oversight

Financial Statement Audits for Fiscal Years 2011 and 2010-Federal Student Aid.

Published by the Department of Education, Office of Inspector General on 2011-11-15.

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

United States Department of Education
Arne Duncan
Secretary

Federal Student Aid
James W. Runcie
Chief Operating Officer

Finance Office
Jay Hurt
Chief Financial Officer

November 15, 2011

About This Report

Federal Student Aid, a principal office of the United States Department of Education, is
mandated by legislation to produce an Annual Report, which details Federal Student Aid‘s
financial and program performance. The Federal Student Aid Annual Report for Fiscal Year
2011 provides an overview of Federal Student Aid‘s financial and program performance
results that enables the President, Congress, and the public to assess the organization‘s
performance relative to its mission and its accountability for the resources entrusted to it.

The report includes information about Federal Student Aid‘s performance as a Performance-
Based Organization, its accomplishments, initiatives, and challenges as required by the
Office of Management and Budget Circulars A-11 and A-136. This report also meets the
following legislated requirements:

      1998 Amendments to The Higher Education Act of 1965 (Pub. L. 105-244)
      The Chief Financial Officers Act of 1990
      The Government Performance and Results Act of 1993
      The Government Management Reform Act of 1994
      The Reports Consolidation Act of 2000
      The Federal Managers’ Financial Integrity Act of 1982
      The Federal Financial Management Improvement Act of 1996
      The Government Performance and Results Act Modernization Act of 2010
      The Improper Payments Information Act of 2002
      The Improper Payments Elimination and Recovery Act of 2010




                               Federal Student Aid Annual Report–FY 2011
                                          Letter from the Chief Operating Officer of Federal Student Aid

LETTER FROM THE CHIEF OPERATING OFFICER OF FEDERAL STUDENT
AID




Dear Federal Student Aid Colleagues, Partners, and Customers:


I am pleased to present the Fiscal Year (FY) 2011
Annual Report for Federal Student Aid. As the Chief
Operating Officer of Federal Student Aid (FSA), I am
honored to be a part of an organization whose
mission is to support the educational achievements of
America‘s students. As such, we constantly strive ―To
be the most trusted and reliable source of student
financial aid, information, and services in the nation.‖
This report highlights the many accomplishments and
challenges FSA faced during FY 2011 in pursuit of
this vision.

FSA achieved many successes in FY 2011—from
improvements to the aid application to the
augmentation of our loan servicing capacity in support
of our growing customer base. We processed over
22 million Free Applications for Federal Student Aid
(FAFSAs) last year, a five percent increase over the                James W. Runcie
prior year. For the 2011–12 application cycle, a                 Chief Operating Officer
redesigned website with improved skip logic coupled
with the expanded availability of the Internal Revenue Service data retrieval tool has
allowed almost 19 million students to complete the FAFSA in about 22 minutes down
from 33 minutes for the same time period in the previous year. To further increase
awareness around the availability of federal financial aid, FSA piloted a program to
provide school districts with FAFSA completion data to help high schools identify and
encourage students to complete a FAFSA.

This was the first full year that the Department originated the majority of all new federal
student loans through the William D. Ford Federal Direct Loan Program. To further
augment our Direct Loan servicing capacity, FSA entered into agreements with more than
20 not-for-profit servicers. The agreements are designed to help lower student loan
delinquency and improve customer service to our borrower population. Direct Loan
disbursements increased by 44 percent and, most importantly, students were universally
able to access Direct Loans at eligible institutions. As a result, I can report that the
transition to Direct Lending was an unqualified success. Of course, this could not have
been accomplished without the tremendous efforts of FSA employees working hand-in-
hand with the school community.

Working with colleagues from across the Department and other federal agencies, FSA
supported the design and began implementation of the Gainful Employment regulations.
These regulations are intended to increase institutional accountability and equip students
and families with better information when making decisions about their investment in higher
                                Federal Student Aid Annual Report–FY 2011
                                         Letter from the Chief Operating Officer of Federal Student Aid

education. We also continued to improve the security and protection of student aid data
available to the Department, schools, contractors, and other business partners who utilize
this information.

Last year was marked by several challenges; the most notable was the effect of our
nation‘s economic struggles on the federal student aid programs. Default rates continued
to rise as students struggled to meet their federal student loan obligations. In response, we
increased our default prevention efforts and strengthened our oversight and monitoring of
institutions participating in the Title IV programs.

In addition, until the President signed the Department of Defense and Full-Year Continuing
Appropriations Act (Pub. L. 112-10) on April 15, 2011, the federal government operated
under multiple continuing resolutions. During this time, FSA was forced to operate at the
FY 2010 funding level, which was $148 million less than the President‘s Budget request.
Despite these administrative cuts, FSA delivered approximately $157 billion to more than
15 million students in grants, loans, and work-study aid. While meeting these challenges,
FSA delivered more aid to more students and families in FY 2011 than during any period in
the history of these programs.

FSA‘s successes could not have been realized without the hard work and commitment of
FSA‘s employees, operating partners and the institutions that participate in our programs. I
thank them for their dedication and service to our nation‘s students and families.

Sincerely,



James W. Runcie
Chief Operating Officer
November 15, 2011




                            Federal Student Aid Annual Report–FY 2011
                                                                                     Table of Contents


                          Table of Contents

     LETTER FROM THE CHIEF OPERATING OFFICER OF FEDERAL
     STUDENT AID

     iii    INTRODUCTION


1    MANAGEMENT’S DISCUSSION AND ANALYSIS


      3     MISSION AND ORGANIZATIONAL STRUCTURE
     13     PERFORMANCE MANAGEMENT
            13   Performance Management Processes at Federal Student Aid

            15   FY 2011 Strategic Goals, Objectives, and Performance Goals

            27   High Priority Performance Goal

            28   Quality of Performance Data

     29     FINANCIAL MANAGEMENT DISCUSSION AND ANALYSIS
     39     ANALYSIS OF SYSTEMS, CONTROLS, AND LEGAL COMPLIANCE
     41     LIMITATIONS OF FINANCIAL STATEMENTS


43   ANNUAL PERFORMANCE REPORT


     45     INTRODUCTION TO THE ANNUAL PERFORMANCE REPORT
     47     PERFORMANCE RESULTS BY STRATEGIC GOAL
            49   Strategic Goal A:   Provide superior service and information to students and
                                     borrowers.

            54   Strategic Goal B:   Work to ensure that all participants in the system of
                                     postsecondary education funding serve the interests of students,
                                     from policy to delivery.

            56   Strategic Goal C:   Develop efficient processes and effective capabilities that are
                                     among the best in the public and private sectors.
            59   Strategic Goal D:   Ensure program integrity and safeguard taxpayers‘ interests.

            61   Strategic Goal E:   Develop FSA‘s performance culture and become one of the best
                                     places to work in the federal government.

     62     FY 2011 ACCOMPLISHMENTS OF FEDERAL STUDENT AID
     67     LEGISLATIVE AND REGULATORY RECOMMENDATIONS
     68     ANNUAL BONUS AWARDS
     70     REPORT OF THE FEDERAL STUDENT AID OMBUDSMAN




                   Federal Student Aid Annual Report–FY 2011                                            i
                                                               Table of Contents

77    FINANCIAL SECTION


       79    MESSAGE FROM THE CHIEF FINANCIAL OFFICER

       81    PRINCIPAL FINANCIAL STATEMENTS
       85    NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS
      121    REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

      123    REQUIRED SUPPLEMENTARY INFORMATION


127   INDEPENDENT AUDITORS’ REPORTS


147   OTHER ACCOMPANYING INFORMATION


151   APPENDICES


      153    APPENDIX A:   DISCONTINUED STRATEGIC OBJECTIVES AND
                           PERFORMANCE METRICS
      155    APPENDIX B:   GLOSSARY OF ACRONYMS AND TERMS
      159    APPENDIX C:   AVAILABILITY OF FEDERAL STUDENT AID’S ANNUAL
                           REPORT




                   Federal Student Aid Annual Report–FY 2011                  ii
                                                                                        Introduction


                                  INTRODUCTION

The Fiscal Year (FY) 2011 Federal Student Aid Annual Report provides financial and
performance information that enables the President, Congress, and the public to assess
how Federal Student Aid (FSA) has performed in accomplishing its mission and achieving its
goals. The report is organized into the following sections:

Management’s Discussion and Analysis: The Management’s Discussion and Analysis
section provides an overview of the entire FSA Annual Report. It includes a synopsis of
FSA‘s mission and its organizational structure, as well as the organization‘s FY 2011
financial and performance highlights, which are discussed in more detail within the
subsequent sections of this report. This section also contains a discussion of FSA‘s
systems, controls, and compliance with laws and regulations. The section concludes with
the Limitations of Financial Statements, which provides the context in which the financial
statements should be reviewed.

Annual Performance Report: The Annual Performance Report presents the strategic
goals included in the Federal Student Aid: Strategic Plan, Fiscal Years 2011–15 and
discusses the results of the various performance goals as related to each strategic goal.
Targets established for each performance goal, are compared to the actual performance of
FSA during the year. These results are presented to demonstrate how effective FSA was in
accomplishing its mission. The Annual Performance Report also presents the FY 2011
accomplishments of FSA and discusses the process by which FSA provides legislative and
regulatory recommendations to the Department on issues that affect federal student
financial aid. The Annual Performance Report concludes with the subsections, Annual
Bonus Awards, which details executive compensation at FSA, and the Report of the
Ombudsman, which details its processes in assisting borrowers in obtaining a resolution to
federal student aid issues.

Financial Section: The Financial Section provides a detailed view of FSA‘s stewardship
and accountability of its resources. The section includes the Message from the Chief
Financial Officer, the audited financial statements, and the accompanying notes to the
financial statements. It concludes with the subsections, Required Supplementary
Stewardship Information and Required Supplementary Information.

Independent Auditors’ Reports: The Independent Auditors’ Reports section consists of
the various reports of the auditor, including the Report of Independent Auditors, which
contains the audit opinion. In addition to the Report of the Independent Auditors, the section
is composed of the Office of Inspector General Audit Transmittal Letter, the Report on
Internal Control, and the Report on Compliance and Other Matters. The section concludes
with the Management‘s Response to the Audit, which is FSA‘s executive management‘s
response to the findings and recommendations contained in the various audit reports.




                            FY 2011 Annual Report–Federal Student Aid                             iii
                                                                                   Introduction

Other Accompanying Information: The Other Accompanying Information section
provides links to the United States Department of Education‘s Agency Financial Report,
which includes a discussion of FSA‘s improper payments in compliance with the Improper
Payment Information Act of 2002 as amended by the Improper Payments Elimination and
Recovery Act of 2010. This section also includes a link to the Summary of Financial
Statement Audit and Management Assurances and concludes with a link to FSA‘s
Management Challenges.

Appendices: The Appendices section includes the Discontinued Strategic Objectives and
Performance Measures from the previous FSA Five-Year Plan, a glossary of acronyms and
terms, and details on the availability of this Annual Report.




                           FY 2011 Annual Report–Federal Student Aid                         iv
                                      Management‘s Discussion and Analysis

              636363636363




MANAGEMENT’S DISCUSSION
     AND ANALYSIS




        Federal Student Aid Annual Report–FY 2011                       1
                                                                               Management‘s Discussion and Analysis

         Fiscal Year 2011 Financial and Performance Highlights of Federal
                                    Student Aid
                               Operational Highlights
                                                           September 30, September 30, % Change 2011
                                                               2011          2010        over 2010
Federal Personnel                                                 1,240         1,168        6%

Total Student Aid Loan Portfolio                           $    848 billion      $    722 billion       17

Total Federal Student Aid Delivered                        $    157 billion      $    134 billion       17

Total Number of Postsecondary Students Served                    15 million            14 million       7

Total Number of Applications Processed                           22 million            21 million       5

Total Number of Postsecondary Education Institutions                   6,300                6,200       2%

                                          Financial Highlights
                                             (Dollars in millions)
                                                           September 30, September 30, % Change 2011
                                                               2011          2010        over 2010
Total Assets                                               $    593,994 $     424,169       40%

Total Liabilities                                                    575,691            413,722         39

Net Position                                                          18,303             10,447         75

Net Cost                                                             (3,373)             19,677        (117)

Budgetary Resources Available for Spending                            54,353             49,131         11
Budgetary Resources Available for Spending
(Non-Budgetary Credit Reform Financing Accounts)                     262,293            231,611         13

Total Outlays, Net (Budgetary)                                       (6,611)             13,399        (149)
Total Outlays, Net
(Non-Budgetary Credit Reform Financing Accounts)                     168,495            142,826         18

                                         Performance Highlights
               Performance Measures                            FY 2011               FY 2011        Performance
                                                                Target                Actual          Results
% of original FAFSA filers among high school seniors                                                    Met
                                                               >=49.5%                52.0%
Customer satisfaction score (ASCI) for the entire aid                                                  Met
                                                                 74                    78
lifecycle
―Ease of doing business with FSA‖ survey result from           Launch                 Survey           Met
schools                                                        survey                launched
Default rate                                                                                           Met
                                                               <=12.3%                11.3%




                                       Federal Student Aid Annual Report–FY 2011                                  2
                                                              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 by Title IV of the
Higher Education Act of 1965, as amended (HEA). Specifically, the federal student
assistance programs for which FSA is responsible are authorized by Title IV of the HEA (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 financial aid;
    Processing millions of student financial aid applications;
    Disbursing billions of dollars in student financial aid;
    Insuring billions of dollars in existing student loans;
    Enforcing financial aid rules and regulations;
    Servicing millions of student loans and helping borrowers avoid default;
    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.




                                Federal Student Aid Annual Report–FY 2011                             3
                                                                 Management‘s Discussion and Analysis
                                                                        Mission and Organizational Structure

Legislative Authority that influences the mission of FSA
FSA‘s mission is ―Funding America’s Future, One Student at a Time.‖ Throughout its history,
there have been several legislative acts that have significantly impacted FSA as an
organization. The 1998 Reauthorization of HEA established FSA as a PBO, to administer the
Title IV programs at the Department. Several other key pieces of legislation have influenced
FSA‘s mission, and are detailed in the following table.

                            Overview of Legislative Authority

   Higher Education Act of 1965, as amended
       Created the federal student financial assistance programs known as the Title IV programs.

   Higher Education Amendments of 1992
                                                                       SM
       Initially authorized William D. Ford Federal Direct Loan Program as a demonstration pilot.

   Student Loan Reform Act of 1993
       Authorized a multi-year phased implementation of the William D. Ford Federal Direct Loan
               SM
       Program .

   1998 Reauthorization of the Higher Education Act of 1965
       Amended the HEA and authorized the designation of FSA as the first PBO in the federal
       government.

   Higher Education Reconciliation Act of 2005
       Created the Academic Competitiveness Grant and the National Science and Mathematics
       Access to Retain Talent Grant Programs.

   College Cost Reduction and Access Act of 2007
        Authorized the Teacher Education Assistance for College and Higher Education Grant
        Program and created the Public Service Loan Forgiveness Program.

   Ensuring Continued Access to Student Loans Act of 2008
       Provided the Department with the authority to implement programs to ensure that eligible
       students and parents were not denied access to federal student loans during the credit
       market disruptions of 2008.

   Higher Education Opportunity Act of 2008
       Authorized the Grants for Access and Persistence Program and assists states in
       establishing partnerships to provide eligible students with Leveraging Educational
       Assistance Partnership grants to attend postsecondary institutions.

   American Recovery and Reinvestment Act of 2009
      Authorized the increase of Pell Grants to the amount of $5,350 and created the $2,500
      American Opportunity Tax Credit for four years of college tuition.

   SAFRA Act of 2010
       Provided that beginning July 1, 2010, no new loans were to be originated under the Federal
                                        SM
       Family Education Loan Program .




                                Federal Student Aid Annual Report–FY 2011                                 4
                                                                                Management‘s Discussion and Analysis
                                                                                     Mission and Organizational Structure

FSA Stakeholders

The community of stakeholders in the student aid delivery system includes students and
parents, lenders, 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).

                Role of FSA and Participants in the Federal Student Aid System
                                            POSTSECONDARY
                                            INSTITUTIONS
                                            Determine students‘ aid
                                            packages and disburse f unds.

   THE PRESIDENT,                           FSA supports them by                      FFEL LENDERS
                                            •Monitoring compliance,                   Hold and service outstanding
   ED, & OTHERS IN                          •Educating them regarding                 FFELP loans to students.
   EXECUTIVE                                policy, and
                                            •Assisting them in meeting
   BRANCH                                   requirements.
                                                                                      FSA supports them by
   Set regulatory standards and                                                       •Monitoring compliance,
   policy on student aid f unding.                                                    •Assisting them in meeting
                                                                                      requirements,
   FSA supports it by                                                                 • Paying interest and Special
   •Providing data and inf ormation                                                   Allowance Payment, and
   f or decision making, and                                                          •Educating them regarding
   •Providing recommendations for                                                     policy.
   implementation.


                                                   STUDENTS
                                             Receive and repay student aid
                                             to f inance postsecondary
                                             education.

                                             FSA supports them by
                                             •Increasing awareness of
                                                                                      GUARANTY
   CONGRESS                                  f ederal student aid,                    AGENCIES
   Sets statutory standards on
                                             •Providing products, services            Insure FFELP loans and
   student aid f unding and
                                             and tools to ensure consistent,          service their def aulted loan
   appropriate budgets.
                                             accurate messaging about the             portf olio.
                                             importance of pursuing
   FSA supports it by
                                             postsecondary education, and             FSA supports them by
   •Providing data and
                                             •Identif ying students f or whom         •Monitoring compliance,
   inf ormation f or decision
                                             f inancial assistance can make           •Assisting them in meeting
   making, and
                                             a dif f erence.                          requirements,
   •Providing updates on
                                                                                      •Educating them regarding
   operational perf ormance.
                                                                                      policy, and
                                                                                      •Paying def ault claims.




                          FSA-CONTRACTED SERVICERS
                          1. Service Direct Loan portf olio and portions of FFELP portfolio,
                          2. Provide systems and services to support FSA‘s core operations (e.g.,
                          applications, disbursement), and
                          3. Recover f unds f rom def aulted loans.

                          FSA supports them by
                          •Acquiring the service,
                          •Setting perf ormance standards, and
                          •Overseeing operations.




One of FSA‘s responsibilities is to coordinate and monitor the activity of the large number of
federal, state, nonprofit, and private entities involved in federal student aid delivery, within a
statutory framework established by Congress and a regulatory framework established by the
Department.




                                       Federal Student Aid Annual Report–FY 2011                                       5
                                                             Management‘s Discussion and Analysis
                                                                   Mission and Organizational Structure

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. James W. Runcie was appointed by the Secretary as the COO on September 15,
2011. Mr. Runcie served in several positions within FSA and was most recently the FSA
Deputy COO. The following graph illustrates the current functional organizational structure of
FSA.




During Fiscal Year (FY) 2011, the organization operated on an annual administrative budget
of approximately $1 billion. FSA is staffed by over 1,200 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 graph. The number of full-time employees at each location is shown
in parentheses immediately following the location name.




                               Federal Student Aid Annual Report–FY 2011                             6
                                                              Management‘s Discussion and Analysis
                                                                    Mission and Organizational Structure

Programs

The federal student financial assistance programs collectively represent the nation‘s largest
source of federal financial aid for postsecondary students. In FY 2011, FSA processed over
22 million Free Applications for Federal Student AidSM (FAFSASM), resulting in the delivery of
approximately $157.0 billion in Title IV aid to over 15 million postsecondary students and their
families. These students attend approximately 6,300 active institutions of postsecondary
education accredited by dozens of agencies.




               Types of Federal Student Financial Assistance Programs


  Loan Programs
       Student aid funds that must be repaid with interest.


  Grant Programs
       Student aid funds that do not have to be repaid (other conditions apply).


  Work-Study Program
       A part-time work program to earn money while in school.




                               Federal Student Aid Annual Report–FY 2011                              7
                                                                            Management‘s Discussion and Analysis
                                                                                      Mission and Organizational Structure

    The following table presents a comparison of the amounts of Title IV aid disbursed to students
    by program in 2011 and 2010. 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)

                                                       2011                2010
                                                   Aid Disbursed      Aid Disbursed                           Percent
Programs                                            to Students        to Students          Difference       Increase
Loan Programs

                                              SM
William D. Ford Federal Direct Loan Program        $     116,098     $      80,559      $        35,539         44%

                                        SM
Federal Family Education Loan Program                            0          19,909              (19,909)        (100)

Federal Perkins Loan Program                                  971            1,042                  (71)         (7)

Subtotal Loan Programs                             $     117,069     $     101,510      $        15,559         15%
Grant Programs


Federal Pell Grant Program                         $       36,515    $      29,103      $         7,412         25%

Federal Supplemental Educational Opportunity
Grants Program                                                959              959                       0       0

Academic Competitiveness Grants Program                       555              503                   52          10

National Science and Mathematics Access to
Retain Talent Grants Program                                  432              361                   71          20

Leveraging Educational Assistance Partnerships
Program                                                       162              162                       0       0

The Teacher Education Assistance for College
and Higher Education Grants Program                           131               93                   38          41

Subtotal Grant Programs                            $       38,754    $      31,181      $         7,573         24%
Work-Study Programs

Federal Work-Study Program                         $        1,171    $       1,171      $                0     0%

Grand Total                                        $     156,994     $     133,862      $        23,132        17%
    Aid disbursed to students as cited in the table above, and in the following sections concerning Federal
    Loan Programs, Federal Grant Programs and the Federal Work Study Program in the Management‘s
    Discussion and Analysis section, are derived from amounts used to support the President‘s Budget.
    These amounts may differ from actual amounts included in the Financial Section of the document.




                                        Federal Student Aid Annual Report–FY 2011                                       8
                                                                   Management‘s Discussion and Analysis
                                                                         Mission and Organizational Structure

Federal Loan Programs

In fulfilling its program responsibilities, FSA directly manages or oversees almost
$848.0 billion in outstanding loans—representing over 146 million student loans to more than
36 million borrowers. These loans were primarily made through the first two federal student
loan programs described below.

The William D. Ford Federal Direct Loan (Direct LoanSM) ProgramSM 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, as well as an appropriation for
subsidy costs. In FY 2011, the Department made $116.1 billion1 in net loans to
11.5 million recipients. With the enactment of the SAFRA Act, as part of the Health Care and
Education Reconciliation Act of 2010 (HCERA) (Pub. L. 111-152), beginning in July 2010, no
new loans were originated under the Federal Family Education Loan (FFELSM) ProgramSM.
This transition from the FFEL Program to the Direct Loan Program resulted in a 44 percent
increase in Direct Loan Program disbursements for FY 2011.

Under the Federal Family Education Loan ProgramSM, students and parents obtained
federal loans through lenders. Guaranty agencies insured these loans, which were, in turn,
reinsured by the federal government. Although the passage of the SAFRA Act ended the
origination of new FFEL Program loans as of July 1, 2010, lenders and guaranty agencies
continue to service and collect outstanding FFEL Program loans. FSA, FFEL lenders, and
guaranty agencies held a FFEL Program loan portfolio of approximately $490.0 billion, as of
September 30, 2011. In FY 2011, FSA made gross payments of approximately $2.5 billion to
lenders for interest and special allowance subsidies and $12.0 billion to guaranty agencies for
reinsurance claims and fees paid to guaranty agencies for account maintenance, default
aversion, and collection activities.

In addition to the above described FFEL Program, the Ensuring Continued Access to Student
Loans Act of 2008 (ECASLA) authorized the Department to implement a number of programs
to ensure credit market disruptions did not deny eligible students and parents access to
federal student loans for the 2008–09 and 2009–10 academic years. Under this authorization,
the Department implemented the Loan Participation Purchase and Loan Purchase
Commitment Programs. These programs were successfully closed-out on October 15, 2010.
During FY 2011, the Department collectively purchased $26.3 billion via these two programs.

A third program the Department implemented under the authority of ECASLA is the Asset-
Backed Commercial Paper Conduit Program (Conduit). Under this program, which began
operations in mid-2009, the Department entered into forward purchase commitments with a
Conduit. The Conduit issues commercial paper backed by qualifying student loans made
between October 1, 2003, and September 30, 2009. If no other financing is available to retire
this paper as it matures, the Department commits to provide the needed funds by purchasing
the underlying student loans. Lenders were able to place loans into the Conduit until June 30,
2010. By that time, a total of 25 lenders had participated, and backed by their loans, the
Conduit issued a total of $41.5 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, 2011, the Department has purchased


1
Excludes consolidation loans of $19.5 billion.

                                     Federal Student Aid Annual Report–FY 2011                             9
                                                               Management‘s Discussion and Analysis
                                                                     Mission and Organizational Structure

$1.2 billion in delinquent loans from the Conduit. To date, the Conduit has only put defaulted
loans to the Department. The option to sell loans to the Department ends in January 2014.

The Federal Perkins Loan Program is one of three campus-based programs through which
the Department provides funds directly to eligible institutions. Funds provided through this
program enable the eligible institutions to offer low-interest loans to students based on need.
For the 2010–11 award year, approximately $970.7 million were disbursed through
approximately 493,000 campus-based awards.

Federal Grant Programs

In its responsibility for administering Title IV aid, FSA oversaw the disbursement of
$38.7 billion in grants to 11.3 million recipients via several grant programs. The following
provides a summary for each grant program, including aid disbursed for FY 2011.

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 2010–11 award year, the Department disbursed $36.5 billion in Pell Grants averaging
approximately $4,115 to approximately 9 million students. The maximum Pell Grant award
was $5,550 for the 2010–11 award year and remained at $5,550 for the 2011–12 award year.

The Federal Supplemental Educational Opportunity Grant Program is one of three
campus-based programs through which the Department provides loan funds directly to eligible
institutions. Funds provided through this program enable the eligible institutions to offer
grants to students based on need. For the 2010–11 award year, approximately
$959.0 million were disbursed through approximately 1.3 million campus-based awards.

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 and signed into law in 2006. Funding for the ACG and National
SMART Grant Programs expired at the end of FY 2011.

The ACG Program was for undergraduates who met Pell Grant eligibility requirements and
completed a rigorous high school program, as determined by the state or local education
agency and as recognized by the Secretary. First-year students were eligible to receive an
ACG award of up to $750, whereas second-year students were eligible to receive up to
$1,300 if they had 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 was awarded as a supplemental grant to the student‘s Pell
Grant award. For the 2010–11 award year, $555 million in ACG awards were disbursed to
approximately 764,000 students.




                               Federal Student Aid Annual Report–FY 2011                              10
                                                                Management‘s Discussion and Analysis
                                                                      Mission and Organizational Structure

The National SMART Grant Program provided 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. In order to be eligible for a SMART grant, the student
must have met Pell Grant eligibility requirements. The student must have maintained a
cumulative grade point average of at least 3.0 for coursework required for the major. The
National SMART Grant was awarded as a supplemental grant to the student‘s Pell Grant
award. A student could not receive more than one ACG or National SMART Grant award in
each academic year for which they were eligible. For the 2010–11 award year, $432.0 million
in National SMART grants were disbursed to approximately 159,000 students.

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 2010–11 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 Program was authorized
under Section 415E of the HEA, which was amended as a result of the Higher Education
Opportunity Act of 2008, and assists states in establishing partnerships to provide eligible
students with LEAP Grants under the Grants for Access and Persistence Program to attend
institutions of higher education and to encourage increased participation in early information
and intervention, mentoring, or outreach programs.

Funding for the LEAP Program expired at the end of FY 2011. This program accomplished its
objective of stimulating all states to establish need-based postsecondary student grant
programs, and federal incentives for such aid are no longer required.

The Teacher Education Assistance for College and Higher Education (TEACH) Grant
Program, 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 2011, the
Department disbursed approximately 44,000 grants for $131 million under TEACH.

Federal Work-Study Program

The Federal Work-Study (FWS) Program is one of three campus-based programs through
which the Department provides funds directly to eligible institutions. Funds provided through
this program enable the eligible institutions to offer employment to students based on need.
For the 2010–11 award year, approximately $1.2 billion was disbursed through approximately
713,000 campus-based awards


                                Federal Student Aid Annual Report–FY 2011                              11
                                                                Management‘s Discussion and Analysis
                                                                      Mission and Organizational Structure

Vision, Mission, Core Values, and Goals

In FY 2010, FSA developed a new vision, mission, and core values 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.




    Vision

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

    Mission

    Funding America’s Future, One Student at a Time

    Core Values

       Integrity                  Customer Service          Excellence
       Respect                    Stewardship               Teamwork


FSA‘s vision and mission focuses on students and positions 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.

In order to achieve its vision and successfully accomplish its mission, FSA developed a new
strategic plan. FSA‘s new strategic goals are outlined in the Federal Student Aid: Strategic
Plan, Fiscal Years 2011–15 (FSA Strategic Plan FY 2011–15) and are listed below. These
goals are closely aligned to FSA‘s PBO responsibilities. Those responsibilities include
improving service, reducing costs, improving and integrating support systems, developing
delivery and information systems, and enhancing staff development and talent to improve
human capital management.

Strategic Goals
    Strategic Goal A: Provide superior service and information to students and borrowers
    Strategic Goal B: Work to ensure that all participants in the system of postsecondary
       education funding serve the interests of students, from policy to delivery
    Strategic Goal C: Develop efficient processes and effective capabilities that are
       among the best in the public and private sectors
    Strategic Goal D: Ensure program integrity and safeguard taxpayers‘ interests
    Strategic Goal E: Develop FSA‘s performance culture and become one of the best
       places to work in the federal government



                                  Federal Student Aid Annual Report–FY 2011                            12
                                                              Management‘s Discussion and Analysis
                                                                             Performance Management




 PERFORMANCE MANAGEMENT

This section of the FSA Annual Report provides a general overview of the performance
management processes at FSA; summary of FSA‘s FY 2011 performance goals,
objectives, and results; discussion of FSA‘s FY 2011 High Priority Performance Goal
(HPPG); and discussion of FSA‘s efforts to validate the quality of performance data
reported.

Performance Management Processes at Federal Student Aid

FSA uses three tools to establish goals, and to communicate, measure, and report
performance. These tools are the following:

      Five-Year Strategic Plan;
      Annual Performance Report; and
      Annual Organizational Performance Review (OPR).

Five-Year Strategic Plan

As part of the strategic planning process, FSA continuously identifies and evaluates key
drivers that significantly influence FSA‘s long-term goals and objectives. FSA analyzes
these drivers to identify long-term core strategic goals that will serve as the foundation of
FSA‘s long-term strategic planning. These strategic goals collectively 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. The strategic goals developed must be:

      appropriate to the mission of the organization;
      realistic and measurable;
      achievable in the time frame established and challenging in their targets; and
      understandable to the layperson (i.e., language is unambiguous and terminology is
       adequately defined).

Each Strategic Goal encompasses Objectives and identifies Performance Goals to
measure FSA‘s level of success in meeting the Strategic Goal. For each Performance
Goal, FSA identifies a target level of performance for each fiscal year. FSA sets the target
level of performance at a challenging, but realistic level that is achievable within the time
frame. Meeting or exceeding the target indicates that FSA succeeded in meeting the
Performance Goal, while falling short of the target indicates that FSA did not meet the
Performance Goal. The following table summarizes the key components of FSA’s Strategic
Plan FY 2011–15.




                               Federal Student Aid Annual Report–FY 2011                         13
                                                                Management‘s Discussion and Analysis
                                                                               Performance Management

              Key Components of FSA Strategic Plan FY 2011–15

              Key Component                                       Description

                                                 Statements of long-term purpose outlined in
                                                 the Strategic Plan that define how FSA will
Strategic Goals
                                                 accomplish its mission. These goals are
                                                 aligned to FSA‘s responsibilities as a PBO.
                                                 Statements that describe the tactical
Objectives                                       activities FSA will perform to achieve the
                                                 associated Strategic Goal.
                                                 Levels of performance over a period of time
                                                 used to gauge FSA‘s success in reaching its
Performance Goals
                                                 Strategic Goals. These Goals include
                                                 targets and timeframes.
                                                 Indicators of the desired performance levels
                                                 or specific desired results targeted for a
                                                 given fiscal year. Targets are expressed in
Targets
                                                 quantifiable terms and compared to the
                                                 actual result to determine level of
                                                 performance.

Throughout the fiscal year, FSA measures and analyzes performance based upon
Performance Goal results. For any Performance Goals not on track, FSA‘s analysis
includes identifying the root cause of the unexpected result and determining the appropriate
corrective actions necessary to improve performance.

Annual Performance Report

To report progress on meeting the Strategic Goals, FSA prepares and publishes an Annual
Performance Report. This report is included in FSA‘s Annual Report issued mid-
November. In addition to the Annual Performance Report, FSA‘s Annual Report includes
FSA management‘s discussion and analysis of financial and performance results, FSA‘s
audited financial statements and notes, and the report of the independent auditors.

Organizational Performance Review

The OPR is part of the Department-wide performance management system. It operates at
the principal office level and is designed to integrate and align all of the Department‘s
performance management elements, including the Department‘s Strategic Plan, the
Secretary‘s annual priorities, the priorities of the principal offices, and other requirements of
law and of the President. The OPR contains timelines with specific milestones. FSA tracks
and reports the status of OPR metrics to the Department on a quarterly basis.




                                Federal Student Aid Annual Report–FY 2011                           14
                                                              Management‘s Discussion and Analysis
                                                                            Performance Management

FY 2011 Strategic Goals, Objectives, and Performance Goals

In the previous five years, FSA primarily focused on achieving operational efficiency and
system integration, both of which are key to FSA‘s designation as a PBO. During FY 2010,
FSA initiated the development of an updated five-year strategic plan. In addition to its core
mission, FSA now seeks to improve the overall system of funding for postsecondary
education by (1) equipping students and their families with better information to make
improved decisions about postsecondary education; and (2) actively shaping the behavior
of participants in education funding, by using FSA‘s knowledge, data, oversight authority,
and relationships to improve the coordination of all participants in the system.

FSA’s Strategic Plan FY 2011–15 was issued in September 2010 and implemented at the
beginning of FY 2011. While developing this plan, FSA identified the key strategic drivers
listed in the following table.


            Key Strategic Driver                  Relevance to FSA’s Strategic Planning
                                                                Process

The Higher Education Act of 1965 legislation.   Prescribes Title IV program and PBO
                                                requirements (i.e., improve service, reduce
                                                costs, improve and integrate support
                                                systems, develop delivery and information
                                                systems, and enhance staff development
                                                and talent).
Student and borrower needs.                     Students and borrowers are key customers
                                                of FSA services and products.
Key trends and conditions for the financial aid Indicates student aid environment within
environment.                                    which FSA must operate. Key trends for
                                                FY 2011 are listed below.
                                                     Rising cost of attendance for
                                                        postsecondary education.
                                                     Decline in availability of nonfederal
                                                        sources of postsecondary education
                                                        funding.
                                                     Expected increase in enrollment,
                                                        particularly of nontraditional
                                                        students.
                                                     Growing number of enrollments at
                                                        proprietary and two-year
                                                        postsecondary institutions.
                                                     Increased role of the federal
                                                        government in providing funding for
                                                        postsecondary education.
The Department‘s Five-Year Strategic Plan.      Requires FSA‘s support of the
                                                Department‘s strategic goals related to
                                                postsecondary education.




                               Federal Student Aid Annual Report–FY 2011                        15
                                                             Management‘s Discussion and Analysis
                                                                           Performance Management



            Key Strategic Driver                 Relevance to FSA’s Strategic Planning
                                                               Process

President Obama‘s higher education goal         Requires the Department and FSA‘s
that, by 2020, America will have the highest    support to achieve goal.
proportion of college graduates in the world.
The Office of Inspector General‘s (OIG‘s)     Requires FSA senior management‘s
Management Challenges.                        consideration for establishing priorities.
                                              OIG‘s management challenges for FY 2011
                                              include:
                                                    Implementation of New Programs
                                                       and Statutory Changes;
                                                    Oversight and Monitoring;
                                                    Data Quality and Reporting; and
                                                    Information Technology Security.
The Office of Inspector General and           Requires FSA senior management‘s
Government Accountability Office (GAO)        consideration for establishing priorities to
audits.                                       address findings and recommendations.
Federal financial management laws and         Prescribes financial management
regulations.                                  requirements.
Federal performance reporting legislation and Prescribes performance and reporting
requirements.                                 requirements.
Federal budget deficits.                      Requires FSA to look for opportunities to
                                              reduce operating costs through improved
                                              efficiency.

FSA identified the following five Strategic Goals based upon analysis of the above key
strategic drivers:

   Strategic Goal A: Provide superior service and information to students and borrowers
   Strategic Goal B: Work to ensure that all participants in the system of postsecondary
    education funding serve the interests of students, from policy to delivery
   Strategic Goal C: Develop efficient processes and effective capabilities that are
    among the best in the public and private sectors
   Strategic Goal D: Ensure program integrity and safeguard taxpayers‘ interests
   Strategic Goal E: Develop FSA‘s performance culture and become one of the best
    places to work in the federal government

The remainder of this section provides a discussion of each Strategic Goal, including the
associated Objectives and a summary of Performance Goal results. For a more detailed
discussion, please see the Annual Performance Report section of this document.
Appendix A of this document details the Strategic Objectives and Performance Metrics that
were in effect for the FY 2010 reporting period which were discontinued for the FY 2011
reporting period due to the implementation of the updated FSA Strategic Plan FY 2011–15.




                               Federal Student Aid Annual Report–FY 2011                      16
                                                              Management‘s Discussion and Analysis
                                                                             Performance Management

How the remainder of this section is organized
This section is organized by the five Strategic Goals. For each Strategic Goal, this section
provides an overview of the goal, lists the associated Objectives that support the Strategic
Goal, and the Performance Goals used to measure performance. Specifically, the following
information is included for each Strategic Goal:

Strategic Goal: States the Strategic Goal and provides a discussion of the relevance of
this goal to FSA‘s mission.

Objective: Includes a brief discussion of the objectives identified for the Strategic Goal.

Performance Goals measured: Includes a brief summary of FSA‘s performance as
measured by the Performance Goals for the Strategic Goal, followed by a table that details,
for each Performance Goal, the current reporting period target, actual result, and reference
to detail contained in the Annual Performance Report section of this document. The
following is the legend for the performance result indicator included in the table.


                      Performance Result Indicator Legend
                  Performance result met or exceeded the          Met
                  target.

                  Performance result did not meet the          Not met
                  target.
                  Performance result was tracked, but no       No target
                  target was established.
                  Performance result is not applicable
                  because the performance goal was not            N/A
                  developed, the performance goal was
                  not implemented, or the required data
                  were not available in time for inclusion.


The Performance Goal results reported are as of fiscal year-end (i.e., September 30, 2011)
unless otherwise noted. If the required data are not available as of fiscal year-end in
sufficient time for inclusion, data as of the most recent period available is used. Data as of
fiscal year-end may not be available, since some required data are obtained from external
sources (i.e., state guaranty agencies, lenders and loan servicers, grant and loan
recipients, etc.).




                                Federal Student Aid Annual Report–FY 2011                        17
                                                                Management‘s Discussion and Analysis
                                                                                Performance Management

Strategic Goal A: Provide superior service and information to students and borrowers.

A major component of FSA‘s mission is to ensure that all eligible individuals have access to
federal student aid. In order to achieve this goal, FSA provides funding options to eligible
students and their families to make well-informed decisions. As a customer-facing
institution, FSA also has an obligation to uphold the highest standards of service when
interacting with its customers: students and their families.

Strategic Goal A aims to actively inform all eligible individuals of their funding options, help
customers make well-informed decisions, provide better services, and improve customer
experience.

Objectives supported:
To support this Strategic Goal, FSA identified a set of Objectives which includes detailed
initiatives designed to assist with meeting each Objective. Meeting each Objective will
result in accomplishing the Strategic Goal. The Objectives that support this Strategic Goal
include:

      Objective 1: Take a data driven approach to better understand our students and
       borrowers and develop insights from these customers.
      Objective 2: Reach out to potential students more effectively to expand access to
       higher education, especially for nontraditional students.
      Objective 3: Aggregate and distribute information on the costs and benefits of
       higher education programs and on funding options to improve financial literacy and
       support the customers‘ decision-making.
      Objective 4: Identify students for whom financial assistance can make a difference
       in completing a degree or credential and develop a plan to support the President‘s
       2020 college completion goal.
      Objective 5: Enhance customer-facing processes to improve the customer
       experience.

Performance Goals measured:
To determine the success of FSA‘s efforts to meet this Strategic Goal, FSA identified a set
of Performance Goals including a target level of performance. For this Strategic Goal, the
following table lists the Performance Goals, FY 2011 target and actual performance levels,
result (i.e., met, not met, etc.), and reference to supporting detail in the Annual
Performance Report section of this document. In summary, FSA had the following
performance results: two Performance Goals met or exceeded the target result; one
Performance Goal did not meet its targeted result; one Performance Goal did not have
established targets in this fiscal year; and one Performance Goal was not applicable.




                                Federal Student Aid Annual Report–FY 2011                          18
                                                                Management‘s Discussion and Analysis
                                                                                Performance Management

                       Performance Summary for Strategic Goal A

  Strategic Goal A: Provide superior service and information to students and borrowers.


Performance Goals                            FY 2011   FY 2011         Result        Reference
                                              Target    Actual                         Page
% of original FAFSA filers among high                                   Met
school seniors
                                             >=49.5%    52.0%                           49
% of original FAFSA filers among                                      Not met
workforce aged 25+ without college           >=3.9%     3.8%                            50
degree
% of original filers among low-income                                No target
                                              TBD       57.0%                           51
students
% of students who dropped out due to                                    N/A
                                              TBD        -—                             52
financial reasons
Customer satisfaction score (ASCI) for the                              Met
entire aid lifecycle                           74         78                            53




                                Federal Student Aid Annual Report–FY 2011                          19
                                                                Management‘s Discussion and Analysis
                                                                               Performance Management

Strategic Goal B: Work to ensure that all participants in the system of postsecondary
education funding serve the interests of students, from policy to delivery.

FSA plays a vital role within the system of postsecondary education funding in the United
States. While the Office of Postsecondary Education within the Department is responsible
for any matters related to policy and regulation setting regarding postsecondary education,
FSA collaborates with the Department and Congress to inform policy and regulations
relating to student financial assistance. Specifically, FSA provides timely and relevant
information to the Department and policymakers to support their decision-making
processes concerning issues related to funding postsecondary education. In addition, FSA
has a leadership role in the universe of postsecondary education funding to ensure that all
system participants effectively serve the interests of students.

To execute delivery of financial assistance, FSA works closely with partners: it coordinates
the activities of different contractors, including servicers and private collection agencies; it
works with guaranty agencies and FFEL Program lenders to administer programs; it
provides oversight and support to postsecondary institutions; and it directly interacts with
students and their families.

Strategic Goal B aims to increase FSA‘s role in working with postsecondary institutions,
contractors, and other major participants in the overall aid delivery system, to fulfill the
organization‘s mission better to consistently champion the promise of postsecondary
education for all Americans.

Objectives supported:
To support this Strategic Goal, FSA identified a set of Objectives which includes detailed
initiatives designed to assist FSA with meeting each Objective. Meeting each Objective will
result in accomplishing the Strategic Goal. The Objectives that support this Strategic Goal
include:

      Objective 1: Improve FSA‘s support, communications, and processes for
       postsecondary institutions and financial partners.
      Objective 2: Provide ideas, data, and analyses to inform policymakers about
       opportunities and challenges in higher education funding.
      Objective 3: Support system participants in completing the transition laid out by
       the HCERA and other future legislation.

Performance Goals measured:
To determine the success of FSA‘s efforts to meet this Strategic Goal, FSA identified a set
of Performance Goals including a target level of performance. For this Strategic Goal, the
following table lists the Performance Goals, FY 2011 target and actual performance levels,
result (i.e., met, not met, etc.), and reference to supporting detail in the Annual
Performance Report section of this document. In summary, FSA met or exceeded the
target result for one Performance Goal and had one Performance Goal for which targets
were not established in this fiscal year.




                                Federal Student Aid Annual Report–FY 2011                          20
                                                                Management‘s Discussion and Analysis
                                                                               Performance Management

                           Performance Summary for Strategic Goal B

   Strategic Goal B: Work to ensure that all participants in the system of postsecondary
         education funding serve the interests of students, from policy to delivery.




            Performance Goals                  FY 2011   FY 2011      Result       Reference
                                                Target    Actual                     Page
―Ease of doing business with FSA‖ survey       Launch      Survey       Met
                                                                                       54
result from schools.                           survey     launched
Additional metric to measure impact of
improvements under development (to be
established in 2011)                                                 No target
                                                 TBD        9.9%                       55
Additional metric established the following:
Borrower based delinquency rate




                                  Federal Student Aid Annual Report–FY 2011                       21
                                                                Management‘s Discussion and Analysis
                                                                               Performance Management

Strategic Goal C: Develop efficient processes and effective capabilities that are among
the best in the public and private sectors.

FSA is responsible for managing the operational functions associated with delivering Title
IV grants, work-study, and loan programs, while continually improving operating efficiency.
To maintain credibility and confidence in the overall student aid delivery system, it is
important for FSA to anticipate and plan for changes in volume that impact capacity
requirements. For example, FSA experienced a significant increase in Direct Loan
originations as a result of the passage of the SAFRA Act during FY 2010. As part of the
ability to respond to changing demands, FSA must consider budgetary resources available
to support increasing capacity. Historically, FSA‘s budget has not grown proportionally to
the increase in the volume of aid, and that is likely to remain true going forward. As a
result, FSA will need to pursue further efficiencies to access additional resources in its
operating budget for allocation to the initiatives outlined in its Strategic Plan.

FSA also will continue to improve its internal efficiency and capabilities across key
functions, particularly in technology, acquisition, risk management, and business
management, by comparing the current state with best practices and benchmarks across
public and private sectors. The objectives under this goal will build the foundation and
capability to support the first two strategic goals, providing better service and information to
FSA customers and playing an integral role in the overall student aid delivery system.

Strategic Goal C aims to pursue further efficiencies to free up additional resources in the
operating budget by integrating systems, improving acquisition processes, improving risk
management, and improving project management.

Objectives supported:
To support this Strategic Goal, FSA identified a set of Objectives which includes detailed
initiatives designed to assist FSA with meeting each Objective. Meeting each Objective will
result in accomplishing the Strategic Goal. The Objectives that support this Strategic Goal
include:

      Objective 1: Deliver funds to students accurately, promptly, and professionally, to
       create high levels of customer satisfaction.
      Objective 2: Strengthen FSA‘s Information Technology (IT) function to complete
       systems integration, modernization, and to maintain IT security.
      Objective 3: Refine FSA‘s acquisition strategy, acquisition processes, and
       performance management.
      Objective 4: Improve the organizational capacity to anticipate and handle external
       change.
      Objective 5: Enhance the risk management organization, systems, and processes.
      Objective 6: Evaluate administrative cost structures and streamline internal
       operations to increase efficiency and productivity.
      Objective 7: Build stronger business management capabilities and increase
       operational transparency to improve cross-functional coordination.




                                Federal Student Aid Annual Report–FY 2011                          22
                                                                  Management‘s Discussion and Analysis
                                                                                 Performance Management

Performance Goals measured:
To determine the success of FSA‘s efforts to meet this Strategic Goal, FSA identified a set
of Performance Goals including a target level of performance. For this Strategic Goal, the
following table lists the Performance Goals, FY 2011 target and actual performance levels,
result (i.e., met, not met, etc.), and reference to supporting detail in the Annual
Performance Report section of this document. In summary, FSA had two Performance
Goals which did not have established targets in this fiscal year and one Performance Goal
which was not applicable.

                          Performance Summary for Strategic Goal C

  Strategic Goal C: Develop efficient processes and effective capabilities that are among the
                           best in the public and private sectors.



         Performance Goals                 FY 2011         FY 2011         Result      Reference
                                            Target          Actual                       Page
Aid delivery-related cost per                                             No target
                                             TBD            $9.89                          56
application

Loan servicing-related cost per                                           No target
                                             TBD            $18.15                         57
borrower serviced
Additional metric to measure
improvement in cost structures under
development (to be established in
                                                                               N/A
2011)                                        TBD             -—                            58

Note: No additional metrics were
established in FY 2011.




                                   Federal Student Aid Annual Report–FY 2011                        23
                                                               Management‘s Discussion and Analysis
                                                                              Performance Management

Strategic Goal D: Ensure program integrity and safeguard taxpayers’ interests.

The Congressional Budget Office projects that the latest federal budget will result in close
to $10 trillion in cumulative budget deficits over the next 10 years. This places additional
importance on the responsibility of all federal agencies to safeguard taxpayer resources
through all of their activities. FSA‘s role requires the organization to provide more oversight
of taxpayer dollars than most agencies, as FSA annually disburses almost $157 billion in
aid and administers a loan portfolio valued at almost $848 billion. Even small variances in
the financial performance of this portfolio can have a large impact on the U.S. federal
budget. FSA is committed to upholding the highest standards of integrity with the Title IV
Programs and continues to work with institutions on increased monitoring and oversight
efforts.

FSA will strive to better manage taxpayer resources and minimize program costs. As part
of this goal, FSA will concentrate its limited resources on those areas that have been
identified as having the greatest potential risk for fraud and abuse. In addition, FSA will
focus on data gathering and analysis to better understand and manage FSA‘s growing
student aid portfolio. Through these efforts, FSA will be able to better identify, understand,
and mitigate all enterprise risks, including the student aid portfolio risk.

Strategic Goal D aims for continuous improvement of FSA‘s oversight functions to maintain
program integrity and safeguard taxpayers‘ interests by using the program dollars
effectively and efficiently. FSA has oversight and enforcement responsibility for
approximately 6,300 schools and 1,975 financial institutions. As such, FSA must leverage
and focus its resources to optimize oversight and monitoring activities, and its
administrative, sanction, and enforcement actions when warranted.

Objectives supported:
To support this Strategic Goal, FSA identified a set of Objectives which includes detailed
initiatives designed to assist FSA with meeting each Objective. Meeting each Objective will
result in accomplishing the Strategic Goal. The Objectives that support this Strategic Goal
include:

      Objective 1: Improve quality control and reduce errors, waste, fraud, abuse, and
       mismanagement on the part of postsecondary institutions and financial partners to
       minimize program losses.
      Objective 2: Manage unpaid obligations and provide transparency about portfolio
       risk exposure.

Performance Goals measured:
To determine the success of FSA‘s efforts to meet this Strategic Goal, FSA identified a set
of Performance Goals including a target level of performance. For this Strategic Goal, the
following table lists the Performance Goals, FY 2011 target and actual performance levels,
result (i.e., met, not met, etc.), and reference to supporting detail in the Annual
Performance Report section of this document. In summary, FSA met or exceeded the
target result for one Performance Goal and one Performance Goal was not applicable.




                               Federal Student Aid Annual Report–FY 2011                          24
                                                              Management‘s Discussion and Analysis
                                                                             Performance Management

                        Performance Summary for Strategic Goal D

         Strategic Goal D: Ensure program integrity and safeguard taxpayers’ interests.



           Performance Goals              FY 2011    FY 2011        Result       Reference
                                           Target     Actual                       Page
                                                                     N/A
Delinquency rate                          <=8.8%        —                            59

                                                                     Met
Default rate                              <=12.3%     11.3%                          60




                               Federal Student Aid Annual Report–FY 2011                        25
                                                              Management‘s Discussion and Analysis
                                                                              Performance Management

Strategic Goal E: Develop FSA’s performance culture and become one of the best places
to work in the federal government.

FSA achieved substantial improvement in operational performance after its transformation
into a PBO in 1998, successfully and reliably delivering aid under changing legislative
conditions. The results of the 2010 Employee Viewpoint Survey identified some areas for
improvement. In addition, a significant number of FSA‘s staff is eligible for retirement over
the next several years. In order to meet the performance challenges facing FSA and to
fulfill its rapidly expanding role, the organization will have to rebuild its human capital
foundations.

Strategic Goal E aims to meet the performance challenges facing FSA. To do so, FSA will
need to empower its employees to accept new challenges, while ensuring the knowledge
accumulated by the retirement eligible staff is not lost upon their departure.

Objectives supported:
To support this Strategic Goal, FSA identified a set of Objectives which includes detailed
initiatives designed to assist FSA with meeting each Objective. Meeting each Objective will
result in accomplishing the Strategic Goal. The Objectives that support this Strategic Goal
include:

      Objective 1: Improve human capital processes to attract, develop, and retain
       talent, and help FSA employees achieve their full performance potential.
      Objective 2: Further develop a student-centric culture among all managers and
       employees that will fully deliver on FSA‘s mission, vision, and strategy.

Performance Goal measured:
To determine the success of FSA‘s efforts to meet this Strategic Goal, FSA identified a
Performance Goal including a target level of performance. For this Strategic Goal, the
following table lists the Performance Goal, FY 2011 target and actual performance level,
result (i.e., met, not met, etc.), and reference to supporting detail in the Annual
Performance Report section of this document. This Performance Goal was not applicable
for FY 2011, since the FY 2011 Actual performance level was not available in time for
inclusion in this Annual Report.

                           Performance Summary for Strategic Goal E

Strategic Goal E: Develop FSA’s performance culture and become one of the best places to
                            work in the federal government.


           Performance Goal                FY 2011     FY 2011       Result       Reference
                                            Target      Actual                      Page

Best Places to Work in the Federal              th                    N/A
                                             180          —                           61
Government ranking




                                Federal Student Aid Annual Report–FY 2011                        26
                                                                        Management‘s Discussion and Analysis
                                                                                          Performance Management

High Priority Performance Goal

During the FY 2011 budget process, OMB required federal agencies to develop HPPGs
that support improvements in near-term outcomes, customer service, or efficiencies, and
advance progress toward longer term, outcome-focused goals. FSA is responsible for the
Departmental HPPG for FY 2010 through FY 2011 that all participating higher education
institutions that want to be operationally ready to originate Federal Direct Student Loans will
be able to do so by the end of FY 2011. This, in turn, will help the United States achieve
the goal of having the highest proportion of college graduates in the world by 2020.
According to the non-partisan Congressional Budget Office, switching to the Direct Loan
program will save taxpayers approximately $62 billion over 10 years.

In anticipation of the expected increase in Direct Loan volume, FSA expanded its Direct
Loan origination and servicing capacities in FY 2010. The OIG performed a review to
assess ―FSA‘s efforts in 1) executing appropriate modifications to the COD [Common
Origination and Disbursement] contract given the anticipated increase in Direct Loan
volume; 2) providing technical assistance to impacted schools; and 3) preparing
contingency plans if the COD system cannot effectively handle the increased loan volume,
especially during the peak loan origination period.‖2 With respect to their scope, the OIG
―…found FSA took actions intended to ensure the effective processing of student loans as
a result of the 100 percent transition to the Direct Loan program.‖3 The full report is located
on the OIG‘s website and can be found at the following link:
http://www2.ed.gov/about/offices/list/oig/auditreports/fy2010/x19k0008.pdf.

As of September 2011, almost 100 percent of domestic schools and 80 percent of foreign
schools that previously participated in the FFEL program have originated Direct Loans.
The Department continues to work with 18 domestic and 33 foreign institutions on transition
activities; these schools are extremely small institutions that have so far not had students
seeking loans. No school wishing to originate loans has been unable to do so. FSA
continues to closely monitor schools participating in the program and to offer assistance
when problems arise. In addition, communications continue to be provided to all
participating schools to offer the most up-to-date information about the program. This
particular HPPG was archived on September 30, 2011.

As required by OMB‘s guidance for implementing the Government Performance and
Results Act Modernization Act of 2010 (Pub. L. 111-352), the Department and FSA
developed a set of Priority Goals for FY 2012–FY 2013 as part of the internal budget
process. These Priority Goals are outcome oriented short-term goals that will align to the
administration‘s priorities and the Department and FSA‘s strategic plans. FSA will report
performance against its Priority Goal in the FY 2012 Annual Report.




2
  U.S. Department of Education, Office of Inspector General, FINAL MANAGEMENT INFORMATION REPORT
- Subject: Federal Student Aid’s Efforts to Ensure the Effective Processing of Student Loans Under the Direct
Loan Program (Control Number ED-OIG/X19K0008), September 16, 2010, 1.

3
    Ibid, 3.

                                    Federal Student Aid Annual Report–FY 2011                                   27
                                                               Management‘s Discussion and Analysis
                                                                              Performance Management



Quality of Performance Data

Ensuring the integrity of the data required to determine performance results is a critical step
in reporting performance. For this step, FSA developed and implemented a Validation and
Verification Matrix. Specifically, FSA uses this matrix as a tool to validate the
completeness and reliability of the underlying data gathered and used to calculate each
Performance Goal for the reporting period, including the performance results reported in
this Annual Report.

For each Performance Goal, this matrix is used to document the following: measurement
definition and owner; data source, availability, security procedures, and known limitations;
whether data are subject to FSA‘s A-123 Internal Control Review process; and procedures
for accessing the data, calculating the Performance Goal, and validating and verifying the
data gathered.

For a discussion of data quality and limitations for each Performance Goal, please see
Performance Results by Strategic Goal contained in the Annual Performance Report
section of this Annual Report.




                               Federal Student Aid Annual Report–FY 2011                          28
                                                                  Management‘s Discussion and Analysis
                                                               Financial Management Discussion and Analysis



FINANCIAL MANAGEMENT DISCUSSION AND ANALYSIS

The financial management discussion and analysis provides an overview of FSA‘s financial
results for FY 2011. This section is included to assist readers in understanding FSA‘s financial
results, position, and condition as portrayed in the principal financial statements and notes
found in the Financial Section of this report. The financial analysis explains major changes in
assets, liabilities, costs, and budgetary resources. It also includes comparisons of the current
year to the prior year and discusses the relevance of significant balances and amounts
reflected in the principal financial statements and notes.

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 FSA‘s
financial position has been fairly presented.

In FY 2011, FSA achieved an unqualified audit opinion on its financial statements. The Report
of Independent Auditors cited no material weaknesses in internal control. These results
demonstrate FSA‘s commitment to strong accountability and effective stewardship of its
resources.

FSA presents its financial statements and notes in the format required by the OMB Circular
A-136, Financial Reporting Requirements. One result of FSA‘s compliance is that for the
comparative fiscal years, FY 2011 and FY 2010, 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. The Report of
Independent Auditors on these statements and accompanying Reports on Internal Control and
Compliance with Laws and Other Matters are included in this report and can be found in the
section, Independent Auditors’ Reports.

Federal Student Aid is responsible for managing a net loan portfolio of approximately
$530.0 billion. This portfolio has seen significant growth, increasing by 44.2 percent over the
September 30, 2010 net portfolio balance. This growth is driven by the expansion of the Direct
Loan program, as dictated by the SAFRA Act legislation. Operationally, FSA must efficiently
utilize the resources it has available to ensure that this portfolio is serviced efficiently and
effectively, and quality customer service is provided to its borrowers. There are several risks
that FSA must mitigate to ensure this portfolio is effectively managed. These risks are
discussed at the conclusion of the analysis of the financial statements.




                               Federal Student Aid Annual Report–FY 2011                           29
                                                                        Management‘s Discussion and Analysis
                                                                  Financial Management Discussion and Analysis

The FY 2011 FSA Financial Highlights chart presented below provides a condensed summary
of the significant balances in FSA‘s financial statements for the current and prior years, as of
September 30, 2011 and 2010 respectively, and the percentage change.

                                 FY 2011 FSA Financial Highlights
               Condensed Balance Sheet                                                  Percentage
                                                            FY 2011          FY 2010
                    (Dollars in millions)                                                Change
   Fund Balance with Treasury                           $      62,214    $     53,465      16%
   Credit Program Receivables, Net                            529,965         367,410       44
   Remaining Assets                                             1,815           3,294      (45)
      Total Assets                                      $     593,994    $    424,169      40%

   Debt                                                 $     546,264    $    373,656      46%
   Liabilities for Loan Guarantees                             10,025          14,479      (31)
   Remaining Liabilities                                       19,402          25,587      (24)
       Total Liabilities                                $     575,691    $    413,722      39%

   Net Position                                         $      18,303    $     10,447       75%
       Total Liabilities & Net Position                 $     593,994    $    424,169       40%
                      Cost summary                                                      Percentage
                    (Dollars in millions)
                                                            FY 2011          FY 2010
                                                                                         Change
   Gross Cost                                           $     16,839     $     36,748      (54)%
   Less: Earned Revenue                                       20,212           17,071        18
      Net Cost of Operations                            $     (3,373)    $     19,677     (117)%

The Balance Sheet
The Balance Sheet presents the recorded value of assets and liabilities retained or managed
by FSA as of a specific point in time. The assets represent resources available for use by FSA,
while the liabilities represent amounts owed by FSA. The difference between the assets and
the liabilities represents FSA‘s net position.

Composition of FSA Assets
FSA‘s assets are the resources available to pay liabilities or satisfy future service needs. The
Consolidated Balance Sheet shows that FSA had total assets of $594.0 billion, as of
September 30, 2011. The primary composition of these assets is FSA‘s Fund Balance with
Treasury and its net Credit Program Receivables. The following charts present the significant
balances of FSA‘s assets and a comparison of those current balances to prior year amounts.
The Composition of Assets chart depicts major categories of assets as a percentage of FSA‘s
total assets. The Comparison of Assets chart presents comparisons of the significant asset
balances for Fiscal Years 2008–2011.




                                  Federal Student Aid Annual Report–FY 2011                           30
                                                                        Management‘s Discussion and Analysis
                                                                     Financial Management Discussion and Analysis

         Composition of Federal Student Aid’s Assets as of September 30, 2011

                                 0.3%
                     10.5%



                                                                                    Credit Program
                                                                                    Receivables, Net


                                                                                    Fund Balance
                                                                                    With Treasury


                                                                                    Remaining Assets


                                                89.2%



Total assets of $594.0 billion represent an increase of $169.8 billion over the previous year‘s
total assets of $424.2 billion, as of September 30, 2010. This increase reflects a 40.0 percent
increase in FSA‘s total assets. The difference resulted primarily from an increase in the Credit
Program Receivables, along with an increase in the various programs‘ Fund Balances with
Treasury.

As can be seen from the chart above, over 99 percent of Federal Student Aid‘s assets consist
of its credit program portfolio and its cash balances. The following chart illustrates the growth
in these two Balance Sheet line items over the past four fiscal years.

         Comparison of Federal Student Aid’s Assets for Fiscal Years 2008–2011
                                           (Dollars in Billions)



     $600.0
                                                                            $530.0
     $500.0
                                                                                         Credit
                                                                                         Program
     $400.0
                                                            $367.4                       Receivables,
                                                                                         Net
     $300.0
                                            $234.0                                       Fund
     $200.0                                                                              Balance
                        $134.5                                                           With
     $100.0                                             $53.5                            Treasury
                                                                            $62.2
                         $56.9          $66.8
        $-
                  FY 2008           FY 2009           FY 2010        FY 2011




                                 Federal Student Aid Annual Report–FY 2011                               31
                                                                     Management‘s Discussion and Analysis
                                                                  Financial Management Discussion and Analysis

Fund Balance with Treasury increased by $8.7 billion from September 30, 2010 to
September 30, 2011. The Direct Loan fund balance increased by $7.2 billion, or 69.4 percent,
primarily as a result of the SAFRA Act legislation, which eliminated all new loan disbursements
under the FFEL Program. The FFEL fund balance decreased by $3.0 billion, or 13.0 percent,
primarily as a result of a decrease in new borrowings which were primarily related to loan
purchase activities under ECASLA, net of collections on defaulted loans, and consolidated
defaulted loans, as well as the recapture of excess interest paid.

Credit Program Receivables, net of subsidy allowance, increased by $162.6 billion over the
September 30, 2010 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, 2011, the Credit Program Receivables‘ balance was
$530.0 billion – the majority of which were for the Direct Loan Program, Loan Participation
Purchase, Loan Purchase Commitment Programs, and defaulted FFEL loans.

Credit Program Receivables, net of the allowance for subsidy, increased primarily due to two
factors. First, as a result of the enactment of the SAFRA Act 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. As of
September 30, 2011, the Direct Loan receivables increased by $153.2 billion, which represents
a 67.2 percent increase.

Secondly, 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, and economic hardship.

         Total Federal Student Aid Loan Portfolio for the Fiscal Years 2008–2011
                                         (Dollars in Billions)
     $450.0

     $400.0
                                                                        $381.5       Direct
     $350.0                                                                          Loans

     $300.0

     $250.0                                                                          FFEL,
                                                         $228.2
                                                                                     ECASLA
     $200.0

     $150.0                              $152.8
                                                        $112.4
                         $109.9                                         $115.7       FFEL,
     $100.0
                                                                                     Guaranteed
      $50.0                              $57.1       $26.4                           Loans (i.e.,
                 $19.2                                                 $32.3         non-
                                         $23.9
       $0.0                                                                          ECASLA)
                $5.2
                  FY 2008           FY 2009        FY 2010        FY 2011




                                  Federal Student Aid Annual Report–FY 2011                           32
                                                                    Management‘s Discussion and Analysis
                                                                 Financial Management Discussion and Analysis

Composition of FSA Liabilities

FSA‘s liabilities represent probable and measurable future outflows of resources arising from
past transactions or events. As of September 30, 2011, FSA had total liabilities of
$575.7 billion, which represent an increase of $162.0 billion over the previous year‘s total
liabilities. The primary composition of these liabilities is FSA‘s Debt, Other Intragovernmental
Liabilities, and its Liabilities for Loan Guarantees. The Composition of Liabilities chart depicts
the significant categories of liabilities as a percentage of FSA‘s total liabilities. The Comparison
of Liabilities chart presents a comparison of FSA‘s debt for Fiscal Years 2008–2011.

         Composition of Federal Student Aid Liabilities as of September 30, 2011


                                     2.2%
                           1.7% 1.2%
                                                                              Debt


                                                                              Liabilities for Loan
                                                                              Guarantees

                                                                              Other
                                                                              Intragovernmental

                                                                              Remaining
                                                                              Liabilities


                                                    94.9%


The increase in liabilities resulted primarily from an increase in Debt, Accounts Payable, and
Other Intragovernmental Liabilities offset by a decrease in the Liabilities for Loan Guarantees.
As can be seen from the chart above, the Debt comprises 94.9 percent of FSA‘s liabilities. The
growth in the debt balance is illustrated in the graph below.




                                Federal Student Aid Annual Report–FY 2011                            33
                                                                    Management‘s Discussion and Analysis
                                                                Financial Management Discussion and Analysis

       Comparison of Federal Student Aid’s Liabilities for Fiscal Years 2008–2011
                                       (Dollars in Billions)
     $600.0
                                                                           $546.3
     $500.0


     $400.0
                                                           $373.7

     $300.0
                                                                                          Debt
                                         $234.9
     $200.0

                         $128.3
     $100.0


        $-
                  FY 2008          FY 2009          FY 2010         FY 2011


Debt increased 46.2 percent to $546.3 billion primarily as a result of the new borrowings to
support the growing loan volume in the Direct Loan Program. 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.

Statement of Net Cost
The Statement of Net Cost is the federal financial statement that presents the net cost of
operations for FSA programs. FSA net cost is the gross cost incurred during its operations less
any revenues earned from its activities.

Through September 30, 2011, net costs reflected a decrease of $23.1 billion from the previous
year‘s total net cost of $19.7 billion. This included a significant decrease in net costs for the
Direct Loan and FFEL Programs. The negative net cost amounts for FFEL and Direct Loan, as
shown in the table below, are due to decreases in subsidy expenses and increase in 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. Please refer to Footnote 6, Credit
Programs for Higher Education, for further details on subsidy related expenses. Additional
gross costs represent the funding of grants under the Pell Grant Program and the American
Recovery and Reinvestment Act of 2009 (Recovery Act).




                               Federal Student Aid Annual Report–FY 2011                            34
                                                                        Management‘s Discussion and Analysis
                                                                     Financial Management Discussion and Analysis

                                Composition of FSA Net Cost
                           For the Year ended September 30, 2011
                                          (Dollars in Millions)
     $50,000
                                                   Grant Programs,
                                                      $38,947
     $40,000

     $30,000

     $20,000

     $10,000                                                      Other Programs,     Recovery Act,
                                                                      $1,109              $27
           $0

    ($10,000)

    ($20,000)
                 FFEL, ($14,825)
    ($30,000)
                                   Direct Loans,
                                    ($28,631)
    ($40,000)


Statement of Changes in Net Position

The Statement of Changes in Net Position presents those amounts that caused the net
position section of the balance sheet to change from the beginning to the end of the reporting
period.

FSA‘s net position as of September 30, 2011, was $18.3 billion, an increase of $7.9 billion over
the previous year‘s total net position of $10.4 billion. The difference is primarily due to subsidy
re-estimates and the unexpended appropriations for the various programs, particularly the
Direct Loan Program, FFEL Program, and Pell Grant Program.




                               Federal Student Aid Annual Report–FY 2011                                 35
                                                                   Management‘s Discussion and Analysis
                                                                Financial Management Discussion and Analysis

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 $316.5 billion in
combined budgetary resources, of which $16.6 billion remained unobligated and not available.

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. FSA had total net outlays as of September 30, 2011, of $161.9 billion.

There was an increase in total net outlays of $5.7 billion comparing September 2011 to
September 2010. Net outlays increased primarily as a result of the enactment of the SAFRA
Act legislation, which stated that there would be no new originations from the FFEL program as
of July 2010, resulting in a significant increase in originations from the Direct Loan Program.

Gross outlays for FSA increased $28.4 billion comparing September 2011 to September 2010
due to increased loan originations and consolidations in the Direct Loan Program.

Financial Management Risks

As mentioned previously, there are several financial management risks that FSA must mitigate
to protect borrower and taxpayer interests. While not directly reflected on the financial
statements as detailed, they are overarching risks going forward that cannot be ignored.
These risks include:

Administrative Budget: With the passage of the SAFRA Act, the Congressional Budget
Office estimates that the federal government will save approximately $68 billion through
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 the SAFRA
Act, 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 increase in administrative costs, then FSA will be
at risk of not being able to maintain ongoing operations.

In addition, 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 places all other expenditures and
plans associated with those expenditures at-risk. This risk must be managed as long as the


                               Federal Student Aid Annual Report–FY 2011                            36
                                                                  Management‘s Discussion and Analysis
                                                               Financial Management Discussion and Analysis

federal government pays for mandatory Direct Loan expenditures using discretionary
administration funding.

Improper Payments: Based on OMB criteria, risk susceptible programs administered by FSA
include Direct Loan Program, FFEL Program, and Pell Program. FY 2011 outlays for these
programs were as follows:

      Direct Loan – $116.1 billion
      FFEL Guaranteed - $14.5 billion (interest and special allowance subsidies to Lenders
       and reinsurance claims and fees to Guaranty Agencies)
      Pell Grants - $36.5 billion
Risks include undetected fraud, waste, and abuse. For more information regarding FSA‘s
assessment of improper payment risk and planned strategies to mitigate this risk, please refer
to the Improper Payments Reporting Details narrative in the Other Accompanying Information
section in the Department's Agency Financial Report (AFR) located at
http://www.ed.gov/about/reports/annual/index.html.

Debt Collection: As of September 30, 2011, the Department managed a Net Credit Program
Receivable portfolio of approximately $530.0 billion. This portfolio includes FSA‘s Direct Loan
Program, FFEL Program (guaranteed loans held by guaranty agencies or FSA), FFEL loans
acquired via authorization of the ECASLA, Federal Perkins Loans Program, and TEACH
Program receivables. FSA realizes that as the size of the loan portfolio significantly grows from
year to year, so does the level of financial risk associated with the collections on these loans.

Generally, a debt is considered delinquent when payment is past due 30 to 270 days. Over
270 days, the debt is considered to be in default. FSA monitors the aging of its portfolio debt,
takes action to rehabilitate defaulted borrowers, and provides incentives to its partners (i.e.,
schools and servicers) to reduce the number of defaulted borrowers. For more details, please
see the discussion of Performance Goal D.2 in the Annual Performance Report section of this
Annual Report.

In its FY 2012–FY 2016 Strategic Plan, FSA is preparing a new metric, the overall Collection
Rate, to better analyze all collections for the loan portfolio, including receivables that are
defaulted and delinquent, as well as those that are in repayment. This new metric will provide
a broader measurement of the status of FSA‘s collection activities and the supporting breakout
of that Collection Rate will ensure the comprehensive management of all debt collection
activities.

Guaranteed Loan Portfolio: As of September 30, 2011, the guaranteed loan portfolio (non-
ECASLA FFEL) consisted of $327.6 billion owned by private lenders and $32.3 billion held by
FSA (unassigned serviced by guaranty agencies or assigned serviced by FSA). As of
September 30, 2011, the estimated maximum government exposure on outstanding
guaranteed loans held by lenders was approximately $320.7 billion. In addition to the
exposure of the guarantee, FSA makes special allowance payments to private lenders and




                               Federal Student Aid Annual Report–FY 2011                           37
                                                                   Management‘s Discussion and Analysis
                                                                Financial Management Discussion and Analysis

reinsurance claims and fees to guaranty agencies. The SAFRA Act eliminated the origination
of guaranteed FFEL loans as of July 1, 2010 and required a transition to 100 percent Direct
Loans. Although the origination of guaranteed FFEL loans has ceased, FSA needs to ensure
the infrastructure (i.e., participating organizations, processes, internal controls, and systems)
remains fully operational through the remaining life of the existing guaranteed FFEL loan
portfolio. Failure to maintain adequate infrastructure may prevent appropriate management of
guarantees and loan portfolio, resulting in loss of government assets and income.




                               Federal Student Aid Annual Report–FY 2011                            38
                                                                              Management‘s Discussion and Analysis
                                                                    Analysis of Systems, Controls, and Legal Compliance



ANALYSIS OF 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; and

   Compliance with applicable laws and regulations.4

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, 2011, 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:




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



                                        Federal Student Aid Annual Report–FY 2011                                    39
                                                            Management‘s Discussion and Analysis
                                                    Analysis of Systems, Controls, and Legal Compliance

   Total and Permanent Disability (TPD).
   Debt Collection.
   Direct Loan Program Operations.
   Direct Loan Consolidation.
   Direct Loan Servicing.
   Title IV Additional Servicers (TIVAS).
   Financial Partner Invoicing.
   Financial Partner Oversight.
   Financial Reporting.
   Funds Control Management.
   IT/General Computer Controls, Financial Management System, COD, Direct Loan
    Consolidation System, Direct Loan Servicing System, Debt Management and
    Collection System, National Student Loan Data System (NSLDS), Central Processing
    System (CPS), Electronic Campus Based System, Postsecondary Education
    Participant System, Financial Partner Data Mart , Great Lakes Commercial System,
    Nelnet Commercial System, Pennsylvania Higher Education Assistance Agency
    Commercial System, Sallie Mae Commercial System, Virtual Data Center.
   Pell Grant Program Operations.
   Campus-based Grant Program Operations.
   TEACH Grant Program Operations.
   Annual Form 2000 Processing/Operations Performance Management Division.
   Procurement Management.
   Human Resource Management.
   School Eligibility Services Group.
   Student Eligibility.

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, 2011 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 AFR for information related to the Department's
compliance with the Federal Financial Management Improvement Act of 1996.

FSA‘s financial management systems strategy is formulated and managed as part of the
Department‘s strategy. For details on FSA‘s financial management systems strategy,
please refer to the Financial Management Systems Strategy narrative found in the
Management‘s Discussion and Analysis section of the Department‘s AFR located at
http://www2.ed.gov/about/reports/annual/index.html.




                              Federal Student Aid Annual Report–FY 2011                              40
                                                           Management‘s Discussion and Analysis
                                                                   Limitations of Financial Statements

4

    LIMITATIONS OF FINANCIAL STATEMENTS

Management has prepared the accompanying financial statements to report the financial
position and operational results for FSA, for FY 2011 and FY 2010 pursuant to the requirements
of Title 31 of the United States Code, Section 3515(b).

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




                              Federal Student Aid Annual Report–FY 2011                              41
                                 Management‘s Discussion and Analysis
                                          Limitations of Financial Statements




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Federal Student Aid Annual Report–FY 2011                                  42
                                                 Annual Performance Report




ANNUAL PERFORMANCE REPORT




         Federal Student Aid Annual Report–FY 2011                      43
                                                                         Annual Performance Report


       FY 2011 Performance Highlights of Federal Student Aid

               Performance Goals                 FY 2011     FY 2011         Result    Reference
                                                  Target      Actual                     Page
Strategic Goal A: Provide superior service and information to students and borrowers.

% of original FAFSA filers among high school                                   Met
                                                 >=49.5%     52.0%                         49
seniors
% of original FAFSA filers among workforce                                   Not Met
                                                 >=3.9%       3.8%                         50
aged 25+ without college degree
                                                                         No target
% of original filers among low-income students    TBD        57.0%                         51

% of students who dropped out due to financial                              N/A
                                                  TBD           —                         52
reasons
Customer satisfaction score (ASCI) for the                                  Met
                                                   74           78                        53
entire aid lifecycle
Strategic Goal B: Work to ensure that all participants in the system of postsecondary education
funding serve the interests of students, from policy to delivery.
―Ease of doing business with FSA‖ survey         Launch       Survey        Met
                                                                                          54
result from schools.                             survey      launched
Additional metric to measure impact of
improvements under development (to be
established in 2011)                                                      No target
                                                  TBD          9.9%                       55
Additional metric established the following:
Borrower based delinquency rate
Strategic Goal C: Develop efficient processes and effective capabilities that are among the best
in the public and private sectors.
                                                                          No target
Aid delivery-related cost per application       TBD         $9.89                          56

Loan servicing-related cost per borrower                                 No target
                                                  TBD        $18.15                        57
serviced
Additional metric to measure improvement in
cost structures under development (to be
established in 2011)                                                           N/A
                                                  TBD          —                           58
Note: No additional metrics were established
during 2011.
Strategic Goal D: Ensure program integrity and safeguard taxpayers’ interests.
                                                                               N/A
Delinquency rate                                 <=8.8%        —                           59
                                                                               Met
Default rate                                     <=12.3%     11.3%                         60

Strategic Goal E: Develop FSA’s performance culture and become one of the best places to
work in the federal government.
Best Places to Work in the Federal Government           th                     N/A
                                                  180          —                           61
ranking




                                 Federal Student Aid Annual Report–FY 2011                         44
                                                                              Annual Performance Report
                                                                Introduction to the Annual Performance Report



INTRODUCTION TO THE ANNUAL PERFORMANCE REPORT

 To guide FSA towards achieving its vision ―To be the most trusted and reliable source of student
 financial aid, information, and services in the nation‖, FSA updated its five-year strategic plan to
 document the Strategic Goals, Objectives, and Performance Goals of the organization. FSA is
 required by the PBO enabling legislation to report annually its level of performance. This section,
 the Annual Performance Report, satisfies this annual reporting requirement.

 In addition to this section, see the following portions of this document for additional performance
 related information:

        Management‘s Discussion and Analysis: See the Management‘s Discussion and Analysis
         section of this document for a more complete discussion of FSA‘s mission, organization, and
         performance management, including performance management processes and summary of
         results.

        Appendix A: See appendix A of this document for the Strategic Objectives and Performance
         Metrics that were in effect for the FY 2010 reporting period that are discontinued for the FY
         2011 reporting period due to the implementation of the FSA Strategic Plan FY 2011–15.

 FSA‘s updated Strategic Plan FY 2011–15 was issued in September 2010 and implemented at the
 beginning of FY 2011. FSA‘s Strategic Goals for FY 2011 are as follows:

    Strategic Goal A: Provide superior service and information to students and borrowers
    Strategic Goal B: Work to ensure that all participants in the system of postsecondary education
     funding serve the interests of students, from policy to delivery
    Strategic Goal C: Develop efficient processes and effective capabilities that are among the
     best in the public and private sectors
    Strategic Goal D: Ensure program integrity and safeguard taxpayers‘ interests
    Strategic Goal E: Develop FSA‘s performance culture and become one of the best places to
     work in the federal government

 To gauge FSA‘s success with meeting these Strategic Goals, FSA identified and included 13
 Performance Goals in its Strategic Plan. The following is a link to the FSA Strategic Plan
 FY 2011–15.

                       http://www2.ed.gov/about/offices/list/fsa/fiveyearplan.pdf




                                Federal Student Aid Annual Report–FY 2011                             45
                                                                                 Annual Performance Report
                                                                   Introduction to the Annual Performance Report
The following table provides a summary of results, by Strategic Goal, as measured by the 13
FY 2011 Performance Goals.


                   Summary of Performance Results by Strategic Goal
                                                                          Not        No
 Strategic Goal                                                    Met                        N/A       Total
                                                                          met      target
 Goal A:
 Provide superior service and information to students and           2       1         1        1          5
 borrowers.
 Goal B:
 Work to ensure that all participants in the system of
 postsecondary education funding serve the interests of             1      —          1        —          2
 students, from policy to delivery.
 Goal C:
 Develop efficient processes and effective capabilities that are   —       —          2        1          3
 among the best in the public and private sectors.
 Goal D:
 Ensure program integrity and safeguard taxpayers‘ interests.       1      —         —         1          2
 Goal E:
 Develop FSA‘s performance culture and become one of the           —       —         —         1          1
 best places to work in the federal government.

 Total                                                              4       1         4        4         13




                                  Federal Student Aid Annual Report–FY 2011                              46
                                                                                 Annual Performance Report
                                                                          Performance Results by Strategic Goal



PERFORMANCE RESULTS BY STRATEGIC GOAL


This section presents detailed performance results including a discussion of progress made to
date in achieving the Strategic Goal and data used to assess performance.

How this section is organized
This section is organized by the five Strategic Goals then associated Performance Goal(s). This
section contains the following information for each Performance Goal:

Table: Identifies the Performance Goal associated with the Strategic Goal and provides
historical actual results for the four previous fiscal years (if available), target and actual result for
the current fiscal year, and an indicator as to whether FSA met the Performance Goal for each
fiscal year reported. The following is the legend for the performance result indicator included in
the table.

                           Performance Result Indicator Legend
                       Performance result met or exceeded the           Met
                       target.
                       Performance result did not meet the            Not met
                       target.
                       Performance goal was tracked, but no          No target
                       target was established.
                       Performance result is not applicable
                       because the performance goal was not
                                                                        N/A
                       developed, the performance goal was
                       not implemented, or the required data
                       were not available in time for inclusion.


Historical actual results are not available for the Performance Goals newly developed and
implemented for FY 2011 (i.e., performance goals not carried forward from the prior five-year
strategic plan).

The Performance Goal results reported are as of fiscal year-end (i.e., September 30, 2011)
unless otherwise noted. If the required data aren‘t available as of fiscal year-end in sufficient
time for inclusion, data as of the most recent reporting period available are presented. Data as
of fiscal year-end may not be available, since some required data are obtained from external
sources (i.e., state guaranty agencies, lenders and loan servicers, grant and loan recipients,
etc.).

Target Context: Explains the parameters or rationale for targets, especially where anomalies
exist.

Analysis of Progress: Provides a discussion of FSA‘s progress in meeting its targets and
includes explanations for unmet targets and actions being taken or planned.

Data Quality and Limitations: Describes the source of data required to calculate the actual
result for the performance goal, any calculation required to determine the actual result, and any

                                 Federal Student Aid Annual Report–FY 2011                              47
                                                                          Annual Performance Report
                                                                   Performance Results by Strategic Goal
known data quality issues or limitations. For an overview of FSA‘s business process to confirm
the quality of performance data, please see Quality of Performance Data in the Management‘s
Discussion and Analysis section of this Annual Report.




                              Federal Student Aid Annual Report–FY 2011                          48
                                                                            Annual Performance Report
                                                                     Performance Results by Strategic Goal
Strategic Goal A: Provide superior service and information to students and
borrowers.
 Strategic Goal A: Provide superior service and information to students and borrowers.
        Performance Goal A.1: % of original FAFSA filers among high school seniors

                         FY 2007     FY 2008     FY 2009     FY 2010              FY 2011
Fiscal Year
                          Actual      Actual      Actual      Actual       Target          Actual
Performance                                                                >=49.5%         52.0%
                                New performance measure
Performance Result                                                                   Met
                               (Prior-year data not available)


Target Context:
A major component of FSA‘s mission is to ensure that all eligible individuals benefit from federal
student aid. In order to achieve this goal, FSA goes to great lengths to increase awareness
about the availability of student financial assistance. To better assess its customers and their
needs and to better support college access and completion among its customer base, FSA is
developing a system of customer segmentation that identifies student/family/influencer profiles
and needs through the analysis of customer geographic, demographic, and behavioral data.
This performance goal measures the penetration of FAFSA applications for one customer
segment, high school seniors.

Analysis of Progress:
FSA exceeded this performance goal with approximately 52 percent of high school seniors from
June 2010 submitting a FAFSA during the 2010–2011 application cycle. Since 2010, FSA and
the Department have undertaken several efforts which have encouraged or made it easier for
students traditionally underrepresented in postsecondary education to apply for aid. This
includes a pilot program in which the Department provided FAFSA completion data to 20 entities.
Entities were located across the country and included administrators from state institutions of
higher education, local educational agencies, and postsecondary schools. The data provided
enabled these entities, as part of their comprehensive college and career readiness strategy, to
focus resources on reaching students who have not completed a FAFSA. In the future, the
Department proposes to expand this program to an additional 100 entities. In addition, FSA
developed and implemented the FAFSA Completion Cities Program. Under this program, FSA
collaborated with key stakeholders in several cities to sponsor FAFSA completion events. FSA
will expand this program to include additional cities in 2012 and beyond.

Data Quality and Limitations:
Data for this measure are derived from FSA‘s CPS to identify FAFSA filers ages 18 and under
submitting an original application for an award year (not a renewal application) and who indicate
they never attended college, divided by the total number of high school graduates from the most
recent high school academic year reported by the National Center for Education Statistics
(NCES).




                               Federal Student Aid Annual Report–FY 2011                            49
                                                                              Annual Performance Report
                                                                       Performance Results by Strategic Goal
              Performance Goal A.2: % of original FAFSA filers among workforce
                             aged 25+ without college degree

                        FY 2007     FY 2008      FY 2009     FY 2010               FY 2011
Fiscal Year
                         Actual      Actual       Actual      Actual         Target         Actual
Performance                                                                 >=3.9%            3.8%
                                New performance measure
Performance Result                                                                  Not met
                               (Prior-year data not available)


Target Context:
The economy and job market require that more workers than ever develop skills and master
knowledge beyond the high school level. Although progress has been made over the years to
increase participation and graduation levels for all individuals, work needs to continue to address
the gap for nontraditional students. Increasing completion rates and the number of graduates is
a priority of this administration, as evidenced by the President‘s 2020 goal for America to have
the highest proportion of college graduates in the world. This performance goal measures the
penetration of FAFSA applications for another customer segment, individuals aged 25 and over.

Analysis of Progress:
FSA fell slightly short of this performance goal with approximately 3.8 percent of the workforce
over 25 years of age, who have never attend college before, submitting a FAFSA during the
2010–11 application cycle. The targeting of this measure may have been overly optimistic as the
2009–10 cycle applicants were relied upon heavily to set the baseline. Unemployment peaked in
October 2009 and many in this group may have enrolled in education programs to obtain
additional skills. FSA will continue its efforts to understand its customers and their needs to
better support college access and completion, which may result in FSA revising the target for this
performance goal.

Data Quality and Limitations:
Data for this measure are derived from FSA‘s CPS to identify FAFSA filers ages 25 and over
submitting an original application for an award year (not a renewal application) and who indicate
they never attended college, divided by the total number of people in the workforce age 25 and
older who have not attended college as of the most current Bureau of Labor Statistics Workforce
data.




                               Federal Student Aid Annual Report–FY 2011                             50
                                                                             Annual Performance Report
                                                                      Performance Results by Strategic Goal
          Performance Goal A.3: % of original filers among low-income students

                        FY 2007     FY 2008     FY 2009      FY 2010              FY 2011
Fiscal Year
                         Actual      Actual      Actual      Actual         Target         Actual
Performance                                                                  TBD           57.0%
                                New performance measure
Performance Result                                                                No target
                               (Prior-year data not available)


Target Context:
Increasing completion rates and the number of graduates is a priority of this Administration, as
evidenced by the President‘s 2020 goal for America to have the highest proportion of college
graduates in the world. Although progress has been made over the years to increase
participation and graduation levels for all individuals, work needs to continue to address the gap
for low-income students. This performance goal measures the penetration of FAFSA
applications for a third customer segment, low-income students. As this is the first year for this
performance goal, FSA did not establish a FY 2011 target.

Analysis of Progress:
No target was set for this performance goal last year because it was agreed that FSA would
identify data sources and data definitions during FY 2011. The FY 2011 actual percentage will
serve as the baseline for FY 2012.

Data Quality and Limitations:
Data for this measure are derived from FSA‘s CPS to identify FAFSA filers ages 18 and under
submitting an original application for an award year (not a renewal application) and who indicate
they never attended college and who are from households with incomes that are less than 150
percent of the Poverty Level established by the Department of Health and Human Services,
divided by the total number of high school graduates from households with incomes that are less
than 150 percent of the Poverty Level as reported by the most recent School Enrollment
Supplement, Current Population Survey.




                               Federal Student Aid Annual Report–FY 2011                            51
                                                                              Annual Performance Report
                                                                       Performance Results by Strategic Goal
     Performance Goal A.4: % of students who dropped out due to financial reasons

                         FY 2007     FY 2008      FY 2009     FY 2010              FY 2011
Fiscal Year
                          Actual      Actual      Actual      Actual        Target         Actual
Performance                                                                  TBD             —
                                New performance measure
Performance Result                                                                   N/A
                               (Prior-year data not available)


Target Context:
This performance goal was not implemented because the Department has no solid sources of
information. NCES eliminated questions from the Beginning Postsecondary Students
Longitudinal Study related to the reasons a student dropped out, because they thought that
information obtained through student recall without validating against a ―trigger event‖ like a job
loss or other income change, was statistically suspect. NCES is currently evaluating alternative
methodologies to obtain dropout information and hopes to have a plan in the near future. FSA
currently lacks resources to do this on its own, but when the information becomes available and
reported on a regular basis, FSA will consider including this performance goal in its strategic
plan. As this is the first year for this performance goal, no FY 2011 target was established

Analysis of Progress:
Not applicable, since this performance goal was not implemented for FY 2011.

Data Quality and Limitations:
Not applicable, since this performance goal was not implemented for FY 2011.




                               Federal Student Aid Annual Report–FY 2011                             52
                                                                           Annual Performance Report
                                                                    Performance Results by Strategic Goal
  Performance Goal A.5: Customer satisfaction score (ACSI) for the entire aid lifecycle

                         FY 2007     FY 2008     FY 2009    FY 2010              FY 2011
Fiscal Year
                          Actual      Actual      Actual     Actual       Target         Actual
Performance                                                                 74             78
                                New performance measure
Performance Result                                                                 Met
                               (Prior-year data not available)


Target Context:
To measure overall customer satisfaction level throughout the student aid lifecycle, FSA
calculates a weighted score for the American Customer Satisfaction Index (ACSI) surveys for
applicants, students in school, and borrowers in repayment. This performance goal measures
how FSA is improving in terms of streamlined processes for customer interaction and the
accessibility of information FSA provides to its customers on its websites.

Analysis of Progress:
FSA exceeded the target for this goal. FSA‘s FAFSA simplification efforts have improved an
applicant‘s ability to successfully navigate and complete the application. A customized
experience reduces the number of questions applicants and their parents must answer. The
availability and increased use of the Internal Revenue Service (IRS) Data Retrieval Tool make it
easier for applicants and their parents to provide financial information and increases the
accuracy of the information provided.

Data Quality and Limitations:
The ACSI survey is conducted annually on FSA‗s major programs. The index provides a
national, cross-industry, cross-public and cross-private sector economic indicator, using widely
accepted methodologies to obtain standardized customer satisfaction information. Survey
scores are indexed on a 100-point scale. The ACSI scores for application, in school experience,
and servicing are weighted by the utilization of each process/service and the intensity of the
service provided. The FSA weighted score of 78 is higher than the National Average overall
ACSI score of 75.6.




                              Federal Student Aid Annual Report–FY 2011                           53
                                                                            Annual Performance Report
                                                                     Performance Results by Strategic Goal
Strategic Goal B: Work to ensure that all participants in the system of
postsecondary education funding serve the interests of students, from
policy to delivery.


  Performance Goal B.1: ―Ease of doing business with FSA‖ survey result from schools

                          FY 2007     FY 2008      FY 2009     FY 2010            FY 2011
 Fiscal Year
                           Actual      Actual       Actual     Actual       Target         Actual
 Performance                                                                Launch        Survey
                                 New performance measure                    survey       launched
 Performance Result             (Prior-year data not available)                      Met



Target Context:
FSA works closely with postsecondary institutions to provide millions of students with federal
student aid. Successfully delivering aid through a complex system depends on FSA‘s ability to
work well with its institutional, financial, and state partners to support them with technical
assistance that will help them improve their performance and to provide adequate oversight to
ensure that participants are complying with program requirements. To ensure that all
participants in the postsecondary education funding system can easily access the information
they need to perform their important functions and serve the interests of students, FSA conducts
a survey with postsecondary institutions and partners every quarter to gauge the ―ease of doing
business with FSA.‖ As this is the first year for this survey, the FY 2011 target is to launch the
survey.

Analysis of Progress:
FSA launched this quarterly survey mid-FY 2011. Based upon survey results for the two
quarters completed, FSA achieved a score of 72. FSA‘s FY 2011 score will serve as the
baseline for FY 2012. To understand this baseline, FSA conducted a preliminary analysis of
survey responses received.

Data Quality and Limitations:
A 10-12 question survey regarding the ease of doing business with FSA is sent to schools
quarterly. Questions focus on how easy it is to interact with major delivery and information
systems. The 1-10 score is indexed to a scale of 1-100 for consistency with other customer
satisfaction metrics and to allow greater accuracy in significance testing.




                               Federal Student Aid Annual Report–FY 2011                           54
                                                                          Annual Performance Report
                                                                   Performance Results by Strategic Goal
   Performance Goal B.2: Additional metric to measure impact of improvements under
                       development (to be established in 2011)

      Additional metric established the following: Borrower based delinquency rate

                          FY 2007      FY 2008    FY 2009     FY 2010           FY 2011
 Fiscal Year
                           Actual       Actual     Actual      Actual      Target       Actual
 Performance                                                                TBD          9.9%
                                 New performance measure
 Performance Result                                                             No target
                                (Prior-year data not available)


Target Context:
FSA studied other possible ways to measure the extent to which postsecondary institutions and
partners are actively supporting the interest of students and borrowers. As a result, FSA
developed a new delinquency metric as Performance Goal B.2: the percent of borrowers
serviced by four TIVAS who are greater than 90 days delinquent. Currently, TIVAS service over
22 million borrower accounts, including Direct Loans and Department-held FFEL loans. TIVAS
can best serve the interest of borrowers by helping them cure delinquencies, especially the
severely delinquent loans that have a greater likelihood of going into default and tarnishing
borrowers‘ credit. As this is the first year for this performance goal, no FY 2011 target was
established.

Analysis of Progress:
The FY 2011 actual will serve as the baseline for FY 2012.

Data Quality and Limitations:
FSA calculates the average number of borrowers who are 91-270 days delinquent in the year
ending June 30 each year and divides this number by the average number of borrowers in
repayment for the year. Borrower-based data are collected from TIVAS invoices.




                              Federal Student Aid Annual Report–FY 2011                          55
                                                                           Annual Performance Report
                                                                    Performance Results by Strategic Goal
Strategic Goal C: Develop efficient processes and effective capabilities that
are among the best in the public and private sectors.


               Performance Goal C.1: Aid delivery-related cost per application

                          FY 2007       FY 2008     FY 2009    FY 2010            FY 2011
 Fiscal Year
                           Actual        Actual     Actual      Actual      Target        Actual
 Performance                                                                  TBD          $9.89
                                  New performance measure
 Performance Result                                                               No target
                                 (Prior-year data not available)


Target Context:
In FY 2011, the Department developed two measures to gauge the efficiency and effectiveness
of aid delivery. The first one is the Aid delivery-related cost per application. Throughout FY
2011, FSA continued to improve aid delivery by automating and simplifying the aid delivery
processes, such as the FAFSA simplification efforts that have improved an applicant‘s ability to
successfully navigate and complete the application. The aid delivery-related unit cost tracks the
impact of these improvements on the overall costs for application and origination operations. As
this is the first year for this performance goal, no FY 2011 target was established.

Analysis of Progress:
The unit cost reflects a rolling four quarters (FY 2010/Quarter 4 – FY 2011/Quarter 3) time period
because full year FY 2011 unit costs are not available until the December-January timeframe.
This is the first time such a period has been calculated so prior year data are not available.
FAFSA and origination unit costs have generally been trending downward the past few years.
The aid delivery-related cost per application is expected to rise as volumes plateau due to the
maturation of the FAFSA simplification operations and maintenance processes.

Data Quality and Limitations:
Data for this measure are derived from FSA‘s Activity Based Costing model, which is updated on
a quarterly basis and reconciled to FSA‘s Statement of Net Cost, ensuring all costs assigned to
FSA are included in the cost model. Specifically, the measure is defined as the total direct cost
to process FAFSAs and to originate aid in the year ending June 30, divided by the number of
original FAFSAs processed in the year ending June 30. The number of original FAFSAs does
not include resubmissions or revisions. However, an applicant will have more than one FAFSA,
if the applicant applied for aid for more than one award year during the year ending June 30.




                              Federal Student Aid Annual Report–FY 2011                            56
                                                                            Annual Performance Report
                                                                     Performance Results by Strategic Goal
         Performance Goal C.2: Loan servicing-related cost per borrower serviced

                           FY 2007      FY 2008     FY 2009     FY 2010            FY 2011
 Fiscal Year
                            Actual       Actual      Actual      Actual      Target        Actual
 Performance                                                                   TBD         $18.15
                                  New performance measure
 Performance Result                                                                No target
                                 (Prior-year data not available)


Target Context:
The second measure developed to gauge the efficiency and effectiveness of aid delivery is the
Loan servicing-related cost per borrower. This unit cost tracks the overall costs of loan servicing
operations and maintenance, including labor, nonlabor, and contracts. As this is the first year for
this performance goal, no FY 2011 target was established.

Analysis of Progress:
The loan servicing unit cost reflects a rolling four quarters (FY 2010/Quarter 4 – FY 2011/Quarter
3) time period because full year FY 2011 unit costs are not available until the December-January
timeframe. This is the first time such a period has been calculated so prior year data are not
available. While the loan servicing unit cost has generally been trending downward in recent
years, FSA expects loan servicing cost to increase over the next several years due to the
inclusion of new not-for-profit (NFP) servicers, which have higher cost structures. Also, FSA
expects the maturation of its loan portfolio to increase loan servicing cost. Specifically, FSA
expects the proportion of borrowers that enter repayment to increase over the next few years.
Based upon the fee structure of FSA‘s contracts with loan servicers, fees for servicing loans in
repayment, as opposed to loans for borrowers in-school, are greater. Therefore, this expected
increase in loans in repayment will increase FSA‘s servicing costs.

Data Quality and Limitations:
Data for this measure are derived from FSA‘s Activity Based Costing model, which is updated on
a quarterly basis and reconciled to FSA‘s Statement of Net Cost, ensuring all costs assigned to
FSA are included in the cost model. Specifically, the measure is defined as the total direct costs
for servicing in the year ending June 30, divided by the average number of borrowers in servicing
for the year. This differs slightly from the proposed calculation in the strategic plan where the
administrative cost of default collections and borrowers in default status were included.




                               Federal Student Aid Annual Report–FY 2011                            57
                                                                          Annual Performance Report
                                                                   Performance Results by Strategic Goal
  Performance Goal C.3: Additional metric to measure improvement in cost structures
                   under development (to be established in 2011)

                 Note: No additional metrics were established in FY 2011.

                          FY 2007      FY 2008    FY 2009     FY 2010            FY 2011
 Fiscal Year
                           Actual       Actual     Actual      Actual      Target         Actual
 Performance                                                                TBD             —
                                 New performance measure
 Performance Result                                                                 N/A
                                (Prior-year data not available)


Target Context:
This additional performance goal was not developed and implemented because changes to cost
structures (fixed and variable costs) are internal tools that help FSA understand its costs and
drive changes. These costs are difficult to describe and use and would not be suitable for
outside consumption. A better performance goal is to focus on unit costs (Performance Goals
C.1 and C.2) to measure efficiency and productivity gains.

Analysis of Progress:
Not applicable, since an additional performance goal was not developed and implemented for
FY 2011.

Data Quality and Limitations:
Not applicable, since an additional performance goal was not developed and implemented for
FY 2011.




                              Federal Student Aid Annual Report–FY 2011                            58
                                                                            Annual Performance Report
                                                                     Performance Results by Strategic Goal
Strategic Goal D: Ensure program integrity and safeguard taxpayers’
interests.


                           Performance Goal D.1: Delinquency rate

                          FY 2007      FY 2008     FY 2009     FY 2010            FY 2011
 Fiscal Year
                           Actual       Actual      Actual     Actual       Target         Actual
 Performance                                                               <=8.8%            —
                                 New performance measure
 Performance Result                                                                  N/A
                                (Prior-year data not available)


Target Context:
This Performance Goal was not implemented because delinquency rates vary by stage of
delinquency, and at the overall level, delinquency rates are not a good leading indicator of
default (taxpayer cost) as borrowers can go in and out of delinquency very easily, especially in
the early stages of repayment. FSA has identified two additional Performance Goals for
Strategic Goal D in FY 2012: improper payments rate and collections rate. FSA is currently
performing an analysis to better define the Performance Goals and baseline targets.

Analysis of Progress:
Not applicable, since this performance goal was not implemented for FY 2011.

Data Quality and Limitations:
Not applicable, since this performance goal was not implemented for FY 2011.




                               Federal Student Aid Annual Report–FY 2011                            59
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                                                                       Performance Results by Strategic Goal
                              Performance Goal D.2: Default rate

                           FY 2007      FY 2008     FY 2009     FY 2010             FY 2011
 Fiscal Year
                            Actual      Actual      Actual       Actual      Target         Actual
 Performance                                                                <=12.3%         11.3%
                                  New performance measure
 Performance Result                                                                   Met
                                 (Prior-year data not available)


Target Context:
Because FSA annually disburses almost $157.0 billion in aid and administers a loan portfolio
valued at almost $848.0 billion, the responsibility to safeguard taxpayer resources requires
accurate oversight and management. One indication of FSA‘s performance in this area is the
rate at which borrowers default on their student loans.

Analysis of Progress:
FSA exceeded the target for this performance goal. FSA is committed to avoiding borrower
default as evidenced by its support for participating schools and its creation of incentives for loan
servicers. For instance, FSA assists schools with their efforts to educate students about their
loan repayment obligation, encourages successful repayment, and addresses delinquent
repayment when it occurs. Also, FSA maintains a website that consolidates resources available
for schools to assist with preventing delinquency and default. Resources include useful
guidance, available training, and a list of contacts.

To incentivize its loan servicers, FSA established performance-based servicing contracts for the
TIVAS. The contract terms foster improved performance by requiring vendors to compete for
additional loan volume allocations. Each quarter, borrowers, schools, and Department
employees are surveyed. Each vendor‗s success in avoiding defaults is also measured on a
quarterly basis. The results of these assessments are compiled annually and are used to
determine the allocation of new borrower accounts for the coming year. In addition to this
allocation methodology, the TIVAS contract fee schedule provides for a higher per borrower
servicing fee paid by FSA for borrowers in a non-delinquent status. These contract terms
encourage TIVAS to promote positive student loan repayment behavior.

Data Quality and Limitations:
The default rate for this goal is defined as the average balance of loans that are 270 days or
more past due and serviced by FSA or its debt collection servicer in the year ending June 30
each year, divided by the average balance of loans serviced by FSA at the end of the year
(excluding loans in "school" or "grace" loan status).




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                                                                    Performance Results by Strategic Goal
Strategic Goal E: Develop FSA’s performance culture and become one of the
best places to work in the federal government.


     Performance Goal E.1: Best Places to Work in the Federal Government ranking.

                         FY 2007    FY 2008     FY 2009      FY 2010            FY 2011
 Fiscal Year
                          Actual     Actual      Actual      Actual       Target         Actual
 Performance                                                               180th           —
                                New performance measure
 Performance Result                                                                N/A
                               (Prior-year data not available)


Target Context:
This measure aims to improve FSA‘s ranking in the Best Places to Work in the Federal
Government as determined by the Partnership for Public Service. This ranking is based on the
composite score of the Employee Viewpoint Survey conducted by Office of Personnel
Management and is a good indicator to measure the change in performance culture.

Analysis of Progress:
The FY 2011 Actual performance level was not available in time for inclusion in this Annual
Report. Although the Office of Personnel Management released the survey results on
September 29, 2011, the Partnership for Public Service, who determines the ranking, will not
publish its rankings until after the due date (November 15, 2011) of this Annual Report.
Therefore, the actual ranking will be reported in the FY 2012 Annual Report. Also, FSA plans to
replace this Performance Goal in FY 2012 with a Morale Index, an average of a subset of seven
survey questions, a more focused measure that may more easily be impacted by internal FSA
actions.

Data Quality:
The Federal Employee Viewpoint Survey is a tool that measures employees' perceptions of
whether and to what extent conditions that characterize successful organizations are present in
their agencies. The results set a baseline for ongoing human capital assessment in the federal
government. The results of this survey are the basis for the ―Best Places to Work in the Federal
Government‖ ranking published by the Partnership for Public Service.




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                                                        FY 2011 Accomplishments of Federal Student Aid




FY 2011 ACCOMPLISHMENTS OF FEDERAL STUDENT AID

During FY 2011, FSA realized additional accomplishments that were not specifically
measured by the Performance Goals implemented to measure performance against FSA‘s
Strategic Plan. Although not measured by FSA Performance Goals, these additional
accomplishments were the result of initiatives FSA undertook to support the implementation
of this Strategic Plan or legislative changes. This section describes FSA‘s additional
accomplishments.

FSA realized the following additional accomplishments in support of Strategic Goal
A: Provide superior service and information to students and borrowers.

Internal Revenue Service Data Retrieval Tool
FSA continues to improve and simplify the FAFSA. Most recently, applicants now have the
option to retrieve tax data directly from the IRS and transfer it directly to the FAFSA on the
Web application. This tool was first available for the 2010–11 academic year from
September 2010–June 2011 and approximately 933,000 users transferred IRS information
into their FAFSA. For the 2011–12 academic year, the tool became available on
January 30, 2011, and approximately 4 million users have already transferred IRS
information into their FAFSA. This improvement, along with others, resulted in a nine minute
decrease in the average time it takes a student to complete the online FAFSA. Future
FAFSA simplification plans include developing a more customized interaction with the IRS
Data Retrieval Tool to facilitate an even higher usage rate and to provide more accurate
data for determining eligibility for Title IV aid, thereby reducing improper payments in the
Pell Grant program. This accomplishment also supports Strategic Goal D: Ensure program
integrity and safeguard taxpayers’ interests

Consolidated Websites
In order to streamline service delivery and improve customer service, FSA began
consolidating websites as part of the Integrated Student View project. The Integrated
Student View project includes a review of more than 14 websites and aims to reduce the
number of websites to make it easier for users of FSA websites to find information. The
effort began with the retirement of the Students.gov website. Visitors to that site are
automatically redirected to Student Aid on the Web and are also provided links to USA.gov,
CareerOneStop.org, and Student Jobs.gov that were the most frequently visited sites from
Students.gov. Consolidating the content of FSA websites will improve discoverability
(through better search, grouping of content based on audience needs, and consistent
navigation) and provide more consistent and authoritative content.

FSA realized the following additional accomplishments in support of Strategic Goal
C: Develop efficient processes and effective capabilities that are among the best in the
public and private sectors.

Direct Loan Implementation
With the enactment of the SAFRA Act, no new loans were originated under the FFEL
Program beginning in July 2010. This transition from the FFEL Program to the Direct Loan
Program resulted in a 44 percent increase in Direct Loan Program disbursements for FY


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                                                                FY 2011 Accomplishments of Federal Student Aid
2011. To support this transition, FSA had to increase its loan origination and servicing
capacities. During FY 2010, FSA successfully oversaw the capacity expansion of the COD
system to accommodate the increased volume of Direct Loan originations. To obtain the
necessary loan servicing capacity, FSA leveraged its existing contract with the TIVAS. The
TIVAS contract was awarded in June 2009 to four loan servicers. Initially, the TIVAS
serviced FFEL Program loans purchased by the Department under the authority granted to
the Secretary by ECASLA. With the 2010–11 award year, FSA implemented the COD
functionality to send Direct Loans originated by schools to the TIVAS for servicing. In
addition to the TIVAS contract, FSA maintains a loan servicing contract with a legacy loan
servicer. Collectively, these five servicers currently service over 22 million borrower
accounts, including borrowers with Direct Loans and Department-held FFEL Program loans.
The OIG performed a review of FSA‘s efforts to prepare for this transition. Specifically, their
review included assessing ―FSA‘s efforts in 1) executing appropriate modifications to the
COD contract given the anticipated increase in Direct Loan volume; 2) providing technical
assistance to impacted schools, and 3) preparing contingency plans if the COD system
cannot effectively handle the increased loan volume, especially during the peak loan
origination period.‖5 With respect to their scope, the OIG ―…found FSA took actions
intended to ensure the effective processing of student loans as a result of the 100 percent
transition to the Direct Loan program.‖6 The full report is located on the OIG‘s website and
can be found at the following link:
http://www2.ed.gov/about/offices/list/oig/auditreports/fy2010/x19k0008.pdf.

Not-For-Profit Servicers
As stipulated in the SAFRA Act, the Department initiated the solicitation to acquire loan
servicing services from NFP servicers. As a result, FSA entered into memoranda of
understanding with entities representing over 20 NFP servicers. Currently, the Department
plans to implement these eligible NFP servicers on a rolling basis during FY 2012 and FY
2013. These NFP servicers will service both Direct Loans and Department held FFEL loans.
Qualified NFP servicers must be implemented no later than July 1, 2014.

Enterprise Strategic Acquisition Plan
In FY 2011, FSA launched the Enterprise Strategic Acquisition Project, which includes two
components: analysis of FSA‘s contracts and survey of best practices. Specifically, FSA‘s
acquisitions team performed an assessment of the current acquisition environment to
ensure effective and efficient utilization of FSA‘s many contracts and completed a review of
acquisition best practices. Based on the results of this assessment and best practices
review, FSA will develop a new acquisitions model that will document how the organization
can best use contract resources to help reach its vision. The implementation plan will also
outline how acquisitions can help FSA fulfill the recommendations resulting from business
process re-engineering as well as the technology needs articulated in its Target State
Vision. FSA‘s Target State Vision is a business-driven, strategic, IT roadmap that aligns
with the organization‘s overall enterprise strategy.



5
  U.S. Department of Education, Office of Inspector General, FINAL MANAGEMENT INFORMATION REPORT -
Subject: Federal Student Aid’s Efforts to Ensure the Effective Processing of Student Loans Under the Direct
Loan Program (Control Number ED-OIG/X19K0008), September 16, 2010, 1.

6
    Ibid, 3.



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                                                          FY 2011 Accomplishments of Federal Student Aid

Lifecycle Management Methodology
This year, FSA began implementation of Lifecycle Management Methodology (LMM), a
project management methodology to ensure proper and consistent planning and execution
of FSA‘s projects by utilizing a core set of project management, acquisition, and technical
system tools and templates that are designed to guide project managers through the seven
LMM stages. All new projects with an IT component are expected to adhere to the
requirements of LMM. LMM can be tailored for a specific project based on such risk factors
as scope and complexity, routine versus non-routine projects, project duration and cost,
criticality, procurement needs, contract type and resources. The LMM Integrated Project
Team, working with subject matter experts, has collected templates, examples, and
guidance to assist teams in developing project documents to address project risks in a
consistent manner. In December 2010, the Technology and Performance Management
Offices formed the LMM Integrated Project Team to work with teams piloting LMM. Ten of
FSA's major IT projects were included in the pilot, including Integrated Partner Management,
NSLDS, and FAFSA.

Realized Cost Avoidances, Cost Savings, and Increased Collections
Through contract renegotiations and improved debt management techniques, FSA realized
cost avoidances, cost savings, and increased collections of over $18 million in FY 2011.
Below are some examples of the efforts that produced the cost avoidances, cost savings,
and increased collections:

       $9.7 million more was collected from defaulted loans by expanding the Treasury
        Offset Program matching process to identify and match on alias names.

       $8.3 million of development work was negotiated at no cost to the government for
        the replacement of the Debt Management Collection System.

       $0.6 million of contractor labor was reduced by restructuring the Financial Partner
        Data Mart contract.

Additional contract renegotiations are currently under way, which will impact FY 2012
through FY 2014. These include loan servicing and Debt Management and Collection
System renegotiations that are expected to result in overall cost reductions of almost
$14 million.

FSA realized the following additional accomplishments in support of Strategic Goal
D: Ensure program integrity and safeguard taxpayers’ interests.

Two-Factor Authentication
FSA handles critical personally identifiable information for millions of student aid recipients.
The challenge is to protect personally identifiable information while also improving
accessibility to appropriate information. FSA began upgrading its IT security with the
implementation of Two-Factor Authentication. This combines something the user knows
(such as a username and password) with something that the user has (i.e., a credential
such as a token or card). This will greatly strengthen FSA data security while helping to
reduce the complexity of verifying online identities and transactions for employees,
customers, and partners. It is delivered as a secure network infrastructure (cloud-based).
Over 1,000 tokens were distributed to FSA employees which are used to remotely access
FSA systems. In addition, vendors are under contract for system modifications to COD,

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                                                         FY 2011 Accomplishments of Federal Student Aid
NSLDS, CPS, Access and Identity Management System Project Management, and the
Student Aid Internet Gateway. When fully implemented, these system modifications will
enable the unique identification of all authorized users accessing FSA systems. Two-Factor
Authentication will improve FSA‘s overall security posture by reducing the threat of intrusion
from malicious activities such as key loggers. This initiative is global, encompassing over
60,000 users at postsecondary and financial institutions. This accomplishment also
supports Strategic Goal C: Develop efficient processes and effective capabilities that are
among the best in the public and private sectors.

Gainful Employment Regulations
Regulations under the HEA were established in the fall of 2010 and the summer of 2011
related to the statutory requirement that some educational programs, including virtually all
non-degree programs at non-profit and public institutions and virtually all programs at for-
profit institutions, must lead to gainful employment in a recognized occupation. Metrics
developed to measure gainful employment include the borrower repayment rate and two
debt to earnings ratios – the earnings rate and the discretionary income rate. FSA, in
coordination with its counterparts in the Office of the Under Secretary, Office of
Postsecondary Education, and Office of the General Counsel, have taken steps to
implement the regulations pertaining to gainful employment. In FY 2011, the Department
published final regulations, developed a Gainful Employment webpage to provide
information to the school community, and held training for schools participating in the Title IV
programs. FSA‘s staff is working to update systems to collect and calculate the data; to
establish the program oversight processes; and to coordinate with the Social Security
Administration on the debt-to-earnings data. In September 2011, FSA began collecting
required data from participating schools into NSLDS. FSA will use the data obtained from
Social Security Administration and NSLDS to calculate the Gainful Employment metrics and
provide the results to participating schools in the spring of 2012 for informational purposes.
See the following link for additional information:
http://ifap.ed.gov/GainfulEmploymentInfo/index.html.

FSA realized the following additional accomplishments in support of Strategic Goal E:
Develop FSA’s performance culture and become one of the best places to work in the
federal government.

FSA First Class
FSA First Class is the principal vehicle that FSA uses to engage its employees in meaningful
programming and dialogue about improving both FSA‘s culture and the overall employee
experience. In FY 2011, FSA First Class introduced the first enterprise-wide employee
recognition event. In recognizing individuals, teams, and other Department colleagues, the
First Class program awarded deserving FSA employees with high quality, non-monetary
awards based on the nomination of peers. FSA First Class also implemented a second non-
monetary awards and recognition program in 2011 called Beyond the Call, which is geared
towards managers to encourage more spontaneous recognition of employee performance
and behaviors that illuminate FSA‘s core values, or that help to meet the agency‘s mission.

FSA Cares is the new community service component of FSA First Class, which was piloted
during FY 2011. Volunteer opportunities were coordinated and offered throughout the year.
Recently, FSA Cares launched the screening of the documentary "TEN9EIGHT", which
focuses on the importance of providing programs that inspire young people from urban
communities to stay in school, to recognize business opportunities, and to plan for
successful futures.

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                                                        FY 2011 Accomplishments of Federal Student Aid

Internal Communications
FSA evaluated its current internal communications strategy and launched an enhanced
strategy to better meet the enterprise communications needs of FSA‘s leaders, managers,
and employees. The new internal communications strategy formalizes the process of
gathering feedback from management and employees regarding their enterprise information
needs and offers a streamlined solution for communicating to FSA‘s diverse audience.
Given the organization‘s resource constraints, the new internal communications strategy is
being implemented in phases. During FY 2011, the internal communications team
implemented the following components to enhance internal communications at FSA:

      Formalized the process of enterprise-wide information sharing by establishing a
       comprehensive network of business unit liaisons to help identify major initiatives,
       processes, and metrics that should be communicated to employees across FSA;

      Revamped its existing communication vehicles, including the internal newsletter to
       better align with employees‘ needs;

      Created a monthly operational update to provide employees with an enterprise-wide
       perspective of FSA‘s work; and

      Established a new quarterly publication to highlight employees‘ personal and
       professional accomplishments.

SharePoint
FSA worked to improve its IT platforms through the launch of a business collaboration
platform called Microsoft SharePoint. The SharePoint Enterprise 2010 platform provides a
series of websites used by the entire Department to conveniently share information, manage
business process workflows, share project calendars, use instant messaging for immediate
communication, create collaborative document libraries, and utilize many other tools that will
improve efficiency and reduce costs.




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                                                            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 support 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, also involve other FSA offices and senior managers.
While a portion of this policy advising is accomplished on an ongoing, informal daily basis,
FSA‘s staff also contributed to the Department‘s Gainful Employment Rulemaking process
and to budgetary changes for the federal student aid programs, including the elimination of
interest subsidies for graduate students, loan incentives in the Direct Loan Program, and the
second Pell Grant in an award year.




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                                                                                 Annual Bonus Awards



ANNUAL BONUS AWARDS

As of the end of FY 2011, there were 75 FSA senior managers. In addition, there were
eight Senior Executive Service staff members. Seven of the 75 senior managers and 3 of
the 8 Senior Executive Service staff served on the FSA Operating Committee, and
reported directly to the COO. The remaining 68 senior managers and 5 Senior Executive
Service staff served in a variety of senior positions and capacities within FSA.

FY 2011 performance ratings and related awards for FSA senior managers and Senior
Executive Service staff were not finalized at the time this report was prepared.

At the end of FY 2010, there were 74 FSA senior managers. There were also nine Senior
Executive Service members. Seven of the 74 senior managers and 3 of the 9 Senior
Executive Service staff served on the FSA 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 FSA.

For FY 2010, the composition of ratings for the 67 senior managers who did not serve on
the Operating Committee last year were as follows: 31 achieved a performance rating of
Outstanding, 27 achieved a performance rating of Highly Successful and 9 achieved a
performance rating of Fully Successful.

Award amounts for those senior managers achieving an Outstanding rating ranged from a
low of $2,901 to a high of $21,156 with a median award of $8,947. Award amounts for
those achieving a Highly Successful rating ranged from a low of $2,887 to a high of
$13,608 with a median award of $4,555.

In FY 2010, the COO received a performance bonus of $71,880 for his work at FSA.
There were also FY 2010 ratings and awards for six senior manager members and three
Senior Executive Service members of the Operating Committee. One additional senior
manager joined FSA too late in the performance cycle to be rated for FY 2010. The
composition of those rated includes: three achieved a performance rating of Outstanding,
three achieved a performance rating of Highly Successful, and none who received a
performance rating of Fully Successful. One senior manager, who served on the
Operating Committee, was not eligible for an award because the individual arrived at FSA
at the end of the rating cycle. Of the six remaining Senior Executive Service members
who were not on the Operating Committee, one achieved a performance rating of
Outstanding, four achieved a performance rating of Highly Successful, and one was not
rated.




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                                                                          Annual Performance Report
                                                                                 Annual Bonus Awards

Award amounts for those Operating Committee members achieving an Outstanding rating
ranged from a low of $22,774 to a high of $35,597, with a median award of $29,750.
Award amounts for those achieving a Highly Successful rating ranged from a low of
$16,858 to a high of $23,780, with a median award of $22,698. 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 $8,040 to $22,173 with a median
of $8,222 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.




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                                                              Report of the Federal Student Aid Ombudsman



REPORT OF THE FEDERAL STUDENT AID OMBUDSMAN

The FSA Ombudsman Group entered its 12th year of service to federal student aid
recipients in FY 2011. Established by the 1998 amendments to the HEA, the Ombudsman
began operations on September 30, 1999, and assisted its 200,000th customer during
FY 2011.

Consistent with its statutory mission, the Ombudsman Group 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 225,470 assistance requests,
including 32,922 in FY 2011. The Ombudsman has generally received more customer
contacts each year of operation. The annual increase is, in part, attributable to growing
awareness of the Ombudsman and the increase in individuals receiving federal student aid.
In the last three fiscal years, however, customer contacts have increased at a higher rate.
Cases opened in FY 2009 were 25.0 percent greater than the previous year; FY 2010 was
27.7 percent greater than FY 2009; and FY 2011 increased by 8.5 percent above FY 2010
levels.

FY 2011 Overview

Customer contacts to the FSA Ombudsman continued to increase in FY 2011, but the rate
of increase was lower than experienced in FY 2010. The Ombudsman received 2,576 more
customer contacts in FY 2011 than in FY 2010, an increase of 8.5 percent.

The Ombudsman classifies customer cases as one of two types: General Assist, which are
typically resolved almost immediately through the provision of information or referral to the
appropriate entity within the student loan community; and Research, which present a more
complex problem, are assigned to a research specialist to address and may take several
months to close. In FY 2011, Ombudsman Research cases increased by 20.2 percent
above the previous fiscal year and accounted for 24.9 percent of the total Ombudsman
caseload. By comparison, Research cases accounted for 22.5 percent of the total caseload
in FY 2010.

Economic Issues Drive Growth in Cases

The economic downturn that began in 2008 is a major factor driving the increase in
customers contacting the Ombudsman and shaping the nature of the problems for which
they seek help. Borrowers experiencing difficulty meeting their monthly loan payments


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                                                               Report of the Federal Student Aid Ombudsman

frequently report job loss, reduced earnings, or the inability to find work upon completion of
their educational program.

To develop a better understanding of this phenomenon, the Ombudsman Group analyzed
case data beginning with FY 2008 by grouping customer issue categories and sub-
categories under a set of broad thematic headings, e.g., administrative issues (requests for
general help or information), economic hardship (default, unemployment or repayment
plans) and account dispute (questions about account balance, interest accrual, or fees).
The chart below demonstrates a steady increase in cases falling under the thematic heading
of economic hardship since 2008.

                   FY 2008 – 2011 Ombudsman Case Classification




A difference in FY 2011 was the increase in customer issues falling under the broad theme
of account dispute, i.e., borrowers challenging the balance on their student loan accounts.
Borrowers faced with difficulty repaying their student loans appear to be choosing to dispute
the amount owed – the way interest was calculated or the addition of collection costs and
other fees – as an initial step in managing the debt.

Issue Highlights

Split Servicing

Beginning in the latter months of FY 2010 and extending through the first few months of
FY 2011, the Ombudsman Group experienced a modest uptick in split servicing issues.
These issues involved borrowers with multiple loans and whose loans had been placed with
more than one of the Department‘s contracted servicers. Split Servicing can also refer to
loans that are split between FSA Servicers and entities servicing loans not held by the
Department; however, in the context of this section, it only refers to borrowers that are split
between multiple FSA Servicers. The issues raised included: confusion over the identity of
the current loan holder, complaints that communication about transfer of the borrower‘s
loans had lagged, and a few complaints about difficulty having payments sent to the prior
loan holder being transferred to the new loan holder and credited to the proper account.

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ECASLA included temporary authorization for the Department of Education to purchase
FFEL loans, thus making additional capital available to lenders to provide for continued
availability of federally insured student loans. The subsequent legislation, the SAFRA Act,
enacted in 2010 provided that no new loans would be originated through the FFEL Program
and that the Direct Loan Program would be the primary source of new federal student loans.
As a result of these statutory changes, the Department became the owner and holder of a
much-expanded portfolio of student loans. The Department initially contracted with four
organizations, known as TIVAS to service this expanded portfolio of loans.

Some confusion and communication problems are expected with a change of this
magnitude, and the limited number of customer contacts to the Ombudsman about the
transfers suggests this is what was happening. Nonetheless, FSA responded proactively to
resolve any problems.

FSA‘s Program Management office reports that over the course of FY 2011, more than
1.0 million borrowers‘ student loans were moved to place all of the individual‘s loans with a
single servicer. In addition, FSA is developing an ongoing process to identify and resolve
instances of split servicing.

The effectiveness of FSA‘s response is evidenced by the near disappearance of borrowers
contacting the Ombudsman with split servicing issues.

Income-Based Repayment

With the CCRAA, Congress created the Income-Based Repayment (IBR) program to
provide borrowers with FFEL or Direct Loans with repayment options more attuned to
individual economic circumstances. Borrowers demonstrating partial financial hardship can
have their monthly student loan payments lowered by entering into IBR. Monthly payments
are adjusted through a statutory calculation based on the borrower‘s income, family size,
and level of indebtedness.

After introduction of the program, the Ombudsman received a number of customer inquiries
about IBR. Most of these were information requests associated with building awareness of
a new program.

Subsequently, the Ombudsman received significantly fewer IBR information requests and
more customers identified problems with applying for or being eligible for IBR.

Ombudsman IBR cases reflect some initial confusion on the part of borrowers and some
loan servicers about the types of alternative income documentation that was acceptable in
making an IBR determination. For instance, typically, the borrower applying for IBR submits
the most recent federal tax return. However, borrowers who do not file a tax return, e.g.,
recipients of Social Security Disability Insurance benefits or individuals who experienced a
reduction in income since their last tax filing, can submit alternative documentation of
income. While most lenders use the same format for alternative documentation of income,
questions arise about receipt of the supporting documentation and its use.

Because the IBR repayment plan is available only for loans in good standing, borrowers with
defaulted student loans may resolve their defaulted status through consolidation into the


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Direct Loan program and then demonstrate eligibility for IBR. There has been some
confusion with the process of consolidation and ensuring that the borrower‘s full
documentation related to the IBR repayment plan is transferred to the operations/servicing
department in an appropriate and timely manner.

Borrowers have pointed to the length of the processing time for IBR applications, both initial
and renewal applications. Renewal applicants become frustrated at sending information in a
timely way and then facing a potential gap between what the lender says is the end of an
IBR eligibility period before the establishment of a new payment. The delay in processing
can result in a larger interim payment or additional capitalized interest being added to the
principal of the loan.

A noteworthy change in July 2010 assisted married borrowers seeking IBR for their
individual loans and who filed a joint federal tax return. Initially, the adjusted gross income
(AGI) from the joint return was used to determine the individual borrower‘s eligibility for IBR,
and as a result, a number of individual borrowers had income too high to qualify for IBR.
These individuals had the option to resolve the problem by filing an individual federal tax
return to lower their AGI to a level eligible for IBR. This, however, could result in a different
tax liability.

Effective July 1, 2010, the IBR income calculation was amended to provide that married
borrowers who file joint tax returns and who both have eligible student loan debt will have
their individual IBR eligibility determined based on their joint AGI and the combined eligible
loan debt of both spouses. This change led to a reduction in Ombudsman cases related to
this issue.

Problems and questions appear to be declining in frequency as knowledge and
understanding of the IBR program increases. However, the Ombudsman Group will
continue to review IBR requests and similar inquiries related to the economic problems
customers describe.

Total and Permanent Disability

TPD discharge has been the leading single issue for Ombudsman research cases for a
number of years. However, from FY 2009 to FY 2010, the number of TPD research cases
declined 23.7 percent. TPD cases received by the Ombudsman in FY 2011 were at
comparable levels to FY 2010. These reductions are attributed to operational changes
implemented in 2009, which included modifications to the medical review process and
revisions to the TPD application to provide greater clarity. Congress also created a loan
discharge for veterans that greatly streamlined disability discharge for veterans with service
connected disabilities. FSA implemented an additional refinement to the TPD process in
2011, removing the requirement that the borrower‘s TPD application have an original
signature rather than a copy.
Additionally, in 2011, the Department convened a new Task Force under the leadership of
the Under Secretary to identify additional ways to improve TPD processing and reduce the
burden on disabled borrowers. One recommendation of the Task Force is to have a single
application, further reducing the burden on applicants and streamlining the TPD process.




                                Federal Student Aid Annual Report–FY 2011                            73
                                                                            Annual Performance Report
                                                              Report of the Federal Student Aid Ombudsman

Under current regulations, the TPD application must be submitted to each separate loan
holder. Ombudsman cases, both historically and in FY 2011, show that borrowers
sometimes fail to submit an application to each loan holder, resulting in a situation where
some of their loans are discharged for disability, while others remain in repayment.
Borrowers also complain that loan holders and servicers have different processing
requirements for TPD.

The Task Force recommended and the Department has agreed to include in negotiated rule
making scheduled for fall 2011, a regulatory change to permit the borrower to submit a
single TPD application directly to the Department. The Ombudsman believes this change
will shorten the time for TPD processing and reduce the difficulties currently encountered by
borrowers seeking disability discharge.

Public Service Loan Forgiveness

Inquiries to the Ombudsman concerning the Public Service Loan Forgiveness (PSLF) and
IBR programs, sometimes confuse or conflate the two programs. Callers inquiring about
PSLF do not realize only holders of Direct Loans are eligible for the benefit or that public
service prior to enactment of the provisions does not qualify to satisfy loan discharge
requirements. In FY 2011, an internal workgroup in FSA made significant progress in
preventing the confusion and providing predictability for individuals interested in PSLF.
Partially, because of those efforts, inquiries about PSLF represented only 0.6 percent of
FY 2011 requests to the Ombudsman Group.

Private Student Loan Borrowers

Borrowers with a combination of federal and private loans may contact the Ombudsman,
and a small number of individuals, who have private loans but no federal debt, also reach
the group. Although the Department of Education has no direct jurisdiction over the non-
federal private loans, the Ombudsman has identified appropriate contacts at each of the
major private lenders to which to refer the borrowers. The Ombudsman began discussions
in FY 2011 with officials of the newly established Consumer Financial Protection Bureau to
establish a cooperative process for dealing with private loan issues under the Consumer
Financial Protection Board jurisdiction and their private loan ombudsman function.

Ombudsman Group Effectiveness

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 being 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 2011 customer satisfaction for Research cases was
4.63 on a five-point scale. Customers also write or call independently to express
appreciation for assistance from the Ombudsman.

The Ombudsman Group became a unique division within FSA‘s newly-created Customer
Experience Office in FY 2011. Continuing to operate under its statutory mission and


                               Federal Student Aid Annual Report–FY 2011                           74
                                                                            Annual Performance Report
                                                              Report of the Federal Student Aid Ombudsman

ombudsman principles, the office expects the change to increase the ability to participate in
FSA‘s customer-centric focus and the feedback loop that can prevent some of the problems
represented in assistance requests that reach the Ombudsman.




                               Federal Student Aid Annual Report–FY 2011                           75
                                                  Annual Performance Report
                                    Report of the Federal Student Aid Ombudsman




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 Federal Student Aid Annual Report–FY 2011                               76
                                              Financial Section




     Section 1. 0

FINANCIAL SECTION




  Federal Student Aid Annual Report–FY 2011               77
                                             Financial Section




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Federal Student Aid Annual Report–FY 2011                78
                                                                                              Financial Section
                                                                     Message from the Chief Financial Officer



MESSAGE FROM THE CHIEF FINANCIAL OFFICER




  During Fiscal Year (FY) 2011, Federal Student Aid (FSA)
  delivered $157 billion of federal aid to15 million postsecondary
  students and their families. In addition, the loan portfolio
  overseen by FSA grew by 17 percent, from $722 billion to $848
  billion. This is an enormous financial responsibility to students
  seeking student financial assistance, borrowers who are paying
  off their student loans, and taxpayers who expect fiscal
  prudence and stewardship. Thanks to the dedicated and
  talented staff at the United States Department of Education
  (Department), we met the unprecedented challenges presented
  by this financial responsibility and continued to maintain our high
  standards of financial management and fiscal reporting.

  Examples of FSA‘s successful financial management include                        John W. Hurt, III
  the following:                                                                 Chief Financial Officer

     As part of the FY 2011 budget process, the Department established a High Priority
      Performance Goal, promising that all participating higher education institutions that want
      to be operationally ready to originate Federal Direct Student Loans will be able to do so
      by the end of FY 2011. By the end of FY 2011, FSA had not only achieved the goal, but
      the Office of Inspector General performed an assessment related to the goal and
      ―…found FSA took actions intended to ensure the effective processing of student loans
      as a result of the 100 percent transition to the Direct Loan program.‖7 For more detail,
      please refer to the Section of the FSA Annual Report titled, High Priority Performance
      Goal.

     In last year‘s Agency Financial Report (AFR), the Department reported an improper
      payment rate for the Pell program of 3.12 percent, caused mostly by the inaccurate self-
      reporting of financial income on the Free Application for Federal Student Aid (FAFSA).
      This year (FY 2011), the improper payment rate fell by 0.40 percent, which is partially
      due to a new process established with the Internal Revenue Service (IRS) that allows
      applicants the opportunity to use their IRS data to populate the FAFSA. Had there not
      been a reduction of 0.40 percent, the amount of improper payments for Pell would have
      been $146 million more than it was this year. For more information regarding FSA‘s
      assessment of improper payment risk and planned strategies to mitigate this risk, please
      refer to the Improper Payments Reporting Details narrative in the Other Accompanying
      Information section in the Department's AFR located at
      http://www.ed.gov/about/reports/annual/index.html.

  7
   U.S. Department of Education, Office of Inspector General, FINAL MANAGEMENT INFORMATION REPORT -
  Subject: Federal Student Aid’s Efforts to Ensure the Effective Processing of Student Loans Under the Direct
  Loan Program (Control Number ED-OIG/X19K0008), September 16, 2010, 3.

                              Federal Student Aid Annual Report–FY 2011                                         79
                                                                                   Financial Section
                                                            Message from the Chief Financial Officer

   As taxpayers require greater scrutiny on government expenditures and administrative
    budgets throughout the government are drastically reduced, FSA continues to fulfill its
    strategic objective to reduce administrative costs. FSA tracks all cost savings, cost
    avoidances, and productivity gains from the point they are conceived in FSA‘s business
    cases, all the way to actual realization. This year, FSA reported on $8.9 million in cost
    savings and cost avoidances (See the FY 2011 Accomplishments of Federal Student Aid
    section.)

   As part of FSA‘s efforts to increase collections, FSA expanded its use of the Treasury
    Offset Program matching process to identify and match on alias names. This resulted in
    an increase of collections on defaulted loans by $9.7 million during FY 2011 (See the
    FY 2011 Accomplishments of Federal Student Aid section.)

FSA‗s successful financial management and our intense focus on internal controls resulted
in the following recognitions:

      An unqualified opinion was received on the principal financial statements for the
        tenth consecutive year, demonstrating a continuing pattern of financial accountability.

       No material weaknesses were identified as part of our Report on Internal Control for
        the ninth 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 Systems, Controls, and Legal Compliance section of this report.

Also, through cooperative efforts between FSA 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 previous internal control reports. The complexity of
these issues has required an ongoing multi-year effort. As a result of these concerted
efforts, in the FY 2011 Report on Internal Control, the auditors recognized improvements in
both areas.

I am proud to be working with a group of professionals throughout the Department who so
enthusiastically attack our financial management challenges and achieve such distinguished
results.

Sincerely,




John W. Hurt, III
Chief Financial Officer
November 15, 2011




                          Federal Student Aid Annual Report–FY 2011                               80
                                                                                                         Financial Section
                                                                                              Consolidated Balance Sheet



PRINCIPAL FINANCIAL STATEMENTS

                                       United States Department of Education
                                                      Federal Student Aid
                                                  Consolidated Balance Sheet
                                               As of September 30, 2011 and 2010
                                                          (Dollars in Millions)
                                                                   0

                                                                                      Fiscal Year        Fiscal Year
                                                                                         2011               2010

  Assets:
   Intragovernmental:
1001 Fund Balance with Treasury (Note 3)                                          $           62,214 $           53,465
1003 Accounts Receivable (Note 4)                                                                  0                  0
     Total Intragovernmental                                                                  62,214             53,465

2001Cash and Other Monetary Assets (Note 5)                                                    1,664              2,965
2003Accounts Receivable, Net (Note 4)                                                            110                221
2004Credit Program Receivables, Net (Note 6)                                                 529,965            367,410
2006General Property, Plant and Equipment, Net (Note 7)                                           14                 25
2007Other Assets (Note 8)                                                                         27                 83

  Total Assets (Note 2)                                                           $          593,994 $          424,169



  Liabilities:
   Intragovernmental:
3001 Accounts Payable                                                             $                1 $                1
3002 Debt (Note 9)                                                                           546,264            373,656
3003 Guaranty Agency Federal and Restricted Funds Due to Treasury (Note 5)                     1,664              2,965
3004 Payable to Treasury (Note 6)                                                              3,886              2,424
3005 Other Intragovernmental Liabilities (Note 10)                                             6,724             12,832

    Total Intragovernmental                                                                  558,539            391,878

4001Accounts Payable                                                                           4,006              4,544
4002Accrued Grant Liability (Note 11)                                                          3,036              2,619
4003Liabilities for Loan Guarantees (Note 6)                                                  10,025             14,479
4005Other Liabilities (Note 10)                                                                   85                202

  Total Liabilities                                                               $          575,691 $          413,722

    Commitments and Contingencies (Note 18)

  Net Position:
    Unexpended Appropriations - Other Funds                                       $           21,441 $           17,259
6002Cumulative Results of Operations - Other Funds                                            (3,138)            (6,812)

  Total Net Position (Note 12)                                                    $           18,303 $           10,447


  Total Liabilities and Net Position                                              $          593,994 $          424,169

                                                                                                    0                  0


  The accompanying notes are an integral part of these statements.




                                        Federal Student Aid Annual Report–FY 2011                                          81
                                                                                                       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, 2011 and 2010
                                                   (Dollars in Millions)
                                                            0




                                                                               Fiscal Year            Fiscal Year
                                                                                  2011                   2010
Program Costs

       Increase College Access, Quality, and Completion
   101 Gross Costs                                                         $           16,812 $               27,828
   102 Less: Earned Revenue                                                            20,212                 17,071
       Net Program Costs                                                               (3,400)                10,757

  Total Program Costs                                                      $           (3,400) $              10,757


       American Recovery and Reinvestment Act
   101 Gross Costs                                                         $                 27 $              8,920
   102 Less: Earned Revenue                                                                  (0)                  (0)
       Net Program Costs                                                                     27                8,920

  Total Program Costs                                                      $                 27   $            8,920


Grand Total Program Costs                                                  $           (3,373) $              19,677


  Net Cost of Operations (Notes 13 & 16)                                   $           (3,373) $              19,677




  The accompanying notes are an integral part of these statements.




                              Federal Student Aid Annual Report–FY 2011                                                 82
                                                                                                                                                           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, 2011 and 2010
                                                                                 (Dollars in Millions)
                                                                                          0
                                                                                                     Fiscal Year                                         Fiscal Year
                                                                                                        2011                                                2010




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


Beginning Balances
1 (b). Beginning Balances - All Other Funds                                  $                    (6,812) $              17,259       $                 (277) $             27,328


Budgetary Financing Sources:
4. Appropriations Received                                                                            (0)                     (0)
4 (b). Appropriations Received - All Other Funds                                                      (0) $               47,961                          (0) $              35,215
6. Other Adjustments (rescissions, etc)                                                               (0)                     (0)                                                (0)
6 (b). Other Adjustments (rescissions, etc) - All Other Funds                                         (0)                  (723)                                              (941)
7. Appropriations Used                                                                                (0)                     (0)                                                (0)
7 (b). Appropriations Used - All Other Funds                                 $                    43,056                (43,056)      $               44,343               (44,343)
8. Nonexchange Revenue                                                                                                                                    (0)
8 (b). Nonexchange Revenue - All Other Funds                                                              3                     (0)                       12                       (0)
10Nonexpenditure Financing Sources - Transfers-Out                                                                                                        (0)                      (0)
10 (b). Nonexpenditure Financing Sources - Transfers-Out - All Other Funds                               (6)                    (0)                       (0)                      (0)


Other Financing Sources:
14. Imputed Financing from Costs Absorbed by Others
14 (b).Imputed Financing from Costs Absorbed by Others - All Other Funds     $                           12                     (0)   $                    10                      (0)
15. Others                                                                                                                                                (0)                      (0)
15 (b). Others - All Other Funds                                                                (42,764)                        (0)                  (31,223)                      (0)
Total Financing Sources
16 (b). Total Financing Sources - All Other Funds                            $                       301 $                4,182       $               13,142 $             (10,069)

Net Cost of Operations                                                                                                                                    (0)                      (0)
17 (b). Net Cost of Operations - All Other Funds                             $                     3,373                        (0)   $              (19,677)                      (0)

Net Change
18 (b). Net Change - All Other Funds                                         $                     3,674 $                4,182       $               (6,535) $            (10,069)

19 (b). Ending Balances - All Other Funds (Note 12)                          $                    (3,138) $              21,441       $               (6,812) $             17,259




  The accompanying notes are an integral part of these statements.




                                                      Federal Student Aid Annual Report–FY 2011                                                                                 83
                                                                                                                                                        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, 2011 and 2010
                                                                                  (Dollars in Millions)




                                                                                                              Fiscal Year                                    Fiscal Year
                                                                                                                 2011                                           2010


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

Budgetary Resources:
1. Unobligated balance, brought forward, October 1:                                    $                   4,174 $                 15,409    $         13,476 $                  9,690
2. Recoveries of prior year Unpaid Obligations                                                               985                   12,192                 410                    4,434
3. Budgetary Authority:                                                                                        0                        0
  3A. Appropriations                                                                                      48,532                        0              39,140                        0
  3B. Borrowing Authority (Note 15)                                                                            0                  211,802                   0                  182,901
  3D. Spending authority from offsetting collections (gross):                                                  0                        0
   3D1. Earned                                                                                                 0                        0
     3D1a. Collected                                                                                       1,719                   53,011               1,499                   51,912
     3D1b. Change in Receivables from Federal Sources                                                          0                        0                   0                        3
  3D2. Change in unfilled customer orders                                                                   0.00                     0.00
     3D2b. Without advance from Federal Sources                                                                0                        1                   0                        4
   3E. Subtotal                                                                        $                  50,251 $                264,814    $         40,639 $                234,820
5. Temporarily not available pursuant to Public Law                                                            0                        0                (561)                       0
6. Permanently not available                                                                              (1,057)                 (30,122)             (4,833)                 (17,333)
7. Total Budgetary Resources (Note 15)                                                 $                  54,353 $                262,293    $         49,131 $                231,611

Status of Budgetary Resources:
8. Obligations incurred: (Note 15)
  8A. Direct                                                                           $                  50,938 $                247,289    $         44,957 $                216,202
9. Unobligated Balances:
  9A. Apportioned                                                                                          1,214                      512                 192                    1,433
10. Unobligated Balance not available                                                                      2,201                   14,492               3,982                   13,976
11. Total Status of Budgetary Resources                                                $                  54,353 $                262,293    $         49,131 $                231,611

Change in Obligated Balance:
12. Obligated balance, net
 12A. Unpaid obligations, brought forward, October 1                                   $                  18,592 $                150,605    $         17,730 $                133,575
 12B. Uncollected customer payments from Federal Sources,
        brought forward, October 1                                                                             (0)                     (4)                  (0)                       3
 12c. Total, unpaid obligated balance, brought forward, net                            $                   18,592 $               150,601    $          17,730 $                133,578
13. Obligation Incurred net (+/-)                                                                          50,938                 247,289               44,957                  216,202
14. Gross Outlays                                                                                         (45,305)               (221,506)             (43,685)                (194,738)
16. Recoveries of prior year unpaid obligations, actual                                                      (985)                (12,192)                (410)                  (4,434)
17. Change in uncollected customer payments from Federal Sources (+/-)                                         (0)                     (1)                  (0)                      (7)
18. Obligated Balance, net, end of period                                                                      (0)                     (0)
 18A. Unpaid Obligations                                                               $                   23,240 $               164,196    $         18,592 $                150,605
 18B. Uncollected customer payments from Federal Sources                                                       (0)                     (5)                 (0)                      (4)
 18C. Total, unpaid obligated balance, net, end of period                              $                   23,240 $               164,191    $         18,592 $                150,601

Net Outlays
19. Net Outlays:
 19A. Gross Outlays                                                                    $                   45,305 $               221,506    $          43,685 $               194,738
 19B. Offsetting collections                                                                               (1,719)                (53,011)              (1,499)                (51,912)
 19C. Distributed Offsetting receipts                                                                     (50,197)                      0              (28,787)                      0
20. Net Outlays (Note 15)                                                              $                   (6,611) $              168,495    $          13,399 $               142,826
                                                                                                                                        0



The accompanying notes are an integral part of these statements.




                                                                Federal Student Aid Annual Report–FY 2011                                                                      84
                                                                                    Financial Section
                                                           Notes to the Principal Financial Statements



NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2011 AND 2010

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

The 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. The SAFRA Act, which was included in the Health Care and
Education Reconciliation Act of 2010 and became effective July 1, 2010, provided that no new
FFEL loans would be made after June 30, 2010.

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; (2) loan participation purchases; and (3) an ABCP Conduit.

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

                         Federal Student Aid Annual Report–FY 2011                                 85
                                                                                 Financial Section
                                                        Notes to the Principal Financial Statements

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 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.

The Recovery Act, enacted on February 17, 2009 as Public Law 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 October 2011. 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.

Transactions and balances among FSA funds have been eliminated from the consolidated
financial statements.




                        Federal Student Aid Annual Report–FY 2011                               86
                                                                                  Financial Section
                                                         Notes to the Principal Financial Statements

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

The Federal Credit Reform Act of 1990 (Credit Reform Act) underlies the proprietary and
budgetary accounting treatment of direct and guaranteed loans. The long-term cost to the
government for direct loans or loan guarantees, other than for general administration of the
programs, is referred to as ―subsidy cost.‖ Under the Credit Reform Act, subsidy costs for loans
obligated beginning in FY 1992 are estimated at the net present value of projected lifetime
costs in the year the loan is obligated. Subsidy costs are 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 for 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 guaranteed, regardless of the timing of disbursements. Risk categories include two-year


                        Federal Student Aid Annual Report–FY 2011                                87
                                                                                  Financial Section
                                                         Notes to the Principal Financial Statements

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 2012 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 unobligated
balances of resources from prior years; recoveries of prior-year obligations; and 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 principal and interest collections from borrowers,
related fees, and interest from Treasury on balances in 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

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                                                                                  Financial Section
                                                         Notes to the Principal Financial Statements

account amounts as appropriate. Amounts borrowed, but not yet disbursed, are included in
uninvested funds and earn interest. Treasury uses the same weighted average interest rates
for both the interest charged on borrowed funds and the interest earned on uninvested funds.
The Department may carry forward borrowing authority to future fiscal years provided that
cohorts are disbursing loans. All borrowings from Treasury are effective on October 1 of the
current fiscal year, regardless of when the Department borrowed the funds, except for amounts
borrowed to make annual interest payments.

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

   Fund Balance with Treasury
The Fund Balance with Treasury includes general, revolving, 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 the 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 2010, which
were statutorily not available for obligation until the following fiscal year. Because 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


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                                                                                  Financial Section
                                                         Notes to the Principal Financial Statements

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)

   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.



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                                                                                           Financial Section
                                                                  Notes to the Principal Financial Statements

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

Components of subsidy costs for loans and guarantees include defaults (net of recoveries),
contractual payments to third-party private loan collectors who receive a set percentage of
amounts collected and, as an offset, origination and other fees collected. For direct loans, the
difference between interest rates incurred by the Department 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


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                                                                                   Financial Section
                                                          Notes to the Principal Financial Statements

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 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)


   Accounts Payable
Accounts Payable include amounts owed by the Department for goods and services received
from other entities and scheduled payments transmitted but not yet processed. The
Department‘s accounts payable primarily consist of in-process grant and loan disbursements to
the public.

   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)

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                                                                                  Financial Section
                                                         Notes to the Principal Financial Statements

   Personnel Compensation and Other Employee Benefits
Annual, Sick, and Other Leave. The liability for annual leave, compensatory time off, and
other vested leave is accrued when earned and reduced when taken. Each year, the accrued
annual leave account balance is adjusted to reflect current pay rates. Annual leave earned but
not taken, within established limits, is funded from future financing sources. (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 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,
match voluntary employee contributions up to 3 percent of the employee‘s basic pay, and
match one-half of contributions between 3 percent and 5 percent of the employee‘s 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 fund the
programs fully, 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, employees who have incurred work-related occupational diseases, and 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.


                        Federal Student Aid Annual Report–FY 2011                                 93
                                                                                                   Financial Section
                                                                      Notes to the Principal Financial Statements

   Reclassifications
Certain reclassifications were made to the FY 2010 financial statements and notes to conform
to the current year presentation. These changes had no effect on total assets, liabilities, net
position, net cost of operations, or budgetary resources. The FY 2010 Statement of Net Cost
and related note were reclassified to align with the strategic goals presented in the
Department‘s draft Strategic Plan 2011-2014. (See Note 13) Additional reclassifications were
made within the FFEL Program Receivables, Net section of Note 6, Credit Programs for Higher
Education, and within Note 16, Reconciliation of Budgetary Obligations to Net Cost of
Operations.

   Additional Comparative Information
In FY 2011, the Department‘s notes to the financial statements include disclosure of the
components of Distributed Offsetting Receipts. FY 2010 information is presented for
comparative purposes. (See Note 15)

Note 2.        Non-Entity Assets
As of September 30, 2011 and 2010, non-entity assets consisted of the following:
                                                Non-Entity Assets
                                                   (Dollars in Millions)

                                                                                   2011                    2010
       Non-Entity Assets
          With the Public:
              Cash and Other Monetary Assets                               $            1,664      $            2,965
              Accounts Receivable, Net                                                      7                       3
              Credit Program Receivables, Net                                             215                     183
       Total Non-Entity Assets                                                          1,886                   3,151
       Entity Assets                                                                  592,108                 421,018
       Total Assets                                                        $          593,994      $          424,169


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, 2011 and 2010, consisted
of the following:
                                                 Fund Balances
                                                   (Dollars in Millions)

                                                                                      2011                  2010
       General Funds                                                           $          24,976       $          20,341
       Revolving Funds                                                                    37,221                  33,106
       Special Funds                                                                          17                      18
       Fund Balance with Treasury                                              $          62,214       $          53,465




                           Federal Student Aid Annual Report–FY 2011                                                   94
                                                                                                     Financial Section
                                                                        Notes to the Principal Financial Statements

The Status of Fund Balance with Treasury, as of September 30, 2011 and 2010, consisted of
the following:
                                    Status of Fund Balance with Treasury
                                                     (Dollars in Millions)

                                                                                        2011                 2010
       Unobligated Balance:
         Available                                                               $           1,726       $       1,625
         Unavailable                                                                        15,029              14,993
       Obligated Balance, Not Yet Disbursed                                                 45,459              36,286
       Authority Temporarily Precluded from Obligation                                           -                 561
       Fund Balance with Treasury                                                $          62,214       $      53,465


Note 4.        Accounts Receivable
Accounts Receivable, as of September 30, 2011 and 2010, consisted of the following:
                                                 Accounts Receivable
                                                     (Dollars in Millions)

                                                                                     2011
                                                   Gross
                                                 Receivables                     Allowance           Net Receivables

       Intragovernmental                     $                     -         $                 -     $                  -
       With the Public                                        136                           (26)                    110

       Accounts Receivable                   $                136            $              (26)     $              110


                                                                                     2010
                                                   Gross
                                                 Receivables                     Allowance           Net Receivables

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

       Accounts Receivable                   $                261            $              (40)     $              221




                            Federal Student Aid Annual Report–FY 2011                                                   95
                                                                                                 Financial Section
                                                                       Notes to the Principal Financial Statements

Note 5.       Cash and Other Monetary Assets
Cash and Other Monetary Assets consist of reserves held in the FFEL guaranty agency
Federal Funds. Changes in the valuation of the Federal Fund increase or decrease the
Department‘s Cash and Other Monetary Assets with a corresponding change in Guaranty
Agency Federal and Restricted Funds Due to Treasury. The table below presents Cash and
Other Monetary Assets for the years ended September 30, 2011 and 2010.
                                     Cash and Other Monetary Assets
                                                    (Dollars in Millions)

                                                                                     2011              2010
       Beginning Balance, Cash and Other Monetary Assets                         $       2,965     $       2,414
         Increase/(Decrease) in Guaranty Agency Federal Funds, net                     (1,301)               989
         Less: Excess Collections Remitted by Guaranty Agencies                              -               438

       Ending Balance, Cash and Other Monetary Assets                            $       1,664     $       2,965



The $1.3 billion net decrease in the Federal Fund in FY 2011 represents the change in the
estimated value of net assets held in the FFEL guaranty agency Federal Funds. This decrease
reflects the impact of guaranty agencies‘ operations and a refinement the Department made to
the process for estimating the valuation of the Federal Fund.

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 $133 billion in Direct Loans to eligible borrowers in
FY 2011 and approximately $75 billion in FY 2010. 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 2011 resulted from the increased use of the
Direct Loan Program in accordance with the changes made by the SAFRA Act.
Approximately 9 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 before the student begins classes. For Direct Loans obligated in the 2011
cohort, an estimated $14.5 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.
Federal Family Education Loan Program. In FY 2008, the Department began administering
activities under temporary loan purchase authority. ECASLA gave the Department temporary
authority to purchase FFEL loans and participation interests in those loans. This authority was

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                                                                                  Financial Section
                                                         Notes to the Principal Financial Statements

to expire on September 30, 2009; however, Public Law 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 commitment activity, lenders had the option to sell directly to the
Department fully disbursed loans originated for academic years 2007-08, 2008-09, or 2009-10.
In loan participation transactions, lenders transferred to a custodian FFEL loans originated in
academic years 2008-09 or 2009-10 on which at least one disbursement had been made. The
custodian issued participation certificates to the lenders, which conveyed a participation
interest in the loans. The lenders sold the participation interest in the loans to the Department
at the par value of these loans. The Department remitted the proceeds through the custodian
to the lenders. Participation interests earned a yield payable from the lenders 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 were
obtained by selling the underlying loans to the Department or by other means. Lenders
committed to redeem the participation certificates and sell loans by September 30, 2010; the
Department finalized these transactions by October 15, 2010.
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 $1.2 billion of these delinquent loans as of September
30, 2011. Under the terms of the Put Agreement with the conduit, the Department may
purchase pledged loans 45 days prior to the Put Agreement expiration on January 19, 2014.
As required by the Credit Reform Act, all cash flows to and from the Government resulting from
its transactions with the ABCP Conduit are recorded in a non-budgetary credit financing
account. Amounts in this account are a means of financing and are not included in budget
totals. Loans originated in academic years 2004-05 through 2007-08, and pledged to the
conduit prior to July 1, 2010, are eligible to be purchased through the ABCP Conduit.
As of September 30, 2011, the Department has $72.6 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. The conduit, a
separate legal entity, has approximately $41.5 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
                        Federal Student Aid Annual Report–FY 2011                                97
                                                                                    Financial Section
                                                           Notes to the Principal Financial Statements

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.
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.
Under the provisions of the SAFRA Act, no new loans were made under the FFEL Program
after June 30, 2010. This legislation effectively required a transition for new loans 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 satisfied, discharged, or cancelled.
As a result of the SAFRA Act, the Department did not guarantee any loans in FY 2011. The
Department guaranteed $24 billion in gross non-consolidation loans to FFEL recipients during
FY 2010. As of September 30, 2011 and 2010, total principal balances outstanding of
guaranteed loans held by lenders were approximately $328 billion and $390 billion,
respectively. As of September 30, 2011 and 2010, the estimated maximum government
exposure on outstanding guaranteed loans held by lenders was approximately $321 billion and
$382 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.
Guaranteed loans that default are initially turned over to guaranty agencies for collection. In
most cases, after approximately four years, defaulted guaranteed loans not in repayment are
turned over to the Department for collection.
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 who agree 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.

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                                                                                                Financial Section
                                                                      Notes to the Principal Financial Statements

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 $17 billion during FY 2010 to $24 billion
during FY 2011. 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
payoff of the existing loans—those being consolidated—is recognized in the future projected
cash flows of the past cohort year in which the loans were originated. FFEL to Direct Loan
consolidations are part of the $24 billion.

Credit Program Receivables
Credit Program Receivables, as of September 30, 2011 and 2010, consisted of the following:
                                      Credit Program Receivables, Net
                                                   (Dollars in Millions)


                                                                                   2011               2010
       Direct Loan Program Loan Receivables, Net                               $     381,454      $    228,208
       FFEL Program
         Guaranteed Loan Program, Net (Pre-1992)                                       3,675              2,419
         FFEL Program (Post-1991):
           FFEL Guaranteed Loan Program, Net                                          28,627             24,030
           Temporary Loan Purchase Authority:
             Loan Purchase Commitment, Net                                            42,116             42,279
             Loan Participation Purchase, Net                                         72,682             69,686
             ABCP Conduit, Net                                                            943                468
       Federal Perkins Program Loan Receivables, Net                                      215                183
       TEACH Program Receivables, Net                                                     253                137

       Credit Program Receivables, Net                                         $     529,965      $    367,410




                           Federal Student Aid Annual Report–FY 2011                                           99
                                                                                               Financial Section
                                                                      Notes to the Principal Financial Statements

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)

                                                                                  2011                2010
       Principal Receivable                                                  $      341,822      $      220,522
       Interest Receivable                                                           14,286               9,655
       Receivables                                                                  356,108             230,177
         Less: Allowance for Subsidy                                                (25,346)              1,969

       Direct Loan Program Loan Receivables, Net                             $      381,454      $      228,208



Of the $356.1 billion in receivables, as of September 30, 2011, $16.1 billion in loan principal
was in default, compared to $14.0 billion a year earlier.




                              Federal Student Aid Annual Report–FY 2011                                      100
                                                                                            Financial Section
                                                                   Notes to the Principal Financial Statements

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

                                                                               2011                2010

       FFEL Guaranteed Loan Program (Pre-1992)
       Principal Receivable                                               $        6,228      $       6,681
       Interest Receivable                                                         4,034              3,849
       Receivables                                                                10,262             10,530
          Less: Allowance for Subsidy                                              6,587              8,111
       FFEL Guaranteed Loan Program, Net (Pre-1992)                                3,675              2,419

       FFEL Program (Post-1991)
         FFEL Guaranteed Loan Program:
          Principal Receivable                                                    29,790              26,358
          Interest Receivable                                                      4,236               4,049
          Receivables                                                             34,026             30,407
           Less: Allowance for Subsidy                                             5,399              6,377
          FFEL Guaranteed Loan Program, Net                                       28,627             24,030


         Temporary Loan Purchase Authority:
          Loan Purchase Commitment:
            Principal Receivable                                                  35,822             36,623
            Interest Receivable                                                    1,879              1,400
            Receivables                                                           37,701             38,023
             Less: Allowance for Subsidy                                          (4,415)            (4,256)
            Loan Purchase Commitment, Net                                         42,116             42,279
          Loan Participation Purchase:
            Principal Receivable                                                  61,125             62,931
            Interest Receivable                                                    2,993              1,665
            Receivables                                                           64,118             64,596
              Less: Allowance for Subsidy                                         (8,564)            (5,090)
            Loan Participation Purchase, Net                                      72,682             69,686
          ABCP Conduit:
           Principal Receivable                                                    1,121                  544
           Interest Receivable                                                        55                   26
           Receivables                                                             1,176                  570
             Less: Allowance for Subsidy                                             233                  102
            ABCP Conduit, Net                                                         943                 468

       FFEL Program Receivables, Net                                      $      148,043      $      138,882



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.


                          Federal Student Aid Annual Report–FY 2011                                        101
                                                                                                              Financial Section
                                                                                Notes to the Principal Financial Statements

Federal Perkins Loan Program. As of September 30, 2011 and 2010, loan receivables, net of
an allowance for loss, were $215 million and $183 million, respectively. These loans are valued
at historical cost.
TEACH Program. As of September 30, 2011 and 2010, loan receivables, net of an allowance
for subsidy, were $253 million and $137 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)

                                                                                         2011                        2010
       Beginning Balance, Allowance for Subsidy                                      $          1,969         $             4,036
       Components of Subsidy Transfers
         Interest Rate Differential                                                         (26,898)                     (11,708)
         Defaults, Net of Recoveries                                                           2,342                        1,307
         Fees                                                                                (1,739)                      (1,067)
         Other                                                                                 9,264                        5,158
       Current Year Subsidy Transfers                                                       (17,031)                      (6,310)
       Components of Subsidy Re-estimates
         Interest Rate Re-estimates1                                                         (8,084)                        3,547
         Technical and Default Re-estimates                                                  (3,515)                        1,196
       Subsidy Re-estimates                                                                 (11,599)                        4,743
       Activity
         Fee Collections                                                                        1,623                       1,056
         Loan Cancellations2                                                                    (964)                       (388)
         Subsidy Allowance Amortization                                                         1,638                       (500)
         Other                                                                                  (982)                       (668)
       Total Activity                                                                           1,315                       (500)
       Ending Balance, Allowance for Subsidy                                         $      (25,346)          $             1,969
          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.




                                Federal Student Aid Annual Report–FY 2011                                                       102
                                                                                                             Financial Section
                                                                                  Notes to the Principal Financial Statements

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

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

                                                                                             2011                   2010
      Beginning Balance, FFEL Financing Account Liability for
      Loan Guarantees                                                                  $        14,407       $          20,448
      Components of Subsidy Transfers
        Interest Supplement Costs                                                                       -                  (733)
        Defaults, Net of Recoveries                                                                     -                   212
        Fees                                                                                            -                  (960)
        Other1                                                                                          -                   878
      Current Year Subsidy Transfers                                                                    -                  (603)
      Components of Subsidy Re-estimates
        Interest Rate Re-estimates                                                                   (1)                      59
        Technical and Default Re-estimates                                                      (11,220)                (12,727)
      Subsidy Re-estimates                                                                     (11,221)                 (12,668)
      Activity
        Interest Supplement Payments                                                            (2,453)                  (3,881)
        Claim Payments                                                                          (9,707)                  (8,987)
        Fee Collections                                                                           2,600                    3,736
        Interest on Liability Balance                                                             (867)                    (152)
        Other2                                                                                  17,225                   16,514
      Total Activity                                                                                6,798                  7,230
      Ending Balance, FFEL Financing Account Liability for Loan
      Guarantees                                                                                    9,984               14,407
      FFEL Liquidating Account Liability for Loan Guarantees                                          41                     72
      Liabilities for Loan Guarantees                                                  $        10,025       $          14,479
          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.




                               Federal Student Aid Annual Report–FY 2011                                                      103
                                                                                               Financial Section
                                                                     Notes to the Principal Financial Statements

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

                                                                              2011                  2010
       Beginning Balance, Allowance for Subsidy                           $          (4,256)   $           (2,360)
       Components of Subsidy Transfers
         Interest Costs                                                                   -                (4,548)
         Defaults, Net of Recoveries                                                      -                   178
         Fees                                                                             -                   520
         Other                                                                            -                 1,647
       Current Year Subsidy Transfers                                                     -                (2,203)
       Components of Subsidy Re-estimates
         Interest Rate Re-estimates                                                   (518)                1,299
         Technical and Default Re-estimates                                           (323)                  438
       Subsidy Re-estimates                                                           (841)                1,737
       Activity
         Fee Disbursements                                                             (31)                 (644)
         Subsidy Allowance Amortization                                                381                  (314)
         Direct Asset Activities and Other                                             332                  (472)
       Total Activity                                                                  682             (1,430)
       Ending Balance, Allowance for Subsidy                              $          (4,415)   $           (4,256)


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

                                                                              2011                  2010
       Beginning Balance, Allowance for Subsidy                           $          (5,090)   $           (2,717)
       Components of Subsidy Transfers
         Interest Costs                                                                   -                (3,662)
         Defaults, Net of Recoveries                                                      -                   254
         Fees                                                                             -                  (693)
         Other                                                                            -                 2,194
       Current Year Subsidy Transfers                                                     -                (1,907)
       Components of Subsidy Re-estimates
         Interest Rate Re-estimates                                              (1,495)                   2,621
         Technical and Default Re-estimates                                      (2,569)               (1,321)
       Subsidy Re-estimates                                                      (4,064)                   1,300
       Activity
         Fee Disbursements                                                            (655)                 (837)
         Subsidy Allowance Amortization                                                 635                 (673)
         Direct Asset Activities and Other                                              610                 (256)
       Total Activity                                                                  590             (1,766)
       Ending Balance, Allowance for Subsidy                              $      (8,564)       $       (5,090)

                            Federal Student Aid Annual Report–FY 2011                                          104
                                                                                                       Financial Section
                                                                            Notes to the Principal Financial Statements


Financing Account Interest Expense and Interest Revenue
The Department borrows from Treasury to fund the unsubsidized portion of lending activities.
The Department calculates and pays Treasury interest on its borrowing at the end of each
year. During the year, interest is earned on outstanding direct loans, outstanding FFEL loans
purchased by the Department, and Fund Balance with Treasury.
The Department accrues interest receivable and records interest revenue on performing Direct
Loans and FFEL loans purchased by the Department. Interest receivable is accrued on
defaulted guaranteed loans, with an offset to the allowance for subsidy. The Department does
not record interest revenue on defaulted guaranteed loans.
Subsidy amortization is calculated 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 for the years ended
September 30, 2011 and 2010:

                                               Direct Loan Program
                                                     (Dollars in Millions)

                                                                                      2011                     2010
          Interest Expense on Treasury Borrowing                              $           14,321       $           10,514
       Interest Expense                                                       $           14,321       $           10,514


         Interest Revenue from the Public                                     $          12,466        $              7,352
         Amortization of Subsidy                                                         (1,638)                        500
         Interest Revenue on Uninvested Funds                                              3,493                      2,662
       Interest Revenue                                                       $           14,321       $           10,514



Payable to Treasury
Payable to Treasury, for the years ended September 30, 2011 and 2010, consisted of the
following:
                                              Payable to Treasury
                                                    (Dollars in Millions)

                                                                                        2011                   2010
       Future Liquidating Account Collections, Beginning Balance                  $         2,424          $          3,569
         Valuation of Pre-1992 Loan Liability and Allowance                                 1,787                     (717)
         Capital Transfers to Treasury                                                         (325)                  (428)
       Future Liquidating Account Collections, Ending Balance                               3,886                     2,424
       Payable to Treasury                                                        $         3,886          $          2,424




                             Federal Student Aid Annual Report–FY 2011                                                   105
                                                                                                Financial Section
                                                                       Notes to the Principal Financial Statements

Subsidy Expense

William D. Ford Federal Direct Loan Program

                               Direct Loan Program Subsidy Expense
                                               (Dollars in Millions)

                                                                                  2011                2010
       Components of Current Year Subsidy Transfers
         Interest Rate Differential                                          $      (26,898)      $      (11,708)
         Defaults, Net of Recoveries                                                  2,342                1,307
         Fees                                                                        (1,739)              (1,067)
         Other                                                                        9,264                5,158
       Current Year Subsidy Transfers                                               (17,031)              (6,310)
         Subsidy Re-estimates                                                       (11,599)               4,743
       Direct Loan Subsidy Expense                                           $      (28,630)      $       (1,567)



William D. Ford Federal Direct Loan re-estimated subsidy cost was adjusted downward by
$11.6 billion in FY 2011. Costs decreased $5.7 billion due to updated economic assumptions,
including probabilistic estimating, discount rates, and weighted consolidation loan interest
rates. The availability of new information allowed Direct Loan death, disability, and bankruptcy
rates to be estimated directly rather than having to use the FFEL rates, reducing cost by $1.5
billion. The decrease in costs is due to lower bankruptcy rates used in formulating the estimate
for Direct Loans. Court action usually prevents discharges of Direct student loans. Costs
decreased by $1.0 billion due to updated actual activity indicating slightly lower rates of
prepayments, resulting in higher interest earnings from borrowers. 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 $1.1 billion.
Re-estimated costs only include those cohorts that are 90 percent disbursed; cohort years
1994-2010.

William D. Ford Federal 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 by
$2.2 billion. Changes in assumptions for income-based repayments and public service loan
forgiveness increased subsidy cost by $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 by $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.



                          Federal Student Aid Annual Report–FY 2011                                           106
                                                                                               Financial Section
                                                                    Notes to the Principal Financial Statements

Federal Family Education Loan Program

                                     FFEL Program Subsidy Expense
                                                (Dollars in Millions)



                                                                                2011                 2010
       FFEL Guaranteed Loan Program
         Components of Current Year Subsidy Transfers
           Interest Supplement Costs                                       $             -      $           (733)
           Defaults, Net of Recoveries                                                   -                  212
           Fees                                                                          -                  (960)
           Other                                                                         -                  878
         Current Year Subsidy Transfers                                                 -                 (603)
           Subsidy Re-estimates                                                   (11,221)             (12,668)
       FFEL Guaranteed Loan Program Subsidy Expense                               (11,221)             (13,271)

       Temporary Loan Purchase Authority
       Loan Purchase Commitment
         Components of Current Year Subsidy Transfers
           Interest Costs                                                                -              (4,548)
           Defaults, Net of Recoveries                                                   -                178
           Fees                                                                          -                520
           Other                                                                         -              1,647
         Current Year Subsidy Transfers                                                   -             (2,203)
           Subsidy Re-estimates                                                        (841)            1,737
       Loan Purchase Commitment Subsidy Expense                                        (841)                (466)

       Loan Participation Purchase
         Components of Current Year Subsidy Transfers
           Interest Costs                                                               -               (3,662)
           Defaults, Net of Recoveries                                                  -                 254
           Fees                                                                         -                 (693)
           Other                                                                        -               2,194
         Current Year Subsidy Transfers                                                 -               (1,907)
           Subsidy Re-estimates                                                    (4,064)              1,300
       Loan Participation Purchase Subsidy Expense                                 (4,064)                  (607)


       FFEL Program Subsidy Expense                                        $      (16,126)      $      (14,344)



FFEL Guaranteed subsidy cost was adjusted downward $11.2 billion in FY 2011. Costs
decreased $5.5 billion due to updated economic assumptions, including probabilistic
deterministic rates, which reflected historically low commercial paper rates, resulting in
substantially higher negative special allowance payments than were previously projected.
Costs decreased $2.0 billion due to multiple assumption changes affecting the Guaranteed
ECASLA cash flows. 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
                          Federal Student Aid Annual Report–FY 2011                                           107
                                                                                         Financial Section
                                                                Notes to the Principal Financial Statements

yield for lenders would increase projected FFEL costs by $13.4 billion. Re-estimated costs only
include those cohorts that are 90 percent disbursed; cohort years 1992-2010.

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.

Subsidy Rates
The subsidy rates applicable to the 2011 loan cohort year follow:
                                        Subsidy Rates—Cohort 2011
                                                  Interest
                                                Differential/
                                               Supplements      Defaults     Fees      Other       Total

       Direct Loan Program                       (20.55%)        1.69%      (1.22%)    6.18%     (13.90%)
       TEACH Program                              4.29%          0.52%      0.00%      7.92%      12.73%



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 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. The
subsidy expense reported in the current year includes re-estimates. The subsidy rates shown
above, which reflect aggregate negative subsidy in the FY 2011 cohort, cannot be applied to
direct 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.




                             Federal Student Aid Annual Report–FY 2011                                 108
                                                                                                        Financial Section
                                                                            Notes to the Principal Financial Statements

Administrative Expenses
Administrative Expenses, for the years ended September 30, 2011 and 2010, consisted of the
following:
                                           Administrative Expenses
                                                        (Dollars in Millions)

                                                   2011                                               2010
                                     Direct Loan                      FFEL           Direct Loan
                                      Program                       Program           Program                FFEL Program
       Operating Expense             $          661             $           388      $        536                $       314
       Other Expense                             30                             18             22                            13

       Administrative Expenses       $          691             $           406      $        558                $       327


Note 7.        General Property, Plant, and Equipment
General Property, Plant, and Equipment, as of September 30, 2011 and 2010, consisted of the
following:
                                  General Property, Plant, and Equipment
                                                        (Dollars in Millions)

                                                                                        2011
                                                                                     Accumulated                 Net Asset
                                                                     Cost            Depreciation                 Value

       Information Technology, Internal Use Software,
       and Telecommunications Equipment                    $                125      $       (111)           $           14
       Furniture and Fixtures                                                    2              (2)                          -

       General Property, Plant, and Equipment              $                127      $       (113)           $           14


                                                                                        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


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


                            Federal Student Aid Annual Report–FY 2011                                                        109
                                                                                                     Financial Section
                                                                      Notes to the Principal Financial Statements

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 $27 million and $83 million as of September 30,
2011 and 2010, respectively.

Note 9.        Debt
Debt, as of September 30, 2011 and 2010, consisted of the following:

                                                        Debt
                                                   (Dollars in Millions)

                                                                            2011
                                       Beginning                 New                                      Ending
                                        Balance                Borrowing               Repayments         Balance
       Treasury Debt
       Direct Loan Program              $ 237,190            $       167,071       $      (11,887)        $ 392,374
       FFEL Program
         Guaranteed Loan Program           10,730                     18,754                     -             29,484
         Loan Purchase Commitment          45,205                      1,394               (2,740)             43,859
         Loan Participation Purchase       79,577                      5,352               (5,627)             79,302
         ABCP Conduit                         804                        250                  (90)                964
         TEACH Program                        150                        133                   (2)                281
       Total                            $ 373,656            $       192,954       $      (20,346)        $   546,264


                                                                            2010
                                       Beginning                 New                                      Ending
                                        Balance                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



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.




                           Federal Student Aid Annual Report–FY 2011                                                110
                                                                                                                 Financial Section
                                                                               Notes to the Principal Financial Statements


Note 10.        Other Liabilities
Other liabilities include current and non-current liabilities. The non-current liabilities primarily
relate to the student loan receivables of the Federal Perkins Loan Program, which when
collected, will be returned to the General Fund of Treasury.
The current liabilities covered by budgetary resources primarily consist of downward subsidy
re-estimates, which when executed will be paid to Treasury.
Other Liabilities, as of September 30, 2011 and 2010, consisted of the following:

                                                       Other Liabilities
                                                            (Dollars in Millions)

                                                                                    2011                           2010
                                                                  Intragovern-             With the       Intragovern-       With the
                                                                     mental                 Public           mental          Public
       Liabilities Covered by Budgetary Resources
          Current
            Employer Contributions and Payroll Taxes                $           2          $          -   $        1      $             -
            Accrued Payroll and Benefits                                            -                 8             -               7
            Deferred Revenue                                                        -            62                 -             182
            Liabilities in Miscellaneous Receipt Accounts                  6,506                      -       12,647                    -
       Total Other Liabilities Covered by Budgetary
       Resources                                                           6,508                 70           12,648              189
       Liabilities Not Covered by Budgetary Resources
          Current
            Accrued Unfunded Annual Leave                                           -            10                 -               9
          Non-Current
            Accrued Unfunded FECA Liability                                     1                     -            1                    -
            Liabilities in Miscellaneous Receipt Accounts                    215                      -          183                    -
            Accrued FECA Actuarial Liability                                        -                 5             -               4
       Total Other Liabilities Not Covered by Budgetary
       Resources                                                             216                 15              184               13

       Other Liabilities                                            $      6,724           $     85       $   12,832     $        202



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 $231 million and $197 million
as of September 30, 2011 and 2010, respectively.
As of September 30, 2011 and 2010, liabilities on the Balance Sheet totaled $575.7 billion and
$413.7 billion, respectively. Of this amount, liabilities covered by budgetary resources totaled
$575.5 billion as of September 30, 2011, and $413.5 billion as of September 30, 2010.




                             Federal Student Aid Annual Report–FY 2011                                                             111
                                                                                                 Financial Section
                                                                        Notes to the Principal Financial Statements

Note 11.       Accrued Grant Liability
FSA‘s accrued grant liability was $3,036 million and $2,619 million as of September 30, 2011
and 2010, respectively. These amounts include $0 million and $603 million accrued grant
liability for Recovery Act funds administered by FSA for FY 2011 and FY 2010, respectively.

Note 12.       Net Position
Unexpended appropriations, as of September 30, 2011 and 2010, consisted of the following:

                                          Unexpended Appropriations
                                                     (Dollars in Millions)

                                                                                  2011                 2010
       Unobligated Balances
         Available                                                           $         1,117      $           166
         Not Available                                                                   398                  988
       Undelivered Orders                                                             19,926               15,544
       Authority Temporarily Precluded from Obligation                                     -                  561

       Unexpended Appropriations                                             $        21,441      $        17,259


FSA had Cumulative Results of Operations of $(3,138) million as of September 30, 2011, and
$(6,812) million as of September 30, 2010. Cumulative Results of Operations consists mostly
of unfunded upward subsidy re-estimates, other unfunded expenses, and net investments of
capitalized assets.




                            Federal Student Aid Annual Report–FY 2011                                          112
                                                                                             Financial Section
                                                                    Notes to the Principal Financial Statements

Note 13.       Intragovernmental Cost and Exchange Revenue by Program
As required by the GPRA Modernization Act of 2010, FSA‘s reporting organization has been
aligned with Strategic Goal 1 presented in the U.S. Department of Education‘s Strategic Plan
2011—2014. Strategic Goal 1, Increase college access, quality, and completion by improving
higher education and lifelong learning opportunities for youth and adults, 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 2011
and FY 2010. 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)

                                                                               2011                2010


       Increase College Access, Quality, and Completion
       Intragovernmental Gross Cost                                        $      20,247       $       16,286
       Public Gross Cost                                                          (3,435)              11,542
         Total Gross Program Costs                                                16,812               27,828
       Intragovernmental Earned Revenue                                            5,304                  5,862
       Public Earned Revenue                                                      14,908               11,209
        Total Program Earned Revenue                                              20,212               17,071
       Total Program Cost                                                         (3,400)              10,757


       American Recovery and Reinvestment Act
       Intragovernmental Gross Cost                                                     -                     -
       Public Gross Cost                                                              27                  8,920
         Total Gross Program Costs                                                    27                  8,920
       Intragovernmental Earned Revenue                                                 -                     -
       Public Earned Revenue                                                            -                     -
        Total Program Earned Revenue                                                    -                     -
       Total Program Cost                                                             27                  8,920


       Net Cost of Operations                                              $       (3,373)     $          19,677




                            Federal Student Aid Annual Report–FY 2011                                        113
                                                                                                         Financial Section
                                                                      Notes to the Principal Financial Statements


Note 14.      Interest Expense and Interest Revenue
For FY 2011 and FY 2010, interest expense and interest revenue by program consisted of the
following:
                                 Interest Expense and Interest Revenue
                                                  (Dollars in Millions)
                                                                                   2011
                                                     Expenses                                         Revenue
                                                       Non-                                             Non-
                                        Federal                           Total           Federal                Total
                                                      federal                                          federal

      Direct Loan Program              $ 14,321       $          - $ 14,321               $   3,493   $ 10,828 $ 14,321
      FFEL Program
        Guaranteed Loan Program           1,331            (867)      464                       464          -      464
        Loan Purchase Commitment          1,552                -    1,552                        77      1,475    1,552
        Loan Participation Purchase       2,916                -    2,916                       385      2,531    2,916
        ABCP Conduit                         48                -       48                        18         30       48
      TEACH Program                           9                -        9                         3          6        9
      Total                            $ 20,177       $    (867) $ 19,310                 $   4,440   $ 14,870 $ 19,310


                                                                                   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


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, 2011, budgetary resources were $316,646 million and net
outlays were $161,884 million. As of September 30, 2010, budgetary resources were $280,742
million and net outlays were $156,225 million.
   Permanent Indefinite Budget Authority
The Direct Loan, FFEL, and TEACH Programs have permanent indefinite budget authority
through legislation. Parts B and D of the HEA (for the FFEL Program and Direct Loan Program,


                           Federal Student Aid Annual Report–FY 2011                                                  114
                                                                                                   Financial Section
                                                                     Notes to the Principal Financial Statements

respectively) pertain to the existence, purpose, and availability of this permanent indefinite
budget authority.
   Reauthorization of Legislation
Funds for most Department programs are authorized, by statute, to be appropriated for a
specified number of years, with an automatic one-year extension available under Section 422
of the General Education Provisions Act. Congress may continue to appropriate funds after the
expiration of the statutory authorization period, effectively reauthorizing the program through
the appropriations process. The current Budget of the United States Government presumes all
programs continue per congressional budgeting rules.

   Obligations Incurred by Apportionment Category
Obligations incurred by apportionment category, as of September 30, 2011 and 2010,
consisted of the following:
                          Obligations Incurred by Apportionment Category
                                                  (Dollars in Millions)

                                                                                   2011                 2010
       Direct
         Category A                                                           $                5   $              910
         Category B                                                                      296,056              260,245
         Exempt from Apportionment                                                         2,166                    4

       Obligations Incurred                                               $              298,227   $          261,159


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, 2011 and 2010, consisted of the following:
                                     Unused Borrowing Authority
                                             (Dollars in Millions)

                                                                                  2011                 2010
    Beginning Balance, Unused Borrowing Authority                         $        132,905         $    106,147
    Current Year Borrowing Authority                                               211,802              182,901
    Funds Drawn From Treasury                                                     (192,954)            (155,175)
    Borrowing Authority Withdrawn                                                   (9,776)               (968)

    Ending Balance, Unused Borrowing Authority                            $        141,977         $    132,905




                          Federal Student Aid Annual Report–FY 2011                                                115
                                                                                              Financial Section
                                                                     Notes to the Principal Financial Statements



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.
   Undelivered Orders at the End of the Period
Undelivered orders, as of September 30, 2011 and 2010, consisted of the following:
                                             Undelivered Orders
                                                  (Dollars in Millions)

                                                                              2011                  2010
       Budgetary                                                          $       19,968      $         15,589
       Non-Budgetary                                                             160,824               147,032

       Undelivered Orders (Unpaid)                                        $      180,792      $        162,621


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. Distributed Offsetting
Receipts, for the years ended September 30, 2011 and 2010, consisted of the following:
                                      Distributed Offsetting Receipts
                                                  (Dollars in Millions)

                                                                              2011                  2010
       Negative Subsidies and Downward Re-estimates:
         FFEL Program                                                     $          24,670   $            16,389
         Direct Loan Program                                                         25,502                12,375
         TEACH Program                                                                    6                     1
         Subtotal                                                                    50,178                28,765
       Other                                                                             19                    22

       Undelivered Orders (Unpaid)                                        $          50,197   $            28,787




                          Federal Student Aid Annual Report–FY 2011                                           116
                                                                                 Financial Section
                                                        Notes to the Principal Financial Statements



   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 2010 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.




                        Federal Student Aid Annual Report–FY 2011                              117
                                                                                                      Financial Section
                                                                          Notes to the Principal Financial Statements

Note 16. Reconciliation of Budgetary Obligations to Net Cost of
Operations
The Reconciliation of Budgetary Obligations to Net Cost of Operations provides information on
how budgetary resources obligated during the period relate to 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.
The Reconciliation of Budgetary Obligations to Net Cost of Operations, as of September 30,
2011 and 2010, are presented below:
             Reconciliation of Budgetary Obligations to Net Cost of Operations
                                                  (Dollars in Millions)

                                                                                         2011                2010
Resources Used to Finance Activities:
  Obligations Incurred                                                               $    298,227        $    261,159
  Spending Authority from Offsetting Collections and Recoveries                           (67,908)            (58,262)
  Offsetting Receipts                                                                     (50,197)            (28,787)
    Net Budgetary Resources Obligated                                                     180,122             174,110

  Imputed Financing from Costs Absorbed by Others                                               12                  10
  Other Financing Sources                                                                 (42,764)            (31,223)
    Net Other Resources                                                                   (42,752)            (31,213)

  Net Resources Used to Finance Activities                                                 137,370             142,897

Less: Resources Used or Generated for Items Not Part of the Net Cost of Operations:
  Increase/(Decrease) in Budgetary Resources Obligated but Not Yet Provided          17,611                     15,810
  Resources that Fund Subsidy Re-estimates Accrued in Prior Period                   (5,785)                  (10,883)
  Credit Program Collections                                                       (43,314)                   (43,410)
  Acquisition of Fixed Assets                                                              3                        10
  Acquisition of Net Credit Program Assets or Liquidation of Liabilities for Loan
  Guarantees                                                                        201,458                   179,632
  Resources from Non-Entity Activity                                               (42,764)                   (31,223)
    Net Resources That Do Not Finance the Net Cost of Operations                    127,209                   109,936

Net Resources Used to Finance the Net Cost of Operations                                    10,161              32,961

Components of the Net Cost of Operations That Will Not Require or Generate Resources in the Current Period:
  Depreciation                                                                         14                  19
  Subsidy Amortization and Interest on the Liability for Loan Guarantees           1,806              (1,640)
  Other                                                                                 1                 (1)
    Total Components Not Requiring or Generating Resources                                   1,821              (1,622)

  Increase in Annual Leave Liability                                                             1                    1
  Accrued Re-estimates of Credit Subsidy Expense                                           (3,329)              (5,785)
  Increase in Exchange Revenue Receivable from the Public                                 (12,010)              (5,875)
  Other                                                                                       (17)                  (3)
     Total Components Requiring or Generating Resources in Future
     Periods                                                                              (15,355)            (11,662)
  Total Components That Will Not Require or Generate Resources in the
  Current Period                                                                          (13,534)            (13,284)

Net Cost of Operations                                                               $      (3,373)      $      19,677


                             Federal Student Aid Annual Report–FY 2011                                              118
                                                                                                                    Financial Section
                                                                                  Notes to the 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, 2011 and 2010, are presented below:

                                 American Recovery and Reinvestment Act of 2009
                                                                 (Dollars in Millions)
                                                                                Cumulative Totals as of September 30, 2011

                                                                         Appropriations             Obligations                Outlays

        Student Financial Assistance:
          Federal Pell Grants                                             $          15,640        $       15,640          $        15,618
          Mandatory Add-on Pell Grants                                                  643                   643                      643
          Federal Work Study Grants                                                     200                   200                      200
        Total Student Financial Assistance                                           16,483                16,483                   16,461

        Student Aid Administration                                                       60                    60                       60
        Total                                                             $          16,543        $       16,543          $        16,521




                                 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 the Health Care and Education Reconciliation Act of 2010, effective July 1, 2010.




                                Federal Student Aid Annual Report–FY 2011                                                              119
                                                                                    Financial Section
                                                           Notes to the 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
The Federal Perkins Loan Program is a campus-based program that provides financial
assistance to eligible postsecondary school students. In FY 2011, the Department provided
funding of 82.6 percent of the capital used to make loans to eligible students through
participating schools at 5 percent interest. The schools provided the remaining 17.4 percent of
program funding. For the academic latest year ended June 30, 2011, approximately 459
thousand loans were made, totaling approximately $853.9 million at 1,505 institutions,
averaging $1,859 per loan. The Department‘s share of the Federal Perkins Loan Program was
approximately $6.6 billion as of June 30, 2011.
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 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.
Federal Perkins Loan Program borrowers who meet statutory eligibility requirements—such as
those who provide service as teachers in low-income areas or as Peace Corps or AmeriCorps
VISTA volunteers, as well as those who serve in the military, law enforcement, nursing, or
family services—may receive partial loan forgiveness for each year of qualifying service. In
these circumstances, a contingency is deemed to exist. The Department may be required to
compensate Federal Perkins Loan Program institutions for the cost of the partial loan
forgiveness.
   Litigation and Other Claims
The Department is involved in various lawsuits incidental to its operations. In the opinion of
management, the ultimate resolution of pending litigation will not have a material effect on
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.




                         Federal Student Aid Annual Report–FY 2011                                120
                                                                                                       Financial Section
                                                                 Required Supplementary Stewardship Information


REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION


   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 2011
   and the preceding four years:

                                Summary of Human Capital Expenses
                                               (Dollars in Millions)
                                            2011              2010           2009           2008             2007

 Federal Student Aid Expense
  Direct Loan Subsidy                  $     (28,630)    $     (1,567)   $    (9,603)   $      5,236     $      (499)
  FFEL Program Subsidy                       (16,126)         (14,344)       (29,940)        (2,852)            4,884
  Recovery Act                                     18            8,869          7,571
  Grant Programs                               39,008           26,799         17,302        17,464            15,092
  Salaries and Administrative                     193              208            186           189               173
 Total                                  $     (5,537)        $ 19,965    $   (14,484)   $    20,037      $     19,650



   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. With
   the passage of SAFRA last year, which eliminated new loan originations from the FFEL
   program, loans that were previously made through the FFEL program are made through
   the Direct Loan Program.

   Although there have been no new loan originations through the FFEL Loan Program
   since June 30, 2010, it 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
   $(4,064) million and $(841) 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.

   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 National
   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. These programs sunset at the conclusion of the 2010-2011 award year.




                                Federal Student Aid Annual Report–FY 2011                                               121
                                                                                  Financial Section
                                                   Required Supplementary Stewardship Information

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

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

Returns, or benefits, of investing in education come in many forms. While some returns
accrue for the individual, others benefit society and the nation in general. Returns related
to the individual include higher earnings, better job opportunities, and jobs that are less
sensitive to general economic conditions. Returns related to the economy and society
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.




                        Federal Student Aid Annual Report–FY 2011                              122
                                                                                                             Financial Section
                                                                                   Required Supplementary Information



     REQUIRED SUPPLEMENTARY INFORMATION
                                         United States Department of Education
                                                  Federal Student Aid
                                      Combining Statement of Budgetary Resources
                                        For the Year Ended September 30, 2011
                                                   (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                $    4,174     $    15,409
Recoveries of prior year Unpaid Obligations                           985          12,192     $         43
Budgetary Authority:
    Appropriations                                                 48,532
    Borrowing Authority (Note 15)                                                 211,802
    Spending authority from offsetting collections (gross):
       Earned
          Collected                                                 1,719          53,011
       Change in unfilled customers orders
          Without advance from Federal Sources                                          1
       Subtotal                                                $   50,251     $   264,814     $          0        $        0
Permanently not available                                          (1,057)        (30,122)
Total Budgetary Resources (Note 15)                            $   54,353     $   262,293     $         43        $        0

Status of Budgetary Resources:
Obligations incurred: Direct (Note 15)                         $   50,938     $   247,289     $         43
Unobligated Balances: Apportioned                                   1,214             512
Unobligated Balance not available                                   2,201          14,492
Total Status of Budgetary Resources                            $   54,353     $   262,293     $         43        $        0

Change in Obligated Balance:
Obligated balance, net: Unpaid obligations, brought forward,
October 1                                                      $   18,592     $   150,605     $       699
Uncollected customer payments from Federal Sources,
brought forward, October 1                                                              (4)
Total, unpaid obligated balance, brought forward, net          $    18,592    $    150,601    $        699        $        0
Obligation Incurred, net (+/-)                                      50,938         247,289               43
Gross Outlays                                                      (45,305)       (221,506)           (677)
Recoveries of prior year unpaid obligations, actual                   (985)        (12,192)             (43)
Change in uncollected customer payments from Federal
Sources (+/-)                                                                          (1)                                (0)
Obligated Balance, net, end of period:
    Unpaid Obligations                                         $   23,240     $   164,196         $     22
    Uncollected customer payments from Federal Sources                                 (5)
Total, unpaid obligated balance, net, end of period            $   23,240     $   164,191         $     22        $        0

Net Outlays:
    Gross Outlays                                              $ 45,305       $   221,506         $   677
    Offsetting collections                                       (1,719)          (53,011)
    Distributed Offsetting receipts                             (50,197)                 0
Net Outlays (Note 15)                                          $ (6,611)      $   168,495         $   677         $        0



                                        Federal Student Aid Annual Report–FY 2011                                         123
                                                                                                                    Financial Section
                                                                                            Required Supplementary Information

                                       United States Department of Education
                                                  Federal Student Aid
                                      Combining Statement of Budgetary Resources
                                           For the Year Ended September 30, 2011
                                                          (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                     $      4,174     $    15,409     $       23       $      2,334
Recoveries of prior year Unpaid Obligations                                  942          12,192                             7,202
Budgetary Authority:
    Appropriations                                                        48,532                          2,782
    Borrowing Authority (Note 15)                                                        211,802                          186,888
    Spending authority from offsetting collections (gross):
      Earned
        Collected                                                          1,719          53,011                           25,161
       Change in unfilled customers orders
          Without advance from Federal Sources                                                 1
       Subtotal                                                     $     50,251     $   264,814     $    2,782       $   212,049
Permanently not available                                                 (1,057)        (30,122)           (23)          (17,689)
Total Budgetary Resources (Note 15)                                 $     54,310     $   262,293     $    2,782       $   203,896

Status of Budgetary Resources:
Obligations incurred: Direct (Note 15)                              $     50,895     $   247,289     $    2,782       $   202,079
Unobligated Balances: Apportioned                                          1,214             512
Unobligated Balance not available                                          2,201          14,492                            1,817
Total Status of Budgetary Resources                                 $     54,310     $   262,293     $    2,782       $   203,896

Change in Obligated Balance:
Obligated balance, net: Unpaid obligations, brought forward,
October 1                                                           $     17,893     $   150,605                      $    55,291
Uncollected customer payments from Federal Sources,
brought forward, October 1                                                                     (4)
Total, unpaid obligated balance, brought forward, net               $     17,893     $    150,601    $         0      $     55,291
Obligation Incurred, net (+/-)                                            50,895          247,289          2,782           202,079
Gross Outlays                                                            (44,628)        (221,506)        (2,782)         (173,110)
Recoveries of prior year unpaid obligations, actual                         (942)         (12,192)                          (7,202)
Change in uncollected customer payments from Federal
Sources (+/-)                                                                                  (1)                              (0)
Obligated Balance, net, end of period:
    Unpaid Obligations                                              $     23,218     $   164,196                      $    77,058
    Uncollected customer payments from Federal Sources                                        (5)
Total, unpaid obligated balance, net, end of period                 $     23,218     $   164,191     $        0       $    77,058

Net Outlays:
    Gross Outlays                                                   $     44,628     $   221,506     $    2,782       $   173,110
    Offsetting collections                                                 (1,719)       (53,011)                         (25,161)
    Distributed Offsetting receipts                                      (50,197)               0        (25,502)
Net Outlays (Note 15)                                              $      (7,288)    $   168,495     $   (22,720)     $   147,949




                                          Federal Student Aid Annual Report–FY 2011                                                  124
                                                                                                                     Financial Section
                                                                                             Required Supplementary Information

                                       United States Department of Education
                                                  Federal Student Aid
                                      Combining Statement of Budgetary Resources
                                           For the Year Ended September 30, 2011
                                                          (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                    $    3,021        $       13,075
Recoveries of prior year Unpaid Obligations                                              $        1              6                 4,989
Budgetary Authority:
    Appropriations                                                                22                           177
    Borrowing Authority (Note 15)                                                              160                                24,754
    Spending authority from offsetting collections (gross):
      Earned
        Collected                                                                                24          1,498                27,826
       Change in unfilled customers orders
          Without advance from Federal Sources                                                   1
       Subtotal                                                     $             22     $     185      $    1,675        $        52,580
Permanently not available                                                                       (2)           (325)               (12,431)
Total Budgetary Resources (Note 15)                                 $             29     $     184      $     4,377       $        58,213

Status of Budgetary Resources:
Obligations incurred: Direct (Note 15)                              $             22     $     184      $    2,476        $       45,026
Unobligated Balances: Apportioned                                                                               98                   512
Unobligated Balance not available                                                  7                         1,803                12,675
Total Status of Budgetary Resources                                 $             29     $     184      $    4,377        $       58,213

Change in Obligated Balance:
Obligated balance, net: Unpaid obligations, brought forward,
October 1                                                           $              5     $       47     $       24            $   95,267
Uncollected customer payments from Federal Sources,
brought forward, October 1                                                                       (4)
Total, unpaid obligated balance, brought forward, net               $               5    $       43     $        24           $    95,267
Obligation Incurred, net (+/-)                                                     22           184           2,476                45,026
Gross Outlays                                                                     (19)         (142)         (2,474)              (48,254)
Recoveries of prior year unpaid obligations, actual                                               (1)            (6)               (4,989)
Change in uncollected customer payments from Federal
Sources (+/-)                                                                                    (1)
Obligated Balance, net, end of period:
    Unpaid Obligations                                              $               8    $      88      $       20        $       87,050
    Uncollected customer payments from Federal Sources                                          (5)
Total, unpaid obligated balance, net, end of period                 $               8    $      83      $       20        $       87,050

Net Outlays:
    Gross Outlays                                                   $             19     $     142      $     2,474       $        48,254
    Offsetting collections                                                                     (24)          (1,498)              (27,826)
    Distributed Offsetting receipts                                                (6)            0         (24,670)
Net Outlays (Note 15)                                                   $          13    $     118      $   (23,694)      $       20,428




                                        Federal Student Aid Annual Report–FY 2011                                                      125
                                                                                                             Financial Section
                                                                                        Required Supplementary Information


                                       United States Department of Education
                                                  Federal Student Aid
                                      Combining Statement of Budgetary Resources
                                           For the Year Ended September 30, 2011
                                                          (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                     $      1,115               $        8
Recoveries of prior year Unpaid Obligations                                  932                        4
Budgetary Authority:
    Appropriations                                                        44,351                   1,200
    Borrowing Authority (Note 15)
    Spending authority from offsetting collections (gross):
      Earned
        Collected                                                             221
       Change in unfilled customers orders
          Without advance from Federal Sources
       Subtotal                                                     $     44,572    $     0    $   1,200       $        0
Permanently not available                                                   (645)                     (64)
Total Budgetary Resources (Note 15)                                 $     45,974    $     0    $    1,148      $        0

Status of Budgetary Resources:
Obligations incurred: Direct (Note 15)                              $     44,475               $   1,140
Unobligated Balances: Apportioned                                          1,108
Unobligated Balance not available                                            391                       8
Total Status of Budgetary Resources                                 $     45,974    $     0    $   1,148       $        0

Change in Obligated Balance:
Obligated balance, net: Unpaid obligations, brought forward,
October 1                                                           $     17,387               $     477
Uncollected customer payments from Federal Sources,
brought forward, October 1
Total, unpaid obligated balance, brought forward, net               $     17,387    $     0    $      477      $        0
Obligation Incurred, net (+/-)                                            44,475                    1,140
Gross Outlays                                                            (38,274)                  (1,079)
Recoveries of prior year unpaid obligations, actual                         (932)                      (4)
Change in uncollected customer payments from Federal
Sources (+/-)
Obligated Balance, net, end of period:
    Unpaid Obligations                                              $     22,656               $     534
Total, unpaid obligated balance, net, end of period                 $     22,656    $     0    $     534       $        0

Net Outlays:
    Gross Outlays                                                   $     38,274               $   1,079
    Offsetting collections                                                  (221)
    Distributed Offsetting receipts                                          (19)          0
Net Outlays (Note 15)                                               $     38,034    $     0    $   1,079       $        0




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                                                 Independent Auditors‘ Reports




INDEPENDENT AUDITORS’
       REPORTS




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                                             Independent Auditors‘ Reports
                               Office of Inspector General Audit Transmittal




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                                            Independent Auditors‘ Reports
                                            Report of Independent Auditors




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                                            Independent Auditors‘ Reports
                                            Report of Independent Auditors




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                                            Independent Auditors‘ Reports
                                                Report on Internal Control




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                                            Independent Auditors‘ Reports
                                                Report on Internal Control




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                                            Independent Auditors‘ Reports
                                                Report on Internal Control




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                                            Independent Auditors‘ Reports
                                                Report on Internal Control




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                                            Independent Auditors‘ Reports
                                                Report on Internal Control




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                                            Independent Auditors‘ Reports
                                                Report on Internal Control




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                                            Independent Auditors‘ Reports
                                                Report on Internal Control




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                                            Independent Auditors‘ Reports
                                                Report on Internal Control




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                                            Independent Auditors‘ Reports
                                                Report on Internal Control




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                                            Independent Auditors‘ Reports
                                                Report on Internal Control




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                                            Independent Auditors‘ Reports
                                  Report on Compliance and Other Matters




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                                            Independent Auditors‘ Reports
                                  Report on Compliance and Other Matters




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                                            Independent Auditors‘ Reports
                                  Report on Compliance and Other Matters




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                                            Independent Auditors‘ Reports
                                     Management‘s Response to the Audit




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                                         Management‘s Response to the Audit




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                                               Other Accompanying Information




OTHER ACCOMPANYING
   INFORMATION




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                                            Other Accompanying Information




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                                                                     Other Accompanying Information




OTHER ACCOMPANYING INFORMATION

Improper Payment Information Act Reporting Details

For improper payments information, FSA‘s activities are part of an overall Departmental
integrated reporting effort. Please refer to the Improper Payments Reporting Details
narrative in the Other Accompanying Information section in the Department's AFR
located at http://www2.ed.gov/about/reports/annual/index.html.


Summary of Financial Statement Audit and Management Assurances

For details on FSA programs, please refer to the Analysis of Systems, Controls and
Legal Compliance discussion found in the Management‘s Discussion and Analysis
section of this document as well as the Summary of Financial Statement Audit and
Management Assurances narrative located in the Other Accompanying Information
section of the Department‘s AFR located at
http://www2.ed.gov/about/reports/annual/index.html.


Management Challenges

For details on FSA Management Challenges, please refer to relevant items included in
the OIG‘s Management Challenges for FY 2012 Executive Summary found in the Other
Accompanying Information section within the Department‘s AFR located at
http://www2.ed.gov/about/reports/annual/index.html.




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                                            Other Accompanying Information




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                                            Appendices




APPENDICES




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                                            Appendices




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                                                                                                      Appendices
                                                                  Appendix A: Discontinued Strategic Objectives and
                                                                                               Performance Metrics



APPENDIX A: DISCONTINUED STRATEGIC OBJECTIVES AND
            PERFORMANCE METRICS

 Discontinued Strategic Objectives and Performance Metrics
 FY 2006–2010 Five-Year Plan

 During FY 2010, FSA reviewed its strategic plan to identify revisions that would enable
 FSA to better address the challenges of the economic environment and improve the
 delivery of its mission–―Funding America‘s Future, One Student at a Time‖. As a result of
 this review, FSA developed and implemented a new set of Strategic Goals and
 Performance Goals for FY 2011 as documented in FSA Strategic Plan FY 2011–15.
 Implementation of this new strategic plan resulted in the discontinuation FY 2010
 strategic objectives and performance metrics. The following table details the FY 2010
 strategic objectives and performance metrics discontinued for FY 2011.


Strategic Objective/Metric                                  Description

Strategic Objective 1         Integrate Federal Student Aid systems and provide new
                              technology solutions.
    Performance Metric 1         Integrated Partner Management
    Performance Metric 2         Integrate aid delivery systems
    Performance Metric 3         Acquisition strategy
    Performance Metric 4         Infrastructure
Strategic 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.
    Performance Metric 1         Cumulative Lifetime Default Rate Title IV student loan portfolio
    Performance Metric 2         Cohort Default Rate
    Performance Metric 3         Direct Loan Default Recovery Rate
    Performance Metric 4         FFEL Default Recovery Rate
Strategic Objective 3         Reduce program administration costs.
    Performance Metric 1        Reduce electronic FAFSA direct unit costs
    Performance Metric 2        Reduce origination and disbursement direct unit costs
    Performance Metric 3        Reduce Direct Loan Servicing direct unit costs
    Performance Metric 4        Reduce Collections direct unit cost
Strategic Objective 4         Improve human capital management.
    Performance Metric 1         Leadership training
    Performance Metric 2         Acquisitions training
    Performance Metric 3         Project management training
    Performance Metric 4         FSA business knowledge training
    Performance Metric 5         School compliance officials training
    Performance Metric 6         General workforce training




                             Federal Student Aid Annual Report–FY 2011                                        153
                                                                                                      Appendices
                                                                  Appendix A: Discontinued Strategic Objectives and
                                                                                               Performance Metrics



Strategic Objective/Metric                                Description

Strategic Objective 5         Improve products and services to provide better customer service.
    Performance Metric 1         Student Aid Application
    Performance Metric 2         Lender Payment Processing
    Performance Metric 3         Direct Loan Borrower Servicing




                             Federal Student Aid Annual Report–FY 2011                                        154
                                                                                          Appendices
                                                            Appendix B: Glossary of Acronyms and Terms



APPENDIX B: GLOSSARY OF ACRONYMS AND TERMS


 Acronym             Description

 A

 ABCP Conduit        Asset-Backed Commercial Paper Conduit
 ACG                 Academic Competitiveness Grant
 ACSI                American Customer Satisfaction Index
 AGI                 Adjusted Gross Income
 AFR                 Agency Financial Report


 C

 CCRAA               College Cost Reduction and Access Act of 2007
 COD                 Common Origination and Disbursement System
 Conduit             Asset-Backed Commercial Paper Conduit
 COO                 Chief Operating Officer
 CPS                 Central Processing System
 Credit Reform Act   Federal Credit Reform Act of 1990
 CSRS                Civil Service Retirement System

 D

 Department          U.S. Department of Education
 Direct Loan         William D. Ford Federal Direct Loan
 DOL                 U.S. Department of Labor

 E

 ECASLA              Ensuring Continued Access to Student Loans Act of 2008
 ED                  U.S. Department of Education




                      Federal Student Aid Annual Report–FY 2011                                   155
                                                                                         Appendices
                                                           Appendix B: Glossary of Acronyms and Terms


Acronym              Description

F

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 Program         Federal Family Education Loan Program
FFELP                Federal Family Education Loan Program
FSA                  Federal Student Aid
FSA Strategic Plan   Federal Student Aid: Strategic Plan, Fiscal Years 2011–15
FY 2011–15
FWS                  Federal Work-Study
FY                   Fiscal Year

G

GAO                  Government Accountability Office

H

HCERA                Health Care and Education Reconciliation Act of 2010
HEA                  Higher Education Act of 1965, as amended
HPPG                 High Priority Performance Goal

I

IBR                  Income Based Repayment program
IRS                  Internal Revenue Service
IT                   Information Technology




                      Federal Student Aid Annual Report–FY 2011                                  156
                                                                                    Appendices
                                                      Appendix B: Glossary of Acronyms and Terms


Acronym      Description

L

LEAP         Leveraging Educational Assistance Partnership
LMM          Lifecycle Management Methodology

M

Met          Performance result met or exceeded target

N

N/A          Performance result is not applicable because the performance goal
             was not developed, the performance goal was not implemented, or
             the required data were not available in time for inclusion.
NCES         National Center for Education Statistics
NFP          Not-For-Profit
NSLDS        National Student Loan Data System
Not met      Performance result did not meet target
No target    Performance result was tracked, but no target was established.

O

OIG          Office of Inspector General
OMB          Office of Management and Budget
OPM          Office of Personnel Management
OPR          Organizational Performance Review

P

PBO          Performance-Based Organization
Pell Grant   Federal Pell Grant Program
PSLF         Public Service Loan Forgiveness program




              Federal Student Aid Annual Report–FY 2011                                     157
                                                                                   Appendices
                                                     Appendix B: Glossary of Acronyms and Terms


Acronym        Description


R

Recovery Act   American Recovery and Reinvestment Act of 2009


S

Secretary      Secretary of Education
SFFAS          Statement of Federal Financial Accounting Standards
SLEAP          Special Leveraging Educational Assistance Partnership
SMART          National Science and Mathematics Access to Retain Talent Grant
               Program

T

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

U

U.S.           United States




                Federal Student Aid Annual Report–FY 2011                                  158
                                                                                                     Appendices
                                                 Appendix C: Availability of the Federal Student Aid Annual Report



APPENDIX C: AVAILABILITY OF THE FEDERAL STUDENT AID
            ANNUAL REPORT


 FSA‘s publicly available FY 2011 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




 The Federal Student Aid: Strategic Plan, Fiscal Years 2011–15 and previous years‘ Annual
 Reports are also available on the websites listed above.




 This report is in the public domain. Authorization to reproduce it in whole or in part is granted.
 While permission to reprint this publication is not necessary, the citation should be: U.S.
 Department of Education, Federal Student Aid, Annual Report-FY 2011, Washington D.C., 2011.




                           Federal Student Aid Annual Report–FY 2011                                         159