakeholders in the student aid delivery system includes students and
          parents, Federal Family Education Loan (FFEL sm) Program sm loan holders, guaranty
          agencies, postsecondary institutions, contracted servicers and collection agencies, as well
          as the taxpayers and other federal entities, such as Congress and the Office of
          Management and Budget (OMB).




   FY 2010                                         -3-                          Federal Student Aid Annual Report
Management’s Discussion and Analysis                                          Mission and Organizational Structure


                     Role of FSA and Participants in the Federal Student Aid System




          A major role of FSA is to coordinate and monitor the activity of the large number of federal,
          state, non-profit, and private entities involved in federal student aid delivery, within a
          statutory framework established by Congress and a regulatory framework established by
          the Department.

          FSA Organizational Structure

          FSA currently operates under a functional organizational structure that aligns the
          organization closely with its strategic drivers, business objectives, and mission goals. A
          Chief Operating Officer (COO), who is appointed to a five-year term by the Secretary of
          Education (Secretary), leads FSA. In 2009, the Secretary appointed William J. Taggart as
          the organization‘s third COO. The following graphic illustrates the current functional
          organizational structure of FSA.
   FY 2010                                         -4-                          Federal Student Aid Annual Report
Management’s Discussion and Analysis                                        Mission and Organizational Structure




          During fiscal year (FY) 2010, the organization operated on an annual administrative
          budget of approximately $946 million. FSA operates as a public-private partnership staffed
          by 1,168 full-time employees and is augmented by contractors who provide outsourced
          business operations. The workforce is based in Washington, D.C., with ten regional offices
          located throughout the country as reflected in the following graphic. The number of full-
          time employees at each location is shown in parentheses immediately following the
          location name.




   FY 2010                                        -5-                         Federal Student Aid Annual Report
Management’s Discussion and Analysis                                            Mission and Organizational Structure


          Vision, Core Values, and Mission

          In FY 2010, FSA developed new vision, core values, and mission (VVM) statements to
          capture the opportunities and meet rising challenges from the changing higher education
          environment. This action was in response to numerous discussions with, and feedback
          from, employees from each office within FSA.

          FSA‘s mission and vision focus on students and position FSA as not only a provider of
          federal student financial aid and services, but also as a trusted source to provide
          information to help students and families make better decisions about their postsecondary
          education funding options. The core values reflect FSA employees‘ desire to create a
          high-performing organization and work environment while improving operations and
          services.

                                    FSA’s Vision, Core Values, and Mission

            Mission
              Funding America’s Future, One Student at a Time

            Vision

               To be the most trusted and reliable source of student financial aid,
               information, and services in the nation

            Core Values

                 Integrity                Do the right thing above other interests and hold everyone
                                           accountable.

                 Customer service         Know what our customers (students and borrowers) want
                                           and ensure we meet their expectations.

                 Excellence               Strive to be the very best in all we do by embracing a
                                           culture of continuous improvement.

                 Respect                  Value individuals by acknowledging the diversity of their
                                           contributions, ideas, and beliefs.

                 Stewardship              Uphold the sacred trust of taxpayers as we work to support
                                           the goals of Congress and the Administration.

                 Teamwork                 Work in collaboration with our colleagues and partners to
                                           produce the best possible results.


          Programs

          The federal student financial assistance programs collectively represent the nation‘s
          largest source of federal financial aid for postsecondary students. In FY 2010, FSA
          processed over 21 million Free Applications for Federal Student Aidsm (FAFSAsm), resulting
          in the delivery of approximately $134 billion in Title IV aid to over 14 million postsecondary
          students and their families. These students attend approximately 6,200 active institutions
   FY 2010                                            -6-                          Federal Student Aid Annual Report
Management’s Discussion and Analysis                                                                   Mission and Organizational Structure


          of postsecondary education accredited by dozens of agencies. Many of these students
          also received loans from 2,540 lenders with 33 agencies administering the guarantee on
          those loans.

          The following table presents a comparison of the amounts of Title IV aid disbursed by
          program in 2010 and 2009. A summary of each of the Title IV student assistance
          programs is presented in the paragraphs that follow the table.

                            Summary of Federal Aid Disbursed to Students by Program
                                                              (Dollars in Millions)

                                                                 2010                      2009
                                                             Aid Disbursed            Aid Disbursed                               Percent
          Programs                                            to Students              to Students          Difference           Increase
          Grant Programs

          Federal Pell Grant Program                           $      29,103           $     18,432           $ 10,671                58%

          Academic Competitiveness Grants                                  503                  343                  160              47

          National Science and Mathematics
          Access to Retain Talent Grants                                   361                  201                  160              80

          The Teacher Education Assistance for
          College and Higher Education Grants                               93                    44                  49              111

          Federal Supplemental Educational
          Opportunity Grants                                               959                  959                     -              -

          Leveraging Educational Assistance
          Partnerships Program                                             162                  162                     -

          Subtotal Grants                                      $      31,181           $     20,141           $ 11,040                55%


          Loan Programs

          Federal Perkins Loan Program                         $          1,042        $      1,103          $       (61)             (6%)

          Federal Direct Loan Program                                 80,559                 22,315               58,244              261

          Federal Family Education Loan Program                       19,909                 67,908              (47,999)             (71)

          Subtotal Loans                                        $    101,510           $     91,326          $    10,184              11%


          Work-Study Programs



          Federal Work-Study Program                           $          1,171        $      1,417          $      (246)         (17%)

          Grand Total                                          $     133,862           $   112,884           $    20,978              19%

          *Aid disbursed to students is based upon award year for all grants, except the Teacher Education Assistance for College and
          Higher Education Grants which is based upon fiscal year. Aid disbursed to students is based upon fiscal year for all loan
          programs, and Teacher Evaluation Assistance for College and Higher Education Grants.

   FY 2010                                                          -7-                                  Federal Student Aid Annual Report
Management’s Discussion and Analysis                                           Mission and Organizational Structure



          The Federal Pell Grant (Pell Grant) Program helps ensure financial access to
          postsecondary education by providing grant aid to low-income and middle-income
          undergraduate students. As the most need-based of the Department‘s student aid
          programs, Pell Grants vary according to the financial circumstances of students and their
          families. For the 2009–10 award year, the Department disbursed $29 billion in Pell Grants
          averaging approximately $3,591 to approximately 8 million students. The maximum Pell
          Grant award was $5,350 for the 2009–10 award year. The maximum Pell Grant award
          increased to $5,550 for the 2010–11 award year.

          The Academic Competitiveness Grant (ACG) and National Science and Mathematics
          Access to Retain Talent (SMART) Grant Programs were created by the Higher
          Education Reconciliation Act of 2005 (HERA), signed into law in 2006, and expire at the
          end of award year 2010-11. The ACG is for undergraduates who meet Pell Grant eligibility
          requirements. The student must have completed a rigorous high school program, as
          determined by the state or local education agency and as recognized by the Secretary.
          First-year students may receive an ACG award up to $750, whereas second-year students
          may receive up to $1,300 if they have maintained a cumulative grade point average of at
          least 3.0. The ACG award became available in the 2006–07 school year for first-year
          students who graduated high school after January 1, 2006, and second-year students who
          graduated high school after January 1, 2005. The ACG award is in addition to the
          student‘s Pell Grant award. For the 2009–10 award year, $503 million in ACG awards
          were disbursed to approximately 716,000 students.

          The National SMART Grant Program provides up to $4,000 to third- and fourth-year
          undergraduates, or fifth-year students in a five-year program, studying full-time and
          majoring in physical, life, or computer sciences, mathematics, technology, engineering, or
          a foreign language critical to national security. The student must meet Pell Grant eligibility
          requirements. The student must maintain a cumulative grade point average of at least 3.0
          for coursework required for the major. The grant award is in addition to the student‘s Pell
          Grant award. A student cannot receive more than one ACG or National SMART Grant
          award in each academic year for which they are eligible. For the 2009–10 award year,
          $361 million in National SMART grants were disbursed to approximately 139,000 students.
          Funding for the ACG and National SMART Grant Programs expires at the end of FY 2011.

          The Teacher Education Assistance for College and Higher Education (TEACH)
          Grant, originally authorized by the College Cost Reduction and Access Act of 2007
          (CCRAA), provides up to $4,000 per year to students agreeing to teach mathematics,
          science, or other specialized subjects in a high-poverty school for at least four years within
          eight years of their graduation. If students fail to fulfill the service requirements, TEACH
          Grants convert to Unsubsidized Stafford Loans, with interest accrued from the time of the
          award. This grant program began in the 2008–09 school year, starting July 1, 2008. In FY
          2010, the Department disbursed approximately 39,000 grants for almost $93 million under
          TEACH.

          The Federal Supplemental Educational Opportunity Grant, the Federal Work-Study
          (FWS) and the Federal Perkins Loan Programs are three campus-based programs
          through which the Department provides funds directly to eligible institutions, enabling them
          to offer grants, employment and low-interest loans to students based on need. For the


   FY 2010                                          -8-                          Federal Student Aid Annual Report
Management’s Discussion and Analysis                                           Mission and Organizational Structure


          2009–10 award year, approximately $3.2 billion were disbursed through approximately 2.6
          million campus-based awards.

          There are two state grant programs. The Leveraging Educational Assistance
          Partnership (LEAP) Program, authorized by Section 415A of the HEA, makes federal
          funds available to assist states in providing student financial assistance programs for
          individuals with substantial financial need. The Special Leveraging Educational
          Assistance Partnership (SLEAP) Program was added to the LEAP Program in the 1998
          Amendments to the HEA (Section 415E). SLEAP makes federal funds available to states
          to cover a third of the cost of supplementing their respective LEAP programs,
          supplementing their LEAP Community Service Work-Study programs and/or providing
          Merit and Academic Achievement or Critical Careers Scholarships to students with
          substantial financial need. For the 2009–10 award year, approximately $162 million in
          LEAP grants were disbursed to approximately 162,000 students. The 2010–2011 award
          year is the last award year in which states will be able to apply for SLEAP funding. The
          Grants for Access and Persistence (GAP) Program was authorized under section 415E of
          the HEA, which was amended as a result of the Higher Education Opportunity Act (HEOA)
          of 2008, and assists states in establishing partnerships to provide eligible students with
          LEAP Grants under GAP to attend institutions of higher education and to encourage
          increased participation in early information and intervention, mentoring, or outreach
          programs.

          In fulfilling its program responsibilities, FSA directly manages or oversees almost $722
          billion in outstanding loans—representing over 128 million student loans to more than 34
          million borrowers. These loans were primarily made through the two federal student loan
          programs described below:

          The William D. Ford Federal Direct Loan (Direct Loan sm) Program sm lends funds
          directly to students and parents through participating schools. Created in 1993, this
          program is funded by borrowings from the U.S. Department of the Treasury (Treasury), as
          well as an appropriation for subsidy costs. In FY 2010, the Department made $80.6 billion 1
          in net loans to 8.3 million recipients. With the enactment of the Student Aid and Fiscal
          Responsibility Act (SAFRA), as part of the Health Care and Education Reconciliation Act
          of 2010 (HCERA) (Pub. L. 111-152), beginning in July 2010 no new loans will be
          originated under the FFEL Program. This means that there will be a greater volume of
          Direct Loans. This transition from the FFEL Program to the Direct Loan Program resulted
          in a 261 percent increase in Direct Loan Program disbursements for FY 2010.

          Under the FFEL Program, students and parents obtained federal loans through lenders.
          Guaranty agencies insured these loans and were, in turn, reinsured by the federal
          government. In FY 2010, FSA supported the delivery of $19.9 billion2 in net loans to 2.4
          million FFEL borrowers. In addition, FSA made gross payments of approximately $3.9
          billion to lenders for interest and special allowance subsidies and $12.2 billion to guaranty
          agencies for reinsurance claims and fees paid to guaranty agencies for loan processing,
          issuance and account maintenance.



          1
             Excludes consolidation loans of $18.1 billion.
          2
             Excludes consolidation loans of $79.0 million.
   FY 2010                                                    -9-                Federal Student Aid Annual Report
Management’s Discussion and Analysis                                           Mission and Organizational Structure


          Although the passage of SAFRA ended the origination of new FFEL Program loans as of
          July 1, 2010, lenders and guaranty agencies will continue to service and collect
          outstanding FFEL Program loans. FFEL lenders and guaranty agencies held a FFEL
          Program loan portfolio of approximately $390 billion as of September 30, 2010.

          The Ensuring Continued Access to Student Loans Act of 2008 (ECASLA)

          Beginning in August 2008, the Department implemented a number of programs authorized
          under 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 and Loan
          Purchase Commitment Programs. 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
          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 was 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 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 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
   FY 2010                                        - 10 -                         Federal Student Aid Annual Report
Management’s Discussion and Analysis                                         Mission and Organizational Structure


          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 certain events, (for example,
          when a loan becomes 255 days delinquent). As of September 30, 2010, the Department
          has purchased $560 million 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.




   FY 2010                                       - 11 -                        Federal Student Aid Annual Report
Management’s Discussion and Analysis                                    Performance Goals, Objectives, and Results


          Performance Goals, Objectives, and Results

          In FY 2010, FSA began developing a new five-year strategic plan. Although this new plan
          was approved during FY 2010, implementation begins in FY 2011. For the purposes of this
          Annual Report, FSA is reporting performance against the targets identified in the FY
          2006–2010 Five-Year Plan.

          This section provides a high-level overview of FSA‘s FY 2010 performance objectives and
          results. The information provides a summary of FSA‘s achievements and progress in
          meeting both the organization‘s stated performance standards and those critical functions
          that were not included in the FY 2006–2010 Five-Year Plan.

          FSA has introduced many substantial and measurable improvements in how it plans and
          reports operational and portfolio performance in administering the federal student financial
          assistance programs since the organization became a PBO in 1998.

          Strategic Planning and Reporting. Several key strategic drivers form the scope and
          content of FSA‘s long-term goals and objectives:

             HEA legislation.
             Federal financial management laws and regulations.
             Student and borrower needs.
             Key trends and conditions for the student lending environment.
             The Department‘s Five-Year Strategic Plan.
             The Office of Inspector General‘s Management Challenges.
             The Office of Inspector General and Government Accountability Office (GAO) audits.

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

          FSA‘s core strategic objectives identified in the FY 2006–2010 Five-Year Plan are to:

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

          With the FY 2006–2010 Five-Year Plan, FSA established and documented strategic
          performance standards to measure the organization‘s success in meeting the stated long-
          term objectives.




   FY 2010                                        - 12 -                         Federal Student Aid Annual Report
Management’s Discussion and Analysis                                   Performance Goals, Objectives, and Results


          Performance Reporting. The Annual Report provides the mechanism for reporting the
          organization‘s annual performance results. It includes the organization‘s audited financial
          statements, a summary of the organization‘s progress in meeting strategic goals, and the
          detailed results of the organization‘s success in meeting performance standards
          established in the five-year plan.

          Key Performance Goals and Results

          This section provides a high-level overview of FSA‘s FY 2010 performance objectives and
          results. The information provides a summary of its achievements and progress in meeting
          the organization‘s stated performance standards.

          In the FY 2006–2010 Five-Year Plan, FSA established and documented strategic
          performance standards to measure the organization‘s success in meeting the stated long-
          term objectives. In that plan, FSA published targets for FY 2006–10. However, FSA has
          not updated that plan, performance standards have changed, and interim year targets,
          where developed, may not have been published. All targets referenced in this report,
          whether previously published or not, are aligned with the FY 2010 targets and gauge
          FSA‘s incremental progress in achieving its objectives.

          The underlying assumptions in FSA‘s performance planning and reporting processes stem
          from the Five-Year Plan and are based on current budgetary, operational and policy
          considerations. In FY 2010, the implementation of SAFRA required FSA to use its
          resources to ensure that students were able to access federal student loans for their
          postsecondary education. As a result, many previously identified tactical objectives were
          reprioritized contributing to the organization‘s inability to achieve many previously
          identified performance targets.

          Nonetheless, during FY 2010, FSA was successful in meeting several of its performance
          standards. For the most recent data available, FSA met targets for seven key measures
          and did not meet targets for eight measures. FSA measured performance for six measures
          that did not have standards or targets established.

          The actual results for each performance standard are presented in conjunction with each
          objective. The respective tables present whether the actual result met or failed to meet the
          target. In some cases, establishing a baseline is the target and is recognized as met if the
          baseline was established. Note: Because performance standards were established in the
          FY 2006–2010 Five-Year Plan, historical data may not be available for some of the
          indicated standards if the Department did not collect the data prior to FY 2007.

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




   FY 2010                                        - 13 -                        Federal Student Aid Annual Report
Management’s Discussion and Analysis                                 Performance Goals, Objectives, and Results


          The Performance Results Summary Table on the following page uses the following
          notations:

             ―Met‖ represents that performance results met or exceeded the target.
             ―Not met‖ represents that performance results fell short of the target.
             ―Improved‖ represents that the performance results improved over the prior year but
              fell short of the target.
             ―PM‖ represents that the metric was tracked, but targets were not established.
             ―NA‖ represents that the data is not available.




   FY 2010                                       - 14 -                       Federal Student Aid Annual Report
Management’s Discussion and Analysis                                    Performance Goals, Objectives, and Results


                         Performance Results Summary Table Fiscal Years 2008 – 2010


                     Performance Results Summary                  FY 2008      FY 2009       FY 2010

          Objective 1 – Integrate Federal Student Aid systems and provide new technology solutions.
          Integrated Partner Management (IPM)                      Not met      Not met         PM
          Integrate aid delivery systems                           Not met       Met            PM
          Acquisition strategy                                     Not met       Met            PM
          Infrastructure                                            Met          Met            PM
          Objective 2 – Improve program integrity to facilitate access to postsecondary education,
          while reducing vulnerability of the federal student financial assistance programs to fraud,
          waste, abuse and mismanagement.
          Cumulative Lifetime Default Rate (CLTDR) – Title IV
                                                                     PM           PM            PM
          student loan portfolio
          National Cohort Default Rate (CDR)                        Met         Not met       Not Met
          Direct Loan default recovery rate                         Met         Not met       Not Met
          FFEL default recovery rate                                Met         Not met        Met
          Objective 3 – Reduce program administration costs.
                                    sm
          Reduce electronic FAFSA direct unit cost                  Met          Met           Met
          Reduce origination and disbursement direct unit cost      Met          Met           Met
          Reduce Direct Loan servicing direct unit cost           Improved     Improved       Not Met
          Reduce collections direct unit cost                      Not met     Improved       Not Met
          Objective 4 – Improve human capital management.
          Leadership training                                       Met         Not met       Not met
          Acquisitions training                                     Met          Met           Met
          Project management training                              Not met       Met           Met
          FSA business knowledge training                          Not met      Not met       Not met
          School compliance officials training                     Not met      Not met       Not met
          General workforce training                               Not met      Not met       Not met
          Objective 5 – Improve products and services to provide better customer service.
          Student aid application                                   Met           Met           Met
          Lender payment processing                                 Met           PM            Met
          Direct Loan borrower servicing                            Met           PM            PM

          In addition to the above performance results, FSA successfully implemented SAFRA.
          Congress passed SAFRA in March 2010. SAFRA included significant changes to the Title
          IV Programs. Most notably, as of July 1, 2010, under provisions of SAFRA, no new loans
          will be originated under the FFEL Program. This resulted in a greater volume of Direct
          Loan originations. FSA prepared for these changes and was successful in the full
          implementation within a short timeframe. In order to meet the July 1, 2010 date, FSA
          revised its performance plans and reassessed priorities.




   FY 2010                                           - 15 -                      Federal Student Aid Annual Report
Management’s Discussion and Analysis                                     Performance Goals, Objectives, and Results



          Achievements in Support of Federal Student Aid Strategic Goals

          Objective 1: Integrate Federal Student Aid systems and provide new technology
          solutions. In FY 2010, FSA continued its focus on integration initiatives designed to
          improve accuracy and availability of the most critical information maintained throughout
          the financial aid lifecycle, specifically, borrower, school, and financial partner data. These
          initiatives are coordinated to present a more integrated and, thus, holistic view of borrower
          information to a variety of stakeholders within FSA and the financial aid community. FSA
          continued to establish the components of its new procurement and management approach
          to business application development.

          Objective 2: Improve program integrity to facilitate access to postsecondary
          education, while reducing the vulnerability of the federal student financial
          assistance programs to fraud, waste, abuse, and mismanagement. FSA improved its
          oversight of schools by partnering with and utilizing the data of other federal agencies that
          have monitoring responsibilities of postsecondary institutions. FSA enhanced referral
          processes between FSA‘s Business Operations and Program Compliance offices, to more
          aggressively identify schools with program operational problems that may impact program
          integrity. Additionally, FSA continued to effectively monitor lenders, guaranty agencies and
          servicers that participate in the FFEL Program. Internally, FSA established the Enterprise
          Risk Management Group (ERMG) to better identify, understand, and mitigate all enterprise
          risks (operational, loan portfolio/credit, and market risks).

          Objective 3: Reduce program administrative costs. FSA continued to focus on
          reducing costs through efficiency and productivity gains that could be achieved throughout
          the organization. In 2010, FSA experienced significant increases in workload volumes
          across several FSA programs and processes. This included an increase of approximately
          12 percent in FAFSA applications processed, an increase of 137 percent3 in the number of
          schools originating loans in the Direct Loan Program, and an increase of 64 percent4 in
          Pell Grants disbursed. FSA anticipates these and other workload volumes will continue to
          increase in the coming years, driving down unit costs but increasing gross costs. In the
          future, FSA will look at a more balanced approach to cost management to ensure a ―best
          value‖ proposition to the government and its customers. This approach will consider
          several variables to gauge cost management including measurement of unit cost and the
          relative impact of unit cost fluctuations on programmatic and systemic risk as well as
          customer service levels, among others.

          Objective 4: Improve human capital management. In FY 2010, FSA made progress
          towards improving the work environment and engaging employees through four initiatives,
          which included: developing new vision, core values, and mission statements for the
          organization; redesigning the hiring process; designing a reward and recognition program;
          and designing an internal communication system. VVM workshops were conducted in
          February and March of 2010 to engage employees in shaping the new vision, core values,
          and mission described earlier in this report. In an effort to rapidly fill the current vacancies
          and increase the staff for strategically important areas, the Human Resources office also
          reviewed and improved the recruiting and employee orientation processes.

          3
           Represents the increase between the 2008-09 award year and the 2009-10 award year.
          4
           Represents the increase between the 2008-09 award year and the 2009-10 award year.
   FY 2010                                        - 16 -                        Federal Student Aid Annual Report
Management’s Discussion and Analysis                                   Performance Goals, Objectives, and Results


          Objective 5: Improve products and services to provide better customer service. In
          FY 2009, the President called for all Americans to seek at least one year of postsecondary
          education5. FSA‘s response to this charge was to improve access to a college education
          by making the FAFSA easier to complete. During FY 2010, FSA continued to simplify the
          application, by implementing 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. In the 2009–10 award year, over 30 percent of eligible
          applicants used this new functionality.

          Another priority of the new administration was to provide greater transparency in
          government. FSA expanded its online data center to provide the public with access to
          information on the most requested information, including Clery Act program reviews,
          financial composite scores and Direct Loan Program transition reports.

          In addition to the initiatives mentioned above, FSA continued to increase awareness about
          the availability of student financial assistance by: leveraging a public service campaign;
          providing issue resolution resources to student borrowers via the FSA Ombudsman; and
          modifying systems and processes to support the increase in Direct Loan originations and
          servicing.

          Quality of Performance Data

          FSA developed a matrix as guidance for data providers who have the responsibility for
          reporting data in performance measures, to evaluate and identify issues of data integrity
          and credibility. The matrix provides a framework for validating and verifying performance
          data before it is consolidated and reported.

          The data validation criteria require that:

               The goal and measure are appropriate to the mission of the organization and
                measured performance has a direct relation to the goal.
               The goal and measure are realistic and measurable, achievable in the time frame
                established, and challenging in their targets.
               The goal and measure are understandable to the lay person, language is
                unambiguous, and terminology is adequately defined.
               The goal and measure are used in decision making about the effectiveness of the
                program and its benefit to the public.

          The metrics employed to measure success are directly related to each of the objectives.
          As an example, targets for each of the metrics have been set at challenging, but realistic
          levels that are achievable within the time horizon.




          5
              http://www.whitehouse.gov/issues/education/

   FY 2010                                             - 17 -                   Federal Student Aid Annual Report
Management’s Discussion and Analysis                                    Performance Goals, Objectives, and Results


          FSA believes that the goals for each objective and the associated performance metrics
          and targets are understandable; however, there are opportunities for improving the
          explanation of these relationships in future editions of its performance plans.

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




   FY 2010                                        - 18 -                         Federal Student Aid Annual Report
Management’s Discussion and Analysis                             Analysis of Federal Student Aid’s Financial Statements



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

          In FY 2010, FSA achieved an unqualified audit opinion on its financial statements. The
          Independent Auditor‘s Report cited no material weaknesses in internal control.

          For FY 2010 and FY 2009, the Balance Sheet, Statement of Net Cost, and Statement of
          Changes in Net Position were prepared on a consolidated basis, whereas the Statement
          of Budgetary Resources was prepared on a combined basis as required by the OMB
          Circular A-136, Financial Reporting Requirements. The Report of Independent Auditors
          (Opinion) on these statements and accompanying Reports on Internal Control and
          Compliance with Laws and Regulations are included in this report.

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

          A comparison between significant line items reported in FSA‘s FY 2010 and FY 2009
          September financial statements is presented in the following table:

                              Summarized Financial Data as of September 30, 2010
                                                (Dollars in Millions)

                                   Percentage       Dollar
                                                                        FY 2010           FY 2009
                                    Change        Difference

          Total Assets                39.5%        $120,182             $424,169          $303,987


          Total Liabilities           49.4%        $136,786             $413,722          $276,936


          Net Position               (61.4)%       $(16,604)            $ 10,447          $ 27,051


          Net Cost of Operations     235.1%         $ 34,246            $ 19,677         $ (14,569)




   FY 2010                                        - 19 -                            Federal Student Aid Annual Report
Management’s Discussion and Analysis                         Analysis of Federal Student Aid’s Financial Statements


          The Balance Sheet
          Composition of FSA Assets

          The Consolidated Balance Sheet shows FSA had total assets of $424.2 billion, as of
          September 30, 2010. This represents an increase of $120.2 billion over the previous
          year‘s total assets of $304.0 billion, as of September 30, 2009. The difference resulted
          primarily from an increase in the Credit Program Receivables net of a decrease in the
          various programs‘ Fund Balances with Treasury.


                                        Composition of FSA Assets
                                         as of September 30, 2010

                   Fund Balance with
                       Treasury
                        12.6%                                                    Credit Program
                                                                                  Receivables
                         Remaining                                                   86.6%
                          Assets
                           0.8%




          Fund Balance with Treasury decreased by $13.3 billion from September 30, 2009 to
          September 30, 2010. The Direct Loan fund balance increased by $3.2 billion, or 43.5
          percent, primarily as a result of the SAFRA legislation, which requires all new federal
          student loan disbursements to be from the Direct Loan Program, eliminating new loan
          disbursements under the FFEL Program. The FFEL fund balance decreased by $7.3
          billion, or 24.2 percent, primarily as a result of a reduction in new borrowings used to
          support the FFEL Program, as a result of the enactment of SAFRA. The fund balances for
          the Loan Purchase and Loan Participation Purchase Programs also all decreased slightly.

          Credit Program Receivables, net of subsidy allowance, increased by $133.5 billion over
          the September 30, 2009 total. Credit Program Receivables are comprised of principal,
          interest and fees owed by students for Direct Loans, TEACH Grants, Perkins loans, and
          FFEL loans under the Conduit, Loan Participation Purchase, Loan Purchase Commitment,
          and defaulted guaranteed loans. As of September 30, 2010, the Credit Program
          Receivables‘ balance was $367.4 billion – the majority of which were Direct Loan Program
          receivables, Loan Participation Purchase and Loan Purchase Commitment Programs and
          defaulted FFEL loans receivables.




   FY 2010                                        - 20 -                        Federal Student Aid Annual Report
Management’s Discussion and Analysis                          Analysis of Federal Student Aid’s Financial Statements


          Receivables, net of the allowance for subsidy, increased primarily due to two factors. As a
          result of the enactment of the SAFRA legislation and the liquidity crisis in the financial
          markets, there has been a large influx of schools and participants into the Direct Loan
          Program, resulting in a significant increase in new loan originations, and an increase in the
          receivable balance of $75.4 billion, or 49.4 percent. Also, the continuation of the Loan
          Participation Purchase and Loan Purchase Commitment Programs, as well as the
          implementation of the ABCP Conduit Program, allowed FSA to purchase existing loans
          from FFEL loan holders.

          Receivables of defaulted guaranteed FFEL Program loans, net of allowance for subsidy,
          increased because of continued growth in the average amount of loans, growth in online
          schools, economic hardship and the expiration of both the Exceptional Performer
          designation and the Voluntary Flexible Agreements.

          Composition of FSA Liabilities

          FSA had total liabilities, as of September 30, 2010, of $413.7 billion, an increase of $136.8
          billion over the previous year‘s total liabilities. The difference resulted primarily from an
          increase in Debt due to Treasury, Accounts Payable and Other Intragovernmental
          Liabilities offset by a decrease in the Liabilities for Loan Guarantees.

          Debt increased as a result of the new borrowings to support the growing loan volume in
          the Direct Loan Program, an $83.0 billion increase, and new debt for the Loan
          Participation Purchase, Loan Purchase Commitment, ABCP Conduit and FFEL Programs.
          Other Intragovernmental Liabilities increased primarily as a result of the Direct Loan
          downward subsidy re-estimates. Net subsidy-related transactions resulted in a reduction of
          the Liability for Loan Guarantees.

                                       Composition of FSA Liabilities
                                         as of September 30, 2010
                    Liabilities for Loan                      Remaining Liabilities
                       Guarantees                                    3.1%
                            3.5%



             Other Intragovernmental
                       3.1%


                                                                                      Treasury Debt
                                                                                         90.3%




   FY 2010                                        - 21 -                          Federal Student Aid Annual Report
Management’s Discussion and Analysis                              Analysis of Federal Student Aid’s Financial Statements


          Statement of Net Cost

          Through September 30, 2010, net costs reflected an increase of $34.2 billion from the
          previous year‘s total net cost of $(14.6) billion. This included a significant increase in net
          costs for the Direct Loan, FFEL, Grant and Other Programs, including the American
          Recovery and Reinvestment Act (Recovery Act) of 2009. The negative net cost amounts
          for FFEL and Direct Loan, as shown in the table below, are due to expenses for downward
          subsidy re-estimates, resulting in negative gross costs. Subsidy expenses are the
          estimated costs of funding the Direct Loans and loan guarantees. The amount of the
          subsidy expense equals the present value of estimated cash outflows over the life of the
          loans minus the present value of estimated cash inflows. Additional gross costs represent
          the funding of grants under the Pell Grant Program and the Recovery Act.

                                         Composition of FSA’s Net Cost
                                     for the Year ended September 30, 2010
                                                  (Dollars in Millions)

             $30,000                                  Grant Programs
                                                         $26,750
             $25,000

             $20,000

             $15,000
                                                                                           Recovery Act
             $10,000                                                                          $8,920

              $5,000       FFEL        Direct Loans                       Other Programs
                         ($15,332)       ($1,567)                              $906
                  $0

              ($5,000)

             ($10,000)

             ($15,000)

             ($20,000)



          Statement of Changes in Net Position

          FSA‘s net position as of September 30, 2010, was $10.5 billion, a decrease of $16.6 billion
          over the previous year‘s total net position of $27.1 billion. The difference is primarily due to
          subsidy re-estimates and the unexpended appropriations for the various programs.




   FY 2010                                            - 22 -                               Federal Student Aid Annual Report
Management’s Discussion and Analysis                         Analysis of Federal Student Aid’s Financial Statements


          Statement of Budgetary Resources

          The Statement of Budgetary Resources compares the budgetary resources provided with
          the status or execution of those resources. It also details the composition of the resources
          and shows the amount of net outlays. This statement shows that FSA had $280.7 billion in
          combined budgetary resources, of which $18.0 billion remained unobligated and not
          available.

          FSA had total net outlays as of September 30, 2010, of $156.2 billion. There was an
          increase in total net outlays of $50.5 billion comparing September 2010 to September
          2009. Net outlays increased primarily as a result of the enactment of the SAFRA
          legislation, which requires most new federal student loans to be from the Direct Loan
          Program.

          Gross outlays for FSA increased $54.0 billion comparing September 2010 to September
          2009 due to increased loan originations and consolidations in the Direct Loan Program.




   FY 2010                                        - 23 -                        Federal Student Aid Annual Report
                                                                   Analysis of Federal Student Aid’s Systems, Controls and Legal
Management’s Discussion and Analysis
                                                                   Compliance


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

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

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

                Effectiveness and efficiency of operations, including the use of the entity‘s resources.
                Reliability of financial reporting, including reports on budget execution, financial
                 statements and other reports for internal and external use.
                Compliance with applicable laws and regulations.6

          FSA management is responsible for establishing and maintaining effective internal control
          and financial management systems that meet the objectives of the Federal Managers’
          Financial Integrity Act of 1982. FSA conducted its assessment of the effectiveness of
          internal control over the effectiveness and efficiency of its operations and compliance with
          applicable laws and regulations in accordance with OMB Circular A-123, Management’s
          Responsibility for Internal Control. Based on the results of this assessment, FSA reported
          to the Department‘s management that its internal control over the effectiveness and
          efficiency of its operations and compliance with applicable laws and regulations, as of
          September 30, 2010, were operating effectively.

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




          6
              GAO Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1, November 1999, p. 4-5.


   FY 2010                                                     - 24 -                                Federal Student Aid Annual Report
                                                     Analysis of Federal Student Aid’s Systems, Controls and Legal
Management’s Discussion and Analysis
                                                     Compliance

             Conditional Disability Discharge.
             ABCP Conduit Program.
             Debt Collection.
             Direct Loans – Servicing.
             Financial Partner Invoicing.
             Financial Partner Oversight.
             Financial Reporting.
             Funds Control Management.
             Information Technology (IT)/General Computer Controls, Financial Management
              System (FMS), Common Origination and Disbursement (COD) System, Direct Loan
              Consolidation System, Direct Loan Servicing System, Debt Management and
              Collection System (DMCS), Virtual Data Center.
             Pell Grant Program Operations.
             Portfolio Performance Division Operations.
             Procurement Management.
             School Eligibility Channel.
             Student Eligibility.
             Title IV Additional Servicers (TIVAS).

          Based on the results of this evaluation, FSA provided reasonable assurance to the
          Department's management that its internal control over financial reporting as of June 30,
          2010 was operating effectively and no material weaknesses were found in the design or
          operation of the internal control over financial reporting.

          FSA‘s participation in the Department's successful implementation of the requirements of
          OMB Circular A-123, Appendix A, enables it to continue to build upon its internal control
          framework. This framework will be used in continuing efforts to monitor and improve
          internal control.

          Please refer to the Department's Agency Financial Report (AFR) for information related to
          the Department's compliance with the Federal Financial Management Improvement Act of
          1996.




   FY 2010                                       - 25 -                         Federal Student Aid Annual Report
Management’s Discussion and Analysis                        Possible Future Effects of Existing Events and Conditions



          Possible Future Effects of Existing Events and Conditions

          The passage of SAFRA during FY 2010 resulted in FSA significantly altering its tactical
          plans. There are a number of possible future effects of existing events and conditions that
          FSA is tracking that may have an impact on its FY 2011 tactical plans. These events
          include the following:

          Final FY 2011 Student Aid Administration Appropriation level. With the passage of
          SAFRA, the Congressional Budget Office estimates that the Federal government will save
          $68 billion between FY 2010 and FY 2020. The Congressional Budget Office also
          estimates that the Federal government will need to spend $6 billion over that same time
          period to cover the increased Direct Loan program administration cost resulting from
          increased Direct Loan volume. Prior to SAFRA, the program administration costs
          associated with this savings were paid for through mandatory FFEL funding. Meanwhile,
          the Federal government is under significant pressure to reduce discretionary spending. If
          FSA does not receive the necessary funding in the Student Aid Administration
          appropriation to cover this anticipated increase in administrative costs, then FSA will need
          to revisit its tactical plans for FY 2011.

          Implementation of Not-For-Profit (NFP) servicers. FSA has issued a request for
          proposal for any eligible NFP servicer, as defined by SAFRA, to offer loan servicing
          activities. Final planning for the implementation of the NFP servicers is dependent on the
          contracts that are awarded.

          Risks associated with variability of volume-driven costs. Many of FSA‘s costs are
          driven by volume activities, such as grant/loan origination and disbursement, and loan
          servicing. For example, loan servicing costs are driven by the number of borrower
          accounts, the status of a borrower‘s loan(s) (e.g. In-School, Repayment,
          Deferment\Forbearance), and when the borrowers‘ loans are disbursed. Grant and loan
          origination and disbursement costs are driven by the number of originations and
          disbursements. The budgeting formulation process generally sets the initial budget for a
          fiscal year 18 months before the start of that fiscal year. However, even a small variation in
          any of FSA‘s volumes can significantly impact its budget. This puts all other expenditures
          and plans associated with those expenditures at-risk. This risk must be managed as long
          as the Federal government pays for mandatory Direct Loan expenditures using
          discretionary administration funding.

          Final Gainful Employment regulations. During FY 2012, FSA is expected to need to
          implement regulations that take into account the debt burden incurred by students in
          determining whether certain institutions are eligible to participate in the Title IV Programs.
          During FY 2011, FSA may need to commit resources to prepare for this task.

          Final determination about transitioning Health Education Assistance Loan (HEAL)
          program to Federal Student Aid. The Departments of Labor, Health and Human
          Services, and Education, and Related Agencies Appropriations Act, 2011 passed by the
          U.S. Senate requires the transfer of the HEAL program from the Department of Health and
          Human Services to the Department of Education, to be administered by FSA. If this
          provision is enacted, FSA will need to plan for and transition this program.


   FY 2010                                         - 26 -                         Federal Student Aid Annual Report
Management’s Discussion and Analysis                                         Limitations of Financial Statements



          Limitations of Financial Statements

          Management has prepared the accompanying financial statements to report the financial
          position and operational results for FSA, for FY 2010 and FY 2009 pursuant to the
          requirements of title 31 of the United States Code (U.S.C.), Section 3515(b).

          While these statements have been prepared from the books and records of FSA 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 for FSA, 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.




   FY 2010                                       - 27 -                       Federal Student Aid Annual Report
Management’s Discussion and Analysis            Limitations of Financial Statements




   FY 2010                             - 28 -   Federal Student Aid Annual Report
Annual Program Performance Report


          Annual Program Performance Report




   FY 2010                          - 29 -    Federal Student Aid Annual Report
Annual Program Performance Report




   FY 2010                          - 30 -   Federal Student Aid Annual Report
Annual Program Performance Report                                                     Annual Program Performance



       Annual Program Performance

       During FY 2010, FSA achieved significant accomplishments. The information presented
       herein provides details of FSA‘s achievements, by objective. For each objective, the
       corresponding Performance Standard has been identified, as well as the organization‘s
       progress in meeting the stated target. A narrative providing information on the data quality
       and analysis of progress is also presented under each objective. Unless otherwise noted,
       these performance standards and their respective ratings are based on criteria established
       by FSA.

       The performance results for each objective are presented in tables that provide trend data
       including the latest available reported data. The Performance Column shows the
       relationship between the FY 2010 actual value and target as follows:

          "Met" represents that performance results met or exceeded the target.
          "Not met" represents that performance results fell short of the target.
          "Improved" represents that the performance results improved over the prior year but
           fell short of the target.
          "PM" represents that the metric was tracked, but targets were not established.
          "NA" represents that the data is not available.

       An analysis of progress is provided as insight into FSA's progress. Data quality
       incorporates information such as the universe included in the measure, while target
       context explains the parameters or rationale or the targets.

       The Goals, Objectives and Results used to report FY 2010 performance are from the
       FY 2006–2010 Five-Year Plan. FSA anticipated developing and implementing a new
       five-year strategic plan during FY 2010. Although FSA developed and finalized this new
       plan in FY 2010, implementation begins in FY 2011. Therefore, FSA will report its FY 2010
       performance against the FY 2006–2010 Five-Year Plan.

       The Goals, Objectives and Results presented in this report terminated effective September
       30, 2010. They will be replaced based on the new Strategic Plan, FY 2011–15. Some
       items may be similar to new targets identified.

       Objective 1: Integrate Federal Student Aid systems and provide new
       technology solutions.
       In FY 2010, FSA continued to focus on integration initiatives designed to improve the
       accuracy and availability of the most critical information maintained throughout the
       financial aid lifecycle: specifically borrower, school, and financial partner data. These
       initiatives are coordinated to present a more integrated and thus, holistic view of borrower
       information to a variety of stakeholders within FSA and the financial aid community. FSA
       also continued to establish the components of its new procurement and management
       approach to business application development.




FY 2010                                        - 31 -                        Federal Student Aid Annual Report
Annual Program Performance Report                                                     Annual Program Performance



       The following narrative provides the details of FSA‘s achievements related to this
       objective.

       National Student Loan Data System (NSLDS)

       The development of the NSLDS was mandated by Congress in the HEA. NSLDS aims to
       collect, store and make available to authorized users detailed data about a recipient‘s Title
       IV aid. In addition, it simplifies and streamlines aid delivery processes used by schools,
       lenders and guarantors throughout the country, replacing paper driven techniques with an
       efficient online interface. Since its introduction, FSA has continuously improved NSLDS‘s
       functionality, and FY 2010 was no exception. In FY 2010, the four new student loan
       servicers started reporting loans to NSLDS through a new interface that improved the
       efficiency of data collection, timeliness of reporting, and ability to monitor portfolio and
       contractor performance. Also, NSLDS developed a new exit counseling module for
       borrowers to use on the NSLDS student web site, which was necessary to support both
       additional servicing capacity and the expansion of the Direct Loan Program. In addition, in
       FY 2010, four reengineering tasks were awarded that will:

          integrate NSLDS with a new DMCS that is being built;
          reengineer the business process for enrollment reporting to improve the collection and
           dissemination of enrollment statuses;
          implement a 3-year CDR calculation as required by statutory changes from the HEA;
           and
          modernize the structure of the NSLDS database, to enable adaptation to data
           standards, improve overall quality of the data, provide a common data framework to be
           used across aid programs for consistency, and increase data storage efficiency.

       Debt Management and Collection System
       The DMCS is used to manage and collect defaulted debt held by the Department from
       borrowers. System activities include generating Department collection correspondence to
       borrowers and supporting collection by Administrative Wage Garnishment, Treasury and
       Federal Salary Offset, as well as credit bureau reporting. Since DMCS was built in June
       1989, the system has become very costly to maintain and many manual workarounds
       have been developed to address emerging requirements. In June 2010, FSA negotiated
       with the Common Services for Borrowers (CSB) contractor to upgrade DMCS at no cost to
       the government and to provide the DMCS ―services‖ to the Department on a per-borrower
       basis. The new DMCS will be based on a commercially available off-the-shelf software
       package that will automate the workflow processes and provide a new web portal interface
       for borrowers, schools, employers, and guaranty agencies. The reengineering project was
       started in June 2010 and implementation is planned for January 2011, with full conversion
       of all defaulted debt to the new system by the end of June 2011.

       Integrated Partner Management
       Currently, many FSA applications support the eligibility, enrollment, and oversight of
       support organizations participating in the Title IV Programs, such as postsecondary
       institutions, servicers, lenders, and guaranty agencies. These individual applications result
       in duplicative and conflicting data storage issues, complex system architecture, excessive
FY 2010                                        - 32 -                        Federal Student Aid Annual Report
Annual Program Performance Report                                                     Annual Program Performance


       file exchange activities, and an absence of a centralized view of partners. Through
       process reengineering, automation, and integration of FSA‘s core systems, IPM will
       provide improved eligibility, enrollment, and oversight processes for Title IV partners in a
       consolidated solution. IPM will improve information security through a single point of
       access and increase efficiency by employing a modernized and scalable system platform
       to facilitate the receiving and processing of information from partners via a web-based
       application.

       In FY 2010, the IPM Project finished the requirements and functional design phase, which
       consisted of completing business requirements, business functional design development,
       test scripts, and the logical data model design. The requirements and functional design
       documentation are now being used for the acquisition segment of the design, development
       and implementation work for the subsequent phases of the project. The Design,
       Development, and Implementation contract was awarded at the end of FY 2010.

       Project Management and Governance
       In FY 2010, FSA made a commitment to implement highly effective and disciplined Project
       Portfolio and Project Management practices. These actions included establishing the
       Strategic Investments Governance (SIG) office under the Chief Performance Officer. The
       SIG office provides Senior Program and Project Managers to manage FSA's complex
       projects, ensuring that project management standards and principles are consistently
       followed in the planning and execution of projects. In addition to the organizational
       changes, recruitment and integration of subject matter experts is critical to realizing the
       business objectives. Preliminary hiring efforts were completed in the fourth quarter of FY
       2010 with additional foundational hiring expected to continue in FY 2011. Additionally, in
       FY 2010, FSA established and implemented a Project Management Toolkit, which
       consists of a set of project management planning and execution methodologies that align
       to the Project Management Body of Knowledge, the world standard for project
       management.




FY 2010                                        - 33 -                         Federal Student Aid Annual Report
Annual Program Performance Report                                                                                     Annual Program Performance


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

   Objective 1 Performance Metrics and Results
                     FY          FY              FY                        FY                FY 2010                 FY 2010
     Metric                                                                                                                              Performance
                    2006        2007            2008                      2009               (Target)                 (Actual)
      IPM          Design       In        Development       Completed evaluation and           PM         The IPM Project finished            PM
                             develop-     terminated.       inventory to determine                        the Requirements and
                              ment        New approach      usability of current                          Functional Design Phase,
                                          and timeline      requirements and                              which consisted of
                                          developed.        development by 1/31/09;                       completing business
                                                            awarded contract on                           requirements, business
                                                            9/25/09 to complete                           functional design
                                                            requirements and                              development, test scripts,
                                                            functional design.                            and the logical data
                                                                                                          model design. The
                                                                                                          Design, Development and
                                                                                                          Implementation contract
                                                                                                          was awarded at the end
                                                                                                          of FY 2010.
  Integrate aid             Strategies    Issued            High Level Requirements            PM         Implemented new                     PM
     delivery        *      completed     request for       were developed for                            interface to allow TIVAS
    systems                               information       NSLDS redesign and                            to report loans to NSLDS.
                                          with a draft      used to make an award                         Developed new Exit
                                          statement of      for design and build of                       Counseling capability for
                                          work for          phase I of the NSLDS                          borrowers to use on the
                                          person data       reengineering project.                        NSLDS student website.
                                          management.                                                     Awarded four
                                          High level        High level requirements                       reengineering tasks.
                                          planning          were drafted for DMCS                         Negotiated with the CSB
                                          completed.        and used to issue a                           contractor to upgrade the
                                                            sources sought possible                       DMCS at no cost to the
                                                            vendors. A contract was                       government and acquire
                                                            also awarded to form                          DMCS ―services‖ on a per
                                                            more detailed                                 borrower basis.
                                                            requirements to issue a
                                                            request for proposal in FY
                                                            2010 for a collections
                                                            services contract.
  Acquisition               Approach      Developer         Additional loan servicing          PM                    NA**                     PM
   strategy          *         and        pool              vendors established;
                             timeline     established.      Enterprise Development
                            completed     Customer          Support Services (EDSS)
                                          care not          Project and Program
                                          complete.         Management vehicle
                                                            established; EDSS
                                                            requirements vehicle
                                                            solicitation published;
                                                            EDSS testing vehicle
                                                            solicitation published.
  Infrastructure             Phase 1     Deployed           Worked with development           PM                      NA**                      PM
                     *      completed    enterprise         initiatives to establish plan
                                         portal             for integration with portal
                                         infrastructure     and ESB as appropriate.
                                         Enterprise
                                         Services
                                         Business
                                         (ESB).
 * Data is not available because 1) the Department was not collecting this data during the fiscal year indicated, 2) the project did not exist or 3)
 the performance standard had not been established. **Acquisition strategy and Infrastructure were not measured in FY 2010 because these
 were not key elements in expanding the Direct Loan Program. However, in the future, the acquisition strategy will change in scope and become
 an important factor in the way that FSA delivers products and services.


FY 2010                                                           - 34 -                                   Federal Student Aid Annual Report
Annual Program Performance Report                                                    Annual Program Performance


       Data Quality: IPM and Integrated aid delivery systems deliverables were achieved upon
       the completion of the prescribed phases of the corresponding projects.

       Analysis of Progress: While the objectives of several of FSA‘s integration projects
       remain the same, the development and procurement strategies changed. FSA discovered
       that large contracts requiring multiple business capabilities and supporting a complex and
       multi-faceted business processes do not necessarily provide FSA with the best solution
       providers from the marketplace. In addition, the lack of post-award competition led to
       price, quality, and innovation issues, preventing FSA from being able to quickly transition
       services, potentially putting its business at risk.

       Target Context: In the FY 2006–2010 Five-Year Plan, FSA established and
       documented strategic performance standards and targets to measure the organization‘s
       success in meeting the stated long-term objectives. Any revisions to the original FY 2010
       targets may not have been published, since FSA has not updated this plan.

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

       In FY 2010, FSA improved its oversight of schools by partnering with and utilizing the data
       of other federal agencies that have monitoring responsibilities of postsecondary
       institutions. FSA enhanced program review standards to strengthen monitoring of distance
       education programs. Additionally, FSA continued to effectively monitor lenders, guaranty
       agencies and servicers that participate in the FFEL Program. During FY 2010, FSA
       continued to focus its efforts in several areas including training and outreach, privacy and
       data protection, risk management, partnership with other departments and agencies,
       comprehensive compliance reviews (CCRs), 9.5 percent Special Allowance Payments
       (SAP), and accessibility to program data.

       The following narrative provides the details of FSA‘s achievements related to this
       objective.

       Privacy and Data Protection
       In March 2010, Education Credit Management Corporation (ECMC), a guarantor of federal
       student loans in the FFEL Program, discovered that two locked safes had been stolen
       from a secured facility at its corporate headquarters in Oakdale, Minnesota. The stolen
       items included personally identifiable information – names, addresses, dates of birth and
       social security numbers for approximately 3.3 million individuals. Once contacted by
       ECMC, the Department‘s Privacy Incident Response Team was convened. The team
       performed an on-site evaluation of the incident location and found reasonable security at
       the site, but was able to provide some additional control recommendations. The data was
       recovered within 48 hours of the theft and law enforcement officials believe the data had
       not been compromised, so no impact from the personally identifiable information theft is
       anticipated.

       As a follow-up to this incident, the Department and FSA developed an IT security self-
       examination checklist that all guaranty agencies were required to complete. Department
FY 2010                                         - 35 -                     Federal Student Aid Annual Report
Annual Program Performance Report                                                      Annual Program Performance


       and FSA IT Staff hosted a Security Summit for guaranty agencies at which ECMC
       provided a detailed briefing on the incident and the steps taken to ensure that the incident
       had no negative impact on borrowers. At the conference, experts from the National
       Institute of Standards and Technology, the Department‘s Office of Inspector General, and
       outside experts in areas of security best practices provided insight and advice to those in
       attendance. FSA plans to continue site visits to all guaranty agency locations, beginning
       with those at the highest risk, based on their response to the checklists provided.

       Risk Management
       During FY 2010, the ERMG began a transformation under an expanded framework to
       move from basic risk assessments to develop a best-in-class, risk-based, decision support
       framework. All key business unit oversight, program compliance, and assurance functions
       are being aligned under this expanded model with reporting and key activities also
       consolidated into the ERMG Office, led by a new Chief Risk Officer who reports directly to
       FSA‘s COO. The change ensures that all enterprise risks (operational, loan portfolio/credit,
       and market risks) are better identified, understood, and mitigated. During FY 2010, special
       focus was given to coordinating risk assurance activities across the organization and
       providing clear visibility into key risks and mitigation status.
       Partnership with Other Federal Agencies
       FSA entered into several partnerships with other agencies, such as the Department of
       Labor, the Securities and Exchange Commission, and the Federal Trade Commission, to
       share information in order to improve compliance and monitor consumer complaints. Other
       partnerships, such as with the Federal Bureau of Investigation, resulted in joint efforts to
       conduct program reviews, including campus security program reviews.

       Comprehensive Compliance Reviews

       FSA reviews schools‘ eligibility, financial statements, and deficient audits and program
       reviews as part of a CCR. In FY 2010, FSA conducted 2,923 CCRs. These CCRs were
       performed on schools that constituted 46 percent of participating schools and accounted
       for 47.5 percent of total Title IV funding. Liabilities were identified where audit or program
       review findings revealed non-compliance. In addition, 53 reviews were conducted on
       financial institutions to examine compliance with the Title IV Program requirements. FSA
       conducted reviews of 11 servicers: 7 commercial servicers and the 4 Departmental loan
       servicers. The most frequent finding was inconsistent reporting to the Lender Application
       and Reporting System and NSLDS. In FY 2010, FSA resolved 634 audits of lenders,
       guarantors, and lender and guarantor servicers. This number includes audits that were
       received in prior fiscal years, but were resolved in 2010. Approximately 22 percent of
       these audits resulted in findings. The most common findings were related to over or under
       billing as a result of interest and/or SAP.

       Special Allowance Payments

       Special allowance payments are a Federal subsidy authorized by Section 438 of the HEA
       for FFEL Program lenders. Its purpose is to compensate lenders during periods when
       federally-mandated student loan rates do not by themselves provide the lender a rate of
       return on the loan comparable to that return which the lender might obtain from other loans
       in light of prevailing interest rates.
FY 2010                                         - 36 -                        Federal Student Aid Annual Report
Annual Program Performance Report                                                      Annual Program Performance



       In 1980, the HEA was amended by reducing by 50 percent the special allowance subsidy
       paid on a loan that was financed by tax-exempt obligations (bonds), but setting a minimum
       SAP rate for those loans to provide a total rate of return sufficient for these lenders to meet
       their financing costs. The statute set the ―floor‖ rate for SAP at whatever rate would,
       together with the interest paid by the borrower, give the lender at least a 9.5 percent rate
       of return.

       The purpose of the change was to recognize that lenders using tax-exempt obligations to
       finance loans had a lower cost of funds than lenders using other sources, and thus, the
       rate of special allowance paid to the loan holder should be lower than the rate provided for
       loans financed from other sources. In 1980, when this amendment was enacted, interest
       rates were as high as 22 percent, with Treasury Bills at 16.5 percent. To ensure an
       established minimum rate of return to protect lenders and their bondholders, Congress
       provided a minimum gross yield of 9.5 percent.

       As of September 30, 2006, 36 lenders claimed SAP at the 9.5 percent return rate on loans
       totaling $11 billion. Of the 36 lenders, 15 lenders elected to comply with a Departmental
       demand that these claims be thereafter supported by a special purpose audit. As a result
       of the audit requirement, loan payoffs and/or sales, the volume of loans that qualified for
       9.5 percent SAP dropped to $1.3 billion, as of the end of FY 2009, an 88 percent
       decrease. In FY 2010, as a result of loan payoffs and/or sales, the ending principal
       balance has further declined to $516 million.




FY 2010                                         - 37 -                        Federal Student Aid Annual Report
Annual Program Performance Report                                                                               Annual Program Performance


       Performance Standards and Results
       The following performance standards were established to gauge FSA’s success in
       improving program integrity, while reducing the vulnerability of the Title IV programs to
       fraud, waste and abuse. The success relies on continuing to achieve low default rates and
       increasing the recovery rate.

       Objective 2 Performance Metrics and Results
                                 FY              FY             FY           FY           FY 2010         FY 2010
              Metric                                                                                                     Performance
                                2006            2007           2008         2009          (Target)        (Actual)

                               FY 2004         FY 2005       FY 2006      FY 2007                          FY 2008
                                5.9%            5.5%          5.8%         8.0%                             9.6%

                               FY 2003         FY 2004       FY 2005      FY 2006                          FY 2007
                                7.3%            8.0%          7.4%         7.6%                             10.3%
              CLTDR*
                               FY 2002         FY 2003       FY 2004      FY 2005                          FY 2006
          Title IV student                                                                  PM                                 PM
                                9.2%            8.8%          9.5%         8.6%                             8.5%
           loan portfolio
                               FY 2001         FY 2002       FY 2003      FY 2004                          FY 2005
                                10.9%           10.3%         10.0%        10.6%                            9.1%

                               FY 2000         FY 2001       FY 2002      FY 2003                          FY 2004
                                12.7%           11.9%         11.3%        10.9%                            10.7%

                               FY 2004        FY 2005        FY 2006      FY 2007                          FY 2008
              CDR**                                                                        < 6%                              Not Met
                                5.1%           4.6%           5.2%         6.7%                             7.0%
           Direct Loan
         default recovery         19.0%         20.1%         21.0%         18.0%           22.9%            17.4%            Not Met
               rate
          FFEL default
                                  19.4%         19.6%         23.6%         19.7%           20.6%            21.9%              Met
          recovery rate
       *The CLTDR was first published in FY 2006. Since that time, FSA has produced and published the FY 2005, FY 2006, FY
       2007 and FY 2008 calculations for the relevant preceding five-year periods, respectively. FSA will continue to analyze the
       impact of portfolio performance on the CLTDR before identifying future performance targets.
       **Indicates what year the data was reported. For example, during FY 2010, FSA calculated the FY 2008 CDR.


       Data Quality: Indicates what year the data was reported. For example, during FY 2010,
       FSA calculated the FY 2008 CDR.

       Analysis of Progress: FSA continues to make progress in improving program integrity
       as defined by the identified performance standards above. Although the Direct Loan
       default recovery rate decreased slightly, and did not meet the targeted amount, the total
       dollar amount recovered in FY 2010 increased by nearly $173 million to $2.3 billion.

       Target Context: In the FY 2006–2010 Five-Year Plan, FSA established and documented
       strategic performance standards and targets to measure the organization‘s success in
       meeting the stated long-term objectives. Any revisions to the original FY 2010 targets may
       not have been published, since FSA has not updated this plan.




FY 2010                                                     - 38 -                                   Federal Student Aid Annual Report
Annual Program Performance Report                                                    Annual Program Performance



       Objective 3: Reduce program administration costs.

       FSA continued to focus on reducing costs through efficiency and productivity gains that
       can be achieved throughout the organization. In FY 2010, FSA experienced significant
       increases in workload volumes across several major FSA programs and processes. This
       included an increase of approximately 12 percent in FAFSA applications processed, an
       increase of 137 percent in the number of schools originating loans in the Direct Loan
       Program, and an increase of 64 percent in the number of Pell Grants disbursed. FSA
       anticipates these and other workload volumes will continue to increase in the coming
       years, driving down unit costs but increasing gross costs.

       In the future, FSA will look at a more balanced approach to cost management to ensure a
       ―best value‖ proposition to the government and its customers. This approach will consider
       several variables to gauge cost management including measurement of unit cost and the
       relative impact of unit cost fluctuations on programmatic and systemic risk as well as
       customer service levels, among others.

       The following narrative provides the details of FSA‘s achievements related to this
       objective.

       Contract Renegotiations

       Contract renegotiations completed in FY 2010 resulted in cost savings and cost avoidance
       totaling approximately $11.6 million in FY 2010 and $78 million in succeeding fiscal years.
       Specifically, the CSB contract was modified to eliminate the account transfer fee. In
       FY 2010, this modification resulted in a savings of $5.3 million. Through the rest of the
       CSB contract term (12/31/2013), cost savings are estimated to be nearly $55 million for
       loan servicing and $15 million for DMCS. Additionally, the CSB contract was modified to
       eliminate $10 million in development costs for the enhancement, upgrade or replacement
       of the current DMCS; the contractor agreed to complete this development at no additional
       cost to the government. Savings of $2 million were realized in FY 2010 and the remainder
       of the savings ($8 million) will be realized in FY 2011. Finally, the COD contract was
       modified to replace letters to borrowers with electronic notices under certain
       circumstances, resulting in savings of $4.3 million in FY 2010.

       FSA Conference

       FSA annually hosts financial aid professionals from schools across the country for a week-
       long training conference on proper administration of the Title IV programs. To
       accommodate the large number of attendees, FSA historically held two identical
       conferences in different cities across the US. In FY 2010, FSA consolidated the two
       conferences into a single large conference in Nashville attracting almost 5,200 financial
       aid professionals. By consolidating the two conferences into a single event, FSA was able
       to save approximately $140,000.




FY 2010                                       - 39 -                        Federal Student Aid Annual Report
Annual Program Performance Report                                                               Annual Program Performance



       Performance Standards and Results
       Performance standards were established to measure FSA’s ability to control costs in an
       environment of increasing workloads. Success relies on achieving economies of scale in
       our application, delivery, servicing and collection activities.

       Objective 3 Performance Metrics and Results
                                   FY       FY       FY         FY       FY 2010     FY 2010
                 Metric                                                                          Performance
                                  2006     2007     2008       2009      (Target)    (Actual)
                                                                           $ 3.78
         Reduce electronic
                                                                           (25%       $ 3.45         Met
       FAFSA direct unit cost     $ 5.04   $ 4.34   $ 3.91     $ 3.94
                                                                        Reduction)
          Reduce origination                                               $ 3.76
           and disbursement                                                (15%       $ 3.35         Met
                                  $ 4.42   $ 4.03   $ 3.65     $ 3.60
            direct unit cost                                            Reduction)
          Reduce Direct Loan                                              $ 18.44
          servicing direct unit   $20.95   $21.45   $19.59     $19.25      (12%      $ 19.96       Not Met
                  cost                                                  Reduction)
                                                                           $ 0.12
          Reduce collections
                                                                           (14%       $ 0.13       Not Met
           direct unit cost       $ 0.14   $ 0.13   $ 0.14     $ 0.13
                                                                        Reduction)


       Data Quality: Unit costs are based on prior year data. For example, in FY 2010, the unit
       costs were based on data from FY 2009. To calculate the unit cost of originating and
       disbursing Direct Loans and Pell Grants, the total amount spent on originating and
       disbursing Direct Loans and Pell Grants is divided by the total number of Direct Loan and
       Pell Grant disbursements. For ‗Processing an Electronic FAFSA‘, ‗Servicing a Direct Loan
       Borrower‘ and ‗Collecting One Dollar in Default Status‘ the total amount spent for each
       output is divided by the number of units for the output.

       Analysis of Progress: FSA has made significant progress in its efforts to reduce the
       administrative unit costs. All measures are below the baseline amounts from FY 2006.
       Due to the nature of the cost calculation for default collections, it will be difficult to meet the
       target of $0.12. This is due to the fact that this measure includes the costs for private
       collection agency (PCA) contracts, which increase in cost as the amount collected
       increases. While the unit cost of collecting one dollar in default is relatively steady, the
       actual amount collected has increased since the FY 2006 baseline. FSA reevaluated these
       standards during the development of the FY 2011–15, Strategic Plan. New costs
       measures will be implemented during FY 2011. Finally, although it was not a metric
       documented in the FY 2006–2010 Five-Year Plan, FSA also measures its administrative
       cost per FFEL loan. The FY 2010 result of $0.10 per loan showed a $0.01 reduction from
       the FY 2009 cost of $0.11 per loan. This calculation does not include any of the FFEL
       subsidy (e.g., SAP, interest benefit, account maintenance fee, etc.)

       Target Context: In the FY 2006–2010 Five-Year Plan, FSA established and documented
       strategic performance standards and targets to measure the organization‘s success in
       meeting the stated long-term objectives. Any revisions to the original FY 2010 targets may
       not have been published, since FSA has not updated this plan.




FY 2010                                               - 40 -                         Federal Student Aid Annual Report
Annual Program Performance Report                                                      Annual Program Performance



       Objective 4: Improve human capital management.

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

       The following narrative provides the details of FSA‘s achievements related to this
       objective.

       Vision, Core Values, and Mission Workshops
       In February 2010, FSA began developing its VVM by holding ―I am FSA‖ sessions. This
       included a series of forty 90-minute employee sessions focused on discussing FSA‘s
       vision, core values, and mission. The sessions were attended by over 250 employees. The
       workshops provided an opportunity for employee engagement, and as a result of input
       received from various sessions, the new FSA VVM was announced in April 2010 and
       formed the foundation for the development of the new Strategic Plan, FY 2011–15.

       Hiring Process Redesign
       In FY 2010, FSA continued to improve the hiring process, particularly in the recruiting
       stage, by establishing and testing new and innovative methods to streamline the
       orientation process as the organization attempted to fill extensive vacancies. For example,
       the Program Compliance Office recruited to fill 50 Institutional Review Specialist positions
       through eight vacancy announcements. FSA uses other hiring approaches including the
       Federal Career Intern Program that recruits at colleges and universities. In FY 2010, eight
       recent graduates were hired through the Federal Career Intern Program. Another
       important program used to attract college students is the Student Career Experience
       Program where the students are pursuing degrees related to the work to be performed
       here at FSA. In FY 2010, 10 Student Career Experience Program appointments were
       made. After students fulfill their academic requirements and complete their service
       requirements at FSA, they can be converted to career positions.

       FSA placed better controls around the hiring approval process, which slowed the initial
       pace of hiring, but was a significant advantage as the volume of requests increased.
       Additional classification resources were used to clarify positions, and in some cases,
       helped identify ways to leverage existing positions and vacancies to ensure the most
       efficient staffing.

       The Department also implemented a new human resource information system, known as
       the Workforce Transformation and Tracking System/Entrance on Duty System. This
       modular system is being implemented in phases and allows FSA to eliminate or reduce
       many manual processes. Despite the low staffing levels of the hiring team, FSA invested
       in training and advisory participation, to help implement this system. The preparation
       required FSA to begin contemplating how work would be processed differently under the
FY 2010                                         - 41 -                        Federal Student Aid Annual Report
Annual Program Performance Report                                                         Annual Program Performance


       new system, and had a positive impact on the hiring design, as staff began determining
       more efficient ways to transition from the ―as-is‖ to the ―to-be‖ state. FSA will begin its full
       implementation of the system in FY 2011.

       FSA has made significant use of the excepted service appointment authorities granted by
       the PBO legislation. The current leadership has encouraged the judicious use of the
       authority to fill positions with highly qualified candidates necessary to fulfill FSA‘s mission.
       In addition to excepted service appointments, FSA has also used two other direct hire
       authorities – one for computer specialists focusing on security, and one for contract
       specialists, to fill five positions. These two direct hire authorities enabled FSA to fill these
       shortage category positions expeditiously. Other hiring reform efforts include considering
       Peace Corps employees eligible for non-competitive appointments and Presidential
       Management Fellows. The focus has been on filling positions quickly with highly qualified
       candidates. For FY 2010, FSA reached an onboard strength of 1,168, or 95 percent of its
       operational goal for the fiscal year.

       The combination of efforts undertaken by FSA in FY 2010, positions the organization to
       make additional improvements in its resourcing efforts.

       Internal Communication

       The FSA COO, William Taggart, made an early commitment to expand the agency‘s
       internal communication efforts. After joining FSA in June 2009, Mr. Taggart toured each of
       FSA‘s regional office locations, convening groups of employees and discussing the need
       for improvement within the organization. He has since implemented several key strategies,
       including:

          Utilization of periodic meetings with key groups of staff including senior managers,
           FSA supervisors and employees;
          Development of a weekly communiqué for employees called ―Funtastic Fridays‖,
           focusing on the FSA Core Values, and the employees and teams that exemplify them;
          Creation of an employee-centered team of Union, bargaining-unit and management
           members, focused on leveraging employee engagement to help FSA become a ―Best
           Place to Work.‖ The team was named the FSA First Class team;
          Implementation of an employee-led strategic planning effort called ―I am FSA‖. One
           result of this initiative was the establishment of the new FSA Vision, Core Values, and
           Mission statements;
          Promotion of pivotal employee initiatives, such as leadership development, annual
           charitable campaigns, and awards and recognition opportunities;
          A greater commitment to senior leader interaction with customer-facing employees at
           FSA‘s regional office locations—such as for the VVM and strategic plan rollouts,
           recognition events, the regional office tour, and engaging staff in school outreach
           events in those local areas; and
          Placement of video-teleconferencing capabilities in FSA regional training centers,
           located in every regional office. This allows greater numbers of employees to fully
           participate in multi-regional meetings.




FY 2010                                          - 42 -                          Federal Student Aid Annual Report
Annual Program Performance Report                                                Annual Program Performance


       Rewards and Recognition

       FSA senior leaders and managers were encouraged to rethink how to reward and
       recognize employees. The Funtastic Fridays vignettes provided a fun and regular source
       of news, ideas and highlights of employee successes around the nation. In an effort to
       expand recognition alternatives at a time of tighter budgets, more emphasis was also
       placed on non-monetary resources. In FY 2010, the FSA First Class developed a non-
       monetary ―Beyond the Call‖ award for managers to recognize extra effort and superior
       performance.

       The Department is currently reviewing and soon is to implement a new performance
       management system. FSA will also re-evaluate its existing awards and recognition
       programs to align with this new system.




FY 2010                                      - 43 -                      Federal Student Aid Annual Report
Annual Program Performance Report                                                                              Annual Program Performance


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

        Objective 4 Performance Metrics and Results
                               FY                FY              FY              FY           FY 2010          FY 2010
          Metric                                                                                                              Performance
                              2006             2007             2008            2009          (Target)         (Actual)
                          Leadership:       Leadership:
                                                            Leadership:     Leadership:     Leadership:
                         trained 100%     trained 95% of                                                      Leadership:
                                                            trained 96%     trained 82%     trained 95%
                             of new             new                                                         trained 92% of
                                                             of new and      of new and      of new and
                          supervisors       supervisors                                                      new and 90%        Not met
                                                               96% of          99% of          75% of
                          and 52% of        and 60% of                                                         of current
                                                               current         current         current
                             current          current                                                         supervisors
                                                            supervisors     supervisors     supervisors
                          supervisors       supervisors
                                                            Acquisitions:   Acquisitions:   Acquisitions:
                         Acquisitions:    Acquisitions:                                                       Acquisitions:
                                                            trained 100%    trained 100%    trained 100%
                         trained 100%     trained 100%                                                      trained 100% of
                                                                    of              of             of                             Met
                         of contracting   of contracting                                                       contracting
                                                              contracting     contracting     contracting
                            officials        officials                                                           officials
                                                                officials       officials      officials
                             Project                            Project         Project
                                              Project                                          Project           Project
                         management:                        management      management
                                           management:                                      management       management:
                         trained 100%                                :               :
                                          trained 75% of                                      : trained     trained 100% of       Met
       Use training         of key IT                        trained 67%     trained 64%
                                           key IT project                                    50% of Key          Key IT
       resources to          project                           of key IT       of Key IT
                                             managers                                       IT managers         managers
     develop a highly      managers                            managers        managers
     skilled workforce                                                            FSA
                         FSA business                            FSA                             FSA
          to ensure                       FSA business                         business
                           knowledge:                         business                        business       FSA business
      competency in                        knowledge:                         knowledge:
                         trained 90% of                      knowledge:                      knowledge:       knowledge:
      mission-critical                    trained 100%                       trained 53%                                        Not met
                               new                          train 89% of                    trained 90%     trained 83% of
     skills/knowledge                         of new                            of new
                           employees                             new                           of new       new employees
                                            employees                         employees
                                                             employees                       employees
                                                                 FSA             FSA             FSA
                         FSA business     FSA business                                                      FSA business
                                                              business        business        business
                          knowledge:       knowledge:                                                         knowledge:
                                                             knowledge:      knowledge:      knowledge:
                         trained 100%     Trained 100%                                                      trained 40% of
                                                            Trained 76%     trained 77%     trained 80%                         Not met
                            of school       of school                                                            school
                                                              of school       of school       of school
                          compliance       compliance                                                         compliance
                                                            compliance      compliance      compliance
                             officials       officials                                                          officials
                                                               officials       officials       officials
                                                                 FSA             FSA             FSA
                         FSA business     FSA business                                                      FSA business
                                                              business        business        business
                           knowledge:      knowledge:                                                         knowledge:
                                                             knowledge:      knowledge:      knowledge:
                         trained 40% of   trained 100%                                                      trained 33% of      Not met
                                                            train 34% of    trained 39%     trained 40%
                             general        of general                                                          general
                                                               general        of general      of general
                            workforce       workforce                                                          workforce
                                                              workforce       workforce       workforce

        Data Quality: Data was obtained from training class rosters and attendance records.

        Analysis of Progress: While FSA exceed its target of training current supervisors, it was
        unable to meet the target of training new supervisors. Results varied for the FSA Business
        Knowledge training targets. FSA significantly improved and far exceeded its target for
        project management training. New employee training also improved, although the target
        completion rate was not met. Finally, training for school compliance officials and
        the general work force did not meet the established targets.

        Target Context: FSA developed the above targets at the beginning of FY 2010 and
        immediately began tracking their progress in achieving these objectives.

FY 2010                                                      - 44 -                                 Federal Student Aid Annual Report
Annual Program Performance Report                                                    Annual Program Performance


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

       In FY 2009, the President called for all Americans to seek at least one year of
       postsecondary education7. One way FSA was able to support this charge was to improve
       access to a college education and increase awareness of the resources available to
       students and their families to pay for it. In FY 2010, the organization continued making
       improvements to the FAFSA to make it easier for applicants to complete. To increase
       greater awareness about the availability of student financial assistance, FSA established a
       nationwide public service campaign. Another priority of the new administration was to
       provide greater transparency in government. FSA expanded its online data center to
       provide the public with access to information on the most requested information, including
       Clery Act program reviews, financial composite scores and Direct Loan Program transition
       reports. Finally, the FSA Ombudsman continued to be a world-class problem resolution
       resource for student borrowers.

       The following narrative provides the details of FSA‘s achievements related to this
       objective.

       Direct Loan Readiness
       In response to uncertainty in the financial markets and ongoing legislative activity, the
       Department moved aggressively throughout FY 2010 to ensure a smooth transition for any
       schools that chose to participate in the Direct Loan Program. With the enactment in late
       March 2010 of SAFRA, which ended new lending in the FFEL Program and, as a result,
       significantly expanded the Direct Loan Program effective July 1, 2010, these efforts were
       expanded and accelerated dramatically.




       7
           http://www.whitehouse.gov/issues/education/




FY 2010                                            - 45 -                   Federal Student Aid Annual Report
Annual Program Performance Report                                                        Annual Program Performance


       FSA went to great lengths to update its systems and increase capacity to prepare for this
       change. Some of these accomplishments include:

          Increased Direct Loan front-end origination and disbursement capacity through three
           separate upgrades;
          Increased Direct Loan back-end servicing capacity with the award and migration onto
           the systems of four private-sector servicers; and
          Increased promissory note capacity.

       Today, FSA is ready to support each and every institution that chooses to participate in the
       Direct Loan Program.

       FSA also accelerated training to schools participating in the FFEL program to provide
       them with the information and resources they need to efficiently and effectively transition
       to the Direct Loan Program. Some of these accomplishments include:

          Offering webinar training to schools interested in participating in the Direct Loan
           Program;
          Training almost 5,200 financial aid professionals at its annual Fall Conference in
           Nashville;
          Conducting the Regional Direct Loan Training Conferences for domestic schools in 15
           cities across the nation serving almost 2,500 financial aid professionals; and
          Conducting training in 8 cities across the world for foreign institutions transitioning into
           the Direct Loan Program.

       FSA took a number of steps to ensure an efficient transition process. These steps
       included:

          Establishing a specialist team. A special integration team was established to
           contact and work directly with school financial aid offices on transition issues. These
           ten specialists worked to provide information, answer questions, and identify schools
           that needed more intensive intervention.

          Providing technical assistance. A technical assistance contract was awarded to
           provide targeted remote and on-site assistance on a range of Direct Loan system and
           process issues. Due in part to the work of the orientation (also known as the ―on-
           boarding‖) team and FSA‘s normal customer service staff, only 31 of the over 2,500
           schools transitioning in FY 2010 required targeted technical assistance.

          Increasing capacity. Capacity was expanded in the COD system and other Direct
           Loan applications to accommodate increased workload. As a result of the shift to
           Direct Loans, FSA processed over 10.4 million promissory notes, a more than 300
           percent increase over the previous year; and originations increased by over 176
           percent compared with the 2009–10 award year.

       FSA also developed and implemented a new streamlined software interface that allows
       easier access for schools new to Direct Loans. This interface will be particularly useful for
       foreign schools, which had previously been prohibited by statute from participating in the
       Direct Loan Program.
FY 2010                                          - 46 -                         Federal Student Aid Annual Report
Annual Program Performance Report                                                        Annual Program Performance



       As a result of these efforts, 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.

       FSA Data Center
       In September 2009, FSA launched the FSA Data Center, accessible at
       http://fsadatacenter.ed.gov. The Data Center was created in an effort to increase
       government transparency by proactively posting information useful to businesses, the
       media, and individuals. It contains data and reports related to application, loan and grant
       volume, default rates, program oversight, and more.

       When the site was initially launched, it provided a compilation of existing data, such as
       default rates, coupled with several new reports, such as Title IV aid volume reports. In FY
       2010, FSA increased the type and quantity of information posted to the FSA Data Center
       by adding Clery Act Program Review Reports, Financial Composite Scores for private and
       for-profit schools participating in the Title IV programs, trial 3-year cohort default rates, and
       Direct Loan transition reports, among others.

       Federal Student Loan Servicing

       To expand and diversify the FSA‘s loan servicing capacity, FSA entered into performance-
       based contracts with the following four companies in June 2009: American Education
       Services/Pennsylvania Higher Education Assistance Agency; Great Lakes Educational
       Loan Services; Nelnet Servicing, LLC and Sallie Mae Corporation. Prior to the award of
       these contracts, collectively referred to as the TIVAS, all FSA loan servicing was
       performed under the CSB contract, which is scheduled to expire December 31, 2013.
       Expanding the pool of servicers introduced competition among vendors and also built
       capacity to accommodate the eventual expiration of CSB as well as the anticipated
       expansion of the Direct Loan Program.

       In September 2009, these servicers began absorbing the large volume of FFEL loans
       purchased by the Department under the ECASLA. By the end of July 2010, all four
       servicers began servicing new Direct Loans. Overall, the TIVAS were servicing roughly
       10.7 million borrower accounts as of the end of FY 2010.

       The servicing contracts foster improved performance by requiring vendors to compete for
       additional loan volume allocations. Each quarter, borrowers, school and Department
       employees are surveyed to assess customer satisfaction. Each vendor‘s success in
       avoiding defaults is also measured on a quarterly basis. The results of these assessments
       are compiled annually and used to determine the allocation of new borrower accounts for
       the coming year.

       FAFSA Simplification
       FSA has made significant improvements to the online application to make it less of a
       barrier to college access. The upgraded application includes new features, functionality
       and a level of user interaction not previously available. The General Services

FY 2010                                          - 47 -                         Federal Student Aid Annual Report
Annual Program Performance Report                                                      Annual Program Performance


       Administration recognized FSA with its 2010 Citizen Services Award for simplifying its
       website, the online FAFSA and improving how applicants may retrieve income and tax
       information with the IRS. The new skip-logic functionality maximizes the use of responses
       to limit further questions. Examples of improvements to the site include:

          Fewer Questions. Questions are now asked only of applicants with relevant
           characteristics. For example, questions regarding the state and date of legal residency
           are asked only of applicants who have not had the same address for at least 5 years;
           questions regarding additional financial information and untaxed income are presented
           in a simplified keyword ―check box‖ format on one page; and only returning students
           are asked about prior drug convictions because the question does not apply to
           students who have never before received federal aid.

          Friendlier Navigation. The entire online application has been redesigned, making it
           more user-friendly. Examples include: student and parent sections are clearly
           identified with side tabs; status indicators guide applicants through web modules, such
           as demographics, basic eligibility, and dependency status; dynamic question labels;
           help text; and instructions based on an applicant‘s profile, such as marital status, tax
           filing status, and type of return filed, have been added for increased clarity and
           direction.

          IRS Data Share. Students applying for aid using the 2009–10 application were able to
           retrieve and import their tax data from the IRS. Over 30 percent of eligible applicants
           utilized this functionality. Starting in September 2010, students applying for aid for the
           2010–11 year are able to retrieve and import their 2009 tax data.

       There are several upcoming changes to complete FSA‘s overhaul of the application
       experience. Planned enhancements for the upcoming application cycle will include the
       following changes:

          A more intuitive Web experience including enhanced technology, redesigned
           homepage, simplified login, and customized user options;
          Fully integrated application functionality with redesigned corrections module;
          Links to key resources and functionality incorporated throughout the user experience
           (e.g., Personal Identification Number (PIN) site, College Navigator, college websites);
          Continued access to the IRS Data Retrieval tool; starting January 30, 2011,
           applicants will have access to their 2010 tax data. The functionality will be bilingual
           (i.e. English and Spanish) and available in both application entry and correction; and
          Reduced redundancy throughout the aid delivery process. Every state grant agency
           is offered the opportunity to link their residents to a pre-populated state financial aid
           application form.

       FAFSA Pilot
       For low-income youth in particular, the accurate completion and early submission of the
       FAFSA is essential to entering and completing postsecondary education. The failure to file
       a FAFSA is a proven barrier to college attendance to such students. In 2007, Chicago
       Public Schools initiated a pilot program that demonstrated the strong role high schools can
       play in whether or not a student enrolls in college. Chicago Public Schools tracked FAFSA
       completion among its seniors, providing resources to ensure students had the support
FY 2010                                         - 48 -                        Federal Student Aid Annual Report
Annual Program Performance Report                                                    Annual Program Performance


       they needed to successfully complete and submit their FAFSAs. During the first two years
       after this program was implemented, the percentage of students that submitted FAFSAs
       rose from 65 percent to 81 percent. In addition, college enrollment in Chicago increased
       by nearly five percentage points during that same time period.

       In 2010, FSA launched a pilot project, based on the successful program in Chicago Public
       Schools, to facilitate local outreach efforts to assist students and families in completing
       their FAFSAs. The pilot project has included twenty participants and identifies which
       students either did not submit a FAFSA or submitted a FAFSA but need to make
       corrections for their application to be complete. High school counselors can focus their
       efforts to provide the highest benefit to students.


       Public Service Announcement (PSA) Campaign
       In January 2010, FSA launched its fourth annual public service campaign to help ensure
       students and families are aware of the over $134 billion available in federal loans, grants,
       and work-study programs to help pay for college. In the ―I‘m Going: College.gov‖ PSAs, 22
       high school and college students relate their personal goals and share the message that
       money is available to help students pay for college. The PSA concept is similar to that of
       past campaigns, which consistently ranked in the top one percent of all PSA campaigns
       tracked by Nielson. The new PSAs direct students and families to the College.gov website
       as the starting point for students and families to get the information they need to plan and
       pay for college. The PSA was distributed nationwide to television and radio stations.
       Announcements also appeared in selected cities in malls and on billboards. In FY 2010,
       the PSAs aired on radio and television resulted in 794 million television and radio
       audience impressions and approximately $18.5 million in media value.
       Training and Outreach
       FSA exceeded its training goal for FY 2010, setting records for the number of sessions
       offered and participants trained. Almost 5,200 participants attended FSA‘s Annual Fall
       Conference, which offered one-half of its sessions on Direct Loan training. In spring 2010,
       15 Regional Direct Loan Conferences on program systems and processes were held
       around the nation. In total, these sessions were attended by over 2,500 student aid
       professionals, while over 26,000 individuals logged on to at least one of the many
       Webinars offered over the course of the year.

       Because foreign schools are participating in the Direct Loan Program for the first time,
       FSA also developed and presented specialized training for foreign school personnel.
       Nearly 600 participants attended at least one of nine sessions held in Canada, Europe,
       Australia, New Zealand, and the Caribbean, while 244 participated in a Webinar on foreign
       school issues.




FY 2010                                        - 49 -                        Federal Student Aid Annual Report
Annual Program Performance Report                                                          Annual Program Performance


       Performance Standards and Results
       The following performance standards were established to measure FSA’s success in
       meeting and exceeding customer service goals. Specifically, success is realized with
       continuous improvement in customer satisfaction scores for the three main systems.

       Objective 5 Performance Metrics and Results
                                      FY     FY     FY        FY     FY 2010    FY 2010
                   Metric                                                                    Performance
                                     2006   2007   2008      2009   (Target*)   (Actual)

           Student aid application   80     80     83        84        84         86             Met

              Lender payment
                                     71     75     77        74        71         75             Met
                processing
           Direct Loan borrower
                                     79     80     80        78       PM          76             PM
                 servicing


       Data Quality: The American Customer Satisfaction Index (ACSI) survey is conducted
       annually on FSA‘s major programs. The index provides a national, cross-industry, cross-
       public and private sector economic indicator, using widely accepted methodologies to
       obtain standardized customer satisfaction information. Survey scores are indexed on a
       100-point scale. This index has been tracked annually since FY 1999, with the exception
       of FY 2002.

       Analysis of Progress: The FY 2010 ACSI ratings for FSA‘s highest volume products and
       services – including, FAFSA on the Web (FOTW®), Direct Loan Servicing, and the Lender
       Reporting System – rate in the ―Excellent‖ or ―Good‖ range in comparison to other entities
       that appear in the ACSI index. According to Claes Fornell International Group, who
       partners with National Quality Research Center and the American Society for Quality in
       conducting the survey, companies with:

             ―business to consumer‖ customers scoring between 60 and 69 are considered ―Fair‖,
              70 and 79 are considered ―Good‖, 80 and 89 are considered ―Excellent‖, and 90 and
              100 are considered ―Hypothetical‖; and
             ―business to business‖ customers scoring between 55 and 64 are considered ―Fair‖, 65
              and 74 are considered ―Good‖, 75 and 84 are considered ―Excellent‖, and 85 and 100
              are considered ―Hypothetical‖.

       Under the ASCI index, both the Student aid application and Lender payment processing
       metrics rated in the "Excellent" range while the and Direct Loan borrower servicing metric
       rated in the "Good" range.

       Target Context: In the FY 2006–2010 Five-Year Plan, FSA established and documented
       strategic performance standards and targets to measure the organization‘s success in
       meeting the stated long-term objectives. Any revisions to the original FY 2010 targets may
       not have been published, since FSA has not updated this plan.




FY 2010                                             - 50 -                      Federal Student Aid Annual Report
                                                                    Changes to Federal Student Aid’s Performance Plan
Annual Program Performance Report
                                                                    over the Year


      Changes to Federal Student Aid’s Performance Plan over the Year
      In recent years, there have been significant changes to the postsecondary education
      environment and uncertainties regarding FSA‘s budget that have required a shift in its
      FY 2010 plans. On March 30, 2010, SAFRA was enacted, significantly expanding the
      Direct Loan Program effective July 1, 2010. Meanwhile, the Federal government is under
      increased pressure to continue to limit costs. On July 22, 2010, $82 million was rescinded
      from FSA‘s budget in order to partially fund the Unemployment Compensation Extension
      Act of 2010. These two events led to significant changes to FSA‘s plans during this fiscal
      year.

      The section describing Objective 5 of this Annual Program Performance Report details
      FSA‘s significant effort and positive outcome of becoming the sole originator of federal
      student loans. The following table is a summary of the more significant initiatives in FY
      2010 that were canceled or delayed as a result of shifting capacity to successfully
      implement SAFRA in a year when budget was rescinded.

                                    FY 2010 Initiatives Canceled or Delayed
                 Initiative Name                                          Impact
          Person Record Management       PRMS is a centralized system of record for person data for all FSA
          System (PRMS)                  Application systems. PRMS eases the reduction in the use of social
                                         security numbers. This system will originate and help maintain a new
                                         identifier that will replace social security numbers to comply with
                                         Congressional mandate. No part of the PRMS development contract
                                         was awarded in FY 2010.
          Integrated Student View        ISV will integrate 17 student Web sites into four websites. No part of the
          (ISV)                          ISV development contract was awarded in FY 2010. The elimination of
                                         the ISV budget will impact the online experience for our customers.
          PIN Re-engineering             PIN Re-engineering will consolidate the management of all external
                                         accounts (approximately 70 million) into a single repository where each
                                         citizen receives one and only one account - regardless of whether they
                                         are functioning as a partner or aid recipient. The PIN Reengineering
                                         contract was not awarded in FY 2010.
          IPM                            FSA delayed the implementation of phase 1 (enrollment and eligibility
                                         phase) until FY 2011 and the development and implementation of
                                         phase 2 (oversight) until FY 2012. Phase 3 (participation management)
                                         was completely eliminated from the scope of work.
          Program Compliance             Based on re-engineering of oversight business processes (program
          Eligibility & Oversight        review, audit, eligibility, financials, and method of payment) through
          Standards                      IPM, there is a need to update and document standards to assure
                                         consistency of operations across ten regional locations for both
                                         domestic and foreign schools and financial partner monitoring. The
                                         delay in the implementation of IPM delayed the need to fund this effort.
          Trusted Internet Connection    OMB Memorandum 08-05 announced the Trusted Internet Connections
                                         initiative which is expected to optimize individual network services into
                                         a common solution for the federal government. This common solution
                                         facilitates the reduction of external connections, including Internet
                                         points of presence, to a target of fifty. This effort remains unfunded,
                                         causing FSA to be non-compliant with OMB requirements.



FY 2010                                            - 51 -                           Federal Student Aid Annual Report
Annual Program Performance Report                                      Legislative and Regulatory Recommendations



          Legislative and Regulatory Recommendations

          One of FSA‘s mission responsibilities is to provide input on legislative proposals (both from
          the Congress and from the administration) and to the Department‘s regulatory activity.
          FSA also may suggest legislative changes for consideration by the Department‘s senior
          policy officials. These recommendations customarily center on improving and simplifying
          the Title IV programs, minimizing administrative costs and improving program integrity.
          FSA‘s recommendations inform the Department‘s policymaking process, including its
          activities and decisions related to each year‘s budget process. These activities are usually
          accomplished by direct contact with colleagues within various offices of the Department,
          such as the Office of Postsecondary Education and the Office of the Under Secretary, at
          both the senior policy level and at a staff level. These efforts, while primarily carried out by
          FSA‘s Policy Liaison and Implementation Staff, also involve other FSA offices and senior
          managers. While a portion of this policy advising is accomplished on an ongoing, informal
          daily basis, FSA staff contributed to policy decision making in a more formalized way
          related to, among other things, the transition to 100 percent direct lending, the ending of
          the FFEL Program loan originations, and the Department‘s Program Integrity Rulemaking
          process.




FY 2010                                                - 52 -                      Federal Student Aid Annual Report
Annual Program Performance Report                                                           Annual Bonus Awards



          Annual Bonus Awards

          As of the end of FY 2010, there were 74 Federal Student Aid senior managers. In addition,
          there were 9 Senior Executive Service staff members. Seven of the 74 senior managers
          and three of the 9 Senior Executive Service staff served on the Federal Student Aid
          Operating Committee (known as the Executive Leadership Team before January, 2010),
          and reported directly to the COO. The remaining 67 senior managers and 6 Senior
          Executive Service staff served in a variety of senior positions and capacities within Federal
          Student Aid.

          FY 2010 performance ratings and related awards for Federal Student Aid senior managers
          and Senior Executive Service staff were not finalized at the time this report was prepared.

          At the end of FY 2009, there were 49 Federal Student Aid senior managers. There were
          also 12 Senior Executive Service members. Eight of the 49 senior managers and five of
          the 12 Senior Executive Service staff served on the Federal Student Aid Executive
          Leadership Team and reported directly to the Chief Operating Officer. The remaining 41
          senior managers and seven Senior Executive Service staff served in a variety of senior
          positions and capacities within Federal Student Aid.

          For FY 2009, the composition of ratings for the 41 senior managers who did not serve on
          the Executive Leadership Team last year were as follows: 20 achieved a performance
          rating of Outstanding, 14 achieved a performance rating of Highly Successful and 7
          achieved a performance rating of Fully Successful.

          Award amounts for those senior managers achieving an Outstanding rating ranged from a
          low of $6,985 to a high of $18,519 with a median award of $10,000. Award amounts for
          those achieving a Highly Successful rating ranged from a low of $3,020 to a high of
          $9,828, with a median award of $6,601.

          In FY 2009, the Chief Operating Officer received a performance bonus of $15,000 for his
          work at Federal Student Aid. There were also FY 2009 ratings and awards for five senior
          manager members and five Senior Executive Service members of the Executive
          Leadership Team. Three additional senior managers joined Federal Student Aid too late in
          the performance cycle to be rated for FY 2009. The composition of those rated includes:
          four achieved a performance rating of Outstanding, five achieved a performance rating of
          Highly Successful and one received a performance rating of Fully Successful. Three
          senior managers who served on the Executive Leadership Team were not eligible for an
          award because they arrived at FSA at the end of the rating cycle. Of the six remaining
          Senior Executive Service members who were not on the Executive Leadership Team, one
          achieved a performance rating of Outstanding, four achieved a performance rating of
          Highly Successful, and one was not rated.

          Award amounts for those Executive Leadership Team members achieving an Outstanding
          rating ranged from a low of $13,911 to a high of $31,564, with a median award of $25,813.
          Award amounts for those achieving a Highly Successful rating ranged from a low of
          $8,255 to a high of $21,105, with a median award of $8,429. Those receiving a rating of
          Fully Successful were not eligible for a performance-based award. The remaining six
          Senior Executive Service members‘ awards ranged from $7,965 to $19,884 with a median

FY 2010                                              - 53 -                      Federal Student Aid Annual Report
Annual Program Performance Report                                                      Annual Bonus Awards


          of $8,156 for the combined categories of Outstanding and Highly Successful performance
          ratings.

          For additional information, please refer to:
          http://www.ed.gov/policy/highered/leg/hea98/sec101D.html.




FY 2010                                            - 54 -                   Federal Student Aid Annual Report
Annual Program Performance Report                                    Report of the Federal Student Aid Ombudsman



          Report of the Federal Student Aid Ombudsman

          The FSA Ombudsman entered its second decade of service to federal student aid
          recipients in FY 2010. Established by the 1998 amendments to the HEA, the Ombudsman
          began operations on September 30, 1999.

          Consistent with its statutory mission, the Ombudsman uses informal dispute resolution
          processes to address complaints about Title IV financial aid programs. The Ombudsman
          applies a collaborative approach in working with institutions of higher education, lenders,
          guaranty agencies, loan servicers, and other participants in the student aid programs.
          Information about customer inquiries is compiled into the Ombudsman Case Tracking
          System. The data are analyzed, and the findings are included in internal and external
          reports for FSA and the industry in general, to identify systemic issues affecting Title IV
          programs. Implementation of systemic solutions can at times prevent problems, an
          approach preferable to resolving individual complaints as received.

          Since 1999, the Ombudsman has received more than 192,554 assistance requests from
          customers, including 30,346 in FY 2010. The Ombudsman has generally received more
          customer contacts in each new year of operation. The annual increase is attributed to
          growing awareness of the Ombudsman and the increase in individuals receiving federal
          student aid. In the last two fiscal years, however, customer contacts have increased at a
          higher rate. Cases opened in FY 2008 were 9 percent greater than the previous year; FY
          2009 was 25 percent greater than FY 2008; and FY 2010 increased by approximately
          28 percent over the FY 2009 total.

          Ombudsman data support the intuitive explanation that the current economic downturn is a
          factor in the increase of contacts. Customer inquiries in issue categories relating to
          economic hardship (e.g. repayment plans/amounts) have increased at a rate higher than
          overall case growth. A review of a sample of cases in the issue categories indicative of
          financial difficulties showed that almost half of the borrowers reported having at least one
          factor commonly linked to economic hardship, such as loss of job or reduced earnings,
          recent medical expenses, or a high level of federal student loan debt.

          Borrowers expressing difficulty in repaying their student loans occasionally offer
          suggestions for changes in policy and practice that, they believe, would better enable them
          to repay the debt. One suggestion is to allow borrowers with high interest loans to
          refinance at a lower interest rate or otherwise restructure the debt. Others who have been
          unable to make scheduled payments point out that increasing the size of their debt
          through capitalized interest, fees and collection costs makes it less likely they will ever be
          able to repay.

          Three related issues were responsible for some of the increase in Ombudsman cases –
          consolidation, income based repayment, and public service loan forgiveness (PSLF).
          Through FY 2007, consolidation was one of the leading issues for Ombudsman cases,
          driven in part by questionable marketing practices and interest rate fluctuations. After new
          federal legislation changed the rules for consolidation loans, borrower complaints to the
          Ombudsman about this issue declined precipitously. Consolidation re-emerged as an
          issue in FY 2010. This time, however, it appears that an increase in borrowers‘ wanting


FY 2010                                               - 55 -                      Federal Student Aid Annual Report
Annual Program Performance Report                                     Report of the Federal Student Aid Ombudsman


          loan consolidation as a debt management tool, rather than marketing issues or other
          problems, is contributing to the growth in contacts to the Ombudsman.

          Interest in PSLF is one reason for additional loan consolidation inquiries. PSLF allows for
          cancellation of any balance remaining after a borrower makes 120 qualifying payments
          while working full-time in eligible public service. PSLF is available only to holders of Direct
          Loans, and the authorizing legislation permitted most borrowers with existing FFEL
          consolidation loans to consolidate into the Direct Loan Program to establish eligibility for
          PSLF.

          Effective July 1, 2009, the Income Based Repayment Plan enabled borrowers to establish
          monthly payments based on adjusted gross income, family size, and debt amount.
          Individuals unable to repay the full balance of their debt within 25 years on the Income
          Based Repayment Plan will not be required to pay further on the debt. The new option is
          important to borrowers with repayment challenges and has also been linked to PSLF.

          The numbers of inquiries to the Ombudsman declined in FY 2010 in some issue areas.
          Despite the challenging economic climate, when compared to FY 2009, complaints about
          collection practices declined 16 percent in FY 2010, indicating strengthened PCA
          practices. Nonetheless, PCAs do not always work transparently with borrowers
          experiencing financial difficulty. One issue raised by borrowers contacting the
          Ombudsman concerns PCAs demanding a ―down payment‖ or lump sum payment as a
          condition for rehabilitating a defaulted loan. The demand for a down payment or lump sum
          is a generally used collection tactic, but failure to agree to the lump sum payment may not
          be used to deny the defaulted borrower access to a rehabilitation agreement.

          For a number of years, Total and Permanent Disability (TPD) discharge has been the
          leading single issue for Ombudsman cases. It is, therefore, noteworthy that Ombudsman
          TPD cases declined 14 percent in FY 2010. A number of operational changes that
          enhanced TPD processing were implemented in 2009. Revisions to the medical review
          protocol became effective; a new TPD application form was made available; and a new
          website with information for borrowers, doctors, and loan holders became operational.
          These changes, all of which provide the TPD applicant with more detailed information
          about the discharge process and documentation requirements, contributed to the decline
          in Ombudsman TPD cases. FSA‘s Atlanta office, operationally responsible for new
          statutory discharge provisions for veterans, has been particularly responsive in assisting
          disabled veterans. Their efforts were critically important in implementing the new
          legislative provisions in a timely manner and in fulfilling Congress‘ intent to create an
          expedited discharge process for veterans unable to work due to service connected
          disabilities.

          Even with these improvements, the Ombudsman still works with many disabled borrowers
          whose TPD applications are rejected, often multiple times, for procedural deficiencies
          rather than for substantive medical reasons. The Ombudsman encourages continuance of
          initiatives to improve correspondence to TPD applicants in the belief this continuance will
          reduce rejections for procedural reasons. The Ombudsman also welcomes the exploration
          of accepting disability determinations made by other federal agencies to satisfy TPD
          discharge requirements. The most recent reauthorization of the HEA included a provision
          for the streamlined discharge of student loans for disabled veterans.



FY 2010                                                - 56 -                      Federal Student Aid Annual Report
Annual Program Performance Report                                    Report of the Federal Student Aid Ombudsman


          Borrowers with private education loans also contact the Ombudsman, although the
          Ombudsman has no direct jurisdiction over these loans. Assistance requests from
          borrowers with private loans increased slightly as a percentage of total cases in recent
          years. Private loan borrowers were 1.7 percent of total cases in FY 2006, 3.5 percent in
          FY 2008, and 3.9 percent in FY 2010. Those borrowers‘ concerns appear to parallel those
          raised by borrowers of federal loans.

          Some borrowers carry a combination of federal and private loans and may contact the
          Ombudsman because they do not understand the differences in repayment terms or
          borrower protections between federal and private student loans. Many private education
          loans, for example, require a co-signer; some charge the borrower for each application for
          deferment or forbearance; and private education loans are not discharged if the student
          becomes disabled. The private student loan ombudsman function within the Consumer
          Financial Protection Bureau established through the recently-enacted Wall Street Reform
          and Consumer Protection Act (Pub. L. No. 111-203) creates an opportunity to address
          some of those concerns.

          Customer satisfaction with the Ombudsman is measured, in part, through independently
          conducted telephone surveys. Closed cases are chosen at random and customers are
          asked to rate service accessibility, Ombudsman representatives‘ knowledge, timeliness of
          case resolution, level of satisfaction with the resolution, and overall service. On a scale of
          1 – 5, with 5 the highest rating, survey results are calculated weekly and cumulatively for
          the fiscal year. Only ratings of 4.0 or higher meet the Ombudsman customer satisfaction
          performance goal. The average FY 2010 customer satisfaction rating was 4.56.
          Customers also write or call independently to express appreciation for assistance from the
          Ombudsman.

          As the Ombudsman continues in its second decade, a key emphasis will be on enhancing
          data collection and analysis with the goal of improving root cause analysis, systemic issue
          identification, and preventive outreach.




FY 2010                                               - 57 -                      Federal Student Aid Annual Report
Annual Program Performance Report            Report of the Federal Student Aid Ombudsman




FY 2010                             - 58 -               Federal Student Aid Annual Report
Financial Section


           Financial Section




FY 2010                        - 59 -   Federal Student Aid Annual Report
Financial Section




FY 2010             - 60 -   Federal Student Aid Annual Report
Financial Section                                                         Message from the Chief Financial Officer MM



           Message from the Chief Financial Officer

           In FY 2010, Federal Student Aid completed a
           challenging, but successful year. Thanks to the
           diligence of the talented staff at Federal Student Aid, we
           met these unprecedented challenges and continued to
           maintain our high standards of financial management
           and fiscal reporting. Below are the challenges Federal
           Student Aid successfully addressed during FY 2010:

              Implemented the Student Aid and Fiscal
               Responsibility Act (SAFRA) enacted by Congress in
               March 2010. SAFRA ended all federal support for
               student loans under the Federal Family Education
               Loan (FFEL) Program effective July 1, 2010 making
               the Direct Loan Program the primary source for
               loans for students and parents. Despite an
               extremely short timeframe, Federal Student Aid
               successfully implemented the requirements on time
               by modifying its loan origination processes and
               systems, transitioning schools that participated in
               the FFEL Program to the Direct Loan Program,                     John W. Hurt, III
               increasing loan servicing capacity, and expanding            Chief  Financial Officer
               its workforce. To accomplish this implementation, Federal Student Aid leveraged the
               foundation it established during FY 2009 in anticipation of the shift to 100 percent
               Direct Loans. This legislation is expected to save taxpayers over $68 billion in
               mandatory costs over the next 11 years (2010 through 2020).

              Continued execution of the Ensuring Continued Access to Student Loans Act of 2008
               (ECASLA), ensuring adequate capital was available to fund FFEL loans for the
               2008–09 and 2009–10 academic years. Specifically, Federal Student Aid oversaw the
               successful closeout of the 2008–09 award year Loan Participation Purchase and Loan
               Purchase Commitment Programs by October 15, 2009. During the life of the 2008–09
               programs, Federal Student Aid purchased over $48 billion of FFEL loans. For the Loan
               Participation Purchase and Loan Purchase Commitment 2009–10 academic year
               Programs, Federal Student Aid purchased a total of approximately $60 billion of FFEL
               loans by the program closeout date of October 15, 2010. In addition, Federal Student
               Aid successfully implemented the Asset Backed Commercial Paper Conduit Program
               during FY 2010. This program injected a total of $41 billion of capital into the financial
               system.

              Continued to address Federal Student Aid‘s administrative budget limitations by
               identifying cost savings, prioritizing internal projects, and identifying alternative sources
               of funding. These efforts enabled Federal Student Aid to resolve a significant budget
               shortfall and to offset the cost of transitioning to 100 percent originations through the
               Direct Loan Program, as required by SAFRA.

           While successfully overcoming the above challenges, we continued to maintain operations
           to deliver Title IV aid. For FY 2010, Federal Student Aid delivered $134 billion of federal

FY 2010                                                 - 61 -                       Federal Student Aid Annual Report
Financial Section                                                       Message from the Chief Financial Officer MM


           aid to14 million postsecondary students and their families. The 14 million students that
           received aid represent approximately 47 percent of all college students.

           Federal Student Aid‘s new initiatives (i.e., implementation of SAFRA and ECASLA)
           significantly impacted not only policy decisions, program systems and performance
           reporting, but also financial management and internal control. In the context of our internal
           control framework, new processes and controls were documented and assessed for each
           of these new initiatives. In addition, Federal Student Aid continued to address previously
           reported problems. As a result of this focus on internal control, Federal Student Aid was
           able to achieve the following:

              An unqualified opinion was received on the principal financial statements for the ninth
               consecutive year, demonstrating a clear pattern of financial accountability.
              No material weaknesses were identified as part of our Report on Internal Control for
               the eighth consecutive year.
              Reasonable assurance was provided of our internal control over financial reporting.
               The successful results of this assessment effort are described further in the ―Analysis
               of Federal Student Aid‘s Systems, Controls and Legal Compliance‖ section.
              Continuous successful implementation of the ECASLA initiatives, with no significant
               problems.
              Continued successful implementation of Title IV Additional Servicers to handle the
               significant increase in loan servicing volume as a result of FFEL loans purchased
               through ECASLA and the transition to 100 percent Direct Loan originations mandated
               by SAFRA.

           Also, through cooperative efforts between Federal Student Aid and the Department‘s
           Office of the Chief Financial Officer, Office of Chief Information Officer, and Budget
           Service, the Department continued to correct two significant deficiencies in credit reform
           estimation and information systems controls that were identified in the FY 2009 Internal
           Control Report. The complexity of these two issues has required an ongoing multi-year
           effort. As a result of these concerted efforts, in the FY 2010 Report on Internal Control, the
           auditors recognized improvements in both areas.

           FY 2010 has brought many financial management and internal control challenges. I am
           proud to be working with a group of professionals throughout the Department who
           enthusiastically accepted these challenges and worked in concert to ensure the
           Department‘s success.

           Sincerely,




           John W. Hurt, III
           Chief Financial Officer
           November 15, 2010




FY 2010                                                - 62 -                      Federal Student Aid Annual Report
                                            Principal Financial Statements and Notes to Principal Financial
Financial Section
                                            Statements


           Principal Financial Statements and Notes to Principal Financial
           Statements




FY 2010                                     - 63 -                        Federal Student Aid Annual Report
                    Principal Financial Statements and Notes to Principal Financial
Financial Section
                    Statements




FY 2010             - 64 -                        Federal Student Aid Annual Report
Financial Section                                                                                        Consolidated Balance Sheet


                                             United States Department of Education
                                                      Federal Student Aid
                                                  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)                                       $       53,465         $       66,807
              Accounts Receivable (Note 4)                                                                                 (3)
         Total Intragovernmental                                                                53,465                 66,804
         Cash and Other Monetary Assets (Note 5)                                                 2,965                  2,414
         Accounts Receivable, Net (Note 4)                                                         221                    504
         Credit Program Receivables, Net (Note 6)                                              367,410                233,959
         General Property, Plant and Equipment, Net (Note 7)                                        25                     34
         Other Assets (Note 8)                                                                      83                    272
        Total Assets (Note 2)                                                           $      424,169        $       303,987


        Liabilities:
          Intragovernmental:
              Accounts Payable                                                          $            1         $
              Debt (Note 9)                                                                    373,656                234,858
              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)                                     12,832                 11,395
          Total Intragovernmental                                                              391,878                252,236

         Accounts Payable                                                                        4,544                  1,734
         Accrued Grant Liability (Note 11)                                                       2,619                  1,929
         Liabilities for Loan Guarantees (Note 6)                                               14,479                 20,543
         Other Liabilities (Note 10)                                                               202                    494
        Total Liabilities                                                               $      413,722        $       276,936

          Commitments and Contingencies (Note 18)

        Net Position:

          Unexpended Appropriations                                                     $       17,259         $       27,328
          Cumulative Results of Operations                                                      (6,812)                  (277)

        Total Net Position (Note 12)                                                    $       10,447         $       27,051

        Total Liabilities and Net Position                                              $      424,169         $      303,987




        The accompanying notes are an integral part of these statements.




FY 2010                                                               - 65 -                     Federal Student Aid Annual Report
Financial Section                                                                             Consolidated Statement of Net Cost



                                         United States Department of Education
                                                  Federal Student Aid
                                          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                                                                $       27,828     $      (11,062)
              Less: Earned Revenue                                                               17,071             11,079
              Net Program Costs                                                                  10,757            (22,141)

           Total Program Costs                                                           $       10,757     $      (22,141)


           American Recovery and Reinvestment Act
             Gross Costs                                                                 $        8,920     $        7,572
             Less: Earned Revenue
             Net Program Costs                                                                    8,920              7,572

           Total Program Costs                                                           $        8,920     $        7,572


      Net Cost of Operations (Notes 13 &16)                                              $       19,677     $      (14,569)




      The accompanying notes are an integral part of these statements.




FY 2010                                                           - 66 -                        Federal Student Aid Annual Report
Financial Section                                                                        Consolidated Statement of Changes in Net Position


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


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




      Beginning Balance                                  $              (277) $              27,328    $         (6,273) $       13,472

      Budgetary Financing Sources:
       Appropriations Received                           $                           $       35,215    $                   $      41,951
       Other Adjustments (rescissions, etc)                                                    (941)                 1               (26)
       Appropriations Used                                            44,343                (44,343)             28,069          (28,069)
       Nonexchange Revenue                                                12

      Other Financing Sources:
       Imputed Financing from Costs Absorbed by Others                   10                                           9
       Others                                                       (31,223)                                    (36,652)

      Total Financing Source                             $           13,142      $          (10,069)   $         (8,573) $       13,856

      Net Cost of Operations                             $          (19,677) $                         $         14,569    $

      Net Change                                         $           (6,535) $              (10,069)   $          5,996    $     13,856

      Ending Balances (Note 12)                          $           (6,812) $               17,259    $           (277) $       27,328




      The accompanying notes are an integral part of these statements.




FY 2010                                                             - 67 -                                 Federal Student Aid Annual Report
Financial Section                                                                        Combined Statement of Budgetary Resources


                                         United States Department of Education
                                                  Federal Student Aid
                                       Combined Statement of Budgetary Resources
                                        For the Years Ended September 30, 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                    $     13,476    $      9,690     $    3,620     $    26,517
      Recoveries of prior year Unpaid Obligations                                 410           4,434            398           8,035
      Budgetary Authority:
          Appropriations                                                       39,140                         41,960             130
          Borrowing Authority (Note 15)                                                      182,901                         200,214
          Spending authority from offsetting collections (gross):
            Earned
               Collected                                                        1,499         51,912           1,569          45,512
               Change in Receivables from Federal Sources                                          3                              (3)
          Change in unfilled customer orders Without advance from
          Federal Sources                                                                          4
      Subtotal                                                           $     40,639    $   234,820      $   43,529     $   245,853
      Temporarily not available pursuant to Public Law                           (561)              0           (887)               0
      Permanently not available                                                (4,833)       (17,333)           (688)        (13,130)
      Total Budgetary Resources (Note 15)                                $     49,131    $   231,611      $   45,972     $   267,275

      Status of Budgetary Resources:
      Obligations incurred: Direct (Note 15)                             $     44,957    $   216,202      $   32,496     $   257,585
      Unobligated Balances: Apportioned                                           192          1,433          10,376             474
      Unobligated Balance not available                                         3,982         13,976           3,100           9,216
      Total Status of Budgetary Resources                                $     49,131    $   231,611      $   45,972     $   267,275

      Change in Obligated Balance:
      Obligated balance, net: Unpaid obligations, brought forward,
      October 1                                                          $     17,730    $   133,575      $   12,927     $    41,157
      Uncollected customer payments from Federal Sources,
      brought forward, October 1                                                                    3
      Total, unpaid obligated balance, brought forward, net              $     17,730    $    133,578     $    12,927    $     41,157
      Obligation Incurred, net (+/-)                                           44,957         216,202          32,496         257,585
      Gross Outlays                                                           (43,685)       (194,738)        (27,295)       (157,132)
      Recoveries of prior year unpaid obligations, actual                        (410)         (4,434)           (398)         (8,035)
      Change in uncollected customer payments from Federal
      Sources (+/-)                                                                                (7)                              3
      Obligated Balance, net, end of period:
          Unpaid Obligations                                             $     18,592    $   150,605      $   17,730     $   133,575
          Uncollected customer payments from Federal Sources                                      (4)                              3
      Total, unpaid obligated balance, net, end of period                $     18,592    $   150,601      $   17,730     $   133,578

      Net Outlays:
          Gross Outlays                                                  $     43,685    $   194,738      $    27,295    $   157,132
          Offsetting collections                                               (1,499)       (51,912)          (1,569)       (45,512)
          Distributed Offsetting receipts                                     (28,787)              0         (31,646)              0
      Net Outlays (Note 15)                                              $     13,399    $   142,826      $    (5,920)   $   111,620


      The accompanying notes are an integral part of these statements.




FY 2010                                                               - 68 -                             Federal Student Aid Annual Report
Financial Section                                                               Notes to Principal Financial Statements


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

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

        The Direct Loan Program, added to the HEA by the Student Loan Reform Act of 1993,
        authorizes FSA to make loans directly to eligible undergraduate and graduate students and their
        parents through participating schools. FSA borrows money from the Treasury to fund the loans.
        The program does not charge interest to eligible borrowers while they are in school or in
        qualified deferment periods.

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

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

        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, 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 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.

FY 2010                                            - 69 -                           Federal Student Aid Annual Report
Financial Section                                                           Notes to Principal Financial Statements



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

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

        The Recovery Act, enacted on February 17, 2009 as P.L. 111-5, provided funding 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. The Recovery Act funds provided to the
        Department include additional funding for student aid administration and student financial
        assistance grant programs managed and administered by FSA. These activities are accounted
        for separately from non-Recovery Act funds. (See Note 17)

           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 FSA reporting group, as
        required by the Chief Financial Officers Act of 1990 and the Government Management Reform
        Act of 1994. The financial statements were prepared from the books and records of FSA, in
        accordance with accounting principles generally accepted in the United States of America for
        federal entities, issued by the Federal Accounting Standards Advisory Board, and OMB Circular
        No. A-136 Financial Reporting Requirements, as revised 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 FSA‘s use of budgetary resources.

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

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



FY 2010                                          - 70 -                         Federal Student Aid Annual Report
Financial Section                                                             Notes to Principal Financial Statements


        Transactions and balances among FSA funds 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 were prepared. Minor adjustments to
        any of these components may create significant changes to the estimate and the amounts
        recorded.

        FSA and the Department estimate 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 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).

        FSA and the Department use 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. FSA and the
        Department use a probabilistic technique to forecast interest rates based on different methods
        to establish the relationship between an event‘s occurrence and the magnitude of its probability.
        The Department‘s approach estimates interest rates under numerous scenarios and then bases
        interest rates on the average interest rates weighted by the assumed probability of each
        scenario occurring. Probabilistic methodology facilitates the modeling of the Department‘s
        unique loan programs.

        For each program, cash flows are projected over the life of the loans, aggregated by loan type,
        cohort year, and risk category. The loan‘s cohort year represents the year a loan was obligated
        or a loan was guaranteed, regardless of the timing of disbursements. Risk categories include
FY 2010                                           - 71 -                          Federal Student Aid Annual Report
Financial Section                                                             Notes to Principal Financial Statements


        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 FSA and the
        Department at the time the financial statements were prepared. Assumptions and their impact
        are updated after the Mid-Session Review to account for significant subsequent changes in
        activity. 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.

        FSA and the Department recognize that cash flow projections and the sensitivity of changes in
        assumptions can have a significant impact on estimates. Management has attempted to
        mitigate fluctuations in the estimates by using trend analysis to project future cash flows.
        Changes in assumptions could significantly affect the amounts reflected in these 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 and FSA to incur
        financial obligations that will result in outlays. FSA‘s budgetary resources include (1)
        unobligated balances of resources from prior years, (2) recoveries of prior-year obligations, and
        (3) new resources, which include appropriations, authority to borrow from Treasury, and
        spending authority from collections.

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

        Authority to borrow from Treasury provides most of the funding for disbursements made under
        the Direct Loan Program, 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 FSA‘s debt to
        Treasury. Major sources of collections include (1) principal and interest collections from
        borrowers, (2) related fees, and (3) interest from Treasury on balances in certain credit financing
        accounts that make and administer loans and guarantees.

        Borrowing authority is an indefinite budgetary resource authorized under the Credit Reform Act.
        This resource, when realized, finances the unsubsidized portion of the 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.
        Treasury prescribes the terms and conditions of borrowing authority and lends to the financing
        account amounts as appropriate. Amounts borrowed, but not yet disbursed, are included in
        uninvested funds and earn interest. Treasury uses the same weighted average interest rates for
FY 2010                                           - 72 -                          Federal Student Aid Annual Report
Financial Section                                                                Notes to Principal Financial Statements


        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, 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
        FSA. FSA‘s records are reconciled with those of Treasury.

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

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

        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 FSA from the public and other federal agencies.
        Receivables from the public result from overpayments to recipients of grants and other financial
        assistance programs, and disputed costs resulting from audits of educational assistance
        programs. Amounts due from other federal agencies result from reimbursable agreements
        entered into by FSA with these agencies to provide various goods and services. Accounts
        receivable are reduced to net realizable value by an allowance for uncollectible amounts.

        Estimates for the allowance for loss on uncollectible accounts are based on historical data.
        (See Note 4)
FY 2010                                            - 73 -                            Federal Student Aid Annual Report
Financial Section                                                              Notes to Principal Financial Statements



           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.

        FSA and the Department disburse funds to a guaranty agency. A guaranty agency, through its
        Federal Fund, pays lender claims and default aversion fees. The Operating Fund is the property
        of the guaranty agency 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 FSA 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
        FSA less the present value of related inflows. The estimated present value of net long-term
        cash outflows of FSA for subsidized costs is net of recoveries, interest supplements, and
        offsetting fees. FSA 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.


FY 2010                                           - 74 -                           Federal Student Aid Annual Report
Financial Section                                                                         Notes to Principal Financial Statements


        Components of subsidy costs for loans and guarantees include defaults (net of recoveries),
        contractual payments to third-party private loan collectors who receive a set percentage of
        amounts collected and, as an offset, origination and other fees collected. For direct loans, the
        difference between interest rates incurred by the Department and FSA 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 interest rates on loans made by those lenders. Subsidy costs are recognized when
        direct loans or guaranteed loans are disbursed to borrowers and re-estimated each year.
        (See Note 6)

           General Property, Plant and Equipment
        In accordance with the Department‘s policy, FSA 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, FSA capitalizes bulk purchases of property and equipment with an
        aggregate cost of $500,000 or more. A bulk purchase is defined as the purchase of like items
        related to a specific project or the purchase of like items occurring within the same fiscal year
        that have an estimated useful life greater than two years. Property and equipment are
        depreciated over their estimated useful lives using the straight-line method of depreciation.
        Internal Use Software meeting the above cost and useful life criteria is also capitalized. Internal
        Use Software is either purchased off the shelf, internally developed, or contractor developed
        solely to meet the agency‘s needs. (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. FSA‘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 FSA or the
        Department without budget authority. Liabilities for which an appropriation has not been enacted
        are classified as liabilities not covered by budgetary resources, and there is no certainty that an
        appropriation will be enacted. The government, acting in its sovereign capacity, can abrogate


FY 2010                                                 - 75 -                                 Federal Student Aid Annual Report
Financial Section                                                              Notes to Principal Financial Statements


        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. FSA repays
        the principal based on available fund balances. Interest on the debt is calculated at fiscal year-
        end using rates set by Treasury, with such rates generally fixed based on the rate for 10-year
        Treasury securities. As discussed in Note 6, the interest received by FSA from borrowers will
        vary from the rate paid to Treasury. Principal and interest payments to Treasury are made
        annually. (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 FSA 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. Cumulative results of operations represent the net
        difference since inception between (1) expenses and (2) revenues and financing sources.
        (See Note 12)

           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 either in the Civil
        Service Retirement System (CSRS), a defined benefit plan or in the Federal Employees
        Retirement System (FERS), a defined benefit and contribution plan. For CSRS employees, the
        Department contributes a fixed percentage of pay.

        FERS consists of Social Security, a basic annuity plan, and the Thrift Savings Plan. The
        Department and the employee contribute to Social Security and the basic annuity plan at rates
        prescribed by law. In addition, the Department is required to contribute to the Thrift Savings
        Plan a minimum of 1 percent per year of the basic pay of employees covered by this system
        and to match voluntary employee contributions up to 3 percent of the employee‘s basic pay, and


FY 2010                                           - 76 -                           Federal Student Aid Annual Report
Financial Section                                                             Notes to Principal Financial Statements


        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 DOL, which pays valid claims and
        subsequently seeks reimbursement from the Department for these paid claims.

        The FECA liability consists of two components. The first component is based on actual claims
        paid and recognized by the Department as a liability. Generally the Department reimburses 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
        FSA‘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 FSA 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                                          - 77 -                           Federal Student Aid Annual Report
Financial Section                                                                                 Notes to 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                                    $                  -      $                  7
                        Total Intragovernmental                                                       -                         7
                 With the Public
                     Cash and Other Monetary Assets                                               2,965                      2,414
                     Accounts Receivable, Net                                                         3                          -
                     Credit Program Receivables, Net                                                183                        184
                        Total With the Public                                                   3,151                     2,598
               Total Non-Entity Assets                                                          3,151                     2,605
               Entity Assets                                                                  421,018                   301,382
               Total Assets                                                        $          424,169        $          303,987


        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                                                           $           20,341        $          29,662
               Revolving Funds                                                                     33,106                   37,124
               Special Funds                                                                           18                       14
               Other Funds                                                                              -                        7
               Fund Balance with Treasury                                              $           53,465        $          66,807




FY 2010                                                - 78 -                                         Federal Student Aid Annual Report
Financial Section                                                                                    Notes to 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                                                                $            1,625          $      10,850
                 Unavailable                                                                          14,993                  9,902
               Obligated Balance, Not Yet Disbursed                                                   36,286                 45,161
               Authority Temporarily Precluded from Obligation                                           561                    887
               Non-Budgetary Fund Balance with Treasury                                                    -                      7
               Fund Balance with Treasury                                                 $           53,465          $      66,807




        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                     $                  -             $                 -         $              -
               With the Public                                         261                            (40)                       221

               Accounts Receivable                   $                 261            $               (40)        $              221


                                                                                              2009
                                                           Gross
                                                         Receivables                      Allowance                Net Receivables

               Intragovernmental                     $                  (3)           $                 -         $              (3)
               With the Public                                         536                            (32)                       504

               Accounts Receivable                   $                 533            $               (32)        $              501




FY 2010                                                   - 79 -                                            Federal Student Aid Annual Report
Financial Section                                                                   Notes to Principal Financial Statements



        Note 5.       Cash and Other Monetary Assets
        Cash and Other Monetary Assets consist of reserves held in the FFEL Guaranty Agency
        Federal Funds. Changes in the valuation of the Federal Fund increase or decrease the
        Department‘s Cash and Other Monetary Assets with a corresponding change in 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 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.

FY 2010                                             - 80 -                              Federal Student Aid Annual Report
Financial Section                                                             Notes to Principal Financial Statements


        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
        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

FY 2010                                           - 81 -                          Federal Student Aid Annual Report
Financial Section                                                             Notes to Principal Financial Statements


        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
        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, $63 billion were disbursed 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

FY 2010                                          - 82 -                           Federal Student Aid Annual Report
Financial Section                                                              Notes to Principal Financial Statements


        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 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.
        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 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
FY 2010                                           - 83 -                           Federal Student Aid Annual Report
Financial Section                                                           Notes to Principal Financial Statements


        the future projected cash flows of the past cohort year when 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 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.




FY 2010                                         - 84 -                          Federal Student Aid Annual Report
Financial Section                                                                              Notes to 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
                    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

               Credit Program Receivables, Net                                             $     367,410        $    233,959


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



        Federal Family Education Loan Program. The following schedule summarizes the principal
        and related interest receivables, net of the allowance for subsidy:
                                                 FFEL Program 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


FY 2010                                                   - 86 -                                 Federal Student Aid Annual Report
Financial Section                                                                                         Notes to Principal Financial Statements


        redeemed by selling the underlying loans to the Department during FY 2010 and FY 2009,
        respectively.
        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.


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



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




FY 2010                                                         - 88 -                                      Federal Student Aid Annual Report
Financial Section                                                                             Notes to 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)




FY 2010                                                - 89 -                                      Federal Student Aid Annual Report
Financial Section                                                                                    Notes to Principal Financial Statements

        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.

        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




FY 2010                                                     - 90 -                                          Federal Student Aid Annual Report
Financial Section                                                                   Notes to Principal Financial Statements

        Subsidy Expense

        William D. Ford Federal Direct Loan Program

                                       Direct Loan Program Subsidy Expense
                                                       (Dollars in Millions)

                                                                                   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 $3.7 billion.
        Rising default rates increased subsidy cost by $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                                             - 91 -                                Federal Student Aid Annual Report
Financial Section                                                                      Notes to 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)




FY 2010                                                - 92 -                                Federal Student Aid Annual Report
Financial Section                                                                   Notes to Principal Financial Statements


        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
        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 schedules 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 1994-2008.

        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

FY 2010                                               - 93 -                               Federal Student Aid Annual Report
Financial Section                                                                             Notes to Principal Financial Statements


        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.

        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
                                          Program                  Program                 Program              FFEL Program
               Operating Expense         $        536           $           314       $            458           $       269
               Other Expense                       22                            13                 23                    13

               Administrative Expenses   $        558          $            327       $            481           $       282




FY 2010                                            - 94 -                                         Federal Student Aid Annual Report
Financial Section                                                                               Notes to Principal Financial Statements


        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                    $                122     $        (97)     $           25
               Furniture and Fixtures                                                   2             (2)                     -

               General Property, Plant, and Equipment              $                124     $        (99)     $           25


                                                                                               2009
                                                                                            Accumulated           Net Asset
                                                                           Cost             Depreciation           Value

               Information Technology, Internal Use Software,
               and Telecommunications Equipment                     $               112     $        (78)     $               34
               Furniture and Fixtures                                                   2             (2)                         -

               General Property, Plant, and Equipment               $               114     $        (80)     $               34


        The majority of the asset costs relate to financial management systems and other information
        technology and communications improvements.

        Leases
        FSA 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 right to extend the lease term by exercising additional one-year
        options.


        Note 8.        Other Assets
        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 $83 million and $272 million as of September 30,
        2010 and 2009, respectively.




FY 2010                                                  - 95 -                                     Federal Student Aid Annual Report
Financial Section                                                                                Notes to Principal Financial Statements



        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
               Total                           $ 234,858    $           -       $      155,175       $   (16,377)    $    373,656


                                                                  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
               Total                           $ 128,256    $         12        $      116,981       $   (10,391)    $    234,858



        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.




FY 2010                                                - 96 -                                        Federal Student Aid Annual Report
Financial Section                                                                                                Notes to 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
                      Employer Contributions and Payroll Taxes               $            1          $           -    $        1      $             -
                      Liability for Deposit Funds                                             -                  -              -               8
                      Accrued Payroll and Benefits                                            -                  7              -               6
                      Deferred Revenue                                                        -            182                  -             467
                      Liabilities in Miscellaneous Receipt Accounts                12,647                        -        11,209                    -
               Total Other Liabilities Covered by Budgetary
               Resources                                                           12,648                  189            11,210              481
               Liabilities Not Covered by Budgetary Resources
                    Current
                      Accrued Unfunded Annual Leave                                           -                  9              -               8
                    Non-current
                      Accrued Unfunded FECA Liability                                     1                      -             1                    -
                      Liabilities in Miscellaneous Receipt Accounts                    183                       -           184                    -
                      Accrued FECA Actuarial Liability                                        -                  4              -               5
               Total Other Liabilities Not Covered by Budgetary
               Resources                                                               184                  13               185               13

               Other Liabilities                                             $     12,832         $        202        $   11,395     $        494



        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 $197 million and $198 million as
        of September 30, 2010 and 2009, respectively.
        As of September 30, 2010 and 2009, liabilities on the Balance Sheet totaled $413.7 billion and
        $276.9 billion respectively. Of this amount, liabilities covered by budgetary resources totaled
        $413.5 billion as of September 30, 2010, and $276.7 billion as of September 30, 2009.




FY 2010                                                        - 97 -                                                Federal Student Aid Annual Report
Financial Section                                                                          Notes to Principal Financial Statements

        Note 11.       Accrued Grant Liability
        FSA‘s accrued grant liability was $2,619 million and $1,929 million as of September 30, 2010
        and 2009, respectively. These amounts include $603 million and $634 million accrued grant
        liability for Recovery Act funds administered by FSA for FY 2010 and FY 2009, respectively.

        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                                                           $         166      $       10,360
                 Not Available                                                                 988                 533
               Undelivered Orders                                                           15,544              15,548
               Authority Temporarily Precluded from Obligation                                 561                 887

               Unexpended Appropriations                                             $      17,259      $       27,328


        FSA had Cumulative Results of Operations of $(6,812) million as of September 30, 2010, and
        $(277) million as of September 30, 2009. Cumulative Results of Operations consists mostly of
        unfunded upward subsidy re-estimates, other unfunded expenses, and net investments of
        capitalized assets.




FY 2010                                                  - 98 -                                 Federal Student Aid Annual Report
Financial Section                                                                       Notes to Principal Financial Statements




        Note 13.         Intragovernmental Cost and Exchange Revenue by Program
        As required by the Government Performance and Results Act of 1993, FSA‘s reporting
        organization has been aligned with Strategic Goal 3 presented in the U.S. Department of
        Education‘s Strategic Plan 2007—2012. Strategic Goal 3, Ensure the Accessibility, Affordability,
        and Accountability of Higher Education, and Better Prepare Students and Adults for
        Employment and Future Learning, is a sharply defined directive that guides divisions to carry
        out the vision and programmatic mission of FSA.
        The goals of the Recovery Act are consistent with the Department‘s current Strategic Goals and
        programs. For reporting purposes, an American Recovery and Reinvestment Act net cost
        program has been created.
        The following table presents FSA's gross cost and exchange revenue by program for FY 2010
        and FY 2009. Gross costs and earned revenue are classified as intragovernmental (exchange
        transactions between FSA and other entities within the federal government) or with the public
        (exchange transactions between FSA and non-federal entities).

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

                                                                                       2010                2009

               Ensure Accessibility, Affordability and Accountability of Higher Education and Career and Technical
               Advancement
               Intragovernmental Gross Cost                                        $     16,286        $       10,079
               Public Gross Cost                                                         11,542               (21,141)
                    Total Gross Program Costs                                            27,828               (11,062)
               Intragovernmental Earned Revenue                                           5,862                   4,644
               Public Earned Revenue                                                     11,209                   6,435
                Total Program Earned Revenue                                             17,071                11,079
               Total Program Cost                                                        10,757               (22,141)


               American Recovery and Reinvestment Act
               Intragovernmental Gross Cost                                                    -                      -
               Public Gross Cost                                                          8,920                   7,572
                    Total Gross Program Costs                                             8,920                   7,572
               Intragovernmental Earned Revenue                                                -                      -
               Public Earned Revenue                                                           -                      -
                Total Program Earned Revenue                                                   -                      -
               Total Program Cost                                                         8,920                   7,572


               Net Cost of Operations                                              $      19,677       $      (14,569)




FY 2010                                                - 99 -                                 Federal Student Aid Annual Report
Financial Section                                                                                  Notes to 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
              Total                            $ 16,204       $    (152) $ 16,052                  $   4,869   $ 11,183 $ 16,052


                                                                                            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
              Total                            $   9,871      $      337          $10,208          $   3,813    $ 6,395   $10,208


        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 compares budgetary resources with the status of those
        resources. As of September 30, 2010, budgetary resources were $280,742 million and net
        outlays were $156,225 million. As of September 30, 2009, budgetary resources were $313,247
        million and net outlays were $105,700 million.
           Permanent Indefinite Budget Authority
        The Direct Loan, FFEL, and TEACH Programs have permanent indefinite budget authority
        through legislation. Part D of the Direct Loan Program and Part B of the FFEL Program,
        pursuant to the HEA pertain to the existence, purpose, and availability of this permanent
        indefinite budget authority.


FY 2010                                            - 100 -                                               Federal Student Aid Annual Report
Financial Section                                                                             Notes to Principal Financial Statements


           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 Category
        Obligations incurred by apportionment category, as of September 30, 2010 and 2009, consisted
        of the following:


                                  Obligations Incurred by Apportionment Category
                                                          (Dollars in Millions)

                                                                                      2010                     2009
               Direct
                 Category A                                                       $              910      $              766
                 Category B                                                                  260,245                 289,236
                 Exempt from Apportionment                                                         4                      79

               Obligations Incurred                                               $          261,159      $          290,081


        Category A apportionments are those resources that can be obligated without restriction on the
        purpose of the obligation, other than to be in compliance with legislation underlying programs for
        which the resources were made available. Category B apportionments are restricted by purpose
        for which obligations can be incurred. In addition, some resources are available without
        apportionment by OMB.
           Unused Borrowing Authority
        Unused borrowing authority, as of September 30, 2010 and 2009, consisted of the following:
                                             Unused Borrowing Authority
                                                      (Dollars in Millions)

                                                                                      2010                    2009
             Beginning Balance, Unused Borrowing Authority                        $    106,147            $     25,650
             Current Year Borrowing Authority                                          182,901                 200,214
             Funds Drawn From Treasury                                                (155,175)               (116,981)
             Borrowing Authority Withdrawn                                               (968)                  (2,736)

             Ending Balance, Unused Borrowing Authority                           $    132,905            $    106,147


        FSA 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. FSA periodically reviews its borrowing authority balances in relation to its
        obligations and may cancel unused amounts.




FY 2010                                            - 101 -                                        Federal Student Aid Annual Report
Financial Section                                                                       Notes to Principal Financial Statements


           Undelivered Orders at the End of the Period
        Undelivered orders, as of September 30, 2010 and 2009, consisted of the following:
                                                Undelivered Orders
                                                     (Dollars in Millions)

                                                                                 2010                    2009
               Budgetary                                                     $       15,589        $         15,513
               Non-Budgetary                                                        147,032                 132,278

               Undelivered Orders (Unpaid)                                   $      162,621        $        147,791


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

           Explanation of Differences Between the Statement of Budgetary Resources and the
           Budget of the United States Government
        Budgetary accounting as shown in the President‘s Budget includes a public enterprise fund that
        reflects the gross obligations by the FFEL Program for the estimated activity of the consolidated
        Federal Funds of the guaranty agencies. Ownership by the federal government is independent
        of the actual control of the assets. Since the actual operation of the Federal Fund is
        independent from the Department‘s direct control, budgetary resources and obligations are
        estimated and disclosed in the President‘s Budget to approximate the gross activities of the
        combined Federal Funds. Amounts reported on the FY 2009 Statement of Budgetary Resources
        for the Federal Fund are compiled through combining all guaranty agencies‘ annual reports to
        determine a net valuation amount for the Federal Fund.




FY 2010                                         - 102 -                                     Federal Student Aid Annual Report
Financial Section                                                                          Notes to 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                                                      $   (261,159)    $   (290,081)
                 Spending Authority from Offsetting Collections and Recoveries                    58,262          55,511
                 Offsetting Receipts                                                              28,787          31,646
                 Imputed Financing from Costs Absorbed by Others                                     (10)             (9)
               Total Resources Used to Finance Activities                                      (174,120)        (202,933)
               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 (+/-)                                    (15,810)         (95,775)
                 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                                                                     43,735          39,460
                 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                               (180,123)        (147,641)
               Total Resources Used to Finance Items Not Part of the Net Cost of
               Operations                                                                      (141,315)        (202,865)
               Components Not Requiring or Generating Resources
                 Depreciation and Amortization                                                    1,472             330
                 Other (+/-)                                                                          1             448
               Total Components of the Net Cost of Operations that Will Not Require
               or Generate Resources                                                              1,473             778
               Components Requiring or Generating Resources in Future Periods
                 Increase in Annual Leave Liability                                                  (1)              -
                 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 (+/-)                                                                          3              19
               Total Components of the Net Cost of Operations that Will Require or
               Generate Resources in Future Periods                                              11,655          13,859

               Net Cost of Operations                                                          $(19,677)    $    14,569




FY 2010                                                 - 103 -                                 Federal Student Aid Annual Report
Financial Section                                                                                          Notes to Principal Financial Statements

        Note 17.         American Recovery and Reinvestment Act of 2009
        The Recovery Act provided $16,543 million for student aid administration and student financial
        assistance programs managed and administered by FSA. Funds provided for student financial
        assistance programs included additional Pell Grant authority for low and middle-income
        undergraduate students, an increase to the per Pell grant amount, and additional funding made
        available in the federal work study program. Additional student aid administration funding was
        provided to increase the number of Title IV student loan servicing vehicles and to improve
        operational performance to collect and deliver loan and grant data.
        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

                    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
                    Total Student Financial Assistance                                        16,483                16,483                   15,792

                    Student Aid Administration                                                    60                    60                       52
                    Total                                                          $          16,543         $      16,543          $        15,844

                *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.




                                          American Recovery and Reinvestment Act of 2009
                                                                          (Dollars in Millions)
                                                                                         Cumulative Totals as of September 30, 2009

                                                                                  Appropriations            Obligations                 Outlays

                    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
                    Total Student Financial Assistance                                        16,483                  8,697                    6,904

                    Student Aid Administration                                                    60                     29                        1
                    Total                                                          $          16,543         $        8,726         $          6,905




FY 2010                                                        - 104 -                                           Federal Student Aid Annual Report
Financial Section                                                                 Notes to Principal Financial Statements


        Note 18.      Contingencies
           Guaranty Agencies
        FSA 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 academic latest 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.
        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. FSA
        may be required to compensate Federal Perkins Loan Program institutions for the cost of the
        partial loan forgiveness. Payments required under the Federal Perkins Loan partial forgiveness
        statutes do not have a material effect on FSA‘s financial statements.
           Litigation and Other Claims
        The Department is involved in various lawsuits incidental to its operations. In the opinion of
        management, the ultimate resolution of pending litigation will not have a material effect on
        FSA‘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 FSA‘s
        financial position.




FY 2010                                           - 105 -                             Federal Student Aid Annual Report
Financial Section                                                              Required Supplementary Stewardship Information



            Required Supplementary Stewardship Information

            Investment in Human Capital

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

            Expenses incurred for human capital investments consisted of the following for FY 2010
            and the preceding four years:

                                         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
           Recovery Act                              8,869               7,571
           Grant Programs                           26,799              17,302        17,464          15,092         15,447
           Salaries and Administrative                 208                 186           189             173            172
          Total                                 $   19,965       $    (14,484)   $    20,037     $    19,650   $     50,336



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

            The FFEL Loan Program operates with state and private nonprofit guaranty agencies to
            provide loan guarantees and interest supplements through permanent budget authority on
            loans by private lenders to eligible students. The FFEL Loan Program expenses include
            the Loan Participation Purchase and Loan Purchase Commitment expenses of $(607)
            million and $(466) million respectively.

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

            ECASLA authorized the Secretary to buy guaranteed student loans for the 2008-2009
            academic year. This authority to buy guaranteed student loans was extended to include
            eligible loans for the 2009-2010 academic year. The Department used this authority to
            purchase fully disbursed Stafford, Unsubsidized Stafford, and PLUS loans, through the
            Loan Purchase Commitment Program. In addition to buying fully disbursed loans, the
            Department had established agreements with FFEL lenders to buy participation interests
            in fully or partially disbursed loans, through its Loan Participation Purchase Program.
            Under the latter, a lender, through an approved sponsor, transferred the title of an eligible
            loan to a custodian who issued a participation certificate. The Department purchased a
            participation interest issued by the custodian, who in turn remitted funds to the lender. The
            participation interests must have been redeemed and amounts provided under these
            agreements remitted to the Department. Lenders could obtain outside funding or opt to
            have the Department purchase fully disbursed loans that were part of the participation
            agreement. Loans purchased by the Department under the Loan Purchase Commitment

FY 2010                                                    - 106 -                              Federal Student Aid Annual Report
Financial Section                                                  Required Supplementary Stewardship Information


           Program and Loan Participation Purchase Program are subsequently treated for budget
           purposes as direct loans. The participation agreements and the Department‘s commitment
           to purchase guaranteed loans terminated September 30, 2010, and all sales were
           completed by October 15, 2010.

           In addition to the Loan Purchase and Loan Participation Purchase Programs, the
           Department has entered into a Put Agreement with an ABCP conduit. Under a Conduit
           program, the Conduit issues commercial paper to investors to finance its acquisition of
           interests in federally-reinsured student loans. The commercial paper is backed by the
           Conduit‘s interest in these loans. The Conduit uses proceeds of these sales to acquire
           these interests from lenders. Lenders that sell interests to the conduit must commit to
           provide new loans for the coming academic years with a portion of the proceeds of the
           sale. To ensure that the Conduit will have the resources to meet investor demands on
           maturing commercial paper if it is unable to reissue that paper or meet that demand from
           its own resources, the Department entered into a forward purchase commitment (a Put
           Agreement) with the Conduit, under which the Department agreed to purchase pledged
           loans from the Conduit at a prearranged price as and when needed to ensure that the
           Conduit can meet these demands of its investors. In addition, the Federal Financing Bank
           has entered into a Liquidity Loan Agreement with the Conduit to provide immediate
           advances as needed by the Conduit.

           Under the SAFRA, effective July 1, 2010, no new student loans will be made under the
           FFEL Program. However, FFEL lenders are 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.

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

           Federal Student Aid‘s programs link with the overall initiatives of the Department in
           enhancing education – a fundamental stepping-stone to higher living standards for
           American citizens. While education is vital to national economic growth, education‘s
           contribution is more than increased productivity and incomes. Education improves health,
           promotes social change, and opens doors to a better future for children and adults.

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

           Returns, or benefits, of investing in education come in many forms. While some returns
           accrue for the individual, others benefit society and the nation in general. Returns related
           to the individual include higher earnings, better job opportunities, and jobs that are less
FY 2010                                             - 107 -                       Federal Student Aid Annual Report
Financial Section                                                   Required Supplementary Stewardship Information


           sensitive to general economic conditions. Returns related to the economy and society
           includes reduced reliance on welfare subsidies, increased participation in civic activities
           and greater productivity.

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




FY 2010                                             - 108 -                       Federal Student Aid Annual Report
Financial Section                                                                                   Required Supplementary Information



             Required Supplementary Information

                                               United Stated Department of Education
                                                        Federal Student Aid
                                            Combining Statement of Budgetary Resources
                                                 For the Year ended September 30, 2010
                                                               (Dollars in Millions)

                                                                                                            American Recovery and
                                                                                Combined                       Reinvestment Act
                                                                                   Non-Budgetary                      Non-Budgetary
                                                                                   Credit Reform                      Credit Reform
                                                                                     Financing                          Financing
                                                                         Budgetary   Accounts              Budgetary    Accounts
      Budgetary Resources:
      Unobligated balance, brought forward, October 1                    $     13,476    $      9,690      $    7,817     $
      Recoveries of prior year Unpaid Obligations                                 410           4,434               9
      Budgetary Authority:
          Appropriations                                                       39,140                             831
          Borrowing Authority (Note 15)                                                      182,901
          Spending authority from offsetting collections (gross):
            Earned
              Collected                                                         1,499         51,912
              Change in Receivables from Federal Sources                                           3
          Change in unfilled customers orders Without advances
          from Federal Sources                                                                     4
          Subtotal                                                       $     40,639    $   234,820       $      831     $
      Nonexpenditure Transfers, net, anticipated and actual
      Temporarily not available pursuant to Public Law                           (561)              0                0            0
      Permanently not available                                                (4,833)       (17,333)            (831)
      Total Budgetary Resources (Note 15)                                $     49,131    $   231,611       $    7,826     $      0

      Status of Budgetary Resources:
      Obligations incurred: Direct (Note 15)                             $     44,957    $   216,202       $    7,826     $
      Unobligated Balances: Apportioned                                           192          1,433
      Unobligated Balance not available                                         3,982         13,976
      Total Status of Budgetary Resources                                $     49,131    $   231,611       $    7,826     $      0

      Change in Obligated Balance:
      Obligated balance, net: Unpaid obligations, brought forward,
      October 1                                                          $     17,730    $   133,575        $   1,821     $
      Uncollected customer payments from Federal Sources,
      brought forward, October 1                                                                    3
      Total, unpaid obligated balance, brought forward, net                    17,730         133,578            1,821
      Obligation Incurred, net (+/-)                                           44,957         216,202            7,826
      Gross Outlays                                                           (43,685)       (194,738)          (8,939)
      Recoveries of prior year unpaid obligations, actual                        (410)         (4,434)              (9)
      Change in uncollected customer payments from Federal
      Sources (+/-)                                                                                (7)                           (0)
      Obligated Balance, net, end of period:
          Unpaid Obligations                                             $     18,592    $   150,605       $      699     $
          Uncollected customer payments from Federal Sources                                      (4)                            (0)
      Total, unpaid obligated balance, net, end of period                $     18,592    $   150,601       $      699     $       0

      Net Outlays:
          Gross Outlays                                                  $     43,685    $   194,738       $    8,939     $
          Offsetting collections                                               (1,499)       (51,912)
          Distributed Offsetting receipts                                     (28,787)              0
      Net Outlays (Note 15)                                              $    (13,399)   $   142,826       $    8,939     $      0


FY 2010                                                          - 109 -                                 Federal Student Aid Annual Report
Financial Section                                                                                   Required Supplementary Information



                                             United States Department of Education
                                                        Federal Student Aid
                                            Combining Statement of Budgetary Resources
                                                 For the Year ended September 30, 2010
                                                               (Dollars in Millions)


                                                                                                              Direct Student Loan
                                                                           Non ARRA Combined                        Program
                                                                                   Non-Budgetary                       Non-Budgetary
                                                                                   Credit Reform                        Credit Reform
                                                                                     Financing                            Financing
                                                                         Budgetary   Accounts              Budgetary      Accounts
      Budgetary Resources:
      Unobligated balance, brought forward, October 1                    $      5,659    $      9,690      $       36     $     1,123
      Recoveries of prior year Unpaid Obligations                                 401           4,434                           3,061
      Budgetary Authority:
          Appropriations                                                       38,309                           3,482
          Borrowing Authority (Note 15)                                                      182,901                          129,880
          Spending authority from offsetting collections (gross):
            Earned
              Collected                                                         1,499         51,912                           19,619
              Change in Receivables from Federal Sources                                           3
          Change in unfilled customers orders Without advances
          from Federal Sources                                                                     4
          Subtotal                                                       $     39,808    $   234,820       $    3,482     $   149,499
      Nonexpenditure Transfers, net, anticipated and actual
      Temporarily not available pursuant to Public Law                           (561)              0                0               0
      Permanently not available                                                (4,002)       (17,333)             (13)         (9,188)
      Total Budgetary Resources (Note 15)                                $     41,305    $   231,611       $    3,505     $   144,495

      Status of Budgetary Resources:
      Obligations incurred: Direct (Note 15)                             $     37,131    $   216,202       $    3,482     $   142,161
      Unobligated Balances: Apportioned                                           192          1,433                              104
      Unobligated Balance not available                                         3,982         13,976               23           2,230
      Total Status of Budgetary Resources                                $     41,305    $   231,611       $    3,505     $   144,495

      Change in Obligated Balance:
      Obligated balance, net: Unpaid obligations, brought forward,
      October 1                                                          $     15,909    $   133,575       $              $    15,618
      Uncollected customer payments from Federal Sources,
      brought forward, October 1                                                                    3
      Total, unpaid obligated balance, brought forward, net              $     15,909    $    133,578      $         0    $    15,618
      Obligation Incurred, net (+/-)                                           37,131         216,202            3,482        142,161
      Gross Outlays                                                           (34,746)       (194,738)          (3,482)       (99,427)
      Recoveries of prior year unpaid obligations, actual                        (401)         (4,434)                         (3,061)
      Change in uncollected customer payments from Federal
      Sources (+/-)                                                                                (7)                             (0)
      Obligated Balance, net, end of period:
          Unpaid Obligations                                             $     17,893    $   150,605       $              $    55,291
          Uncollected customer payments from Federal Sources                                      (4)                              (0)
      Total, unpaid obligated balance, net, end of period                $     17,893    $   150,601       $        0     $    55,291

      Net Outlays:
          Gross Outlays                                                  $     34,746    $   194,738       $    3,482     $    99,427
          Offsetting collections                                               (1,499)       (51,912)                         (19,619)
          Distributed Offsetting receipts                                     (28,787)              0          (12,375)
      Net Outlays (Note 15)                                              $      4,460    $   142,826       $    (8,893)   $    79,808



FY 2010                                                          - 110 -                                 Federal Student Aid Annual Report
Financial Section                                                                                    Required Supplementary Information



                                             United States Department of Education
                                                        Federal Student Aid
                                            Combining Statement of Budgetary Resources
                                                 For the Year ended September 30, 2010
                                                               (Dollars in Millions)


                                                                                                             Federal Family Education
                                                                           Teach Grant Program                    Loan Program
                                                                                    Non-Budgetary                       Non-Budgetary
                                                                                    Credit Reform                       Credit Reform
                                                                                      Financing                            Financing
                                                                         Budgetary    Accounts              Budgetary      Accounts
      Budgetary Resources:
      Unobligated balance, brought forward, October 1                    $              7     $             $    2,580     $     8,567
      Recoveries of prior year Unpaid Obligations                                                  34                8           1,339
      Budgetary Authority:
          Appropriations                                                               27                        4,274
          Borrowing Authority (Note 15)                                                            97                           52,924
          Spending authority from offsetting collections (gross):
            Earned
              Collected                                                                            26            1,499          32,267
              Change in Receivables from Federal Sources                                                                             3
          Change in unfilled customers orders Without advances
          from Federal Sources                                                                       4
          Subtotal                                                       $             27     $   127       $    5,773     $    85,194
      Nonexpenditure Transfers, net, anticipated and actual
      Temporarily not available pursuant to Public Law                                               0                0               0
      Permanently not available                                                                   (16)            (865)         (8,129)
      Total Budgetary Resources (Note 15)                                $             34     $   145       $     7,496    $    86,971

      Status of Budgetary Resources:
      Obligations incurred: Direct (Note 15)                             $             27     $   145       $    4,475     $    73,896
      Unobligated Balances: Apportioned                                                                             27           1,329
      Unobligated Balance not available                                                 7                        2,994          11,746
      Total Status of Budgetary Resources                                $             34     $   145       $    7,496     $    86,971

      Change in Obligated Balance:
      Obligated balance, net: Unpaid obligations, brought forward,
      October 1                                                           $                   $    47       $       23     $   117,910
      Uncollected customer payments from Federal Sources,
      brought forward, October 1                                                                                                     3
      Total, unpaid obligated balance, brought forward, net              $               0    $     47      $        23    $   117,913
      Obligation Incurred, net (+/-)                                                    27         145            4,475         73,896
      Gross Outlays                                                                    (22)       (111)          (4,466)       (95,200)
      Recoveries of prior year unpaid obligations, actual                                          (34)              (8)        (1,339)
      Change in uncollected customer payments from Federal
      Sources (+/-)                                                                                 (4)                             (3)
      Obligated Balance, net, end of period:
          Unpaid Obligations                                             $               5    $    47       $       24     $    95,267
          Uncollected customer payments from Federal Sources                                       (4)                              (0)
      Total, unpaid obligated balance, net, end of period                $               5    $    43       $       24     $    95,267

      Net Outlays:
          Gross Outlays                                                  $             22     $   111       $     4,466    $    95,200
          Offsetting collections                                                                  (26)           (1,499)       (32,267)
          Distributed Offsetting receipts                                               (1)          0          (16,389)
      Net Outlays (Note 15)                                              $             (21)   $    85       $   (13,422)   $    62,933




FY 2010                                                          - 111 -                                  Federal Student Aid Annual Report
Financial Section                                                                               Required Supplementary Information



                                             United States Department of Education
                                                        Federal Student Aid
                                            Combining Statement of Budgetary Resources
                                                 For the Year ended September 30, 2010
                                                               (Dollars in Millions)



                                                                             Grant Programs             Administrative Funds
                                                                                    Non-Budgetary                Non-Budgetary
                                                                                    Credit Reform                Credit Reform
                                                                                      Financing                     Financing
                                                                         Budgetary    Accounts        Budgetary     Accounts
      Budgetary Resources:
      Unobligated balance, brought forward, October 1                    $      2,972    $            $      64     $
      Recoveries of prior year Unpaid Obligations                                 362                        31
      Budgetary Authority:
          Appropriations                                                       29,532                       994
          Borrowing Authority (Note 15)
          Spending authority from offsetting collections (gross):
            Earned
              Collected
              Change in Receivables from Federal Sources
          Change in unfilled customers orders Without advances
          from Federal Sources
          Subtotal                                                       $     29,532    $            $     994     $
      Nonexpenditure Transfers, net, anticipated and actual                       (18)                        18
      Temporarily not available pursuant to Public Law                           (561)          0               0            0
      Permanently not available                                                (3,039)                       (85)
      Total Budgetary Resources (Note 15)                                $     29,248    $     0      $    1,022    $       0

      Status of Budgetary Resources:
      Obligations incurred: Direct (Note 15)                             $     28,133    $            $   1,014     $
      Unobligated Balances: Apportioned                                           154                        11
      Unobligated Balance not available                                           961                        (3)
      Total Status of Budgetary Resources                                $     29,248    $     0      $   1,022     $       0

      Change in Obligated Balance:
      Obligated balance, net: Unpaid obligations, brought forward,
      October 1                                                          $     15,567    $            $     319     $
      Uncollected customer payments from Federal Sources,
      brought forward, October 1
      Total, unpaid obligated balance, brought forward, net              $     15,567    $     0      $     319     $       0
      Obligation Incurred, net (+/-)                                           28,133                     1,014
      Gross Outlays                                                           (25,951)                     (825)
      Recoveries of prior year unpaid obligations, actual                        (362)                      (31)
      Change in uncollected customer payments from Federal
      Sources (+/-)
      Obligated Balance, net, end of period:
          Unpaid Obligations                                             $     17,387    $            $     477     $
          Uncollected customer payments from Federal Sources                                                                (0)
      Total, unpaid obligated balance, net, end of period                $     17,387    $     0      $     477     $        0

      Net Outlays:
          Gross Outlays                                                  $     25,951    $            $     825     $
          Offsetting collections
          Distributed Offsetting receipts                                         (22)          0
      Net Outlays (Note 15)                                              $     25,929    $     0      $     825     $       0




FY 2010                                                          - 112 -                            Federal Student Aid Annual Report
Financial Section                                                                Other Accompanying Information



            Other Accompanying Information

            Management Challenges

            For details on FSA Management Challenges, please refer to relevant items included in the
            Management Challenges for FY 2011 narrative in the Management Discussion and
            Analysis section in the Department‘s AFR located at
            http://www.ed.gov/about/reports/annual/index.html.

            Summary of Financial Statement Audit and Management Assurances

            For details on FSA‘s programs, please refer to the Management‘s Assurance in the
            Management Discussion and Analysis "Analysis of Federal Student Aid's Systems,
            Controls and Legal Compliance" section of this document as well as the Summary of
            Financial Statement Audit and Management Assurance narrative in the Other
            Accompanying Information section in the Department‘s AFR located at
            http://www.ed.gov/about/reports/annual/index.html.

            Improper Payment Information Act of 2002 Reporting Details

            For improper payments information, FSA‘s activities are part of an overall Department
            integrated reporting effort. Please refer to the Improper Payment Information Act of 2002
            narrative in the Other Accompanying Information section in the Department's AFR located
            at http://www.ed.gov/about/reports/annual/index.html.




FY 2010                                            - 113 -                      Federal Student Aid Annual Report
Financial Section              Other Accompanying Information




FY 2010             - 114 -   Federal Student Aid Annual Report
Office of Inspector General Transmittal Letter


             Office of Inspector General Transmittal Letter




FY 2010                                          - 115 -      Federal Student Aid Annual Report
Office of Inspector General Transmittal Letter




FY 2010                                          - 116 -   Federal Student Aid Annual Report
Office of Inspector General Transmittal Letter




FY 2010                                          - 117 -   Federal Student Aid Annual Report
Office of Inspector General Transmittal Letter




FY 2010                                          - 118 -   Federal Student Aid Annual Report
Report of Independent Auditors


           Report of Independent Auditors




FY 2010                              - 119 -   Federal Student Aid Annual Report
Report of Independent Auditors




FY 2010                          - 120 -   Federal Student Aid Annual Report
Report of Independent Auditors




FY 2010                          - 121 -   Federal Student Aid Annual Report
Report of Independent Auditors




FY 2010                          - 122 -   Federal Student Aid Annual Report
Report on Internal Control over Financial Reporting Based on
an Audit of Financial Statements Performed in Accordance
with Government Auditing Standards


            Report on Internal Control over Financial Reporting Based on
            an Audit of Financial Statements Performed in Accordance
            with Government Auditing Standards




FY 2010                                             - 123 -    Federal Student Aid Annual Report
Report on Internal Control over Financial Reporting Based on
an Audit of Financial Statements Performed in Accordance
with Government Auditing Standards




FY 2010                                             - 124 -    Federal Student Aid Annual Report
Report on Internal Control over Financial Reporting Based on
an Audit of Financial Statements Performed in Accordance
with Government Auditing Standards




FY 2010                                             - 125 -    Federal Student Aid Annual Report
Report on Internal Control over Financial Reporting Based on
an Audit of Financial Statements Performed in Accordance
with Government Auditing Standards




FY 2010                                             - 126 -    Federal Student Aid Annual Report
Report on Internal Control over Financial Reporting Based on
an Audit of Financial Statements Performed in Accordance
with Government Auditing Standards




FY 2010                                             - 127 -    Federal Student Aid Annual Report
Report on Internal Control over Financial Reporting Based on
an Audit of Financial Statements Performed in Accordance
with Government Auditing Standards




FY 2010                                             - 128 -    Federal Student Aid Annual Report
Report on Internal Control over Financial Reporting Based on
an Audit of Financial Statements Performed in Accordance
with Government Auditing Standards




FY 2010                                             - 129 -    Federal Student Aid Annual Report
Report on Internal Control over Financial Reporting Based on
an Audit of Financial Statements Performed in Accordance
with Government Auditing Standards




FY 2010                                             - 130 -    Federal Student Aid Annual Report
Report on Internal Control over Financial Reporting Based on
an Audit of Financial Statements Performed in Accordance
with Government Auditing Standards




FY 2010                                             - 131 -    Federal Student Aid Annual Report
Report on Internal Control over Financial Reporting Based on
an Audit of Financial Statements Performed in Accordance
with Government Auditing Standards




FY 2010                                             - 132 -    Federal Student Aid Annual Report
Report on Internal Control over Financial Reporting Based on
an Audit of Financial Statements Performed in Accordance
with Government Auditing Standards




FY 2010                                             - 133 -    Federal Student Aid Annual Report
Report on Internal Control over Financial Reporting Based on
an Audit of Financial Statements Performed in Accordance
with Government Auditing Standards




FY 2010                                             - 134 -    Federal Student Aid Annual Report
Report on Compliance and Other Matters Based on an Audit
of Financial Statements Performed in Accordance with
Government Auditing Standards

            Report on Compliance and Other Matters Based on an Audit
            of Financial Statements Performed in Accordance with
            Government Auditing Standards




FY 2010                                           - 135 -   Federal Student Aid Annual Report
Report on Compliance and Other Matters Based on an Audit
of Financial Statements Performed in Accordance with
Government Auditing Standards




FY 2010                                           - 136 -   Federal Student Aid Annual Report
Report on Compliance and Other Matters Based on an Audit
of Financial Statements Performed in Accordance with
Government Auditing Standards




FY 2010                                           - 137 -   Federal Student Aid Annual Report
Report on Compliance and Other Matters Based on an Audit
of Financial Statements Performed in Accordance with
Government Auditing Standards




FY 2010                                           - 138 -   Federal Student Aid Annual Report
Report on Compliance and Other Matters Based on an Audit
of Financial Statements Performed in Accordance with
Government Auditing Standards




FY 2010                                           - 139 -   Federal Student Aid Annual Report
Report on Compliance and Other Matters Based on an Audit
of Financial Statements Performed in Accordance with
Government Auditing Standards




FY 2010                                           - 140 -   Federal Student Aid Annual Report
Management’s Response


          Management’s Response




FY 2010                           - 141 -   Federal Student Aid Annual Report
Management’s Response




FY 2010                 - 142 -   Federal Student Aid Annual Report
Management’s Response




FY 2010                 - 143 -   Federal Student Aid Annual Report
Management’s Response




FY 2010                 - 144 -   Federal Student Aid Annual Report
Glossary of Acronyms and Terms


          Glossary of Acronyms and Terms




FY 2010                           - 145 -   Federal Student Aid Annual Report
Glossary of Acronyms and Terms




FY 2010                          - 146 -   Federal Student Aid Annual Report
Glossary of Acronyms and Terms



                     Acronym                               Description
               ABCP                Asset-Backed Commercial Paper
               ACG                 Academic Competitiveness Grant
               ACSI                American Customer Satisfaction Index
               AFR                 Agency Financial Report
               CCR                 Comprehensive Compliance Reviews
               CCRAA               College Cost Reduction and Access Act of 2007
               CDR                 National Cohort Default Rate
               CLTDR               Cumulative Lifetime Default Rate
               COD                 Common Origination and Disbursement System
               COO                 Chief Operating Officer
               Credit Reform Act   Federal Credit Reform Act of 1990
               CSB                 Common Services for Borrowers
               CSRS                Civil Service Retirement System
               DMCS                Debt Management and Collection System
               Department          U.S. Department of Education
               Direct Loan         William D. Ford Federal Direct Loan
               ECASLA              Ensuring Continued Access to Student Loans Act of 2008
               EDSS                Enterprise Development Support Service
               ECMC                Education Credit Management Corporation
               ERMG                Enterprise Risk Management Group
               ESB                 Enterprise Services Business
               FAFSA               Free Application for Federal Student Aid
               FECA                Federal Employees’ Compensation Act
               Federal Fund        Federal Student Loan Reserve Fund
               FERS                Federal Employees Retirement System
               FFEL                Federal Family Education Loan
               FFELP               Federal Family Education Loan Program
               FMS                 Financial Management System
               FOTW                FAFSA on the Web
               FSA                 Federal Student Aid
               FWS                 Federal Work-Study
               FY                  Fiscal Year
               GAP                 Grants for Access and Persistence
               GAO                 Government Accountability Office
               HCERA               Health Care and Education Reconciliation Act of 2010
               HEA                 Higher Education Act of 1965, as amended
               HEAL                Health Education Assistance Loan
               HEOA                Higher Education Opportunity Act of 2008
               HERA                Higher Education Reconciliation Act of 2005
               Improved            Performance results improved over the prior year, but fell
                                   short of target
               IPM                 Integrated Partner Management
               IRS                 Internal Revenue Service
               ISV                 Integrated Student View
               IT                  Information Technology
FY 2010                                        - 147 -                      Federal Student Aid Annual Report
Glossary of Acronyms and Terms


                    Acronym                            Description
               LEAP              Leveraging Educational Assistance Partnership
               Met               Performance results met or exceeded target
               NA                Data is not available
               NSLDS             National Student Loan Data System
               Not met           Performance results fell short of target
               NFP               Not-For-Profit
               OMB               Office of Management and Budget
               OPM               Office of Personnel Management
               Opinion           Report of Independent Auditors
               PBO               Performance-Based Organization
               PCA               Private Collection Agency
               Pell Grant        Federal Pell Grant Program
               PIN               Personal Identifiable Number
               PM                Performance results tracked, but targets were not
                                 established
               PRMS              Person Record Management System
               PSA               Public Service Announcement
               PSLF              Public Service Loan Forgiveness
               Recovery Act      American Recovery and Reinvestment Act of 2009
               SAFRA             Student Aid and Fiscal Responsibility Act
               SAP               Special Allowance Payment
               Secretary         Secretary of Education
               SIG               Strategic Investments Governance
               SLEAP             Special Leveraging Educational Assistance Partnership
               SMART             National Science and Mathematics Access to Retain Talent
                                 Grant Program
               TEACH             Teacher Education Assistance for College and Higher
                                 Education
               Title IV          Title IV of the Higher Education Act of 1965, as amended
               TIVAS             Title IV Additional Servicers
               TPD               Total and Permanent Disability
               Treasury          U.S. Department of the Treasury
               U.S.              United States
               U.S.C.            United States Code
               VVM               Vision-Core Values-Mission




FY 2010                                      - 148 -                    Federal Student Aid Annual Report
Availability of Federal Student Aid’s Annual Report


            Availability of Federal Student Aid’s Annual Report




FY 2010                                               - 149 -   Federal Student Aid Annual Report
Availability of Federal Student Aid’s Annual Report




FY 2010                                               - 150 -   Federal Student Aid Annual Report
Availability of Federal Student Aid’s Annual Report



              The following company was contracted to assist in the preparation of FSA's FY 2010
                                              Annual Report:

                                           For Web design: ICF Macro




                FSA‘s publicly available FY 2010 Annual Report is accessible on FSA‘s and the
                                          Department‘s Web sites at:

                                       http://www.federalstudentaid.ed.gov

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




FY 2010                                               - 151 -                  Federal Student Aid Annual Report
The front and back cover of this report each consist of 50,000 individual dots. Lay this report flat to see
100,000 dots across both covers. You would need 140 covers, laid flat open like this, to represent each of the
14 million students FSA provided aid to this year alone.