oversight

Financial Statement Audits - Fiscal Years 2013 and 2012 - U.S. Department of Education

Published by the Department of Education, Office of Inspector General on 2013-12-11.

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

U.S. Department of Education
Arne Duncan
Secretary

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



December 11, 2013

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, Fiscal Year
2013 Agency Financial Report, Washington D.C., 2013.

This report is available on the Department’s website at: http://www.ed.gov/about/reports/annual/index.html. On
request, the report also is available in alternative formats, such as Braille, large print, or computer diskette. For
more information, please contact our Alternate Format Center at (202) 260-0852 or (202) 260-0818.

To become connected to the Department through social media, please visit the Department’s website at:
www.ed.gov.

Notice to Limited English Proficient Persons

If you have difficulty understanding English, you may request language assistance services for Department
information that is available to the public. These language assistance services are available free of charge. If
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Department of Education, Information Resource Center, LBJ Education Building, 400 Maryland Ave. SW,
Washington, DC 20202.

Please submit your comments and questions regarding this Agency Financial Report and any suggestions to
improve future reports, including suggestions for additional links that will increase the usefulness of the report
to the public, to PARcomments@ed.gov or:

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




                                                                           FY 2013 Agency Financial Report—U.S. Department of Education
                                                               About This Report
The purpose of the United States Department of Education’s (the Department) FY 2013 Agency Financial
Report (AFR) is to assist Congress, the President, and the American people to assess the Department’s
stewardship over resources with which it is entrusted. This annual report is required by legislation and
complies with the requirements of the Office of Management and Budget’s Circulars A-11, Preparation,
Submission, and Execution of the Budget, and A-136, Financial Reporting Requirements.

Federal Student Aid, a principal office of the Department and a designated Performance-Based Organization,
is required by legislation to produce a separate Annual Report, which details Federal Student Aid’s financial
and program performance. A summary of the information included in the Federal Student Aid Annual Report
can be found in the applicable sections of the Department’s AFR. For more detail on Federal Student Aid’s
performance and financial information, refer to StudentAid.gov.

The AFR is organized into four major sections:

Management’s Discussion and Analysis—This section provides information about the Department’s mission
and organizational structure, our high-level performance results, financial highlights, and management
assurances regarding internal controls.
Financial Section—This section provides a message from the Chief Financial Officer, the financial statements
and notes, required supplementary information and required supplementary stewardship information, and the
report from our independent auditors.
Other Information—This section provides improper payments reporting details, the schedule of spending, a
summary of financial statement audit and management assurance, and the Office of Inspector General’s
Management and Performance Challenges for Fiscal Year 2014 Executive Summary.

Appendices—This section provides a listing of selected Department web links and education resources and a
glossary of acronyms and abbreviations.

This report satisfies the reporting requirements contained in the following legislation:
•     Federal Managers’ Financial Integrity Act of 1982
•     Government Management Reform Act of 1994
•     Federal Financial Management Improvement Act of 1996
•     Reports Consolidation Act of 2000
•     Improper Payments Elimination and Recovery Act of 2010
•     Government Performance and Results Modernization Act of 2010

In FY 2013, the Department chose to produce an Agency Financial Report (AFR) and Annual Performance
Report (APR). The APR and the Congressional Budget Justification will be posted on the Department’s
website at http://www.ed.gov/about/reports/annual/index.html when the FY 2015 budget is released.


    Annual Performance Report (APR)                                       Summary of Performance and Financial Information
    [available February 2014]                                             [available February 2014]

    The APR is produced in conjunction with the FY 2015                   This document provides an integrated overview of
    President’s Budget Request and provides more detailed                 performance and financial information that consolidates
    performance information and analysis of performance                   the AFR and the APR into a user-friendly format.
    results.




           FY 2013 Agency Financial Report—U.S. Department of Education                                                             i
                          Message From the Secretary
                                December 11, 2013

                                I am pleased to present the Department of Education’s Fiscal
                                Year (FY) 2013 Agency Financial Report. In this report, we
                                share the Department’s financial and performance highlights
                                over the past 12 months.

                                Our mission is to promote student achievement and
                                preparation for global competitiveness by fostering educational
                                excellence and ensuring equal access.

                                Providing every student in America with a world-class
                                education is an economic imperative. From improving access
                                to early learning programs, to reforming elementary and
                                secondary education, to making higher education more
                                accessible and affordable, to working to attract talented people
to the teaching profession we have made an unprecedented commitment to education.

Performance Highlights
In the Department’s Strategic Plan for FY 2011–2014, our mission is reflected in six strategic
goals and 21 objectives. In FY 2013, we designated six programmatic two-year Department
Priority Goals that are essential to achieving our mission. The Management’s Discussion and
Analysis section contains more details on the Agency Priority Goals and a high-level discussion
about our approach to performance management.

For those seeking additional details regarding our performance and progress toward achieving
our strategic goals, I invite you to read our Annual Performance Report, which will be released
with the Congressional Budget Justification and the President’s FY 2015 budget. Additionally,
the Department’s Priority Goals are posted on performance.gov.

Financial Management
Although we are the smallest of the 15 cabinet level agencies in terms of government staff, the
Department is the third largest of the 26 federal grant-making organizations, manages the
second largest loan portfolio in the federal government. It is imperative that we demonstrate
that we are good stewards and that we have well controlled and managed financial systems and
business processes.

I am proud to report that we have received our 12th consecutive unqualified audit opinion.
Along with the unqualified opinion for 2013, our auditors reported that there were no material
internal control weaknesses and no instances of noncompliance with applicable laws and
regulations, except for one compliance issue with the Federal Financial Management
Improvement Act (FFMIA). Last year, we reported a material weakness in internal controls over
the operation of the Direct Loan and FFEL programs and that our financial management
systems did not substantially comply with FFMIA. We took steps in 2013 to correct the material
weakness and to ensure that our financial management systems substantially comply with
FFMIA.




ii                                                       FY 2013 Agency Financial Report—U.S. Department of Education
                                                                     MESSAGE FROM THE SECRETARY


I am confident that the financial and summary performance data included in this AFR are
complete and reliable in accordance with federal requirements. This financial report also
includes information and assurances about the Department’s financial management systems
and controls as required by the Federal Managers’ Financial Integrity Act, as well as a
discussion of the one item mentioned above.

Management Challenges
We remain committed to improved governance and better business processes. Management
has worked closely with the Office of Inspector General (OIG) to gain its perspective about our
most significant management and performance challenges. These are presented in the Other
Information section of this report. The OIG’s review addresses five FY 2014 management
challenges: improper payments, information technology security, oversight and monitoring, data
quality and reporting, and information technology system development and implementation.

The Department takes these challenges seriously, as well as other issues identified through our
own self-assessments of operations and external audits. The Department is responding to each
challenge with initiatives designed to improve our systems and process.

Outreach and Partnerships
The Department leverages free web resources to connect directly with an ever-growing online
community of educators, parents, students, and other stakeholders. Our most popular Twitter
page, @used.gov, has grown to reach more than 250,000 followers who have joined us in real-
time conversations about the challenges facing their schools and communities. Through Twitter
town halls and impromptu exchanges, we answer questions and gain feedback that help to
shape our outreach activities and discussions about education policy. The Department’s official
Facebook page shares photos, videos, and information with its active members.

Our blog, Homeroom, provides stakeholders with the opportunity to learn about financing
college, combating bullying, supporting teachers, and other important topics. Homeroom
readers—like our Twitter followers and Facebook fans—share the information that matters to
them. Blog posts reach thousands of people with just a few clicks. On our YouTube channel,
the Department shares stories about schools where reform efforts and innovations are making a
difference for students. We were also proud to host our first Google+ Hangout this year, when I
connected with student athletes and both Women’s National Basketball Association and
National Basketball Association players to discuss how sports can play an important role in
students’ maturation on and off the court.

The Department also interacts with hundreds of key national associations and organizations,
which represent the interests of the K-12 education, civil rights and advocacy, and higher
education communities by keeping them apprised of our programs’ progress, major policy
decisions, and funding opportunities. The information we convey through e-mail blasts and
stakeholder forums is made available through our national partners, who share updates with
their state and local affiliate networks. When key policy decisions or shifts are pending, the
Department makes it a priority to inform leaders of these groups and gain their feedback.




FY 2013 Agency Financial Report—U.S. Department of Education                                     iii
MESSAGE FROM THE SECRETARY


Looking Ahead

Guided by our new strategic plan for FY 2014–2018, we have charted a roadmap for future
success, and we will continue to evaluate how best to accomplish our strategic goals and
objectives during these fiscally challenging times. Our FY 2014–2018 Strategic Plan will be
published in February 2014 and can be found on both ed.gov and performance.gov. We look
forward to working with our partners and colleagues in Congress, the states, and across the
education community by keeping foremost in our minds why we care about education.

I am proud of the progress we are making at the Department. I salute the efforts of our
dedicated employees who carry out the day-to-day work of the Department and of their
continued commitment to provide every student in America with a world-class education.

Sincerely,

/s/

Arne Duncan




iv                                                     FY 2013 Agency Financial Report—U.S. Department of Education
                                                                    Contents
About This Report .......................................................................................................................................... i
Message From the Secretary .........................................................................................................................ii

Management’s Discussion and Analysis
About the Management’s Discussion and Analysis ...................................................................................... 2
About the Department ................................................................................................................................... 4
The Department’s Approach to Performance Management ......................................................................... 6
The Department’s Priority Goals ................................................................................................................. 10
Looking Ahead and Addressing Challenges ............................................................................................... 17
Financial Highlights ..................................................................................................................................... 21
Limitations of the Financial Statements ...................................................................................................... 32
Analysis of Controls, Systems, and Legal Compliance .............................................................................. 33

Financial Section
Message From the Chief Financial Officer.................................................................................................. 44
Financial Statements ................................................................................................................................... 45
Notes to the Financial Statements .............................................................................................................. 49
Required Supplementary Information ......................................................................................................... 90
Required Supplementary Stewardship Information .................................................................................... 91
Report of the Independent Auditors ............................................................................................................ 94


Other Information
About the Other Information Section ......................................................................................................... 122
Improper Payments Reporting Details ...................................................................................................... 123
Schedule of Spending ............................................................................................................................... 134
Summary of Financial Statement Audit and Management Assurances ................................................... 136
Memorandum From the Office of Inspector General ................................................................................ 137
Office of Inspector General’s (OIG) Management and Performance Challenges
    for Fiscal Year 2014 Executive Summary .......................................................................................... 138

Appendices
Appendix A: Selected Department Web Links and Education Resources ............................................... 148
Appendix B: Glossary of Acronyms and Abbreviations ............................................................................ 152




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vi                             FY 2013 Agency Financial Report—U.S. Department of Education
    Management’s
Discussion and Analysis
MANAGEMENT’S DISCUSSION AND ANALYSIS


           About the Management’s Discussion and Analysis
The Department of Education (the Department) continues to enhance the usefulness of the
Agency Financial Report (AFR) as a roadmap to relevant web content. The AFR is designed to
be read online to take full advantage of the information presented. Links replace static pages in
earlier reports allowing for current information to be drawn from our websites. The Department’s
intent is to provide users with access to useful information about the Department and its
financial activities, while meeting the intent of the Federal Accounting Standards Advisory Board
(FASAB) Financial Reporting Model Task Force recommendation on web-based reporting and
complying with existing Office of Management and Budget (OMB) reporting requirements.

To help continue to improve the content of the AFR, readers are encouraged to provide their
feedback at: PARcomments@ed.gov.

Mission and Organizational Structure

This section provides information about the Department’s mission, an overview of its history and
its structure. The active links include: the organization chart and principal offices, a map of its
regional offices, and a full list of Department programs and funding for the current year.

Discussion of Performance

The Department has elected to produce separate financial and performance reports for the last
five years. The Agency Financial Report for fiscal year (FY) 2013 provides a high-level
description of key performance measures and goals based on the FY 2011–2014 Strategic Plan
with a focus on the Priority Goals for 2012–13. A detailed discussion of performance information
for FY 2013 will be provided in the Department’s Annual Performance Report to be published in
February 2014 with the President’s Budget. Additional information on data from the FY 2011–
2014 Strategic Plan can be found in the FY 2012 Annual Performance Report and FY 2014
Annual Performance Plan.

The section includes an overview of performance reporting, a report on the Agency Priority
Goals for 2012–13, and high-level discussion of performance information.

The Department has identified a small number of priority goals that have been focus areas over
the last two years. These goals, which will help measure the success of the Department’s
cradle-to-career education strategy, reflect the importance of teaching and learning at all levels
of the education system. These goals are consistent with the Department’s Strategic Plan,
which will be used to regularly monitor and report progress. To view information on all
Department programs, please visit the Department’s website.

Looking Ahead and Addressing Challenges describes how the Department’s FY 2014–2018
Strategic Plan charts future success during these fiscally challenging times.

Financial Highlights

The Department has significantly expanded information in the Financial Highlights section of the
report to provide a more comprehensive depiction of its key financial activities for FY 2013 and
to identify and explain significant trends.

The Department expends a substantial amount of its budgetary resources and disburses large
cash amounts on grant and loan programs intended to increase college access, quality, and


2                                                         FY 2013 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


completion; improve preparation for college and career from birth through 12th grade, especially
for children with high needs; and ensure effective educational opportunities for all students.
Therefore, the Department has included more high-level details about the sources and uses of
these funds and a composition of and summary of net costs by program.

The primary sources of funds are borrowings from Treasury (Debt), appropriations from
Congress, and spending authority from offsetting collections. Most borrowings and collections
are associated with student loans.

As a nine-time recipient of the Association of Government Accountants Certificate of Excellence
in Accountability Reporting and having earned unqualified (or “clean”) audit opinions for
12 consecutive years, the Department has demonstrated its commitment to continuous
improvement in its financial management, operations, and reporting.

Analysis of Controls, Systems, and Legal Compliance

The Department is the smallest of the 15 cabinet level agencies in terms of government staff,
yet it has the third largest grant portfolio among the 26 federal grant-making organizations. The
Department manages the second largest loan portfolio in the federal government. In order to
demonstrate effective stewardship of these resources, the Department has to implement
effective controls over operations, systems, and financial reporting as described in the Analysis
of Controls, Systems, and Legal Compliance section of the report.

The three objectives of internal controls are to ensure the effectiveness and efficiency of
operations, reliability of financial reporting and systems controls, and compliance with applicable
laws and regulations. The Department categorizes and assesses controls in three categories:

•    internal controls over operations,
•    internal controls over financial reporting, and
•    internal controls over systems.




FY 2013 Agency Financial Report—U.S. Department of Education                                        3
MANAGEMENT’S DISCUSSION AND ANALYSIS


                                About the Department

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

Overview. In 1867, the federal government recognized that furthering education was a national
priority and created a federal education agency to collect and report statistical data. The
Department was established as a cabinet-level agency in 1979. Today, the Department
supports programs that touch on every area and level of education. The Department has
approximately 4,200 employees and manages a $65 billion discretionary appropriation. The
Department has set high expectations for its own employees and is continuously working to
improve management practices, ensure fiscal integrity, and develop a culture of high
performance.

Our Public Benefit. The Department is committed to ensuring that students throughout the
nation develop the skills they need to succeed in school, college, and the workforce, while
recognizing the primary role of states and school districts in providing a high-quality education,
employing highly qualified teachers and administrators, establishing challenging content and
achievement standards, and monitoring students’ progress against those standards. As a
principal office of the Department, Federal Student Aid (FSA) provides about 14 million
postsecondary students with low-interest loans, grants, and work-study funds to cover
expenses, such as tuition and fees, room and board, books and supplies, and transportation.
The Department’s early learning, elementary, and secondary programs annually serve
approximately 14,000 school districts and 55 million students attending about 99,000 public and
31,000 private schools.

What We Do. The Department engages in four major types of activities: establishing policies
related to federal education funding, including the distribution of funds and monitoring of their
use; supporting data collection and research on America’s schools; identifying major issues in
education and focusing national attention on them; and enforcing federal laws prohibiting
discrimination in programs that receive federal funds.

Organizational Structure. Our staff is organized as shown in the organizational chart. Links
are provided to web pages that provide a detailed description of the principal offices and
overview of the activities of the Department and its programs.

Regional Offices. The Department has ten regional offices that provide points of contact and
assistance for schools, parents, and citizens. The primary support within the regional offices is
that of communications, civil rights enforcement, and federal student aid services to promote
efficiency, effectiveness, and integrity in the programs and operations of the Department. In
addition to enforcement offices in federal regions, enforcement offices are located in
Washington, D.C. and Cleveland, Ohio.

Web Presence. The Department maintains a comprehensive website that focuses on most
popular searches, latest news and events, and links to social media.



4                                                         FY 2013 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




                                 Our Organization in Fiscal Year 2013
   An interactive version of this chart is available. Note that Federal Student Aid is the
   largest component of the Department. The printed version reflects the Department
   organization as of September 30, 2013.




FY 2013 Agency Financial Report—U.S. Department of Education                                      5
                                                                                       The Department’s Approach to Performance Management
6




                                                                                                                                                                                                       MANAGEMENT’S DISCUSSION AND ANALYSIS
                                                               Performance Management Framework

                                                               From its mission and core values, the Department is developing an FY 2014–2018 Strategic Plan by building upon and updating the
                                                               current FY 2011–2014 Strategic Plan. In accordance with the GPRA Modernization Act of 2010, the Department’s framework for
                                                               performance management starts with the strategic plan, including its priority goals, which serve as the foundation for establishing
                                                               overall long-term priorities and developing performance goals, objectives, and measures by which the Department can gauge
                                                               achievement of its stated outcomes. The Department is currently tying its internal management review process, known as the
                                                               Quarterly Performance Review (QPR), to its Strategic Objectives Annual Review (SOAR) to inform long-term strategy planning,
                                                               budgeting practices and fiscal management, staff capacity and effectiveness, and transparency around successes and challenges.

                                                               As the Department closes out its FY 2011–2014 plan and migrates to the updated FY 2014–2018 plan, the Department’s results are
                                                               mixed—presenting both accomplishments and challenges moving forward. Of the 35 metrics in the FY 2011–2014 plan, 13 have
FY 2013 Agency Financial Report—U.S. Department of Education




                                                               shown significant progress toward established goals, including such important areas as increased state commitments to high-quality
                                                               outcome metrics for pre-schools; better use of data to evaluate teachers and colleges, and to help students identify their own
                                                               strengths and remediate areas where they face challenges; as well as some improvements in the number of science, technology,
                                                               engineering, and math (STEM) degrees being earned. The nation continues to face serious challenges in promoting high standards
                                                               while at the same time increasing the number of students who successfully complete their formal education and find employment.
                                                               Progress towards the Department’s strategic and priority goals is measured using data-driven review and analysis. This focus
                                                               promotes active management engagement across the Department, which ensures alignment to the Department’s Annual
                                                               Performance Plans and Annual Performance Reports.

                                                               The Strategic Plan for FY 2014–2018 is being developed in collaboration with Congress, state and local partners, and other
                                                               education stakeholders. The Strategic Plan is comprised of six foundational strategic goals and seven priority goals (see
                                                               pages 18–20). The chart below shows the goals, objectives, and priorities established in the Department’s current FY 2011–2014
                                                               Strategic Plan. The Department’s updated Strategic Plan for FY 2014–2018 largely follows the same goals and general strategic
                                                               objectives as our previous plan, with six strategic goals that will help to align the Administration’s yearly budget requests and the
                                                               Department’s legislative agenda. The FY 2014–2018 plan will be published early in 2014.
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS
FY 2013 Agency Financial Report—U.S. Department of Education                                7
MANAGEMENT’S DISCUSSION AND ANALYSIS
8                                      FY 2013 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


Discretionary Funding by Goal

The Department is the smallest of the 15 cabinet level agencies in terms of government staff,
yet it has the third largest grant portfolio among the 26 federal grant-making organizations, with
approximately 4,200 employees and $65 billion in discretionary appropriations. Its grant making
overall represents 26.3 percent of the Department’s $311.7 billion in gross outlays for FY 2013,
divided between discretionary and formula grants.

More than 90 percent of the discretionary appropriations are divided among programs and
accounts that support state and local education efforts under goals 1, 2, and 3 of the
Department’s Strategic Plan. In addition, significant amounts are appropriated for federal
support in the areas of equity and access, as well as continuous systemic improvement under
goals 4 and 5 of the Strategic Plan. Appropriations allocated to goal 6 include management
efforts to improve and streamline services offered by the Department and its employees.

For greater detail on the programs and accounts under each goal and other details on
performance metrics, see the Annual Performance Report for FY 2012. The Annual
Performance Report for FY 2013 will be published in February 2014.




FY 2013 Agency Financial Report—U.S. Department of Education                                         9
MANAGEMENT’S DISCUSSION AND ANALYSIS


                         The Department’s Priority Goals
The Department has identified six Agency Priority Goals for FY 2012–13 that serve as a
particular focus for its activities. These Priority Goals reflect the Department’s cradle-to-career
education strategy and will help concentrate efforts on the importance of teaching and learning
at all levels of the education system. In most cases, progress is reported through the third
quarter of FY 2013. Quarterly updates are available on performance.gov.

Progress on the Department’s FY 2012–13 Priority Goals

        Priority Goal: Improve students’ ability to afford and complete college

     Goal for FY 2012–2013: By September 30, 2013, the Department will develop a college
     scorecard designed to improve consumer decision-making and transparency about
     affordability for students and borrowers by streamlining information on all degree-
     granting institutions into a single, comparable, and simplified format, while also helping
     all states and institutions develop college completion goals.

                                    Supports Strategic Goal 1.

Overview: As more and more jobs require postsecondary education and training, college is
becoming a vital necessity for most Americans. Yet too many students fail to complete college
and are burdened by high student loan debt. Institutions raise tuition and fees as states cut
education funding for postsecondary institutions. Even with increased federal Pell Grant funding,
many Americans remain concerned about whether they can afford the high cost of college.
Many Americans do not know about or are confused by the maze of information that is available
about colleges and how to pay for college. To help students and their families make decisions
about college, the Department has developed a number of resources, such as College
Navigator, the College Affordability and Transparency Center, and the Net Price Calculator. In
order to meet the national goal to increase the number of college graduates, the Department is
committed to helping states and institutions increase the number and percentage of students
who complete their postsecondary educations.

The Department will support college completion by identifying and promoting successful
evidence-based practices and by highlighting noteworthy state efforts in key areas such as
transfer, performance-based funding, and college-and-career readiness. The Department has
achieved the goal that was set to implement the College Scorecard. The challenge that remains
is that the Department must work with the federal Consumer Financial Protection Bureau to
ensure that its Paying for College tool complements and aligns with the data used in the
scorecard. Regarding state completion goals, the primary obstacle is that the Department has
little influence over states’ decisions to set goals.

Progress: The scorecard was released in tandem with the President’s State of the Union
address in February. This is a first version of the scorecard, with future versions to incorporate
additional information, such as earnings data once logistical issues for obtaining such data have
been addressed. The number of states with completion goals has grown from 38 to 40 since
November 2012 (completion defined as either attainment, graduation, or degree production),
with a variety of target dates and levels of specificity. The Department has little influence over
state decisions to establish goals, although it continues to encourage goal setting and highlight
states that have goals in speeches, editorials, and conversations.



10                                                         FY 2013 Agency Financial Report—U.S. Department of Education
                                                                         MANAGEMENT’S DISCUSSION AND ANALYSIS



         Priority Goal: Improve learning by ensuring that more students have an
                                     effective teacher

     Goal for FY 2012–2013: By September 30, 2013, at least 500 school districts will have
     comprehensive teacher and principal evaluation and support systems and the majority of
     states will have statewide requirements for comprehensive teacher and principal
     evaluation and support systems.

                                                   Supports Strategic Goal 2.

Overview: The Priority Goal is based on the premise, supported by abundant research, that
teachers are the single most critical in-school factor in improving student achievement.
Principals are often cited as the second most influential in-school factor. Teacher and principal
evaluation systems supported by the Department’s contributing programs enable the
development and identification of effective educators and provide the needed information to
improve the educator workforce or provide incentives to teach in challenging schools or
shortage areas.

The Department will help strengthen the profession by focusing on meaningful feedback,
support, and incentives at every stage of a career, based on fair evaluation systems that look at
multiple measures, including, in significant part, student growth.

The Department will support state and district efforts that provide time for teacher collaboration,
on-the-job learning opportunities, and professional advancement. As states transition to new
college- and career-ready standards, the Department will support opportunities for teachers to
enhance their instructional expertise related to the new standards.

The Department continues to ensure adherence to timelines regarding development and
adoption of state requirements for comprehensive teacher evaluation systems and for district
development and implementation of comprehensive educator evaluation systems.

Current challenges center on maintaining momentum for reform, given districts’ and states’
current fiscal situation, potential changes in leadership, ongoing development of student growth
measures in non-tested grades and subjects, and the scaling up of systems in a relatively short
time frame. Another challenge relates to the coordination required of the Department’s
programs to ensure policy and communications consistency. With multiple programs interacting
with the same grantees (e.g., states and districts), to a varying degree, it will take a significant
shift in the Department’s culture to break down silos to improve coordination.

Progress: The Department has made significant progress in leveraging its programs to support
state- and district-led efforts to ensure that more students have effective teachers by better
training, recruiting, identifying, and retaining effective teachers, especially in areas with high
needs. In particular, the Department’s efforts are focused on:

•    encouraging teachers to play active roles in the development of these policies through the
     Recognizing Educational Success, Professional Excellence, and Collaborative Teaching
     (RESPECT) project and the Teacher Incentive Fund (TIF);
•    encouraging school districts to leverage best practices to recruit and retain effective
     teachers (through TIF grants);




FY 2013 Agency Financial Report—U.S. Department of Education                                               11
MANAGEMENT’S DISCUSSION AND ANALYSIS


•    encouraging the development and adoption of innovative strategies to transform the
     teaching profession that will ultimately impact student outcomes through TIF, Investing in
     Innovation (i3), and other grants; and
•    creating a critical mass of states that have created the conditions for education innovation
     and reform through Race to the Top (RTT), Elementary and Secondary Education Act
     (ESEA) Flexibility, School Improvement Grants (SIG), and other initiatives.

As a result of these efforts:

•    Twenty-five (25) states have received approval of their evaluation system guidelines through
     either ESEA Flexibility (21 states) and/or Race to the Top (4 additional states).
•    Race to the Top states plan to have 2,012 participating local educational agencies (LEAs)
     with qualifying evaluation systems for teachers in the 2012–2013 school year.
•    Race to the Top states plan to have 1,978 participating LEAs with qualifying evaluation
     systems for principals in the 2012–2013 school year.
•    ESEA Flexibility States plan to have all LEAs with qualifying teacher and principal evaluation
     systems ready to implement in the 2014–2015 school year.
•    And 213 LEAs are implementing evaluation systems under the SIG Transformation Model.
•    In addition, 162 LEAs are implementing reformed educator evaluation systems as part of a
     TIF 3 (2010) grant. 159 LEAs plan to have reformed educator evaluation systems ready to
     implement in the 2013–2014 school year as part of a TIF 4 (2012) grant.

     Priority Goal: Demonstrate progress in turning around the nation’s lowest-
                                performing schools

     Goal for FY 2012–2013: By September 30, 2013, 500 of the nation’s persistently lowest-
     achieving schools will have demonstrated significant improvement and will have served
     as potential models for future turnaround efforts.

                                    Supports Strategic Goal 2.

Overview: The goal seeks to prepare all K-12 students for college and career by improving the
education system’s ability to consistently deliver excellent classroom instruction with rigorous
academic standards while providing effective support services.

Through RTT, the SIG program, ESEA Flexibility, and other federal programs, the Department
is providing significant resources to dramatically improve the nation’s lowest-achieving schools
by using intensive turnaround models and identifying the low-achieving schools that are
showing strong evidence of successfully turning around.

The Department is focused on supporting innovation, not just compliance monitoring, and is
focused on spurring growth in achievement, not just absolute achievement measures as done in
the past. Central to these efforts has been the creation of the Office of School Turnaround
(OST). Through OST’s monthly check-in calls with all 50 states, the School Turnaround
Learning Community, and the many OST-facilitated peer-to-peer learning opportunities, states,
districts, and schools are learning from each other and scaling up promising practices. In order
to better provide technical assistance and support for what is working, OST has created a
National Activities Plan to effectively use up to 5 percent of the more than $500 million annual
SIG program.



12                                                         FY 2013 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


Key barriers and challenges include:

•    sustainability of reforms in schools as SIG grants end;
•    capacity challenges at state, district, and school level mean some intervention challenges
     persist;
•    insufficient focus on comprehensive turnaround efforts at the state and district level,
     including alignment of SIG, Race to the Top, and ESEA Flexibility; and
•    lack of quality and completeness data/knowledge allows others to define success.

Engagement with external stakeholders includes the following:

•    The Department implemented a communications plan that prioritizes regional and local
     media outreach to share promising stories and proven practices.
•    And conducted several outreach events, including SIG/turnaround forum with external
     stakeholders.

Progress:

•    The federal government has made significant investments in turning around the nation’s
     persistently lowest-achieving schools, in large part though SIG, RTT, and the Department’s
     work to grant states flexibility regarding specific requirements of the No Child Left Behind
     Act of 2001 (NCLB).
•    With more than 1,400 schools now implementing one of the four SIG intervention models,
     schools around the country have hired new leadership, recruited effective teachers,
     increased learning time, changed school climate, and offered teachers data-driven
     professional development aimed at increasing student achievement.
•    Thirty-four (34) states and the District of Columbia are carrying out plans to implement
     turnaround principles in their priority schools under their Department-approved ESEA
     Flexibility plan.
•    Overall, from 2009–10 to 2010–11, 64 percent of SIG schools increased their student
     proficiency rates in reading, and 65 percent increased their student proficiency rates in
     math. The remaining SIG schools showed similar proficiency rates or decreases in
     proficiency rates over these two years. Because there are so many factors that contribute to
     student proficiency rates, and because these data are only based on one year of SIG
     implementation, it is not certain that it is attributable to the SIG program.
•    Office of School Turnaround has profiled nearly 100 states, districts, and schools
     implementing promising school turnaround practices, and is using National Activities funds
     to profile 100 more to eventually share publicly.




FY 2013 Agency Financial Report—U.S. Department of Education                                      13
MANAGEMENT’S DISCUSSION AND ANALYSIS



                Priority Goal: Prepare all students for college and career

     Goal for FY 2012–2013: By September 30, 2013, all states will adopt internationally-
     benchmarked college- and career-ready standards.

                                   Supports Strategic Goal 2.

Overview: The adoption of internationally-benchmarked college- and career-ready standards is
the foundation to improving educational outcomes for all students and a fundamental step
toward meeting the goal of once again having the highest proportion of college graduates in the
world by 2020. The Department is working to increase the number of states approved for ESEA
Flexibility, those that have adopted college- and career-ready standards, by working with states
that submitted ESEA Flexibility requests to meet the high bar for approval. The Department is
developing and targeting technical assistance activities that will, in part, increase state capacity
to leverage limited resources and continue to identify promising practices across multiple states.

For example, the Department will build a bank of data to assist in full and effective transition to
college- and career-ready standards developed or identified by other Department offices to
leverage resources across the agency. Second, the Department is working internally to
coordinate the provision of technical assistance across RTT, ESEA Flexibility, and other related
programs. And, in the most recent Comprehensive Centers competition, the Department
created a Center on Standards and Assessments Implementation that will help build the
capacity of state educational agencies to implement college- and career-ready standards. The
Department has met with stakeholders to provide information on state plans, as well as to enlist
external support and technical assistance for states and districts as they move forward with
implementing the new standards.

Progress: Forty-six (46) states and the District of Columbia (47 total) have adopted college-
and career-ready standards through adoption of the Common Core State Standards.

Through their ESEA Flexibility requests, 47 states, the District of Columbia, Puerto Rico, and
the Bureau of Indian Education have, as of the 2nd quarter, submitted evidence of formal
adoption of college- and career-ready standards and provided plans to transition to those
standards by 2013–2014. In February 2013, three states (Pennsylvania, Texas, and Wyoming)
submitted requests for flexibility. More states may yet request flexibility in the coming months.
The total number of states that submitted and that have been approved (39 states and the
District of Columbia) to date is significantly more than the Department initially anticipated as
nearly all states have requested flexibility and states have been generally willing to make
changes to their requests needed to meet ESEA Flexibility principles.

Because of the iterative approach to approval, and the high bar set for states, the Department
has not set specific targets for approval but has worked with states individually to meet the high
bar. Some states are unable to meet that bar at this time.




14                                                         FY 2013 Agency Financial Report—U.S. Department of Education
                                                                         MANAGEMENT’S DISCUSSION AND ANALYSIS



        Priority Goal: Improve outcomes for all children from birth through third
                                        grade

     Goal for FY 2012–2013: By September 30, 2013, at least nine states will implement a
     high-quality plan to collect and report disaggregated data on the status of children at
     kindergarten entry.

                                                   Supports Strategic Goal 3.

Overview: To enhance the quality of early learning programs and improve outcomes for
children from birth through third grade, including children with disabilities and those who are
English learners, the Department will promote initiatives that improve the early learning
workforce, build the capacity of states and programs to develop and implement comprehensive
early learning assessment systems, and improve systems for ensuring accountability of
program effectiveness.

The nine Race to the Top - Early Learning Challenge (RTT-ELC) FY 2011 grantees all have
high-quality plans as evidenced by their winning an RTT-ELC grant and addressing these
criteria in their applications and will report disaggregated data on the status of children at
kindergarten entry. With the addition of the RTT-ELC FY 2012, four states were added.
RTT-ELC states are just beginning to develop or enhance these instruments and are limited to
using funds other than those provided under the program. Because of sequestration and a slow
economic recovery, there are few state resources to support development of appropriate
instruments and the implementation of the assessments. Grantees report that they may not
meet their proposed implementation date. In addition, the Department would like to have a
national picture, but there are currently no organizations that collect data on state activities
around Kindergarten Entry Assessment (KEA) implementation.

Progress: The nine FY 2011 grantees’ Annual Performance Reports (APRs), Summaries, and
Response Letters have been posted on the RTT-ELC program page (http://www2.ed.gov/
programs/racetothetop-earlylearningchallenge/performance.html).

The APRs asked states if they made progress in developing a KEA that is 1) aligned with
standards, 2) valid for the target population and purpose, 3) administered by the 2014–15
school year, 4) reported to the Statewide Longitudinal Data System, and 5) significantly funded
outside of the RTT-ELC grant. Six states reported progress in all 5 of the progress areas, while
Massachusetts reported progress in 4 of the 5, noting that they have not been able to find
funding for the project outside of the grant. Three states made it clear that they would not be
able to implement the KEA by the 2014–15 school year.

On April 16, 2013, the Departments of Education and Health and Human Services announced
they will invest the majority of the 2013 Race to the Top funds ($370 million) for both a new
competition and to provide supplemental awards for six state grantees—California, Colorado,
Illinois, New Mexico, Oregon, and Wisconsin—who had only received 50 percent of their initial
request.

Final Scopes of Work and Amendment Letters for the nine FY 2011 grantees have been posted
on the RTT-ELC program page (http://www2.ed.gov/programs/racetothetop-
earlylearningchallenge/awards-phase-1.html).




FY 2013 Agency Financial Report—U.S. Department of Education                                               15
MANAGEMENT’S DISCUSSION AND ANALYSIS


Race to the Top - Early Learning Challenge States on track to reach the goal: California,
Colorado, Delaware, Illinois, Maryland, Massachusetts, Minnesota, New Mexico, North Carolina,
Ohio, Oregon, Rhode Island, and Washington.

Race to the Top - Early Learning Challenge States not on track to reach the goal:
Wisconsin.

     Priority Goal: Make informed decisions and improve instruction through the
                                    use of data

     Goal for FY 2012–2013: By September 30, 2013, all states will implement
     comprehensive statewide longitudinal data systems (SLDS).

                                  Supports Strategic Goal 5.

Overview: The Department will facilitate the development of interoperable state data systems
from early learning through the workforce and will provide support to the education community,
including teachers and administrators, on how to understand and appropriately use data to
inform policies, instructional practices, and leadership decisions.

Key barriers and challenges include districts’ and states’ limited resources; state procurement
practices; lack of engagement with needed district and state stakeholders; difficulties with cross-
agency governance and data sharing; ongoing leadership changes at state educational
agencies (SEAs), partner agencies, and at the state level; misconceptions about data collection
and the Family Educational Rights and Privacy Act (FERPA); state laws, and other regulations
related to privacy and confidentiality; lack of training on how to use data to make policy and
instructional decisions; and concerns from stakeholders about the long-term sustainability of
data systems without long-term federal funding.

Cross-sector linkages between K-12, early childhood, postsecondary, and workforce require a
champion outside the SEA (e.g., a governor’s office) but political support for widespread data
collection and linkage varies. Additionally, state education and labor agencies are relatively new
partners so they are figuring out how to work together. The Department is implementing new,
targeted technical assistance to increase states’ capacity to support statewide longitudinal data
systems after federal funding. Additionally, the Department meets with state leadership to affirm
their support for and commitment to use SLDS data to make educational improvements, but
there is a need for the Department and the Department of Labor (DOL) to provide guidance and
resources to states to encourage secure linking of education and workforce records.

Progress: SLDS grants were awarded to 14 states in November 2005 (FY 2006 grantees),
12 additional states and the District of Columbia in June 2007 (FY 2007 grantees), 27 states—
including 15 new states—in March 2009 (FY 2009 grantees), 20 states in May 2010 (FY 2009
American Recovery and Reinvestment Act grantees), and 24 states and territories—including
6 new states and 2 new territories—in June 2012 (FY 2012 grantees). Based on the five rounds
of funding, 47 states, the District of Columbia, Puerto Rico, and the Virgin Islands have received
at least one SLDS grant. By the end of FY 2013, we expect all states and DC to have a
functioning K-12 SLDS, 12 states to link with early childhood systems, 21 states to link with
postsecondary data from state institutions, and 10 to link with labor. Labor linkages have
presented the largest challenges for states due to the lack of a common ID, multiple privacy
laws, and multi-agency coordination. The Department has increased coordination with DOL and
the Workforce Data Quality Initiative grants program, including joint sessions at an annual



16                                                        FY 2013 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


grantee conference. Additionally, fewer states are ready to link to early childhood data, as
evidenced in the low number of Priority 2 FY 2012 applications. The Department is creating a
series of best practice materials in early childhood and held a privacy workshop for states on
sharing early childhood data.

For more information on the Department’s FY 2012–13 Priority Goals, please go to
http://goals.performance.gov/agency/ed.

Cross-Agency Priority Goals

In addition to the Agency Priority Goals, the Department contributes to several Cross-Agency
Priority (CAP) Goals as required by the GPRA Modernization Act of 2010:

Broadband: As part of expanding all broadband capabilities, ensure 4G wireless broadband
coverage for 98 percent of Americans by 2016.

Veteran Career Readiness: Improve career readiness of veterans. By September 30, 2013,
increase the percent of eligible service members who will be served by career readiness and
preparedness programs from 50 percent to 90 percent in order to improve their competitiveness
in the job market.

Job Training: Ensure our country has one of the most skilled workforces in the world by
preparing 2 million workers with skills training by 2015 and improving the coordination and
delivery of job training services.

Science, Technology, Engineering, and Math (STEM) Education: In support of the
President’s goal that the U.S. have the highest proportion of college graduates in the world by
2020, the federal government will work with education partners to improve the quality of STEM
education at all levels to help increase the number of well-prepared graduates with STEM
degrees by one-third over the next 10 years, resulting in an additional 1 million graduates with
degrees in STEM subjects.

For additional information on the Cross-Agency Priority Goals, please go to
http://goals.performance.gov/goals_2013.

                        Looking Ahead and Addressing Challenges
Education is key to the nation’s long-term economic prosperity and is an investment in its future.
A highly educated workforce is necessary for American competitiveness in the global economy.
The Department continues to maintain strong support for traditional state formula grant
programs while continuing to fund competitive initiatives, including Race to the Top, Promise
Neighborhoods, Investing in Innovation (i3) grants, and a redesigned School Improvement
Grants program. Almost every state is supporting higher standards that ensure students will be
college- and career-ready.

The United States is seeing the highest high school graduation rate in three decades, and over
the past four years, postsecondary financial assistance available to students and families has
increased significantly. Moreover, the Department has seen an increase of more than
50 percent in the number of students accessing higher education on Pell Grants.

Finally, the Department’s efforts to support and strengthen the teaching profession through
improved teacher evaluation and professional development are predicted to pay long-term
dividends.


FY 2013 Agency Financial Report—U.S. Department of Education                                       17
MANAGEMENT’S DISCUSSION AND ANALYSIS


Going forward, the Department will build on what it has already established:

•    state-driven accountability that demands progress for all children;
•    high-quality early education for more low-income children;
•    more flexibility for state decision-making;
•    more support for principals and teachers to apply high standards to practice;
•    reforming career education in high schools and community colleges; and
•    reforming and simplifying the application process for student aid to help drive college
     affordability and completion.

The Department cannot stop here, however. It needs to continue to strengthen the support
systems necessary for all students to reach the middle class and beyond. Pre-school should be
accessible for all students. The Department needs to fund a set of K-12 strategic reforms,
including improving teaching to improve learning and making schools safer. The Department
needs to ensure that college is more affordable. Ultimately, the Department looks to creating
ladders of opportunity to help students living in poverty advance beyond their means.

The Department’s 2014–2018 Strategic Plan stands on a foundation of six strategic goals:

     Goal 1: Postsecondary Education, Career and Technical Education, and Adult Education.
     Increase college access, affordability, quality, and completion by improving postsecondary
     education and lifelong learning opportunities for youths and adults.

     Goal 2: Elementary and Secondary Education.
     Improve the elementary and secondary education system’s ability to consistently deliver
     excellent instruction aligned with rigorous academic standards while providing effective
     support services to close achievement and opportunity gaps, and ensure all students
     graduate high school college- and career-ready.

     Goal 3: Early Learning.
     Improve the health, social-emotional, and cognitive outcomes for all children from birth
     through 3rd grade, so that all children, particularly those with high needs, are on track for
     graduating from high school college- and career-ready.

     Goal 4: Equity.
     Increase educational opportunities for and reduce discrimination against underserved
     students so that all students are well-positioned to succeed.

     Goal 5: Continuous Improvement of the U.S. Education System.
     Enhance the education system’s ability to continuously improve through better and more
     widespread use of data, research and evaluation, evidence, transparency, innovation, and
     technology.

     Goal 6: U.S. Department of Education Capacity.
     Improve the organizational capacities of the Department to implement this strategic plan.

The challenges to achieving these goals lie in the Department’s capacity and funding. The
Department must focus on ways to thrive in a climate that is resource constrained. In
addressing capacity, the Department will invest in the continuous improvement of a skilled,
diverse, and engaged workforce to improve productivity and communication. Competencies will
be modernized and sharpened, processes will be streamlined, and succession planning will be
ongoing so that there is no break in effective leadership or direction.


18                                                          FY 2013 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


The Department will employ comprehensive risk management and grant and contract
monitoring to ensure prudent use of public dollars by mitigating risk through increased oversight
and support of grantees and contractors.

The Department will build systems to support states’ and grantees’ implementation of reforms
that result in improved outcomes. To this end, the Department will keep the public informed of
promising practices and new reform initiatives that result from federal investment and new
relationships that have been enabled by innovations afforded by grant initiatives and through
use of the latest technologies.

Regarding funding, the Department, as others, faces fiscal uncertainty. Over the past few years,
the Department has achieved savings through hiring more slowly and reducing lease costs,
utilities, travel, printing, supplies, and some contract costs. Through careful management of
funds, the Department was able to avert furloughing employees in FY 2013 so that our
customers and stakeholders continued to receive the best possible service. The Department will
continue to meet the financial challenge head-on, always with efficiency and responsibility in
mind as it complies with the Balanced Budget and Emergency Deficit Control Act.

The Department continues to have concerns about interest and default rates on student loans. It
will work toward more collaboration with other federal government agencies around science,
technology, engineering, and mathematics (STEM) initiatives and with the Department of Health
and Human Services on early learning.

The Department sees education as the foundation for a strong national economy. Working with
partners and colleagues in Congress, the states, and across the education community, the
Department’s primary focus will be on the students, who are the reason for its existence.

Enhancing Education Systems and Support: The Department strives to leverage its data,
evaluation, performance, and financial systems to meet four important aspects of its mission:

•    To contribute to the Department’s ability to build customer relations by providing timely
     responses to customer inquiries.
•    To empower employees to make informed decisions by increasing their access to data.
•    To increase accountability through improved financial management.
•    To keep Department employees informed of project status and ensure that all users receive
     proper training on new systems.

Finally, as the Department transitions to its new Strategic Plan for FY 2014–2018 during the
coming year, as an organization it will have charted a roadmap for future success and will
continue to evaluate how best to accomplish its strategic goals and objectives during these
fiscally challenging times. The new plan is intended to help the Department refine its course and
better focus performance within the framework of the GPRA Modernization Act of 2010.

The six Department Strategic Plan goals guide the day-to-day work of the Department’s staff.
This plan will help to align the administration’s yearly budget requests and the Department’s
legislative agenda. Continuous improvement rests on ongoing cycles of assessing performance,
examining data, and improving practices. Creating a culture of continuous improvement is at the
heart of the Department’s efforts to work with and support elementary, secondary, and
postsecondary educators and policy makers at the federal, state, and local levels.

Accomplishing all of this plan’s priorities will require strong coordination and collaboration from
Department staff working with Congress, partners at the state and local levels, and all other


FY 2013 Agency Financial Report—U.S. Department of Education                                          19
MANAGEMENT’S DISCUSSION AND ANALYSIS


stakeholders. This includes meeting numerous legislative challenges. In addition, state and
federal fiscal constraints may impact the Department’s ability to provide the necessary
incentives and resources to increase quality, transparency, and accountability.

Reporting on Progress Made on Strategic Goals and Objectives: The Department will
continue to use tools such as quarterly reviews to ensure progress toward achieving strategic
goals and outcomes. The Department’s strategic goals align with government-wide goals and
priorities and translate to specific organizational goals. The Organizational Performance Review
will continue to be a paramount process for setting goals at the principal office level. These
goals will cascade down to the individual employee level through Senior Executive Service
plans and through the Department’s individual performance plans and metrics.

To support the tracking and reporting of progress against the goals and objectives, the
Department has created and is developing its data profile on http://www.performance.gov for
key policy and programmatic topics. It is also creating a set of information dashboards and data
analysis tools to provide more relevance and context for senior leaders in gauging the impact of
individual and collective performance, and in overall strategic decision making.

The effective implementation of the Department’s priority and strategic goals will depend, in
part, on the effective use of high-quality and timely data, including evaluations and performance
measures, throughout the lifecycle of policies and programs. The Department is committed to
increasing the number of programs and initiatives that are evaluated using methods that include
those consistent with the What Works Clearinghouse Evidence Standards and incorporating
cost-effectiveness measures into evaluations and program improvement systems.

Department of Education’s FY 2014–2015 Priority Goals
Improve students’ ability to complete college
By September 30, 2015, increase degree attainment among 25–34-year-old age cohort to 45.6 percent.
Support implementation of college- and career-ready standards and assessment
By September 30, 2015, at least 50 states will have adopted college and career-ready standards.
By September 30, 2015, at least 50 states will be implementing next-generation assessments, aligned with
college- and career-ready standards.
Improve learning by ensuring that more students have effective teachers and leaders
By September 30, 2015, at least 37 states will have fully implemented teacher and principal evaluation and
support systems that consider multiple measures of effectiveness, with student growth as a significant
factor.
Turn around and close achievement gaps in low-performing schools
By September 30, 2015, decrease the number of high schools with low graduation rates to 1,285.
Support comprehensive early learning assessment systems
By September 30, 2015, at least nine states will be collecting and reporting disaggregated data on the
status of children at kindergarten entry using a common measure.
Ensure equitable educational opportunities
By September 30, 2015, increase the national high school graduation rate to 83 percent, as measured by
the Adjusted Cohort Graduation Rate; decrease disparities in the national high school graduation rate
among minority students, students with disabilities, English learners, and students in poverty.
Enable evidence-based decision making.
                                                           1
By September 30, 2015, at least 11 percent of select new (non-continuation) discretionary grant dollars will
reward evidence.


1
  A list of reform-directed grant programs will be provided. New grant dollars that “reward evidence” include all dollars
awarded as a result of addressing tiered-evidence as either eligibility threshold (e.g., i3 competition), absolute priority,
competitive priority (earning at least one point for it), or selection criteria (earning at least one point for it).



20                                                                       FY 2013 Agency Financial Report—U.S. Department of Education
                                                                   MANAGEMENT’S DISCUSSION AND ANALYSIS


                                                  Financial Highlights

Introduction

This section provides summarized information and analyses of the Department’s assets,
liabilities, net position, sources and uses of funds, program costs, and related trend data. It is
intended to help increase the AFR users’ understanding of the Department’s business
processes and provide a high-level perspective of the detailed information contained in the
financial statements and related notes.

The Department consistently produces accurate and timely financial information. Our financial
statements and notes are prepared in accordance with accounting principles generally accepted
in the United States for federal agencies issued by the Federal Accounting Standards Advisory
Board (FASAB) and the Office of Management and Budget (OMB), specifically in Circular
No. A-136, Financial Reporting Requirements. The financial statements, notes, and underlying
business processes, systems, and controls are audited by an independent accounting firm with
audit oversight provided by the Office of Inspector General (OIG). For twelve consecutive years,
the Department has earned an unqualified (or “clean”) audit opinion. The financial statements
and notes for FY 2013 are on pages 45–89 and the Independent Auditors’ Report begins on
page 94.

Management’s assessment of internal controls in accordance with OMB Circular A-123,
Management's Responsibility for Internal Control, provides the Department with credibility to
external stakeholders and confidence that financial data produced from its underlying financial
systems and business processes are complete, correct, and reliable. This ensures the financial
statements conform with applicable federal reporting requirements, the Department has
trustworthy financial information for good decision-making, and various reports can be produced
for both internal and external stakeholders.

Trend Analysis

The tables below summarize trend information about components of the Department’s financial
condition. The Table of Key Measures below summarizes trend information about components
of the Department’s financial condition and offers a snapshot of the Department’s financial
condition as of September 30, 2013, compared with the end of fiscal years 2012–2009,
displaying net cost, assets, liabilities, and net position. The Summarized Financial Data graphic
is a presentation of the table data, rounded to the billions, for an alternate display over the same
five consecutive years.




FY 2013 Agency Financial Report—U.S. Department of Education                                         21
MANAGEMENT’S DISCUSSION AND ANALYSIS



                                                                      Table of Key Measures
                                                                As of September 2013, 2012, 2011, 2010, 2009
                                                                                 (Dollars in Millions)

                                                                             % Change
                                                                                                  FY 2013            FY 2012            FY 2011            FY 2010             FY 2009
                                                                            FY 13/FY 12

                                                                                          Costs


  Gross Cost                                                                     -31%         $        61,353 $            89,263 $           89,910 $         116,953 $            55,412
  Earned Revenue                                                                 +5%                  (26,881)            (25,490)           (20,397)          (17,279)            (11,251)
 Total Net Cost of Operations                                                    -46%         $        34,472 $            63,773 $           69,513 $          99,674 $            44,161

                                                                                      Net Position

  Fund Balance with Treasury                                                    -11%          $       108,732 $          121,993 $          114,085 $          132,259 $           168,032
  Credit Program Receivables, Net                                               +23%                  826,684            673,488            530,491            367,904             234,254
  Other                                                                         +14%                    1,642              1,446              1,966              3,501               3,659
 Total Assets                                                                   +18%                  937,058            796,927            646,542            503,664             405,945
  Debt                                                                          +19%                  852,432            715,303            547,108            374,335             235,385
  Liabilities for Loan Guarantees*                                              -100%                     -                1,037             10,025             14,479              20,543
  Other                                                                          +9%                   16,783             15,432             20,824             27,248              22,957
 Total Liabilities                                                              +19%                  869,215            731,772            577,957            416,062             278,885
  Unexpended Appropriations                                                      -2%                   71,371             72,686             71,729              94,371            127,269
  Cumulative Results of Operations                                              +53%                   (3,528)            (7,531)            (3,144)             (6,769)              (209)
 Total Net Position (Assets minus Liabilities)                                  +4%           $        67,843 $           65,155 $           68,585 $            87,602 $          127,060

         * The presentations of the FY 2012 and earlier Liability for Loan Guarantees is in the Liability section of the Department’s Balance Sheet; however, the presentation of the same
         F Y 2013 liability is in the Credit Program Receivables, Net Balance Sheet line item, due to its negative value.




                                                             Summarized Financial Data
                                                                                (Dollars in Billions)

                                                                       2013       2012       2011      2010       2009

                                                                                                                                                               $937
                                                                                                                                              $797
                       Total Assets                                                                                        $647
                                                                                                          $504
                                                                                              $406

                                                                                                                                                 $827
                                                                                                                               $673
     Credit Program Receivables                                                                              $530
                                                                                         $368
                                                                         $234

                                                                                                                                                       $869
                                                                                                                                      $732
                    Total Liabilities                                                                              $578
                                                                                               $416
                                                                              $279

                                                                                                                                                      $852
                                                                                                                                     $715
                                 Debt                                                                           $547
                                                                                           $374
                                                                          $235

                                                    $68
                                                    $65
                Total Net Position                  $69
                                                      $88
                                                         $127

                                                $34
                                                  $64
                     Total Net Cost                $70
                                                     $100
                                                 $44




22                                                                                                             FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                           MANAGEMENT’S DISCUSSION AND ANALYSIS


Balance Sheet

The Consolidated Balance Sheet is “as of a particular date” in time (the end of the fiscal year)
and provides descriptions of Department “assets,” “liabilities,” and the difference, which is
known as “net position.”

                              Comparison
                              Comparison of
                                         of Department's
                                            Department’s Assets
                                                          Assets,, Liabilities
                                                                   Liabilities &
                                                                               & Net
                                                                                 Net Position
                                                                                     Position
                                              for Fiscal Years 2009–2013
                                                               (Dollars in
                                                               (Dollars in Billions)
                                                                           Billions)

                    $1,000

                      $900

                      $800

                      $700

                      $600

                      $500

                      $400

                      $300

                      $200

                      $100

                         $-
                                     FY 2009            FY 2010                 FY 2011             FY 2012        FY 2013
          Total Assets               $405,945           $503,664                $646,542           $796,927       $937,058
          Total Liabilities          $278,885           $416,062                $577,957           $731,772       $869,215
          Total Net Position         $127,060            $87,602                $68,585             $65,155        $67,843

    Table amounts are presented in millions.



Analysis of Assets

Assets of the Department totaled $937.1 billion as of September 30, 2013, an increase of about
18 percent over the FY 2012 balance. The vast majority of the increase in assets relates to the
Credit Program Receivables, which increased by $153.2 billion, a 23 percent increase over
FY 2012. This Credit Program Receivables increase is largely the result of Direct Loan
disbursements for new loan originations and Federal Family Education Loan (FFEL)
consolidations, net of borrower principal and interest collections, which increased the net
portfolio for Direct Loans by $129.5 billion ($27.4 billion was disbursed for consolidated loans).
Total Assets are primarily comprised of Credit Program Receivables.

The presentation of the FY 2012 Liability for Loan Guarantees is in the liability section of the
Department’s Balance Sheet, while the presentation of the FY 2013 liability is in the Credit
Program Receivables, Net line item which is presented in the assets section of the Balance
Sheet.




FY 2013 Agency Financial Report—U.S. Department of Education                                                                 23
MANAGEMENT’S DISCUSSION AND ANALYSIS



                                              Composition of Assets
                                                As of September 30, 2013
                                                     ($937.1 Billion)




                                                                                             Property and Equipment &
                                                                                                   Other Assets
                                                                                                       0.0%



                                                                                                           Fund Balance with Treasury
                                                                                                                    11.6%




                                                                                                           Cash and Other Monetary
                                                                                                                   Assets
                                                                                                                    0.2%




     Credit Program Receivables
                88.2%




Assets as of September 30, 2013 and 2012
                                                                                            2013                               2012
(Dollars in Millions)


Fund Balance with Treasury                                            $                 108,732        $                   121,993

Cash and Other Monetary Assets                                                              1,482                             1,307

Credit Program Receivables                                                              826,684                            673,488

Other Assets*                                                                                 160                                139


Total Assets                                                          $                 937,058        $                   796,927

* The Other Assets amount includes Accounts Receivable, Property and Equipment, and Other.




24                                                                        FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                   MANAGEMENT’S DISCUSSION AND ANALYSIS


The chart below depicts the Department’s shift in the composition of its student loan portfolio
from guaranteed to direct loans. While there has been a pronounced increase in the Direct Loan
Program, FFEL Guaranteed Loans have been shrinking because no new FFEL Loans were
made after June 30, 2010. This shift is in accordance with the provisions of the SAFRA Act,
which has required the transition for new loans to full direct lending instead of guaranteeing the
loans provided by the private sector.


                                          Comparison of the Department’s
                                  Comparison of Department's Assets & Liabilities
                                        Credit Program Receivables, Net and
                                            for FiscalLoans
                                    FFEL Guaranteed    YearsPrincipal
                                                             2009-2013Outstanding
                                                                  (Dollars
                                                           for Fiscal Yearsin Billions)
                                                                                 2009–2013
                                                                     (Dollars in Billions)

                                  $900


                                  $800


                                  $700


                                  $600


                                  $500


                                  $400


                                  $300


                                  $200


                                  $100


                                    $-
                                                 FY 2009                 FY 2010                 FY 2011                 FY 2012                 FY 2013
         Credit Program Receivables, Net*          $234                    $368                    $530                   $673                    $827
         FFEL Guaranteed Loans Principal
                                                   $457                    $390                    $328                   $291                    $264
                  Outstanding

   * Credit Program Receivables, Net are presented using net present value methodology as required by OMB A-129, Credit Reform Program Guidance, whereas
   FFEL Guaranteed Loans Principal Outstanding does not use present value methodology.




Analysis of Liabilities

Liabilities of the Department totaled $869.2 billion as of September 30, 2013, an increase of
about 19 percent over the FY 2012 balance. The increase is the result of current year borrowing
from Treasury (Debt) for the Direct Loan and FFEL Programs that provided funding for Direct
Loan disbursements and FFEL Program downward re-estimates. This current year borrowing,
net of repayments, resulted in a $137.1 billion increase in Debt. Total Liabilities are primarily
made up of Debt resulting from Credit Program Receivable activity.

The presentation of the FY 2012 Liability for Loan Guarantees is in the liability section of the
Department’s Balance Sheet, while the presentation of the FY 2013 negative liability is in the
Credit Program Receivables Balance Sheet line item. As mentioned above, with the SAFRA Act
legislation, the Department ceased to guarantee loans after June 30, 2010.




FY 2013 Agency Financial Report—U.S. Department of Education                                                                                               25
MANAGEMENT’S DISCUSSION AND ANALYSIS



                                   Composition of Liabilities
                                       As of September 30, 2013
                                            ($869.2 Billion)


                                                                                  Guaranty Agency Federal
                                                                                   Funds Due to Treasury
                                                                                           0.2%

                                                                                               Accrued Grant Liability
                                                                                                       0.2%


                                                                                                Other Liabilities
                                                                                                    1.0%

                                                                                              Accounts Payable
                                                                                                   0.5%




          Debt
         98.1%




Liabilities as of September 30, 2013 and 2012
                                                                                     2013                       2012
(Dollars in Millions)


Accounts Payable                                                    $                4,129      $               4,129

Debt                                                                             852,432                    715,303

Guaranty Agency Federal Funds Due to Treasury                                        1,482                      1,307

Accrued Grant Liability                                                              2,170                      2,901

Liabilities for Loan Guarantees                                                         -                       1,037

Other Liabilities                                                                    9,002                      7,095


Total Liabilities                                                   $            869,215        $           731,772



Statement of Net Cost

The Consolidated Statement of Net Cost reports the components of the net costs of the
Department’s operations for a “particular period” of time. The net cost of operations consists of
the gross cost incurred by the Department less any exchange (i.e., earned) revenue from
activities.


26                                                          FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                     MANAGEMENT’S DISCUSSION AND ANALYSIS


Net Costs of the Department totaled $34.5 billion for the year ended September 30, 2013, a
46 percent decrease compared to total program net costs for the prior year. The Department’s
negative net cost for Program A, as shown below, is derived using economic models that
project, on a net present value basis, which results in a higher estimate of future cash inflows
(net of outflows) related to the loan programs. Current year models predict the net present value
of future cash flows will exceed program costs by $27 billion and $12.6 billion for Direct Loans
issued in the current year and prior year, respectively, and are $8.8 billion higher for prior year
FFEL. These estimated cash flows are amortized, or spread out, over 30 years and are
re-valued each year based on current economic conditions.

                                             Net Cost By Program FY 2013 & FY 2012
                                                                      (Dollars in Millions)



                                                                      2,623
   Program E
                                                                                         7,660



                                                                  1,795
   Program D
                                                                 1,591



                                                                                                                             16,830
   Program C
                                                                                                                             17,103



                                                                                                                                               22,380
   Program B
                                                                                                                                              22,349

                       (9,156)
   Program A
                                                                                                                    15,070


           $(10,000)             $(5,000)             $-                 $5,000           $10,000            $15,000            $20,000         $25,000
                                                     Program B:
                                               Improve Preparation for                                          Program D:                  Program E:
                       Program A:                                                 Program C:
                                            College and Career from Birth                                  Enhance the Education      American Recovery and
                Increase College Access,                                  Ensure Effective Educational
                                                Through 12th Grade,                                          System’s Ability to       Reinvestment Act and
                 Quality, and Completion                                  Opportunities for All Students
                                             Especially for Children with                                  Continuously Improve        Education Jobs Fund
                                                     High Needs
         2013             (9,156)                      22,380                        16,830                       1,795                       2,623
         2012             15,070                       22,349                         17,103                      1,591                       7,660



As required by the GPRA Modernization Act of 2010, each of the Department’s reporting groups
and major program offices have been aligned with the goals presented in the Department’s
FY 2011–2014 Strategic Plan.

The Department has more than 100 grant and loan programs (http://www2.ed.gov/programs/
gtep/gtep.pdf). In the Statement of Net Cost, they have been mapped to the Strategic Goals.
The three largest grant programs are Title I, Pell, and the Individuals with Disabilities Education
Act (IDEA) grants. Each of these programs’ FY 2013 appropriations exceeded $10 billion. In
addition to student loans and grants, the Department offers other discretionary grants under a
variety of authorizing legislation, awarded using a competitive process, and formula grants,
using formulas determined by Congress with no application process. Among the largest K-12
discretionary grants are: TRIO, RTT, and the Teacher Incentive Fund. Among the largest
formula grants are: Title I Grants to LEAs (Title I, Elementary and Secondary Education Act of
1965, as amended) and IDEA grants.


FY 2013 Agency Financial Report—U.S. Department of Education                                                                                                  27
MANAGEMENT’S DISCUSSION AND ANALYSIS



                                              Reporting Group/
       Net Cost Program                                                                           Strategic Goal
                                               Program Office
Program A:                                     Federal Student Aid                       Goal 1: Postsecondary
Increase College Access, Quality,                                                        Education, Career and
and Completion                         Office of Postsecondary Education                 Technical Education, and
                                                                                         Adult Education.
                                          Office of Vocational and Adult                 Increase college access, quality,
                                                     Education                           and completion by improving
                                                                                         higher education and lifelong
                                                                                         learning opportunities for youth
                                                                                         and adults.
Program B:                             Office of Elementary and Secondary                Goal 2: Elementary and
Improve Preparation for College                     Education                            Secondary Education.
and Career from Birth Through 12th                                                       Prepare all elementary and
Grade, Especially for Children with      Hurricane Education Recovery                    secondary students for college
High Needs                                                                               and career by improving the
                                                                                         education system’s ability to
                                                                                         consistently deliver excellent
                                                                                         classroom instruction with
                                                                                         rigorous academic standards
                                                                                         while providing effective support
                                                                                         services.
                                                                                         Goal 3: Early Learning.
                                                                                         Improve the health, social-
                                                                                         emotional, and cognitive
                                                                                         outcomes for all children from
                                                                                         birth through 3rd grade, so that
                                                                                         all children, particularly those
                                                                                         with high needs, are on track for
                                                                                         graduating from high school
                                                                                         college- and career-ready.
Program C:                            Office of English Language Acquisition             Goal 4: Equity.
Ensure Effective Educational                                                             Ensure and promote effective
Opportunities for All Students                Office for Civil Rights                    educational opportunities and
                                                                                         safe and healthy learning
                                         Office of Special Education and                 environments for all students
                                              Rehabilitative Services                    regardless of race, ethnicity,
                                                                                         national origin, age, sex, sexual
                                                                                         orientation, gender identity,
                                                                                         disability, language, and
                                                                                         socioeconomic status.
Program D:                               Institute of Education Sciences                 Goal 5: Continuous
Enhance the Education System’s                                                           Improvement of the U.S.
Ability to Continuously Improve       Office of Innovation and Improvement               Education System.
                                                                                         Enhance the education system’s
                                                                                         ability to continuously improve
                                                                                         through better and more
                                                                                         widespread use of data, research
                                                                                         and evaluation, transparency,
                                                                                         innovation, and technology.
Program E:                            American Recovery and Reinvestment
American Recovery and                                Act
Reinvestment Act and Education                                                           Cuts across Strategic Goals 1–5
Jobs Fund                                     Education Jobs Fund



Strategic Plan Goals 1–5 are sharply defined directives that guide the Department’s program
offices to carry out the vision and programmatic mission; the net cost programs can be
specifically associated with these five Strategic Goals. The Department also has a cross-cutting
Strategic Plan Goal 6, U.S. Department of Education Capacity, which focuses on improving the


28                                                                      FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                 MANAGEMENT’S DISCUSSION AND ANALYSIS


organizational capacities of the Department to implement the Strategic Plan. As a result, the
Department does not assign specific programs to Strategic Plan Goal 6 for presentation in the
Statement of Net Cost.

                                           Composition of Net Cost by Program
                                                For the Year Ended September 30, 2013
                                                             ($34.5 Billion)




                                                                                                $16.8
                                                                                               48.8%




                       $22.4
                      64.9%




                                                                                                   $1.8
                                                                                                  5.2%


                                                                                                       $2.6
                                                                                                      7.6%




                                                                                                           $(9.1)
                                                                                                          (26.5)%




                                       Program A      Program B   Program C   Program D   Program E




Statement of Changes in Net Position

The Consolidated Statement of Changes in Net Position reports the beginning net position, the
transactions that affect net position presented for a “particular period” of time, and the ending
net position. Net position consists of unexpended appropriations and cumulative results of
operations. Unexpended appropriations include undelivered orders and unobligated balances,
except for federal credit financing and liquidating funds, and trust funds. Cumulative results of
operations represent the net difference since inception between (1) expenses and (2) revenues
and financing sources. Net Position of the Department totaled $67.8 billion for the period ended
September 30, 2013. This reflects a 4 percent increase over the prior fiscal year.




FY 2013 Agency Financial Report—U.S. Department of Education                                                        29
MANAGEMENT’S DISCUSSION AND ANALYSIS


                               Changes
                        Net Change       in NetResults
                                   in Cumulative Position       for FY 2009–2013
                                                          of Operations  for FY 2009 - 2013
                                               (Dollars in Billions)
                                                (Dollars in Billions)
 $ 100.0


                 2009
     $ 80.0



     $ 60.0



     $ 40.0



     $ 20.0


                                      2010                 2011                                              2013
                                                                                    2012
      $ 0.0
                $83.7                                                                                        $2.7
                                                                                   ($3.4)


 -$ 20.0                                                   ($19.0)



 -$ 40.0
                                      ($39.5)


 -$ 60.0


Statement of Budgetary Resources

The Combined Statement of Budgetary Resources presents information on how budgetary
resources were made available and their status at the end of the fiscal year. Information in this
statement is reported on the budgetary basis of accounting.

Budgetary resources of the Department totaled $359.9 billion for the period ended September
30, 2013, decreasing 4 percent from the prior year. Budgetary resources are comprised of
appropriated budgetary resources of $102.5 billion and non-budgetary credit reform resources
of $257.4 billion. The non-budgetary credit reform resources are predominantly borrowing
authority for the loan programs.

Gross outlays of the Department totaled $311.7 billion for the period ended September 30, 2013
and consisted of appropriated budgetary resources of $90.6 billion and non-budgetary credit
reform funding of $221.1 billion.




30                                                                      FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                   MANAGEMENT’S DISCUSSION AND ANALYSIS


                                                           Sources of Funds
                                                For the Year Ended September 30, 2013
                                                            ($359.9 Billion)


                                     $28.6
                                     7.9%

                                                                                                     $195.2
                                                                                                     54.2%




                          $47.7
                         13.3%




                                   $88.4
                                  24.6%




              Borrowing                                                     Appropriations

              Spending Authority from Offsetting Collections                Unobligated Balance Brought Forward
                                                                            from Prior Years


                                                               Gross Outlays
                                                For the Year Ended September 30, 2013
                                                            ($311.7 Billion)


                   $227.9
                   73.1%




                                                                                                                   $81.9
                                                                                                                  26.3%




                                                                                              $1.9
                                                                                             0.6%




                                                      Loans      Grants   Administrative




FY 2013 Agency Financial Report—U.S. Department of Education                                                               31
MANAGEMENT’S DISCUSSION AND ANALYSIS


Additional information on the Department’s sources of funds and spending is shown in the
Schedule of Spending on pages 134–135. This schedule includes sections titled, “What Money
Is Available to Spend” and “How Was the Money Spent.”

                   Limitations of the Financial Statements
Management has prepared the accompanying financial statements to report the financial
position and operational results for the U.S. Department of Education for FY 2013 and FY 2012,
pursuant to the requirements of Title 31 of the United States Code, section 3515(b).

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

The statements should be read with the realization that they are a component of the U.S.
Government, a sovereign entity. The implications of this are that the liabilities presented herein
cannot be liquidated without the enactment of appropriations, and that ongoing operations are
subject to the enactment of future appropriations.




32                                                        FY 2013 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


             Analysis of Controls, Systems, and Legal Compliance
This section provides management assurances regarding compliance with the Federal
Managers’ Financial Integrity Act of 1982 (P.L. 97-255) (FMFIA) and Office of Management and
Budget (OMB) Circular A-123, Management’s Responsibility for Internal Control. It also provides
an analysis of the Department’s controls, systems, and legal compliance.

The Department is the smallest of the 15 cabinet level agencies in terms of government staff,
yet it has the third largest grant portfolio among the 26 federal grant-making organizations. The
Department manages the second largest loan portfolio in the federal government. As such, the
Department relies heavily on its internal controls and system frameworks to ensure that the
Department maintains appropriate stewardship over funds entrusted to it by the American
people.

Controls Framework and Analysis

The FMFIA requires agencies to establish internal controls that provide reasonable assurance
that the following objectives are achieved:

•    effectiveness and efficiency of operations,
•    compliance with applicable laws and regulations, and
•    reliability of financial reporting.

OMB Circular A-123 implements the FMFIA and defines management’s responsibility for
internal control in federal agencies.

The Department’s internal control framework is robust. Consistent with Circular A-123, the
Department established a Senior Management Council (SMC) comprised of senior leaders from
across the Department to provide oversight over the internal control framework. This oversight
role includes identifying focus areas, determining when internal control deficiencies are
significant, setting expectations for their correction, and monitoring the implementation of
corrective actions. The Department also established a Senior Assessment Team (SAT) and
Core Assessment Team (CAT) to help guide the internal control process.

Each principal office within the Department implements internal controls to achieve operational
goals, which include internal controls over: operations, financial reporting, and information
technology systems. The process begins with risk assessments of the Department’s business
processes and information technology systems. The SAT considers the potential impact of risks
using a multi-dimensional framework comprised of numerous risk factors. The SAT
recommends higher risk processes and systems for more frequent and rigorous internal control
evaluations. Through the evaluations, Department offices document key controls, evaluate and
test the design and effectiveness of those controls, and communicate results to the SAT. Each
office must develop and implement corrective action plans for all reported deficiencies.
Throughout this process, the CAT provides technical support.

The office of Federal Student Aid (FSA) maintains a parallel governance structure that is
integrated with the Department’s. FSA’s Chief Operating Officer both chairs the FSA SMC and
participates as a member of the Department’s SMC, FSA’s Chief Financial Officer both chairs
the FSA SAT and participates as a member of the Department’s SAT, and the chair of the
Federal Student Aid CAT participates as a member of the Department’s CAT. Additional
information on Federal Student Aid’s internal control framework, assessment of controls, and



FY 2013 Agency Financial Report—U.S. Department of Education                                     33
MANAGEMENT’S DISCUSSION AND ANALYSIS


related assurances can be found in the Analysis of Systems, Controls, and Legal Compliance
section of the FY2013 Federal Student Aid Annual Report.




Controls over Operations

The Department’s two primary areas of operation are administering grants and loans. Other
significant business activities include the management of contracts and interagency
agreements, human capital, facilities, and legal enforcement activities. To ensure the efficient
and effective implementation of these and other operations, including compliance with
applicable laws and regulations, the Department issued a Directive, establishing in policy that all
managers are responsible for ensuring the development, maintenance, documentation,
evaluation, and improvement of internal control for the programs and administrative functions for
which they are responsible. The Directive also designates the Chief Financial Officer (CFO) as
the Senior Internal Control Official for the Department. In this role, the Office of the CFO
develops and issues policies, procedures, and reporting requirements; develops and provides
training and technical assistance; coordinates with the SMC, SAT, and CAT; conducts selected
internal control reviews; and develops and maintains internal control and audit follow-up
systems.

Each principal office assesses the design and operation of applicable key controls in their
respective areas of responsibility and prepares an annual FMFIA assurance which highlights
internal control processes and reports material weaknesses and significant deficiencies
identified. These management assurances, along with the results of internal control reviews and
external audits serve as the basis for the Secretary’s assurance statement provided later in this
section of the report.




34                                                        FY 2013 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


In FY 2013, the Department identified no material weaknesses in internal controls over the
effectiveness and efficiency of operations. The Department, however, continues to identify
challenges in the administration of grants, loans, and other program operations. Additionally, the
OIG has identified five FY 2014 management challenges: improper payments, information
technology security, oversight and monitoring, data quality and reporting, and information
technology system development and implementation. A summary of the OIG report with links to
the full report are provided in the Other Information section.

Controls over Financial Reporting

Internal Control over Financial Reporting (ICOFR) is a subset of FMFIA, Section 2. For the
Department to comply with ICOFR, each principal office must annually assess and report on the
adequacy and effectiveness of the applicable internal controls they have in place to protect the
reliability and integrity of the Department’s financial reporting. The Office of Management and
Budget (OMB) implementation guidance describes a process for accessing internal control over
financial reporting. The Department’s assessment of the effectiveness of control over financial
reporting is performed in accordance with OMB Circular A-123, Appendix A (A-123A) and
leverages the implementation guidance. A-123A requires each agency to provide an annual
statement of assurance on the effectiveness of internal control over financial reporting as part of
the overall FMFIA assurance statement.

Planning is a critical step in the A-123A compliance process. Key decisions that drive the
assessment are made during the planning phase. Management must decide the materiality
threshold, the scope of the assessments (e.g., which financial processes to review), and the test
approach/methodology as well as other key decisions. Materiality levels were established for
each of the four principal financial statements based on the Government Accountability Office
(GAO) Financial Audit Manual (FAM) guidance and taking into consideration the Department’s
established materiality threshold.

Each year, as a function of the risk assessment and analysis process, management identifies
areas to test. For any deficiency identified during testing, the CFO staff works with control
owners to facilitate Corrective Action Plan development, approval, and implementation. The
Department also considers the status of ongoing corrective actions and results of the financial
statement audit.

In FY 2013, the Department focused on 10 business processes and assessed 60 key controls.
The testing process was primarily focused on assessing whether key controls were operating
effectively as of June 30, 2013. Additionally, follow-up testing and the results of the financial
statement audit were considered to determine the effectiveness of controls as of September 30,
2013. The Department concluded that internal controls over financial reporting were in place
and working.

FSA conducted its assessment of effectiveness of internal control over financial reporting and
provided its assurances to the Department. Overall, the results of the FSA self-assessments
revealed no material weaknesses.

In FY 2012, FSA identified and disclosed two material weaknesses related to the issues with the
large-scale system conversions for the Debt Management Collection System/2 (DMCS2) and
Affiliated Computer Services (ACS), Inc. Education Servicing (ACES) that occurred during that
review period. Nine Corrective Action Plans (CAPs), with underlying action items, were
developed to address those issues, and another CAP was added in FY 2013. At the end of
FY 2013, nine of the ten CAPs have been closed and the issues remediated. The remaining


FY 2013 Agency Financial Report—U.S. Department of Education                                      35
MANAGEMENT’S DISCUSSION AND ANALYSIS


CAP continues to be worked and will be tracked and monitored through to resolution, or will be
resolved through new contract actions.

In addition, throughout FY 2013, FSA has been committed to responding to external audit
recommendations in its Report on Internal Controls over Financial Reporting. At the end of
FY 2013, 22 CAPs have been developed to address the recommendations. Corrective actions
taken in 2013 sufficiently remediated the underlying conditions such that, for the year ended
September 30, 2013, these deficiencies no longer aggregate to a material weakness.

Additional information on FSA’s assessment of controls and related assurances can be found in
the Analysis of Systems, Controls, and Legal Compliance section of the FY2013 Federal
Student Aid Annual Report.

Controls over Systems

Among the guidance applied by the Department in assessing controls over systems during
FY 2013 were FMFIA (section 4) and OMB Circular A-127, Financial Management Systems, or
Appendix D of OMB A-123, Compliance with the Federal Financial Management lmprovement
Act of 1996.

The Department’s core financial applications have been brought together under the umbrella of
the Education Central Automated Processing System (EDCAPS). EDCAPS is a suite of
financial applications, including commercial off-the-shelf and custom code and interfaces that
encompass the Department’s core financial management processes.

The Department’s financial management systems are designed to support effective internal
controls and to produce accurate, reliable, and timely financial information. Our current financial
systems (EDCAPS) portfolio is depicted in the image below:




36                                                        FY 2013 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


The components of EDCAPS are linked through custom interfaces to provide the Department
with real-time financial management capabilities. EDCAPS serves approximately
4,200 departmental users in Washington, DC, as well as 10 regional offices throughout the
United States. EDCAPS also serves approximately 100,000 external users.

Components of EDCAPS

Financial Management System Software (FMSS)—The FMSS is the Department’s core
financial system. It provides financial management functions for the Department, including
general ledger, financial statement production, funds control and budget reporting, cost
accounting, and accounts receivable/administrative accounts payable functions.

Contracts and Purchasing Support System (CPSS)—The CPSS provides users with a
central repository to enter, retrieve, manage, and view acquisition/contract-related data. The
centralized data provides enhanced information dissemination with the ability to respond to
internal and external information requests. Various other systems and processes are used to
augment and supplement the business process management gaps in the current environment.

Federal Student Aid’s Financial Management System (FSA’s FMS)—FSA’s FMS is an
integrated financial management system, utilizing Oracle Federal Financials, which incorporates
full financial business functionality, including general ledger, accounts payable, and accounts
receivable across multiple FSA program areas. FMS supports FSA service areas, enterprise
areas, and partners and provides timely and consistent financial data for strategic decision
making. The core of FMS encompasses interfaces (file transfers of data) from program
applications to the Oracle Financials application and the consolidation and centralization of all
accounting and financial data into one system for FSA programs. There are also customized
modules or extensions that provide additional functionality to FMS allowing for the collection of
data from financial partners in various FSA programs. FMS, in turn, interfaces with the
Department’s general ledger and with other systems to provide accounting and payment
transactions. In addition, FMS provides FSA with a fully auditable accounting system
incorporating appropriate security, controls, and audit trails.

Grants Management System (G5)—G5 manages all grant activities from initial recipient
contact, through grant processing, to payments and grant closeout. This single system
approach provides improved grant information management, recipient response time, and
accuracy of financial management information.

Travel Management System (TMS)—The Department participates in e-Travel. Under e-Travel,
travel system functionality is provided under contract by E2 solutions. EDCAPS interfaces with
E2 in accordance with an established memorandum of understanding.

Hyperion Budget Planning—Hyperion Budget Planning is used by the Department for
preparing annual spending plans. The Plan versus Actuals Report is generated from this
system.

EDCAPS also has interfaces with the Department of Interior for payroll data, the Department of
Treasury for payment data, and the Nortridge Loan System (NLS) for promissory note data.

Self-Assessments

The Department is keenly aware of the importance of strong internal controls and adequate
security controls over system access and data and continually looks for ways to strengthen



FY 2013 Agency Financial Report—U.S. Department of Education                                     37
MANAGEMENT’S DISCUSSION AND ANALYSIS


these controls. The Department’s System Security Plan (SSP) identifies management,
operational, and technical security controls for EDCAPS. The SSP is based upon a review of
the environment, documentation, and interviews with information system personnel. While the
Department has not eliminated all risks, management reviews confirm that all favorable actions
are taken to diminish deficiencies and strengthen internal control overall. Risks are routinely
monitored and contingency and mitigation plans are maintained.

Because EDCAPS is a moderate-impact application per Federal Information Processing
Standards (FIPS) 199, this system is subject to the moderate-impact baseline required by
National Institute of Standards and Technology (NIST) Special Publication (SP) 800 53 Rev 3.
Therefore, EDCAPS uses the NIST SP 800 53 Rev 3 moderate-impact baseline as its minimum
security control requirements.

All internal EDCAPS user accounts are established using an EDCAPS Access Request Form.
This form is used to grant initial access to EDCAPS subsystems and must be validated by the
user’s supervisor and the appropriate Information System Security Officer. Access is based on
the user’s role or job title. Principles of least privilege and segregation of incompatible duties are
applied at all times. Access to all EDCAPS applications is protected by a user ID and password.
Each application has a security administrator who is responsible for vetting individual EDCAPS
access forms and for establishing their accounts. Access is granted based on the “need to
know” and the least privilege the user requires performing his or her duties.

The Federal Financial Management Improvement Act (FFMIA) requires federal agencies to
implement and maintain financial management systems that comply substantially with federal
financial management systems requirements, applicable federal accounting standards, and the
United States Standard General Ledger at the transaction level. Agencies are required to
assess and report on whether these systems comply with FFMIA on an annual basis.

EDCAPS has been designed to deliver efficient and effective operations, while complying with
FFMIA. In determining whether the Department’s financial systems comply with system controls,
management considered available information from annual audit reports and other relevant and
appropriate information. The Department’s determination leverages the results of related annual
reviews. The Department is committed to continually improving all controls and acknowledges
the ongoing efforts of security management to strengthen financial management systems.

Based on self-assessments and results of external audits, the Department has concluded that
there are no material weaknesses in control over systems. However, self-assessments and
external audits continue to identify significant challenges associated with maintaining highly
effective controls over the multiple areas of system controls.

FSA conducted its assessment of effectiveness of internal control over financial reporting and
has provided its assurances to the Department. A significant component of FSA’s assessment
includes Statements on Standards for Attestation Engagements (SSAE) 16 audits over its loan
servicers’ controls, including system controls. No material weaknesses were identified. Of the
more than 3,200 controls tested, about 6 percent of them had control weaknesses. Overall, the
impact of those weaknesses was immaterial to the FSA financial statements. Accordingly, FSA
concluded that its systems substantially complied with the requirements of the Federal Financial
Management Improvement Act (FFMIA). However, FSA considers the deficiencies to be
significant and continues to act on them. Additional information on FSA’s internal control
framework, assessment of controls, and related assurances can be found in the Analysis of
Systems, Controls, and Legal Compliance section of the FY 2013 Federal Student Aid Annual
Report.


38                                                          FY 2013 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


Management Assurances

Based on the assurances of the Department’s management, which is responsible for internal
controls, and assessment of the results of external audits, the Department is able to provide
reasonable assurance that the internal controls and financial management systems in effect
during FY 2013 met the objectives of both sections 2 and 4 of the FMFIA.

•    FMFIA section 2 explains management’s responsibility for, and its role in, assessment of
     accounting and administrative controls.
•    FMFIA section 4 relates to the Department’s analysis of systems, controls, and legal
     compliance related to financial reporting; internal controls and system frameworks included
     FMFIA, FFMIA, and the Federal Information Security Management Act (FISMA), as well as
     OMB Circulars A-123 and A-127, as addressed in previous sections of this report.




FY 2013 Agency Financial Report—U.S. Department of Education                                       39
MANAGEMENT’S DISCUSSION AND ANALYSIS


Statement of Assurance

     The Department of Education’s 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 (FMFIA) and
     OMB Circular A-123, Management’s Responsibility for Internal Control. The
     Department evaluated its internal controls to support (1) effective and efficient
     programmatic operations, (2) compliance with applicable laws and regulations, and
     (3) reliable financial reporting.

     Internal Control Over Operations

     For all program areas, the Department provides reasonable assurance that internal
     controls were in place and operating to meet the objectives of section 2 of FMFIA, no
     material weaknesses were identified, and we were in compliance with applicable
     laws and regulations as of September 30, 2013.

     Internal Control Over Financial Reporting

     The Department conducted its assessment of the effectiveness of internal controls
     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. The Department has reasonable assurance that internal
     controls over financial reporting as of September 30, 2013, were operating
     effectively and no material weaknesses were found in the design or operation of the
     controls.

     Internal Control Over Systems

     The Department is required to implement and maintain financial management
     systems that substantially comply with federal financial management systems
     requirements, federal accounting standards, and the United States Government
     Standard General Ledger at the transaction level. Based on the results of the
     Department’s assessment in accordance with the requirements of section 4 of
     FMFIA, the Department’s financial management systems substantially comply with
     Federal Financial Management Improvement Act as of September 30, 2013.

     Notwithstanding the aforementioned assertions, I acknowledge that we have issues
     that we must remediate, including internal control and compliance issues identified
     by our auditors and the management challenges raised by the Office of the Inspector
     General in other sections of this report.



                                              /s/

                                         Arne Duncan
                                       December 11, 2013




40                                                      FY 2013 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


Financial Management Systems Strategy

The Department designated FMSS as a mission-critical system that provides core financial
management services. The Department expects to improve the following performance
outcomes: control and accountability over financial management services, including financial
management system controls and practices that include cross-validation rules to prevent
erroneous accounting transactions from being processed; and financial system reporting
capabilities that continue to respond quickly to internal and external financial information
inquiries. Additional areas of emphasis are the continued tight integration and streamlining with
the office of Federal Student Aid and business processes; reduced manual reconciliation efforts
for the Office of the Chief Financial Officer; reduction of errors and improved funds control;
better data sharing and centralized data edits and controls that could otherwise get out of
synchronization between the FMSS and its feeder systems; and budget planning that integrates
with the general ledger.

Currently, the FMSS resides on an Oracle database and uses the Oracle Federal Financial
Software Version 11.5.10 (11i). Oracle has issued version Release 12 of its software as a
replacement for the 11i version. Release 12 has passed the necessary testing and is federally
compliant for financial management. The Department is examining solutions for migrating to the
Release 12 version. OMB has directed agencies to explore the possibility of utilizing a shared
service provider (SSP) for financial management before implementing or migrating to new
versions of financial applications. During FY 2014, the Department expects to begin the analysis
of identifying the potential of using an SSP solution for financial management.

Legal Compliance

Federal Financial Management Improvement Act (FFMIA)—requires federal agencies to
implement and maintain financial management systems that comply substantially with federal
financial management systems requirements, applicable federal accounting standards, and the
United States Standard General Ledger at the transaction level. Section 803(c) (1) of the FFMIA
requires the Department to make an annual determination of the agency’s substantial
compliance with Section 803(a) of the Act based on a review of relevant factors. In determining
whether the Department’s financial systems substantially comply with FFMIA, management
considered available information from audit reports and other relevant and appropriate
information. The Department’s determination leveraged the results of related reviews such as
those required by FISMA and OMB Circular A-123. Key factors used in the determination
included: agency improvements and ongoing efforts to strengthen financial management
systems and the impact of instances of non-compliance on overall financial management
system performance.

In FY 2012, management determined that the Department’s systems were not in overall
compliance with FFMIA based, in part, on self-reported FMFIA material weaknesses. These
issues directly impacted the reliability of borrower account information and related financial
statement balances throughout FY 2012. Corrective actions taken in FY 2012 and FY 2013
sufficiently remediated the underlying conditions such that, for the year ended September 30,
2013, these deficiencies no longer aggregate to a material weakness. However, some of the
remaining FY 2012 issues, including new issues of lesser significance identified in FY 2013,
continued to impact the reliability of borrower account information and related financial
statement balances throughout FY 2013. The auditors have provided their recommendations to
address these issues and the Department plans to implement them in FY 2014. Full and
complete implementation of the auditor’s recommendations and corrective actions to their



FY 2013 Agency Financial Report—U.S. Department of Education                                     41
MANAGEMENT’S DISCUSSION AND ANALYSIS


findings will allow the Department to continue to strengthen and improve the internal controls of
its financial management systems.

The Department places a priority on the importance of adequate security controls over system
access and data and continually looks to ways to strengthen these controls. Management
reviews during FY 2013 confirm that favorable actions have been taken to diminish weaknesses
and strengthen internal controls overall. The Department is committed to continually improving
its key controls and acknowledges the ongoing efforts of management to strengthen financial
management systems. Additionally, based on the evaluation of the criteria listed in the FFMIA
Indicators of Compliance and Risk Categories, the department’s financial management system
possesses low risk in complying with the FFMIA requirements based on the listed compliance
indicators. None of the compliance indicators are rated at the high-risk level. Though the
Department and its auditors have identified issues of non-compliance with some system
requirements and significant internal control weaknesses exist, taken as a whole, the
Department has determined that it is in substantial compliance with FFMIA in FY 2013 for its
system of controls over loans, grants, contracts, payroll, and other key business activities.

Federal Information Security Management Act (FISMA)—requires that each agency perform
an annual, independent evaluation of the information security program and practices of that
agency to determine the effectiveness of such program and practices. The Department has
been implementing a multiyear process to improve our reporting activities. In FY 2013, the
Office of Inspector General (OIG) found that the Department has made progress in remediating
issues identified in previous FISMA reviews. Specifically, they found the Department was
compliant in 4 of the 11 reporting metrics. Their findings included issues related to:
(1) configuration management; (2) identity and access management; (3) incident response and
reporting; (4) risk management; (5) security training; (6) remote access management; and
(7) contingency planning. Also, the findings in seven of the reporting metrics contained repeat or
modified repeat findings from OIG reports issued from fiscal years 2010 through 2012.

In response to the reported issues, the Department established: a 24x7, on premise, Security
Operations Center (EDSOC) that will operate in an integrated enterprise-wide program and
respond to threats and vulnerabilities to the Department’s information infrastructure and assets;
a Risk Management Framework, using a suite of continuous monitoring tools; and initiatives
intended to safeguard personally identifiable information. The Department has garnered
significant benefits from previous years’ audits and expects that the recommendations
presented in FY 2013 will further improve the information security program by strengthening the
associated management, technical and operational security controls. The Office of the Chief
Information Officer has formulated a plan to address each of the findings and recommendations
across the seven metric areas. The plan has been conveyed to and accepted by the OIG.

Prompt Payment Act of 1982—requires federal agencies to make timely payments to vendors.
When a payment is not processed within the timeframes specified in the act, payment of interest
is required. During FY 2013, the Department made timely payments for 99.77 percent of the
6,998 vendor invoices processed. Virtually all recurring payments were processed by
information technology audits in accordance with the provisions of the Prompt Payment Act.

Anti-Deficiency Act—prohibits federal agencies from obligating or expending federal funds in
advance or in excess of an appropriation, apportionment, or certain administrative subdivisions
of those funds. The act also prohibits agencies from accepting voluntary services. For FY 2013,
the Department had no Anti-Deficiency Act violations to report.




42                                                       FY 2013 Agency Financial Report—U.S. Department of Education
Financial Section
FINANCIAL SECTION



               Message From the Chief Financial Officer
The Department of Education is firmly committed to financial
management excellence. We hope you find the Agency Financial
Report (AFR) a useful summary of the Department’s use of
resources, operating performance, financial stewardship, and internal
control. In compiling the AFR this year, we made a concerted effort
to provide information at a high level with the support of web links for
readers who want more details.

I am extremely pleased to report that we have attained our 12th
consecutive unqualified or “clean” opinion on our FY 2013 financial
statements. The consistency in our accounting and reporting is a
tribute to the excellent work of our employees and contract partners.
Operating budgets were tight in 2013, but the financial management
team and the Department’s employees carried out their responsibilities in an efficient and
effective manner. We spent less than 1 percent of the annual appropriations on
administrative costs in making almost $200 billion in new grant and loan obligations.

Along with the unqualified opinion for 2013, our auditors reported that there were no
material internal control weaknesses and no instances of noncompliance with applicable
laws and regulations, except for one compliance issue with the Federal Financial
Management Improvement Act (FFMIA). This is an improvement over 2012.

The audit and related reports help us by suggesting areas where we can improve. Last
year, we reported a material weakness associated with a transition among some systems
contracts that help track our student loan accounts. We took steps in 2013 to address
those issues and eliminated the material weakness. Despite our significant efforts to
improve our internal control over financial reporting and related information technology
controls, the auditors reported the Department’s financial management systems did not
substantially comply with the FFMIA system requirements. In their view, certain technical
and operational issues in the functionality and application control over financial systems for
managing loans receivable impacted the Department’s ability to maintain effective controls
and the efficiency of servicing the direct loan portfolio. The auditors reported no instances
of noncompliance with other applicable laws and regulations. We remain committed to
addressing the reported FFMIA issue, as well as the other management challenges
identified in reports by the Inspector General and the independent auditors.

We strive to monitor and improve our internal controls for all of our activities and
demonstrate compliance with applicable laws and regulations. Internal controls are never
perfect, and there are always areas for improvement, including those identified by our
independent auditors in their report and by the Office of Inspector General in its
management challenges.

/s/
Thomas P. Skelly
Delegated to perform the functions and duties of the Chief Financial Officer
December 11, 2013




44                                                    FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                              FINANCIAL SECTION
                                                                                                          FINANCIAL STATEMENTS



                                      United States Department of Education
                                           Consolidated Balance Sheet
                                            As of September 30, 2013 and 2012
                                                               (Dollars in Millions)



                                                                                           FY 2013              FY 2012
Assets:
  Intragovernmental:
      Fund Balance with Treasury (Note 3)                                              $      108,732       $      121,993
      Accounts Receivable (Note 4)                                                                  2                    1
      Other Intragovernmental Assets (Note 8)                                                      22                   18
  Total Intragovernmental                                                                     108,756              122,012

 Cash and Other Monetary Assets (Note 5)                                                        1,482                1,307
 Accounts Receivable, Net (Note 4)                                                                121                   92
 Credit Program Receivables, Net (Note 6)                                                     826,684              673,488
 Property and Equipment, Net (Note 7)                                                               2                    7
 Other Assets (Note 8)                                                                             13                   21
Total Assets (Note 2)                                                                  $      937,058       $      796,927


Liabilities:
  Intragovernmental:
      Accounts Payable (Note 9)                                                        $            2       $           31
      Debt (Note 10)                                                                          852,432              715,303
      Guaranty Agency Federal Funds Due to Treasury (Note 5)                                    1,482                1,307
      Other Intragovernmental Liabilities (Note 11)                                             8,855                6,944
  Total Intragovernmental                                                                     862,771              723,585

 Accounts Payable (Note 9)                                                                      4,127                4,098
 Accrued Grant Liability (Note 12)                                                              2,170                2,901
 Liabilities for Loan Guarantees (Note 6)                                                           -                1,037
 Other Liabilities (Note 11)                                                                      147                  151
Total Liabilities (Note 11)                                                            $      869,215       $      731,772

  Commitments and Contingencies (Note 20)

Net Position:
  Unexpended Appropriations (Note 13)                                                  $       71,371       $       72,686
  Cumulative Results of Operations (Note 13)                                                    (3,528)              (7,531)

Total Net Position (Note 13)                                                           $       67,843       $       65,155

Total Liabilities and Net Position                                                     $      937,058       $      796,927




The accompanying notes are an integral part of these statements.




FY 2013 Agency Financial Report—U.S. Department of Education                                                                   45
FINANCIAL SECTION
FINANCIAL STATEMENTS


                                   United States Department of Education
                                    Consolidated Statement of Net Cost
                               For the Years Ended September 30, 2013 and 2012
                                                    (Dollars in Millions)



                                                                                                  FY 2013                     FY 2012
Program Costs:


     Increase College Access, Quality, and Completion
     Gross Costs                                                                              $         17,588           $          40,410
     Earned Revenue                                                                                    (26,744)                    (25,340)
          Net Program Costs                                                                             (9,156)                     15,070

 Total Program Costs                                                                          $          (9,156)         $             15,070


     Improve Preparation for College and Career from Birth
     Through 12th Grade, Especially for Children with High Needs
     Gross Costs                                                                              $          22,405          $             22,419
     Earned Revenue                                                                                         (25)                          (70)
          Net Program Costs                                                                              22,380                        22,349

 Total Program Costs                                                                          $          22,380          $             22,349


     Ensure Effective Educational Opportunities for All Students
     Gross Costs                                                                              $          16,856          $             17,114
     Earned Revenue                                                                                         (26)                          (11)
          Net Program Costs                                                                              16,830                        17,103

 Total Program Costs                                                                          $          16,830          $             17,103


     Enhance the Education System’s Ability to Continuously Improve
     Gross Costs                                                                              $           1,881          $              1,660
     Earned Revenue                                                                                         (86)                          (69)
          Net Program Costs                                                                               1,795                         1,591

 Total Program Costs                                                                          $           1,795          $              1,591


     American Recovery and Reinvestment Act and Education Jobs Fund
     Gross Costs                                                                              $           2,623          $              7,660
     Earned Revenue                                                                                           -                             -
          Net Program Costs                                                                               2,623                         7,660

 Total Program Costs                                                                          $           2,623          $              7,660


 Grand Total Program Costs                                                                    $          34,472          $             63,773


 Net Cost of Operations (Notes 14 & 17)                                                       $          34,472          $             63,773



The accompanying notes are an integral part of these statements.




46                                                                      FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                                    FINANCIAL SECTION
                                                                                                                FINANCIAL STATEMENTS


                                    United States Department of Education
                               Consolidated Statement of Changes in Net Position
                                    For the Years Ended September 30, 2013 and 2012
                                                                 (Dollars in Millions)


                                                                                FY 2013                               FY 2012
                                                                       Cumulative                            Cumulative
                                                                       Results of    Unexpended              Results of    Unexpended
                                                                       Operations Appropriations             Operations Appropriations


Beginning Balances:
 Beginning Balances                                                $         (7,531)     $   72,686      $        (3,144)   $   71,729

Budgetary Financing Sources:
 Appropriations Received                                           $             -       $    90,993     $            -     $    98,372
 Other Adjustments (Rescissions, etc.)                                           -             (2,824)                1            (493)
 Appropriations Used                                                        89,484           (89,484)            96,922         (96,922)
 Nonexchange Revenue                                                            10                  -                 1               -
 Donations and Forfeitures of Cash and Cash
 Equivalents                                                                        1               -                  1              -
 Nonexpenditure Financing Sources Transfers-Out                                     -               -                (29)             -

Other Financing Sources:
 Imputed Financing from Costs Absorbed by Others                   $              34     $          -    $           34     $         -
 Negative Subsidy Transfers, Downward Subsidy
 Re-Estimates, and Other                                                    (51,054)               -             (37,544)            -
Total Financing Sources                                            $         38,475      $    (1,315)    $        59,386    $      957



Net Cost of Operations:                                            $        (34,472)     $          -    $       (63,773)   $         -



Net Change:                                                        $          4,003      $    (1,315)    $        (4,387)   $      957


     Ending Balances (Note 13)                                     $         (3,528)     $   71,371      $        (7,531)   $   72,686




The accompanying notes are an integral part of these statements.




  FY 2013 Agency Financial Report—U.S. Department of Education                                                                       47
FINANCIAL SECTION
FINANCIAL STATEMENTS


                                    United States Department of Education
                                  Combined Statement of Budgetary Resources
                                   For the Years Ended September 30, 2013 and 2012
                                                            (Dollars in Millions)


                                                                                FY 2013                                 FY 2012
                                                                                  Non-Budgetary                           Non-Budgetary
                                                                                   Credit Reform                           Credit Reform
                                                                                     Financing                               Financing
                                                                       Budgetary     Accounts                   Budgetary    Accounts
Budgetary Resources:
  Unobligated Balance, Brought Forward, October 1                     $      12,622       $        18,993       $     5,434      $        15,402
  Recoveries of Prior Year Unpaid Obligations                                 1,191                35,425             1,182               18,649
  Other Changes in Unobligated Balance (+ or -)                                (428)              (39,189)             (638)             (20,697)
  Unobligated Balance from Prior Year Budget Authority, Net           $      13,385       $        15,229       $     5,978      $        13,354
  Appropriations (Discretionary and Mandatory)                               88,380                     5            98,284                   36
  Borrowing Authority (Discretionary and Mandatory) (Note 16)                       -             195,185                 -              209,614
  Spending Authority from Offsetting Collections
  (Discretionary and Mandatory)                                                779                 46,976             448                 47,270
Total Budgetary Resources (Note 16)                                   $    102,544        $       257,395       $ 104,710        $       270,274
Status of Budgetary Resources:
  Obligations Incurred (Note 16)                                      $      86,337       $       246,080       $    92,088      $       251,281
  Unobligated Balance, End of Year:
       Apportioned                                                          13,700                      -          10,480                     1
       Unapportioned                                                         2,507                 11,315           2,142                 18,992
  Total Unobligated Balance, End of Year                                    16,207                 11,315          12,622                 18,993
Total Status of Budgetary Resources (Note 16)                         $    102,544        $       257,395       $ 104,710        $       270,274
Change in Obligated Balance:
  Unpaid Obligations
    Unpaid Obligations, Brought Forward, October 1                    $      65,057       $       172,230       $    72,684      $       164,389
    Obligations Incurred                                                     86,337               246,080            92,088              251,281
    Outlays (Gross) (-)                                                     (90,573)             (221,138)          (98,533)            (224,791)
    Recoveries of Prior Year Unpaid Obligations (-)                          (1,191)              (35,425)           (1,182)             (18,649)
    Unpaid Obligations, End of Year                                   $      59,630       $       161,747       $    65,057      $       172,230
  Uncollected Payments
    Uncollected Payments, Federal Sources, Brought Forward,
    October 1 (-)                                                     $             (2)   $             (26)    $          (6)   $            (27)
    Change in Uncollected Payments, Federal Sources (+ or -)                        (1)                   1                 4                   1
    Uncollected Payments, Federal Sources, End of Year (-)            $             (3)   $             (25)    $          (2)   $            (26)
  Memorandum (Non-add) Entries
    Obligated Balance, Start of Year (+ or -)                         $      65,055       $       172,204       $    72,678      $       164,389
    Obligated Balance, End of Year (+ or -)                           $      59,627       $       161,722       $    65,055      $       172,204
Budget Authority and Outlays, Net:
 Budget Authority, Gross (Discretionary and Mandatory)                $      89,159       $       242,166       $    98,732      $       256,920
 Actual Offsetting Collections (Discretionary and Mandatory) (-)               (935)              (72,672)             (655)             (64,687)
 Change in Uncollected Customer Payments from Federal
 Sources (Discretionary and Mandatory) (+ or -)                                  (1)                    1                 4                    1
Budget Authority, Net (Discretionary and Mandatory)                   $      88,223       $       169,495       $    98,081      $       192,234
  Outlays, Gross (Discretionary and Mandatory)                        $      90,573       $       221,138       $    98,533      $       224,791
  Actual Offsetting Collections (Discretionary and Mandatory) (-)              (935)              (72,672)             (655)             (64,687)
  Outlays, Net (Discretionary and Mandatory)                                 89,638               148,466            97,878              160,104
  Distributed Offsetting Receipts (-) (Note 16)                             (48,725)                    -           (40,612)                   -
Agency Outlays, Net (Discretionary and Mandatory)
(Note 16)                                                             $      40,913       $       148,466       $    57,266      $       160,104


The accompanying notes are an integral part of these statements.




48                                                                                  FY 2013 Agency Financial Report—U.S. Department of Education
                                                                               FINANCIAL SECTION




                       Notes to the Financial Statements
              For the Years Ended September 30, 2013 and 2012


Note 1. Summary of Significant Accounting Policies
Reporting Entity and Programs
The U.S. Department of Education (the Department), a cabinet-level agency of the Executive
Branch of the U.S. Government, was established by Congress under the Department of
Education Organization Act (Public Law 96-88), which became effective on May 4, 1980. The
Department is responsible, through the execution of its congressionally enacted budget, for
administering direct loans, guaranteed loans, and grant programs, as discussed below.
The Department administers the William D. Ford Federal Direct Loan (Direct Loan) Program,
the Federal Family Education Loan (FFEL) Program, the Federal Pell Grant (Pell Grant)
Program, and the campus-based student aid programs to help students and their parents
finance the costs of postsecondary education.
The Direct Loan Program, added to the Higher Education Act of 1965 (HEA) in 1993 by the
Student Loan Reform Act of 1993, authorizes the Department to make loans directly to eligible
undergraduate and graduate students and their parents through participating schools. Under
this program, the loans are made to individuals who meet eligibility criteria established by
statute and attend eligible institutions of higher education—public or private two- and four-year
institutions, graduate schools, and vocational training schools. Student borrowers who
demonstrate financial need also may 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 agencies to provide loan guarantees and interest subsidies on loans made by private
lenders to eligible students. The SAFRA Act, formerly the Student Aid and Fiscal Responsibility
Act, which was included in the Health Care and Education Reconciliation Act of 2010 (HCERA)
and became effective July 1, 2010, provided that no new FFEL loans would be made after
June 30, 2010.
The Ensuring Continued Access to Student Loans Act of 2008 (ECASLA) authorized the
Secretary of Education (Secretary) to purchase or enter into forward commitments to purchase
FFEL loans. 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 Asset-Backed Commercial Paper (ABCP) Conduit.
The Federal Pell Grant Program provides need-based grants to low-income undergraduate and
certain post baccalaureate students to promote access to postsecondary education.
The Teacher Education Assistance for College and Higher Education (TEACH) Grant Program
was implemented beginning July 1, 2008. This program, added to the HEA by the College Cost
Reduction and Access Act, 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.
Additionally, the Department administers numerous other grant programs and Facilities Loan
Programs. Grant programs include grants to state and local entities for elementary and
secondary education; special education and rehabilitative services grants; grants to support
institutions of higher education; educational research and improvement grants; grants to assist
low-income and first-generation college students to prepare for and transition into college;
grants to improve our global awareness and competitiveness; and fellowships for college and

FY 2013 Agency Financial Report—U.S. Department of Education                                   49
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


graduate students. Through the Facilities Loan Programs, the Department administers low-
interest loans to institutions of higher education for the construction and renovation of their
facilities.
In addition to student loans and grants, the Department supports state and local education
agencies through discretionary grants under a variety of authorizing legislation, which are
awarded using a competitive process, and formula (mandatory) grants. Among the largest K-12
discretionary grants are The Federal TRIO Program (TRIO), Race to the Top, and Teacher
Incentive Fund. Among the largest formula grants are Title I, Elementary and Secondary
Education Act of 1965, as amended, (Title I) Grants to Local Educational Agencies and
Individuals with Disabilities Education Act (IDEA) grants.
The American Recovery and Reinvestment Act of 2009 (Recovery Act), enacted on February
17, 2009, as Public Law 111-5, provided funding to the Department for improving schools,
raising students’ achievement, driving reform, and producing better results for children and
young people for the long-term health of the nation.
Public Law 111-226 (Education Jobs Fund), enacted on August 10, 2010, provided funding to
the Department for saving and creating education jobs.
As of fiscal year 2013, Recovery Act and Education Jobs Fund programs are winding down and
have 4 percent and less than 1 percent remaining, respectively, to be expended as of
September 30, 2013.
Reporting Groups
The Department has established five reporting groups that administer loan and grant programs.
They are:
     •   Federal Student Aid (FSA)                     •   Office of Special Education and
     •   Office of Elementary and Secondary                Rehabilitative Services (OSERS)
         Education (OESE)                              •   Other
     •   American Recovery and Reinvestment
         Act and Education Jobs Fund (RA/JF)
The “Other” reporting group consists of the Office of Vocational and Adult Education (OVAE),
Office of Postsecondary Education (OPE), Institute of Education Sciences (IES), Office of
English Language Acquisition (OELA), Office of Innovation and Improvement (OII), Office of
Management, Office for Civil Rights (OCR), and Hurricane Education Recovery (HR) activities.
Basis of Accounting and Presentation
These financial statements have been prepared to report the financial position, net cost of
operations, changes in net position, and budgetary resources of the Department, as required
by the Chief Financial Officers Act of 1990 and the Government Management Reform Act of
1994. The financial statements were prepared from the books and records of the Department,
in accordance with accounting principles generally accepted in the United States of America for
federal entities, issued by the Federal Accounting Standards Advisory Board, and the Office of
Management and Budget (OMB) Circular No. A-136, Financial Reporting Requirements, as
revised. These financial statements are different from the financial reports prepared by the
Department pursuant to OMB directives that are used to monitor and control the Department’s
use of budgetary resources.
The Department’s financial statements should be read with the realization that they are for a
component of the U.S. Government, a sovereign entity. One implication of this is that the
liabilities cannot be liquidated without legislation providing resources and legal authority to do
so.

50                                                         FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                 FINANCIAL SECTION
                                                                NOTES TO THE FINANCIAL STATEMENTS


The accounting structure of federal agencies is designed to reflect both accrual and budgetary
accounting transactions. Under the accrual method of accounting, revenues are recognized
when earned, and expenses are recognized when a liability is incurred, without regard to
receipt or payment of cash. Budgetary accounting facilitates compliance with legal constraints
and controls over the use of federal funds.
Intradepartmental transactions and balances have been eliminated from the consolidated
financial statements.
Credit Reform Accounting: Federal Credit Reform
The Federal Credit Reform Act of 1990 (CRA) became effective on October 1, 1991. Its
purpose is to measure the cost of Federal credit programs and to place the cost of each credit
program on a basis equivalent with other Federal spending, i.e., calculate the cost of Direct
Loan Programs evenly with the cost of Guaranteed Loan Programs. Under CRA, subsidy cost
is estimated using the net present value of future cash flows to, and from, the Department.
A loan guarantee is any guarantee, insurance, or other pledge with respect to the payment of
all or part of the principal or interest on any debt obligation of a non-Federal borrower to a non-
Federal lender. A direct loan is any debt instrument issued to the public by the federal
government. CRA establishes the use of Program, Financing, and General Fund Receipt
Accounts for loan guarantees committed and direct loans obligated after September 30, 1991.
It also establishes Liquidating Accounts for activity relating to any loan guarantees committed
or direct loans obligated before October 1, 1991. These accounts are classified as either
budgetary or non-budgetary in the Combined Statements of Budgetary Resources. The
budgetary accounts include the Program and Liquidating Accounts. The non-budgetary
accounts are the Financing Accounts.
The Program Account is a budget account that receives and obligates appropriations to cover
the subsidy cost of a direct loan or loan guarantee and disburses the subsidy cost to the
Financing Account. A Program Account also receives appropriations for administrative
expenses. The Financing Account is a non-budgetary account that records all of the cash flows
resulting from CRA direct loans or loan guarantees. It disburses loans, collects repayments and
fees, pays claims, borrows from U.S. Treasury, earns and pays interest, and receives the
subsidy cost payment from the Program Account. The General Fund Receipt Account is a
budget account used by Treasury for the receipt of amounts paid from the Financing Account
when there are negative subsidies for original cost estimates or downward re-estimates of prior
subsidy costs.
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 fiscal year (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

FY 2013 Agency Financial Report—U.S. Department of Education                                      51
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


rates, prevailing interest rates, and loan volume. Actual loan volume, interest rates, cash flows,
and other critical components used in the estimation process may differ significantly from the
assumptions made at the time the financial statements are prepared. Minor adjustments to any
of these components may create significant changes to the estimates and the amounts
recorded.
The Department estimates all future cash flows associated with the Direct Loan, FFEL, and
TEACH Programs. Projected cash flows are used to develop subsidy estimates. Subsidy cost
can be positive or negative; negative subsidies occur when expected program inflows of cash
(e.g., repayments and fees) exceed expected outflows. Subsidy cost is recorded as the initial
amount of the loan guarantee liability when guarantees are made, or as a valuation allowance
to government-owned loans and interest receivable (i.e., direct and defaulted guaranteed
loans).
The Department uses a cash flow projection 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. In developing assumptions for future interest rates, the
Department uses a probabilistic technique that estimates future interest rates and weighs each
one by the assumed probability of each scenario occurring. 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 colleges, graduate schools,
proprietary (for-profit) schools, freshmen and sophomores at four-year colleges, as well as
juniors and seniors at four-year colleges.
Estimates reflected in these financial statements were prepared using assumptions developed
for the FY 2013 Mid-Session Review, a governmentwide exercise required annually by OMB.
These estimates are based on the most current information available to the Department at the
time the financial statements were prepared. Assumptions and their impact are updated after
the Mid-Session Review to account for significant subsequent changes in activity. Management
has a process to review these estimates in the context of subsequent changes in activity and
assumptions, and to reflect the impact of changes, as appropriate.
The Department recognizes that cash flow projections and the sensitivity of changes in
assumptions can have a significant impact on estimates. Management has attempted to
mitigate fluctuations in the estimates by using trend analysis to project future cash flows.
Changes in assumptions could significantly affect the amounts reflected in these financial
statements. For example, a minimal change in the projected long-term interest rate charged to
borrowers could change the current subsidy re-estimate by a significant amount.
Budget Authority
Budget authority is the authorization provided by law for the Department to incur financial
obligations that will result in outlays. The Department’s budgetary resources include
unobligated balances of resources from prior years; recoveries of prior-year obligations; and
new resources, which include appropriations, authority to borrow from the 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, the Historically Black Colleges and Universities

52                                                       FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                FINANCIAL SECTION
                                                               NOTES TO THE FINANCIAL STATEMENTS


(HBCU) Capital Financing Program, and activities under the temporary loan purchase authority.
Subsidy and administrative costs of the programs are funded by appropriations. Budgetary
resources from collections are used primarily to repay the Department’s debt to Treasury.
Major sources of collections include principal and interest collections from borrowers, related
fees, and interest from Treasury on balances in Credit Financing Accounts that make and
administer loans and loan 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,
ECASLA Programs, the TEACH Program, and the HBCU Capital Financing Program. In
addition, borrowing authority is requested in advance of expected collections to cover negative
subsidy cost. Treasury prescribes the terms and conditions of borrowing authority and lends to
the Credit Financing Account amounts as appropriate. Amounts borrowed, but not yet
disbursed, are included in uninvested funds and earn interest. Treasury uses the same
weighted average interest rates for both the interest charged on borrowed funds and the
interest earned on uninvested funds. The Department may carry forward borrowing authority to
future fiscal years provided that cohorts are disbursing loans. All borrowings from Treasury are
effective on October 1 of the current fiscal year, regardless of when the Department borrowed
the funds, except for amounts borrowed to make annual interest payments.
Non-Budgetary Financing Accounts are reported separately in the Non-Budgetary Credit
Reform Financing Accounts column of the Statement of Budgetary Resources (SBR). The
amounts recorded in this column are the cash flow activity resulting from Credit Reform
Financing Accounts. In compliance with A-136 guidance, the activity in the Financing Accounts
is reported separately in the Budget of the United States Government and is excluded from the
budget surplus or deficit totals. The separate presentation in the SBR allows for a clear
distinction between budgetary accounts and Non-Budgetary Credit Reform Financing
Accounts.
Entity and Non-Entity 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.
Fund Balance with Treasury
The Fund Balance with Treasury includes general, financing, revolving, trust, special, and other
funds in the Department’s accounts with Treasury available to pay current liabilities and finance
authorized purchases, as well as funds restricted until future appropriations are received.
Treasury processes cash receipts and cash disbursements for the Department. The
Department’s records are reconciled with those of the Treasury.
A portion of the general funds is provided in advance by multiyear 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 and
clearing accounts. Non-budgetary Credit Reform Financing Accounts have many similarities to
revolving 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


FY 2013 Agency Financial Report—U.S. Department of Education                                     53
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


available to incur new obligations. Obligated balances not yet disbursed include undelivered
orders and unpaid expended authority.
Accounts Receivable
Accounts Receivable are amounts due to the Department from the public and other federal
agencies. Receivables from the public result from overpayments to recipients of grants and
other financial assistance programs, and disputed costs resulting from audits of educational
assistance programs. Amounts due from federal agencies result from reimbursable agreements
entered into by the Department with other agencies to provide various goods and services.
Accounts receivable are reduced to net realizable value by an allowance for uncollectible
amounts. The estimate of an allowance for loss on uncollectible accounts is based on the
Department’s experience in the collection of receivables and an analysis of the outstanding
balances.
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 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. 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.
The Department disburses funds to a guaranty agency. A guaranty agency, through its Federal
Fund, pays lender claims and pays default aversion fees into its own Operating Fund. 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. Payments made to the Department from
guaranty agency federal funds through a statutory recall or agency closures represent capital
transfers and are credited to the Department’s Fund Balance with Treasury account.
Credit Program Receivables, Net and Liabilities for Loan Guarantees
The financial statements reflect the Department’s estimate of the long-term cost of direct and
guaranteed loans in accordance with the Credit Reform Act. Loans and interest receivable are
valued at their gross amounts less an allowance for the present value of amounts not expected
to be recovered and thus having to be subsidized—called “allowance for subsidy.” The
difference between the gross amount and the allowance for subsidy is the present value of the
cash flows to and from the Department that are expected from the receivables over their
projected lives. Similarly, liabilities for loan guarantees are valued at the present value of the
cash outflows from the Department less the present value of related inflows. The estimated
present value of net long-term cash outflows of the Department for subsidized costs is net of
recoveries, interest supplements, and offsetting fees. The Department also values all pre-1992
loans and loan guarantees at their net present values.
Credit program receivables for activities under the temporary loan purchase authority include
the present value of future cash flows related to purchased loans. Subsidy is transferred, which

54                                                       FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                               FINANCIAL SECTION
                                                                              NOTES TO THE FINANCIAL STATEMENTS


may be prior to purchasing loans, and is recognized as subsidy expense in the Statement of
Net Cost. The cash flows of these authorities also include inflows and outflows associated with
the underlying or purchased loans and other related activities, including any positive or
negative subsidy transfers.
Components of subsidy costs for loans and guarantees include defaults (net of recoveries);
contractual payments to third-party private loan collectors who receive a set percentage of
amounts collected; and, as an offset, origination and other fees collected. For direct loans, the
difference between interest rates incurred by the Department on its borrowings from Treasury
and interest rates charged to particular borrowers 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.
Non-Budgetary Credit Reform Financing Accounts
Actual cash flows to and from the Government for direct loan and loan guarantee programs are
recorded in separate Credit Reform Financing Accounts within the Treasury. These accounts
borrow funds from Treasury, make direct loan disbursements, pay claims on guaranteed loans,
collect principal and interest from borrowers, earn interest from Treasury on any uninvested
funds, and transfer excess subsidy to Treasury’s General Fund Receipt Account.
Appropriations for new subsidy and subsidy re-estimates are received in program accounts and
transferred to Non-Budgetary Credit Reform Financing Accounts. The budgetary resources and
activities for these accounts are presented separately in the Combined Statement of Budgetary
Resources and the Budget of the United States and are excluded from the determination of the
budget deficit or surplus.
Property and Equipment, Net
The Department capitalizes single items of property and equipment with a cost of $50,000 or
more that have an estimated useful life of two years or more. Additionally, the Department
capitalizes bulk purchases of property and equipment with an aggregate cost of $500,000 or
more. A bulk purchase is defined as the purchase of like items related to a specific project, or
the purchase of like items occurring within the same fiscal year that have an estimated useful
life of at least two years. Property and equipment are depreciated over their estimated useful
lives using the straight-line method of depreciation. Internal Use Software meeting the above
cost and useful life criteria is also capitalized. Internal Use Software is either purchased off the
shelf, internally developed, or contractor developed solely to meet the Department’s needs.
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
The Department’s Other Intragovernmental Assets primarily consist of advance payments to
federal agencies as part of interagency agreements for various goods and services. The
Department’s other assets (with the public) consist of payments made to grant recipients in


FY 2013 Agency Financial Report—U.S. Department of Education                                                  55
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


advance of their expenditures and in-process disbursements of interest benefits and special
allowance payments for the FFEL Program.
Liabilities
Liabilities represent actual and estimated amounts to be paid as a result of transactions or
events that have already occurred. However, no liabilities can be paid by the Department
without budget authority. Liabilities for which an appropriation has not been enacted are
classified as liabilities not covered by budgetary resources, and there is no certainty that an
appropriation will be enacted. The government, acting in its sovereign capacity, can abrogate
liabilities that arise from activities other than contracts. FFEL Program and Direct Loan
Program liabilities are entitlements covered by permanent indefinite budget authority.
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 from Treasury to provide funding for the Direct Loan, FFEL, and
TEACH Programs. The liability to Treasury from borrowings represents unpaid principal at
year-end. The Department repays the principal based on available fund balances. Interest on
the debt is calculated at fiscal year-end using rates set by Treasury. These are rates generally
fixed based on the rate for 10-year Treasury securities. In addition, the Federal Financing Bank
(FFB) holds bonds issued by a designated bonding authority, on behalf of the Department, for
the HBCU Capital Financing Program. The Department reports the corresponding liability for
full payment of principal and accrued interest on bonds as a payable to the FFB.
Accrued Grant Liability
Disbursements of grant funds are recognized as expenses at the time of disbursement. Some
grant recipients incur allowable expenditures as of the end of an accounting period but have
not yet been reimbursed by the agency. The Department will accrue a liability for these
allowable expenditures incurred that have not yet been reimbursed. The amount is estimated
using statistical sampling as well as information on recent grant expenditures and unliquidated
balances.
Net Position
Net position consists of unexpended appropriations and cumulative results of operations.
Unexpended appropriations include undelivered orders and unobligated balances, except for
federal credit financing and liquidating funds, and trust funds. Cumulative results of operations
represent the net difference since inception between (1) expenses and (2) revenues and
financing sources.
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. Sick leave and other
types of non-vested leave are expensed as taken. Annual leave earned but not taken, within
established limits, is funded from future financing sources.



56                                                       FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                FINANCIAL SECTION
                                                               NOTES TO THE FINANCIAL STATEMENTS


Retirement Plans and Other Retirement Benefits. Employees participate in either 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 U.S. Department of Labor (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.
Intragovernmental Transactions
The Department’s financial activities interact with and are dependent upon the financial
activities of the centralized management functions of the federal government. Due to financial
regulation and management control by OMB and Treasury, operations may not be conducted
and financial positions may not be reported as they would if the Department were a separate,
unrelated entity.
Reclassifications
Certain reclassifications were made to the FY 2012 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. In accordance with the requirements
contained in OMB Circular No. A-136, Financial Reporting Requirements, effective for
FY 2013’s reporting, the presentation of the SBR was changed. The statement was changed to
better align the Change in Obligated Balance section of the statement. Also, during FY 2013,
as required by Treasury and Departmental guidance, excess collections from pre-1992 FFEL
loan guarantees, the College Housing Loan program, and the Higher Education Facilities Loan
Program, which are payable to Treasury, are to be reported as non-current liabilities not
covered by budgetary resources. This reclassification has resulted in a $3 billion reduction of
the FY 2012 reported balance of Intragovernmental Accounts Payable and a corresponding
increase in the FY 2012 reported Other Liabilities balance. In accordance with Treasury
guidance on capital transfer accounting, excess collections from pre-1992 FFEL loan
guarantees, the College Housing Loan Program, and the Higher Education Facilities Loan


FY 2013 Agency Financial Report—U.S. Department of Education                                     57
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


Program, which are payable to Treasury, but that have not yet been transferred, should be
reported as Other Financing Sources on the Statement of Changes in Net Position. Transfers-
Out was reduced by $22 million while Negative Subsidy Transfers, Downward Subsidy
Re-Estimates, and Other was increased by $22 million.
Subsequent Events
The financial statements, notes, and required supplementary information do not reflect the
effects of the subsequent event described below.
ABCP Conduit
The asset-backed commercial paper vehicle (ABCP Conduit) closes in the second quarter of
2014. Following Departmental policy, the costs of the ABCP Conduit will be re-estimated after
the program closes. A recovery of prior year obligations and the cancellation of borrowing
authority in the amount of approximately $71 billion will occur after the final re-estimate is
completed.




58                                                      FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                           FINANCIAL SECTION
                                                                                          NOTES TO THE FINANCIAL STATEMENTS


Note 2. Non-Entity Assets
As of September 30, 2013 and 2012, non-entity assets consisted of the following:
                                                               Non-Entity Assets
                                                                  (Dollars in Millions)

                                                                                              2013                  2012
           Non-Entity Assets
             Intragovernmental:
                Fund Balance with Treasury                                                $          40     $              (39)
                  Total Intragovernmental                                                            40                    (39)
              With the Public:
               Cash and Other Monetary Assets                                                    1,482                 1,307
               Credit Program Receivables, Net                                                     369                   351
               Accounts Receivable, Net                                                             61                    (4)
                  Total With the Public                                                          1,912                 1,654
           Total Non-Entity Assets                                                               1,952                 1,615
           Entity Assets                                                                       935,106               795,312
           Total Assets                                                                   $    937,058      $        796,927


Entity and non-entity assets are combined on the Consolidated Balance Sheet. Non-entity
assets are offset by liabilities to third parties and have no impact on net position. Non-entity
intragovernmental assets primarily consist of deposit fund and receipt and clearing account
balances. Non-entity assets with the public primarily consist of guaranty agency reserves and
Federal Perkins Loan Program loan receivables. The corresponding liabilities for these non-
entity assets are reflected in various accounts, including Intragovernmental Accounts Payable,
Guaranty Agency Federal Funds Due to Treasury, and Other Liabilities. (See Notes 1, 3, 4, 5,
and 6)

Note 3. Fund Balance with Treasury
Fund Balance with Treasury by fund type, as of September 30, 2013 and 2012, consisted of
the following:
                                                                Fund Balances
                                                                  (Dollars in Millions)

                                                                                              2013                  2012

           General Funds                                                                  $     74,329      $         76,351
           Revolving Funds                                                                      34,343                45,664
           Special Funds                                                                             17                     14
           Trust Funds                                                                                3                      3
           Other Funds                                                                               40                    (39)

           Fund Balance with Treasury                                                     $    108,732          $    121,993


A portion of the general funds is provided in advance by multiyear appropriations for obligations
anticipated during the current and future fiscal years. Revolving funds are derived from
borrowings, as well as collections from the public and other federal agencies. Trust funds
generally consist of donations for the hurricane relief activities. Other funds primarily consist of
non-entity deposit and receipt funds and clearing accounts.



FY 2013 Agency Financial Report—U.S. Department of Education                                                                      59
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


The Status of Fund Balance with Treasury, as of September 30, 2013 and 2012, consisted of
the following:
                                   Status of Fund Balance with Treasury
                                                      (Dollars in Millions)

                                                                                    2013                            2012

       Unobligated Balance:
         Available                                                            $          13,700             $            10,481
         Unavailable                                                                     12,340                          19,827
       Obligated Balance, Not Yet Disbursed                                              82,652                          91,724
       Non-Budgetary Fund Balance with Treasury                                               40                            (39)

       Fund Balance with Treasury                                             $        108,732              $          121,993


Available unobligated balances represent amounts that are apportioned for obligation in the
current fiscal year. Unavailable unobligated balances represent amounts that are not
apportioned for obligation during the current fiscal year and expired appropriations no longer
available to incur new obligations. Obligated balances not yet disbursed include undelivered
orders and unpaid expended authority.
Note 4. Accounts Receivable
Accounts receivable are established as claims to cash or other assets against other entities. At
the Department, administrative accounts receivable arise through legal provisions or program
requirements to return funds due to noncompliant program administration, regulatory
requirements, or individual service obligations. As such, administrative accounts receivable
consist primarily of institutional debt resulting from external audit or program review, program
scholarship grant repayments, and employee debt. Accounts Receivable, as of September 30,
2013 and 2012, consisted of the following:
                                                  Accounts Receivable
                                                      (Dollars in Millions)

                                                                                     2013
                                                    Gross
                                                  Receivables                     Allowance                  Net Receivables

       Intragovernmental                      $                 2             $                  -           $                  2
       With the Public                                       306                            (185)                            121

       Total                                  $              308              $             (185)            $               123



                                                                                     2012
                                                    Gross
                                                  Receivables                     Allowance                  Net Receivables

       Intragovernmental                      $                 1             $                    -        $                   1
       With the Public                                       317                            (225)                             92

       Total                                  $              318              $             (225)           $                 93




60                                                                        FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                        FINANCIAL SECTION
                                                                                       NOTES TO THE 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 Funds Due to Treasury. The table below presents Cash and Other Monetary
Assets for the years ended September 30, 2013 and 2012.
                                                 Cash and Other Monetary Assets
                                                               (Dollars in Millions)

                                                                                             2013             2012
           Beginning Balance, Cash and Other Monetary Assets                             $     1,307      $      1,664
              Increase/(Decrease) in Guaranty Agency Federal Funds, net                             175          (357)

           Ending Balance, Cash and Other Monetary Assets                                $     1,482      $      1,307


The $175 million net increase and $357 million net decrease in the Federal Fund in fiscal years
2013 and 2012, respectively, represent the change in the estimated value of net assets held in
the FFEL guaranty agency Federal Funds. This increase reflects the impact of guaranty
agencies’ operations.


Note 6. Credit Programs for Higher Education: Credit Program
Receivables, Net and Liabilities for Loan Guarantees
The Federal Government currently operates two major student loan programs: the Federal
Family Education Loan (FFEL) program and the William D. Ford Federal Direct Loan (Direct
Loan) program. The Health Care and Education Reconciliation Act of 2010 (HCERA)
eliminated the authorization to originate new FFEL loans; as of July 1, 2010, all new loans are
originated in the Direct Loan Program. The Direct Loan Program offers four types of loans:
Stafford, Unsubsidized Stafford, PLUS, and Consolidation. Evidence of financial need is
required for a student to receive a subsidized Stafford loan. The other three loan programs are
available to borrowers at all income levels. Loans can be used only to meet qualified
educational expenses.
William D. Ford Federal Direct Loan Program. The federal government makes loans directly
to students and parents through participating institutions of higher education under the William
D. Ford Federal Direct Loan Program, referred to as the Direct Loan Program. Direct loans are
originated and serviced through contracts with private vendors. As of September 30, 2013 and
2012, total principal balances outstanding of Direct Loans were approximately $585 billion and
$473 billion, respectively.
The Department disbursed approximately $130 billion in Direct Loans to eligible borrowers in
FY 2013 and approximately $142 billion in FY 2012. 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.
Approximately 9 percent of Direct Loan obligations made in a 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 2013 cohort, an


FY 2013 Agency Financial Report—U.S. Department of Education                                                             61
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


estimated $14.2 billion will never be disbursed. Eligible schools may originate direct loans
through an advance from the Department or by advancing their own funds in anticipation of
reimbursement from the Department.
Negative allowance for subsidy is a factor of interest rates, default rates, fees, and other costs.
Negative subsidy is an estimate of future cash inflows exceeding future cash outflows. Subsidy,
either positive or negative, provides resources for the Department to carry on its loan
origination activities under the Direct Loan Program or support its past FFEL Program loan
guarantees’ made on or before June 30, 2010.
Federal Family Education Loan Program. As a result of the SAFRA Act, the Department and
private lenders did not originate or guaranty any new loans in FY 2013 or FY 2012. 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 of
September 30, 2013 and 2012, total principal balances outstanding of guaranteed loans held
by lenders were approximately $264 billion and $291 billion, respectively. As of September 30,
2013 and 2012, the estimated maximum government exposure on outstanding guaranteed
loans held by lenders was approximately $258 billion and $285 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.
ECASLA gave the Department temporary authority to purchase FFEL loans and participation
interests in those loans. 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. This authority expired after September 30,
2010; as a result, loan purchase commitments and purchases of loan participation interests
concluded. However, ABCP Conduit activity has continued.
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 or acquire FFEL loans. The Department purchases
certain pledged loans that become more than 210 days delinquent. The conduit has sold to the
Department approximately $2.2 billion of these delinquent loans as of September 30, 2013.
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. 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.
The conduit, a separate legal entity, has approximately $588 million in commercial paper
outstanding. The Department’s relationship with the ABCP Conduit requires it to buy delinquent
loans and be available to purchase loans at the end of the program, January 2014. As of
September 30, 2013, the Department has $71 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. Any obligations not used
during the shutdown of the ABCP Conduit program will be deobligated at the end of the
program. Further discussion on this subsequent event is discussed in the last section of Note 1.

62                                                        FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                  FINANCIAL SECTION
                                                                 NOTES TO THE FINANCIAL STATEMENTS


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
Program loan receivables.
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 that provides 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 Grant Program. The Department awards annual grants of 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.
Facilities Loan Programs. The Department administers the College Housing and Academic
Facilities Loan Program (CHAFL), the College Housing Loan Program and the Higher
Education Facilities Loan Program. From 1952 to 1993, these programs provided low-interest
financing to institutions of higher education for the construction, reconstruction, and renovation
of housing, academic, and other educational facilities. The Department has approximately
$5 million in outstanding borrowing from Treasury lent to eligible CHAFL institutions as of
September 30, 2013.
The Department also administers the Historically Black Colleges and Universities (HBCU)
Capital Financing Program. Since 1992, this program has given HBCUs access to financing for
the repair, renovation, and, in exceptional circumstances, the construction or acquisition of
facilities, equipment, and infrastructure through federally insured bonds. The Department has
authorized a designated bonding authority to make the loans to eligible institutions, charge
interest, and collect principal and interest payments. In compliance with statute, the Higher
Education Act of 1965 (HEA), as amended, the bonding authority maintains an escrow account
to pay the principal and interest on bonds for loans in default.
On March 22, 2013, the Department and representatives from Treasury and OMB jointly
offered loan modification terms and conditions to all four HBCU institutions in response to their
request for forbearance considerations. In an effort to mitigate the economic effects of the
hurricanes and to better serve the interests of the United States and the institutions, the
Department has agreed to three components of modifications: forbearance, expense-based
repayment, and debt adjustment. As part of the five-year forbearance agreement, the
Department will pay on behalf of the institutions: servicing costs due to the Bank of New York
Mellon Trust Company; servicing costs due to the designated bonding authority, Rice Capital
(Atlanta, GA); and biannual bond principal and interest payments due to the Federal Financing
Bank. The loan modification will not reduce the amount owed by the institutions and the
Department will become the holder of the aforementioned bonds to the extent of its payments
made on behalf of the institutions during the forbearance period. The total amount of this
support and any accrued interest and unpaid servicing fees will be capitalized to principal and

FY 2013 Agency Financial Report—U.S. Department of Education                                       63
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


be reamortized through the original maturity date on June 1, 2037. Accordingly, the structure of
this modification will result in zero subsidy cost. The Department has approximately $1.1 billion
in outstanding borrowing from the Federal Finance Bank to support loans made to HBCU
institutions with another $260 million obligated to support near term lending as of
September 30, 2013.
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 decreased from $36 billion during FY 2012 to $28 billion
during FY 2013. The $28 billion includes approximately $0.6 billion in Special Direct
Consolidation Loans. 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.
Modifications of Subsidy Cost
The recorded subsidy cost of a loan is based on a set of assumed future cash flows.
Government actions that change these assumed future cash flows change subsidy cost and
are recorded as loan modifications. Loan modifications are recognized under the same
accounting principle as subsidy re-estimates. Modification adjustment transfers are required to
adjust for the difference between current discount rates used to calculate modification costs
and the discount rates used to calculate cohort interest expense and revenue. Separate
amounts are calculated for modification costs and modification adjustment transfers. The
Department had no modifications in fiscal year 2013, but modified loans in fiscal year 2012.
Two modifications were recognized in FY 2012; the first was related to the interest rates used
in the calculation of special allowance payments and the second was the offering of Special
Direct Consolidation Loans. Both modifications affect FFEL subsidy costs for cohort year 2010
and prior.
The net effect of loan modifications executed in FY 2012 was an upward subsidy cost of
$153 million in FFEL with a corresponding effect on Liability for Loan Guarantees. Of this
amount, $352 million in upward cost was related to the consolidation loan initiative while a net
downward modification of $199 million resulted from the London Inter Bank Offered Rate
initiative.




64                                                         FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                        FINANCIAL SECTION
                                                                                       NOTES TO THE FINANCIAL STATEMENTS


Credit Program Receivables
Credit Program Receivables, as of September 30, 2013 and 2012, consisted of the following:
                                             Credit Program Loan Receivables, Net
                                                               (Dollars in Millions)


                                                                                                2013             2012
           Direct Loan Program Loan Receivables, Net                                        $    679,107     $   526,035
           FFEL Program Loan Receivables:
              FFEL Guaranteed Loan Program, Net (Pre-1992)                                         2,231           2,697
              FFEL Program (Post-1991):
                FFEL Guaranteed Loan Program, Net                                                 35,144          29,644
                Temporary Loan Purchase Authority:
                   Loan Purchase Commitment, Net                                                  38,946          41,145
                   Loan Participation Purchase, Net                                               67,546          70,888
                   ABCP Conduit, Net                                                               1,864           1,731
           Federal Perkins and Other Loan Program Loan Receivables, Net                                369          351
           TEACH Program Loan Receivables, Net                                                         453          344
           Facilities Loan Programs Loan Receivables, Net                                          1,024            653

           Total                                                                            $    826,684     $   673,488


William D. Ford Federal Direct Loan Program. Direct Loan Program loan receivables are
defaulted and non-defaulted loans owned by the Department and are held by the Department
or guaranty agencies. 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)

                                                                                                2013             2012
           Principal Receivable                                                         $       584,528      $   472,877
           Interest Receivable                                                                   29,332           21,082
             Total                                                                              613,860          493,959
           Allowance for Subsidy                                                                 65,247           32,076
           Direct Loan Program Receivables, Net                                         $       679,107      $   526,035


Of the $613.9 billion in receivables, as of September 30, 2013, $28.9 billion (4.7 percent) in
loan principal was in default and had been transferred to the Department’s defaulted loan
servicer, compared to $20.2 billion (4.1 percent) a year earlier. As of September 30, 2013, an
additional $1.1 billion in defaulted loans held by servicers had not yet been transferred to the
Department’s defaulted loan servicer; this amount includes defaulted Direct Loans and
defaulted loans from other loan programs.
Federal Family Education Loan Program. FFEL Program loan receivables are defaulted
loans owned by the Department and are held by the Department or guaranty agencies.
Guaranteed student loans that default are first placed with guarantee agencies for collection. If
collection activities of guarantee agencies are not successful, the defaulted FFEL loans are
assigned to the Department for collection. Defaulted FFEL loans are accounted for under credit
reform rules, although they are legally not direct student loans.



FY 2013 Agency Financial Report—U.S. Department of Education                                                               65
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


The following schedule summarizes the principal and related interest receivables, net of the
allowance for subsidy:

                                 FFEL Program Loan Receivables, Net
                                                (Dollars in Millions)
                                                                                     2013                       2012

       FFEL Program (Pre-1992)
         Principal Receivable                                                  $         5,040            $          5,519
         Interest Receivable                                                             5,563                       5,358
           Total                                                                       10,603                      10,877
         Allowance for Subsidy                                                         (8,356)                     (8,180)
         Liabilities for Loan Guarantees                                                   (16)                          -
       FFEL Guaranteed Loan Program, Net (Pre-1992)                                      2,231                       2,697

       FFEL Program (Post-1991)
       FFEL Guaranteed Loan Program:
         Principal Receivable                                                          32,649                      31,549
         Interest Receivable                                                             4,849                       4,541
           Total                                                                       37,498                      36,090
         Allowance for Subsidy                                                         (6,614)                     (6,446)
         Liabilities for Loan Guarantees                                                 4,260                           -
       FFEL Guaranteed Loan Program, Net                                               35,144                      29,644

       Temporary Loan Purchase Authority:
         Loan Purchase Commitment:
           Principal Receivable                                                         31,899                     34,012
           Interest Receivable                                                           1,859                      1,875
             Total                                                                      33,758                     35,887
           Allowance for Subsidy                                                         5,188                      5,258
         Loan Purchase Commitment, Net                                                  38,946                     41,145
         Loan Participation Purchase:
           Principal Receivable                                                         56,041                     58,834
           Interest Receivable                                                           3,297                      3,144
             Total                                                                      59,338                     61,978
           Allowance for Subsidy                                                         8,208                      8,910
         Loan Participation Purchase, Net                                               67,546                     70,888
         ABCP Conduit:
           Principal Receivable                                                          2,208                      2,038
           Interest Receivable                                                             193                        133
             Total                                                                       2,401                      2,171
           Allowance for Subsidy                                                         (537)                      (440)
         ABCP Conduit, Net                                                               1,864                      1,731

       FFEL Program Loan Receivables, Net                                      $      145,731             $      146,105


All loans purchased by the Department under the temporary loan purchase authority are
defaulted and non-defaulted federal assets.
Federal Perkins Loan Program. As of September 30, 2013 and 2012, loan and interest
receivables, net of allowance for losses, were $358 million and $343 million, respectively.
These receivables are valued at net realizable value with estimated allowance for losses of
$154 million and $147 million as of September 30, 2013 and 2012, respectively.



66                                                                  FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                               FINANCIAL SECTION
                                                                                              NOTES TO THE FINANCIAL STATEMENTS


TEACH Grant Program. As of September 30, 2013 and 2012, loan receivables were $453
million and $344 million, respectively. The receivable balance is net of allowance for subsidy of
$106 million and $93 million as of September 30, 2013 and 2012, respectively.
Facilities Loan Programs. The following schedule summarizes the principal and related
interest receivables, net of the allowance for subsidy:
                                      Facilities Loan Programs Loan Receivables, Net
                                                                  (Dollars in Millions)

                                                                                                      2013                 2012
           Principal Receivable                                                                $         1,211        $       1,056
           Interest Receivable                                                                              10                   12
             Receivables                                                                                 1,221                1,068
           Allowance for Subsidy/Loss                                                                    (197)                (415)
           Facilities Loan Programs Loan Receivables, Net                                      $         1,024        $          653



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)
                                                                                                   2013                   2012
           Beginning Balance, Allowance for Subsidy                                       $           32,076          $      25,346
           Activity
             Fee Collections                                                                         (1,557)                  (1,585)
             Loan Cancellations1                                                                       1,890                    1,250
             Subsidy Allowance Amortization                                                          (7,719)                  (3,778)
             Other                                                                                     1,000                      123
           Total Activity                                                                            (6,386)                  (3,990)
           Components of Subsidy Transfers
             Interest Rate Differential                                                              37,063                   32,372
             Defaults, Net of Recoveries                                                             (1,887)                  (2,356)
             Fees                                                                                      1,801                    1,792
             Other2                                                                                  (9,967)                  (8,901)
           Current Year Subsidy Transfers                                                             27,010                  22,907
           Components of Subsidy Re-estimates
             Interest Rate Re-estimates3                                                              11,754                  (7,651)
             Technical and Default Re-estimates                                                          793                  (4,536)
           Subsidy Re-estimates                                                                       12,547                (12,187)

           Ending Balance, Allowance for Subsidy                                          $           65,247          $       32,076
               1
                   Loan cancellations include write-offs of loans because the primary borrower died, became disabled, or declared
                   bankruptcy.
               2
                   Other consists of contract collection costs, program review collections, fee and other accruals.
               3
                   The interest rate re-estimate relates to subsidy associated with establishing a fixed rate for the Department’s
                   borrowing from Treasury.




FY 2013 Agency Financial Report—U.S. Department of Education                                                                            67
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


Federal Family Education Loan Program. The FFEL Guaranteed Student Loan Financing
Account has a negative estimated Liability for Loan Guarantees of $4.3 billion as of September
30, 2013. This indicates expected collections on anticipated future defaulted loans will be in
excess of default disbursements, calculated on a net present value basis. As of September 30,
2012, the Department’s Liability for Loan Guarantees was approximately $1 billion on
anticipated loan defaults. Under Generally Accepted Accounting Principles negative estimated
liability, the negative estimated liability has been classified as Credit Program Receivables on
the Consolidated Balance Sheet. According to “Federal Accounting Standards Advisory Board
Standard No. 2, Accounting for Direct Loans and Loan Guarantees,” a negative liability is
reasonable, as that the accounting standard was written with deference to budgetary rules as
promulgated by OMB. 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)

                                                                                                2013                        2012
       Beginning Balance, FFEL Financing Account Liability for
       Loan Guarantees                                                                   $         (1,013)           $          (9,984)
       Activity
         Interest Supplement Payments                                                                1,336                       1,756
         Claim Payments                                                                              9,125                       9,291
         Fee Collections                                                                           (2,239)                      (2,344)
         Interest on Liability Balance                                                               1,783                       1,440
         Other1                                                                                   (12,564)                    (12,748)
       Total Activity                                                                              (2,559)                      (2,605)
       Components of Loan Modifications
         Loan Modification Costs                                                                           -                      (153)
         Modification Adjustment Transfers                                                                 -                         (6)
       Loan Modifications                                                                                  -                      (159)
       Components of Subsidy Re-estimates
         Interest Rate Re-estimates                                                                      -                           -
         Technical and Default Re-estimates                                                          7,832                      11,735
       Subsidy Re-estimates                                                                          7,832                      11,735

       Ending Balance, FFEL Financing Account Liability for Loan
       Guarantees                                                                                    4,260                      (1,013)
       FFEL Liquidating Account Liability for Loan Guarantees                                          (16)                        (24)
       Liabilities for Loan Guarantees                                                    $          4,244          $          (1,037)
          1
              Other activity is comprised of negative special allowance collections, collections on defaulted FFEL loans, and loan
              cancellations due to death, disability, or bankruptcy. In addition, other miscellaneous collections, expenditures, and
              accruals related to operations are recorded.


The presentation of the FY 2012 Liability for Loan Guarantees is in the liability section of the
Department’s Balance Sheet, while the presentation of the FY 2013 liability is in the Credit
Program Receivables Balance Sheet line item. The Liability for Loan Guarantees schedule
above presents both years.




68                                                                               FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                            FINANCIAL SECTION
                                                                                           NOTES TO THE 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. Loans in these programs are
acquired loans by the Department. 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)

                                                                                             2013                2012
           Beginning Balance, Allowance for Subsidy                                    $         5,258       $       4,415
           Activity
              Subsidy Allowance Amortization                                                        (771)               (684)
              Loan Cancellations                                                                     106                  84
              Contract Collection Cost and Other                                                      51                  37
           Total Activity                                                                           (614)               (563)
           Components of Subsidy Re-estimates
              Interest Rate Re-estimates                                                                -                   -
              Technical and Default Re-estimates                                                     544             1,406
           Subsidy Re-estimates                                                                      544             1,406

           Ending Balance, Allowance for Subsidy                                       $         5,188       $       5,258



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

                                                                                             2013                2012
           Beginning Balance, Allowance for Subsidy                                    $         8,910       $       8,564
           Activity
              Subsidy Allowance Amortization                                                   (1,319)              (1,167)
              Loan Cancellation                                                                      197                 157
              Contract Collection Cost and Other                                                      43                 (37)
           Total Activity                                                                      (1,079)              (1,047)
           Components of Subsidy Re-estimates
              Interest Rate Re-estimates                                                                -                   -
              Technical and Default Re-estimates                                                     377             1,393
           Subsidy Re-estimates                                                                      377             1,393

           Ending Balance, Allowance for Subsidy                                       $         8,208       $       8,910


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 on uninvested funds.
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. Changes in timing of
interest accrual have zero effect on the financial statements. The Department does not record
interest revenue on defaulted guaranteed loans. The Department implemented a new Debt
Management Collection System in October FY 2012. As a result of the new system’s
capabilities, the Department is now accruing interest on a monthly basis. In addition, no

FY 2013 Agency Financial Report—U.S. Department of Education                                                                    69
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


budgetary resources or status of resources are affected, including expended and unexpended
obligations. The amounts are affected by the timing of interest accruals; however, the amounts
related to these timing differences are not material to the footnote disclosures. (See Note 15)
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, 2013 and 2012:
                                             Direct Loan Program
                                                  (Dollars in Millions)

                                                                                 2013                            2012
         Interest Expense on Treasury Borrowing                           $          22,661             $            20,643
       Total Interest Expense                                             $          22,661             $            20,643


         Interest Revenue from the Public                                 $            26,972           $             20,156
         Amortization of Subsidy                                                       (7,720)                        (3,778)
         Interest Revenue on Uninvested Funds                                            3,409                          4,265
       Total Interest Revenue                                             $            22,661           $             20,643



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

                                                                                      2013                       2012
       Components of Current Year Subsidy Transfers
         Interest Rate Differential                                              $      37,063               $       32,372
         Defaults, Net of Recoveries                                                    (1,887)                      (2,356)
         Fees                                                                             1,801                        1,792
         Other                                                                          (9,967)                      (8,901)
       Current Year Subsidy Transfers                                                   27,010                       22,907

         Subsidy Re-estimates                                                           12,547                     (12,187)

       Direct Loan Subsidy Expense                                               $      39,557               $       10,720


William D. Ford Federal Direct Loan re-estimated subsidy cost was adjusted downward by
$12.5 billion in FY 2013. Updated discount rates for the 2012 and 2011 cohorts in the credit
subsidy calculator decreased cost by $11.8 billion. Deferment and forbearance rate changes
decreased cost by $1.5 billion. Costs increased $1.5 billion due to increases in default and
disability rates. Changes in prepayment rates reflect slower than expected prepayment activity,
leading to increased interest earnings resulting in $1.1 billion in downward subsidy cost. 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 by
$1.8 billion. Re-estimated costs only include those cohorts that are 90 percent disbursed;
cohort years 1994–2012.


70                                                                    FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                        FINANCIAL SECTION
                                                                                       NOTES TO THE FINANCIAL STATEMENTS


William D. Ford Federal Direct Loan re-estimated subsidy cost was adjusted upward by
$12.2 billion in FY 2012. Costs increased $10.3 billion due to updated economic assumptions,
including probabilistic estimating, discount rates, and weighted consolidation loan interest
rates. Direct Loan death, disability, and bankruptcy rates increased cost by $478 million due to
increased disability claims. Costs increased $538 million due to slight decreases in loan
volume, concentrated in negative subsidy loan types and default rates increased resulting in
$604 million in cost. 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 $2.0 billion. Re-estimated costs only include those cohorts
that are 90 percent disbursed; cohort years 1994–2011.
Federal Family Education Loan Program
                                                  FFEL Program Subsidy Expense
                                                               (Dollars in Millions)

                                                                                              2013             2012
           FFEL Guaranteed Loan Program Subsidy Re-estimates                              $     7,832      $    11,735
           Loan Purchase Commitment Subsidy Re-estimates                                          544            1,406
           Loan Participation Purchase Subsidy Re-estimates                                       377            1,393
             FFEL Program Subsidy Re-estimates                                                  8,753           14,534

           FFEL Guaranteed Loan Program Modification Costs                                           -                153

              FFEL Program Subsidy Expense                                                $     8,753      $    14,381


FFEL Guaranteed re-estimated subsidy cost was adjusted downward by $7.8 billion in
FY 2013. Costs decreased $5.2 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 increased $1 billion due to increases in bankruptcy and disability rates. 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 leaders would increase
projected FFEL costs by $12.3 billion. Re-estimated costs only include those cohorts that were
90 percent disbursed; cohort years 1992–2010.

FFEL Guaranteed re-estimated subsidy cost was adjusted downward by $11.7 billion in
FY 2012. Costs decreased $10.3 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 $1.2 billion given the lower than expected demand for Special
Direct Consolidation Loans—a short-term consolidation initiative offered during FY 2012. 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 $13.1 billion. Re-estimated costs only include those cohorts that were
90 percent disbursed; cohort years 1992–2010.




FY 2013 Agency Financial Report—U.S. Department of Education                                                                71
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


Subsidy Rates
The subsidy rates applicable to the 2013 loan cohort year follow:
                                     Subsidy Rates—Cohort 2013
                                                 Interest
                                                Differential           Defaults          Fees          Other            Total

       Direct Loan Program                       (26.22%)                   0.88%       (1.33%)         7.48%         (19.19%)
       TEACH Program                              3.47%                     0.41%        0.00%          7.13%          11.01%


The subsidy rate represents the subsidy expense of the program in relation to the obligations or
commitments made during the fiscal year. The subsidy expense for new direct 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 may include re-estimates. The subsidy rates shown
above, which reflect aggregate negative subsidy in the FY 2013 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.
Administrative Expenses
Administrative Expenses, for the years ended September 30, 2013 and 2012, consisted of the
following:
                                    Administrative Expenses
                                              (Dollars in Millions)

                                               2013                                                  2012
                                Direct Loan                    FFEL                 Direct Loan                   FFEL
                                 Program                     Program                 Program                    Program
     Operating Expense         $       639               $            413           $         543           $        321
     Other Expense                      25                            16                        26                     16

     Total                     $       664                $           429           $         569           $        337




72                                                                      FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                            FINANCIAL SECTION
                                                                                           NOTES TO THE FINANCIAL STATEMENTS


Note 7. Property and Equipment, Net
Property and Equipment, as of September 30, 2013 and 2012, consisted of the following:
                                                     Property and Equipment, Net
                                                               (Dollars in Millions)

                                                                                                2013
                                                                                             Accumulated          Net Asset
                                                                         Cost                Depreciation          Value

           Information Technology, Internal Use Software,
           and Telecommunications Equipment                       $              177         $      (175)     $           2
           Furniture and Fixtures                                                      3              (3)                     -

           Property and Equipment, Net                            $              180         $      (178)     $               2



                                                                                                2012
                                                                                             Accumulated          Net Asset
                                                                          Cost               Depreciation          Value

           Information Technology, Internal Use Software,
           and Telecommunications Equipment                       $              176         $      (169)     $           7
           Furniture and Fixtures                                                      3              (3)                     -

           Property and Equipment, Net                            $              179         $      (172)     $               7


The depreciation expense as of September 30, 2013 and 2012 is $6 million and $9 million,
respectively.
The major drivers of fixed assets at the Department are improvements to information
technology including financial management and program management systems. Specifically,
recent enhancements have been made to the Department’s automated grant management
capability. The Department acquires more robust information technology to augment its
significant capabilities to manage student loan and grant operations.




FY 2013 Agency Financial Report—U.S. Department of Education                                                                      73
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


Leases
The Department leases information technology and telecommunications equipment as part of a
contractor-owned, contractor-operated services contract. Lease payments associated with the
equipment have been determined to be operating leases and, as such, are expensed as
incurred. The non-cancelable lease term is one year, with the Department holding the right to
extend the lease term by exercising additional one-year options.
All Department and contractor staff are housed in leased buildings. The Department does not
own real property. The Department leases office space from the General Services
Administration (GSA). The lease contracts with GSA for privately and publicly owned buildings
are operating leases. Future lease payments are not accrued as liabilities, are expensed as
incurred. The Department leases 22 privately owned and 8 publicly owned buildings in
19 cities. Building lease expense as of September 30, 2013 and 2012, was $80 million and
$65 million, respectively. Estimated future minimum lease payments for the privately and
publicly owned buildings are presented below.
                                          Leases
                                       (Dollars in Millions)
                                              2013
       FY                                                                                  Amount
       2014                                                                               $    80
       2015                                                                                    90
       2016                                                                                    93
       2017                                                                                    96
       2018                                                                                   100
       After 2018                                                                             103
       Total                                                                              $      562


Note 8. Other Assets
Other Intragovernmental Assets primarily consist of advance payments to the Department of
Interior's Bureau of Indian Education under terms of an interagency agreement. Under this
agreement, funds are transferred from the Department to Interior to fund initiatives that include,
but are not limited to: (1) Improving Basic Programs Operated by Local Education Agencies,
(2) Comprehensive School Reform, (3) Teacher Quality Improvement Formula Grants,
(4) Enhancing Education through Technology, and (5) 21st Century Community Learning
Centers. Other Intragovernmental Assets were $22 million and $18 million as of September 30,
2013 and 2012, respectively.
Other Assets with the public consist of payments made to grant recipients in advance of their
expenditures and in-process invoices for interest benefits and special allowances for the FFEL
Program. Other Assets with the public were $13 million and $21 million as of September 30,
2013 and 2012, respectively.




74                                                             FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                                FINANCIAL SECTION
                                                                                               NOTES TO THE FINANCIAL STATEMENTS


Note 9. Accounts Payable
Accounts Payable, as of September 30, 2013 and 2012, consisted of the following:
                                                               Accounts Payable
                                                                  (Dollars in Millions)

                                                                                                 2013                        2012
           Direct Loan Booking Accrual                                                     $             2,923       $               2,984
           In Process Disbursements:
              Direct Loans                                                                                 573                         588
              Grants                                                                                       366                         288
              FFEL Claim Payments                                                                            52                        163
           Contractual Services                                                                            228                           -
           Other                                                                                           (15)                         75
           Accounts Payable to the public                                                                4,127                       4,098

           Intragovernmental Accounts Payable                                                                2                          31

           Total Accounts Payable                                                          $             4,129       $               4,129



Accounts Payable to the public primarily consists of in-process grant and loan disbursements,
including an accrued liability for schools that have disbursed loans prior to requesting funds.
The Department pays vendor invoices according to the Prompt Payment Act rules that are built
into the financial system as a control mechanism, generally within 25–30 days of receipt of
goods and proper invoicing. The Department also monitors and leverages vendor discount
opportunities by processing payments to coincide with discount terms when possible.

Accounts Payable Other abnormal balance of $(15) million is primarily due to FFEL
Guaranteed Loan Program collections of fees, principal, and interest on defaulted loans.

Note 10. Debt
Debt, as of September 30, 2013 and 2012, consisted of the following:
                                                                          Debt
                                                                   (Dollars in Millions)

                                                                                                2013
                                                  Beginning          Accrued                                                        Ending
                                                   Balance           Interest              Borrowing         Repayments             Balance
          Treasury Debt
          Direct Loan Program                      $ 549,332         $          -          $   177,682        $   (28,653)          $ 698,361
          FFEL Program
             Guaranteed Loan Program                  43,254                    -                    -                   -            43,254
             Loan Purchase Commitment                 42,341                    -                  602             (4,345)            38,598
             Loan Participation Purchase              77,292                    -                  519             (9,794)            68,017
             ABCP Conduit                              1,735                    -                1,000               (192)             2,543
          TEACH Program                                  370                    -                  128                (13)               485
          Facilities Loan Programs                        45                    -                    -                 (8)                37
          Total Treasury Debt                        714,369                    -              179,931            (43,005)           851,295
          Debt to the FFB
          HBCU                                            934                   -                 225                 (22)             1,137
          Total Debt to the FFB                           934                   -                 225                 (22)             1,137
          Total                                    $ 715,303          $         -          $   180,156        $   (43,027)          $ 852,432




FY 2013 Agency Financial Report—U.S. Department of Education                                                                              75
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


                                                                        2012
                                       Beginning   Accrued                                                     Ending
                                        Balance    Interest       Borrowing            Repayments              Balance
      Treasury Debt
      Direct Loan Program              $ 392,374   $      -      $     175,881          $    (18,923)          $ 549,332
      FFEL Program
         Guaranteed Loan Program          29,484          -             13,770                      -             43,254
         Loan Purchase Commitment         43,859          -                719                (2,237)             42,341
         Loan Participation Purchase      79,302          -              1,621                (3,631)             77,292
         ABCP Conduit                        964          -              1,050                  (279)              1,735
      TEACH Program                          281          -                119                   (30)                370
      Facilities Loan Programs                58          -                  -                   (13)                 45
      Total Treasury Debt                546,322          -            193,160               (25,113)            714,369
      Debt to the FFB
      HBCU                                   786         4                 158                   (14)                934
      Total Debt to the FFB                  786         4                 158                   (14)                934
      Total                            $ 547,108   $     4       $     193,318          $    (25,127)          $ 715,303


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. Borrowing from Treasury
decreased by $13.2 billion and 7 percent from FY 2012. The majority of the increase in debt
resulted from the Direct Loan Program borrowing for loan origination. Additionally, the FFEL,
TEACH, and HBCU programs had increased borrowings.
The maturity date for borrowing from Treasury is based on the time period used in subsidy
calculation, not the contractual term of the Department’s or private lender’s loan to the
borrower. The period of time used for subsidy calculation may exceed the contractual term of a
loan to a borrower. Borrowings from Treasury mature on September 30 of the estimated final
year of a cohort.




76                                                            FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                                      FINANCIAL SECTION
                                                                                                     NOTES TO THE FINANCIAL STATEMENTS


Note 11. Other Liabilities
Other Liabilities, as of September 30, 2013 and 2012, consisted of the following:
                                                               Other Liabilities
                                                                 (Dollars in Millions)

                                                                                2013                                     2012
                                                                      Intragovern-   With the                 Intragovern-    With the
                                                                         mental       Public                     mental       Public
    Liabilities Covered by Budgetary Resources
      Current
        Advances From Others                                           $            29       $           -     $       35    $           -
        Employer Contributions and Payroll Taxes                                     6                   -              5                -
        Liability for Deposit Funds and Clearing
          Accounts                                                                  7                   37            (73)           36
        Accrued Payroll and Benefits                                                -                   28               -           26
        Deferred Revenue                                                            -                   31               -           36
        Liabilities in Miscellaneous Receipt Accounts                           6,074                    -          3,716             -
    Total Other Liabilities Covered by
    Budgetary Resources                                                         6,116                   96          3,683            98


    Liabilities Not Covered by Budgetary Resources
      Current
        Accrued Unfunded Annual Leave                                                    -              36               -           37
      Non-Current
        Accrued Unfunded FECA Liability                                             4                    -              5             -
        Custodial Liability                                                         2                    -              -             -
        Liabilities in Miscellaneous Receipt Accounts                             358                    -            342             -
        Capital Transfers1                                                      2,375                    -          2,914             -
        Accrued FECA Actuarial Liability                                            -                   15              -            16
    Total Other Liabilities Not Covered by
    Budgetary Resources                                                         2,739                   51          3,261            53

    Other Liabilities                                                      $    8,855            $     147     $    6,944    $      151
           1
               See Reclassification in Note 1.

Other liabilities include current and non-current liabilities. The current liabilities covered by
budgetary resources primarily consist of downward subsidy re-estimates ($6.1 billion), which
when executed will be paid to the General Fund of the Treasury.
The non-current liabilities not covered by budgetary resources primarily relate to capital
transfers ($2.4 billion) and the student loan receivables of the Federal Perkins Loan Program
($0.4 billion).
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 $2,790 million and
$3,314 million as of September 30, 2013 and 2012, respectively.
As of September 30, 2013 and 2012, liabilities on the Balance Sheet totaled $869.2 billion and
$731.8 billion, respectively. Of this amount, liabilities covered by budgetary resources totaled
$866.4 billion as of September 30, 2013, and $731.4 billion as of September 30, 2012.




FY 2013 Agency Financial Report—U.S. Department of Education                                                                             77
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


Note 12. Accrued Grant Liability
Accrued Grant Liability is an accrual made by the Department for expenditures incurred by
grantees prior to their receiving grant funds to cover the expenditures. Accrued Grant Liability is
estimated using statistical sampling. The Accrued Grant Liability by major reporting groups, as
of September 30, 2013 and 2012, consisted of the following:
                                       Accrued Grant Liability
                                              (Dollars in Millions)

                                                                               2013                          2012
       FSA                                                             $              1,727           $              2,269
       OESE                                                                             105                            211
       OSERS                                                                            120                            233
       RA/JF                                                                             61                             55
       Other                                                                            157                            133

       Accrued Grant Liability                                         $              2,170           $              2,901


Note 13. Net Position
Unexpended appropriations, as of September 30, 2013 and 2012, consisted of the following:
                                    Unexpended Appropriations
                                              (Dollars in Millions)

                                                                                2013                         2012
       Unobligated Balances:
         Available                                                         $          13,700          $             10,479
         Not Available                                                                    909                          632
       Undelivered Orders                                                             56,762                        61,575

       Unexpended Appropriations                                           $          71,371          $             72,686


The Cumulative Results of Operations of $(3,528) million and $(7,531) million as of September
30, 2013 and 2012, respectively, consists mostly of unfunded upward subsidy re-estimates,
other unfunded expenses, and net investments of capitalized assets.




78                                                                FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                           FINANCIAL SECTION
                                                                                          NOTES TO THE FINANCIAL STATEMENTS


Other Financing Sources on the Statement of Changes in Net Position was primarily comprised
of negative subsidy transfers, downward subsidy re-estimates, and other, as of September 30,
2013 and 2012 as presented in the following table:
               Negative Subsidy Transfers, Downward Subsidy Re-Estimates, and Other
                                                                (Dollars in Millions)

                                                                                 2013
                                                    Negative             Downward
                                                     Subsidy              Subsidy                             Ending
                                                    Transfers           Re-Estimates          Other           Balance

          Direct Loan                                 $ (27,010)          $  (12,603)         $          -      $ (39,613)
          FFEL                                                 -             (11,065)                    -        (11,065)
          Facilities                                           -                (199)                 (18)           (217)
          Grants                                               -                    -                 (52)            (52)
          TEACH                                                -                 (18)                    -            (18)
          Other                                                -                    -                 (89)            (89)
          Total                                       $ (27,010)           $ (23,885)         $      (159)      $ (51,054)


                                                                                  2012
                                                    Negative             Downward
                                                     Subsidy              Subsidy                              Ending
                                                    Transfers           Re-Estimates              Other        Balance

          Direct Loan                                 $ (22,907)           $     1,025        $          -      $ (21,882)
          FFEL                                                 -              (15,699)                131         (15,568)
          Facilities                                           -                   (20)               (14)            (34)
          Grants                                               -                      -               (35)            (35)
          TEACH                                                -                      -                  -               -
          Other                                                -                      -               (25)            (25)
          Total                                       $ (22,907)            $ (14,694)        $         57      $ (37,544)




FY 2013 Agency Financial Report—U.S. Department of Education                                                                 79
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


Note 14. Intragovernmental Cost and Exchange Revenue by
Program
As required by the GPRA Modernization Act of 2010, each of the Department’s reporting
groups and major program offices have been aligned with the goals presented in the
Department’s Strategic Plan 2011–2014.

                                      Reporting Group/
           Net Cost Program            Program Office                          Strategic Goal
                                                         Goal 1: Postsecondary Education, Career and
                                            FSA          Technical Education, and Adult Education.
     Increase College Access,
                                           OPE           Increase college access, quality, and completion by
     Quality, and Completion
                                           OVAE          improving higher education and lifelong learning
                                                         opportunities for youth and adults.
                                                         Goal 2: Elementary and Secondary Education.
                                                         Prepare all elementary and secondary students for
                                                         college and career by improving the education
                                                         system’s ability to consistently deliver excellent
     Improve Preparation for                             classroom instruction with rigorous academic
     College and Career from                             standards while providing effective support services.
                                           OESE
     Birth Through 12th Grade,
                                            HR
     Especially for Children with                        Goal 3: Early Learning. Improve the health, social-
     High Needs                                          emotional, and cognitive outcomes for all children
                                                         from birth through 3rd grade, so that all children,
                                                         particularly those with high needs, are on track for
                                                         graduating from high school college- and career-
                                                         ready.
                                                         Goal 4: Equity. Ensure and promote effective
                                                         educational opportunities and safe and healthy
                                           OELA
     Ensure Effective Educational                        learning environments for all students regardless of
                                           OCR
     Opportunities for All Students                      race, ethnicity, national origin, age, sex, sexual
                                          OSERS
                                                         orientation, gender identity, disability, language, and
                                                         socioeconomic status.
                                                         Goal 5: Continuous Improvement of the U.S.
                                                         Education System. Enhance the education
     Enhance the Education
                                            IES          system’s ability to continuously improve through
     System’s Ability to
                                            OII          better and more widespread use of data, research
     Continuously Improve
                                                         and evaluation, transparency, innovation, and
                                                         technology.
     American Recovery and
     Reinvestment Act and                  RA/JF         Cuts across Strategic Goals 1-5
     Education Jobs Fund


Strategic Plan Goals 1–5 guide the Department’s program offices to carry out the vision and
programmatic mission, and the net cost programs can be specifically associated with these five
strategic goals. The Department also has a cross-cutting Strategic Plan Goal 6, U.S.
Department of Education Capacity, focusing primarily upon improving the organizational and
administrative capacities of the Department to implement the Strategic Plan Goals 1–5. The
costs associated with Strategic Plan Goal 6 are allocated to Goals 1–5 based on full-time
employee equivalents of each program.
The goals of the Recovery Act and Education Jobs Fund are consistent with the Department’s
current strategic goals and programs. For reporting purposes, a net cost program called
American Recovery and Reinvestment Act and Education Jobs Fund has been created. Gross
Cost and Exchange Revenue is the cost incurred less any exchange revenue earned from
activities. The Department determines Gross Cost and Exchange Revenue by tracing amounts
back to the relevant program office. Administrative overhead costs of funds unassigned are
allocated based on full-time employee equivalents of each program.

80                                                                 FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                                    FINANCIAL SECTION
                                                                                                   NOTES TO THE FINANCIAL STATEMENTS


Gross costs and earned revenue are classified as intragovernmental (exchange transactions
between the Department and other entities within the federal government) or with the public
(exchange transactions between the Department and non-federal entities). “Increase College
Access, Quality, and Completion” program negative net cost of operations is due to negative
subsidy cost transfers and the downward re-estimates of prior subsidy cost. The following
tables present the gross cost and exchange revenue by program for the Department for
FY 2013 and FY 2012.
                                     Gross Cost and Exchange Revenue by Program
                                                                   (Dollars in Millions)

                                                                                                       2013

                                                                 FSA           OESE            OSERS          RA/JF       Other         Total


           Increase College Access, Quality, and Completion
             Intragovernmental Gross Cost          $ 28,513                   $            -   $         -    $       -   $       85   $ 28,598
             Public Gross Cost                      (15,247)                               -             -            -       4,237    (11,010)
                Total Gross Program Costs             13,266                               -             -            -       4,322      17,588
             Intragovernmental Earned Revenue        (3,685)                               -             -            -         (12)     (3,697)
             Public Earned Revenue                  (23,003)                               -             -            -         (44)   (23,047)
                Total Program Earned Revenue        (26,688)                               -             -            -         (56)   (26,744)
           Total Program Cost                       (13,422)                               -             -            -       4,266      (9,156)

           Improve Preparation for College and Career from Birth Through 12th Grade, Especially for Children with
           High Needs
             Intragovernmental Gross Cost                 -        188          -        -           -        188
             Public Gross Cost                            -     22,210          -        -           7     22,217
                Total Gross Program Costs                 -     22,398          -        -           7     22,405
             Intragovernmental Earned Revenue             -         (2)         -        -           -         (2)
             Public Earned Revenue                        -        (23)         -        -           -        (23)
                Total Program Earned Revenue              -        (25)         -        -           -        (25)
           Total Program Cost                             -     22,373          -        -           7     22,380

           Ensure Effective Educational Opportunities for All Students
             Intragovernmental Gross Cost                  -           -                                48            -          30          78
             Public Gross Cost                             -           -                           16,008             -         770     16,778
                Total Gross Program Costs                  -           -                           16,056             -         800     16,856
             Intragovernmental Earned Revenue              -           -                               (1)            -            -        (1)
             Public Earned Revenue                         -           -                              (24)            -          (1)       (25)
                Total Program Earned Revenue               -           -                              (25)            -          (1)       (26)
           Total Program Cost                              -           -                           16,031             -         799     16,830

           Enhance the Education System’s Ability to Continuously Improve
             Intragovernmental Gross Cost                 -         -                                    -            -           62          62
             Public Gross Cost                            -         -                                    -            -       1,819       1,819
                Total Gross Program Costs                 -         -                                    -            -       1,881       1,881
             Intragovernmental Earned Revenue             -         -                                    -            -          (2)         (2)
             Public Earned Revenue                        -         -                                    -            -         (84)        (84)
                Total Program Earned Revenue              -         -                                    -            -         (86)        (86)
           Total Program Cost                             -         -                                    -            -       1,795       1,795

           American Recovery and Reinvestment Act and Education Jobs Fund
             Intragovernmental Gross Cost              -          -                                      -            -            -          -
             Public Gross Cost                         -          -                                      -        2,623            -      2,623
                Total Gross Program Costs              -          -                                      -        2,623            -      2,623
             Intragovernmental Earned Revenue          -          -                                      -            -            -          -
             Public Earned Revenue                     -          -                                      -            -            -          -
                Total Program Earned Revenue           -          -                                      -            -            -          -
           Total Program Cost                          -          -                                      -        2,623            -      2,623

           Net Cost of Operations                              $(13,422)      $ 22,373         $ 16,031       $ 2,623     $ 6,867      $ 34,472


FY 2013 Agency Financial Report—U.S. Department of Education                                                                                    81
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS




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

                                                                                      2012

                                                FSA           OESE          OSERS            RA/JF       Other         Total


       Increase College Access, Quality, and Completion
         Intragovernmental Gross Cost         $ 26,750  $              -     $         -     $       -   $       77   $ 26,827
         Public Gross Cost                        9,216                -               -             -       4,367      13,583
            Total Gross Program Costs            35,966                -               -             -       4,444      40,410
         Intragovernmental Earned Revenue       (5,343)                -               -             -         (26)     (5,369)
         Public Earned Revenue                 (19,963)                -               -             -          (8)   (19,971)
            Total Program Earned Revenue       (25,306)                -               -             -         (34)   (25,340)
       Total Program Cost                        10,660                -               -             -       4,410      15,070

       Improve Preparation for College and Career from Birth Through 12th Grade, Especially for Children with
       High Needs
         Intragovernmental Gross Cost                  -          227                  -             -           -         227
         Public Gross Cost                             -       22,175                  -             -          17      22,192
            Total Gross Program Costs                  -       22,402                  -             -          17      22,419
         Intragovernmental Earned Revenue              -          (70)                 -             -           -         (70)
         Public Earned Revenue                         -             -                 -             -           -            -
            Total Program Earned Revenue               -          (70)                 -             -           -         (70)
       Total Program Cost                              -       22,332                  -             -          17      22,349

       Ensure Effective Educational Opportunities for All Students
         Intragovernmental Gross Cost                 -           -                   44             -          32           76
         Public Gross Cost                            -           -              16,235              -         803      17,038
            Total Gross Program Costs                 -           -              16,279              -         835      17,114
         Intragovernmental Earned Revenue             -           -                 (10)             -          (1)        (11)
         Public Earned Revenue                        -           -                    -             -            -           -
            Total Program Earned Revenue              -           -                 (10)             -          (1)        (11)
       Total Program Cost                             -           -              16,269              -         834      17,103

       Enhance the Education System’s Ability to Continuously Improve
         Intragovernmental Gross Cost               -           -                      -             -           65          65
         Public Gross Cost                          -           -                      -             -       1,595       1,595
            Total Gross Program Costs               -           -                      -             -       1,660       1,660
         Intragovernmental Earned Revenue           -           -                      -             -          (9)         (9)
         Public Earned Revenue                      -           -                      -             -         (60)        (60)
            Total Program Earned Revenue            -           -                      -             -         (69)        (69)
       Total Program Cost                           -           -                      -             -       1,591       1,591

       American Recovery and Reinvestment Act and Education Jobs Fund
         Intragovernmental Gross Cost                  -               -               -             3            -          3
         Public Gross Cost                             -               -               -         7,657            -      7,657
            Total Gross Program Costs                  -               -               -         7,660            -      7,660
         Intragovernmental Earned Revenue              -               -               -             -            -          -
         Public Earned Revenue                         -               -               -             -            -          -
            Total Program Earned Revenue               -               -               -             -            -          -
       Total Program Cost                              -               -               -         7,660            -      7,660

       Net Cost of Operations                 $ 10,660      $ 22,332        $ 16,269         $ 7,660     $ 6,852      $ 63,773




82                                                                     FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                                    FINANCIAL SECTION
                                                                                                   NOTES TO THE FINANCIAL STATEMENTS


Note 15. Interest Expense and Interest Revenue
For FY 2013 and FY 2012, interest expense and interest revenue by program consisted of the
following:
                                            Interest Expense and Interest Revenue
                                                                   (Dollars in Millions)
                                                                                                     2013
                                                                       Expenses                                         Revenue
                                                                         Non-                                             Non-
                                                        Federal                            Total            Federal                Total
                                                                        federal                                          federal


          Direct Loan Program                           $ 22,661       $          -        $22,661          $ 3,409     $ 19,252   $22,661
          FFEL Program :
             Guaranteed Loan Program                           2,083       (1,783)             300               300           -       300
             Loan Purchase Commitment                          1,244             -           1,244                79       1,165     1,244
             Loan Participation Purchase                       2,293             -           2,293               203       2,090     2,293
             ABCP Conduit                                        124             -             124                44          80       124
          TEACH Program                                           16             -              16                 2          14        16
          Other Programs                                          31             -              31                12          31        43

          Total                                         $ 28,452       $ (1,783)           $26,669          $ 4,049     $ 22,632   $26,681


                                                                                                     2012
                                                                       Expenses                                         Revenue
                                                                         Non-                                             Non-
                                                        Federal                            Total            Federal                Total
                                                                        federal                                          federal

          Direct Loan Program                           $ 20,643       $          -        $20,643          $   4,265   $ 16,378   $20,643
          FFEL Program :
             Guaranteed Loan Program                           2,083       (1,440)             643               643           -       643
             Loan Purchase Commitment                          1,318             -           1,318                73       1,245     1,318
             Loan Participation Purchase                       2,471             -           2,471               237       2,234     2,471
             ABCP Conduit                                         90             -              90                32          58        90
          TEACH Program                                           15             -              15                 4          11        15
          Other Programs                                          23             -              23                18          24        42

          Total                                         $ 26,643       $ (1,440)           $25,203          $   5,272   $ 19,950   $25,222


Federal interest expense is recognized on the Department’s outstanding Borrowings from
Treasury (Debt). The Direct Loan and FFEL Programs have $698 billion and $153 billion in
Debt, respectively, as of September 30, 2013. Federal Interest Revenue is earned on Fund
Balance with Treasury for the Direct Loan and FFEL Programs. The interest rate set by OMB is
the same for interest expense and income.
Non-Federal interest revenue is interest earned from the public on Credit Program Receivables
held by the Department. The Credit Program Receivable balances for the Direct Loan and
FFEL Program are $679 billion and $146 billion, respectively, as of September 30, 2013. Non-
federal interest expense results from the amortization of loan subsidy.




FY 2013 Agency Financial Report—U.S. Department of Education                                                                                 83
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


Note 16. Statement of Budgetary Resources
The Statement of Budgetary Resources (SBR) compares budgetary resources with the status
of those resources. As of September 30, 2013, budgetary resources were $359,939 million and
net agency outlays were $189,379 million. As of September 30, 2012, budgetary resources
were $374,984 million and net agency outlays were $217,370 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,
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 Type and Category
Obligations incurred by apportionment type and category, as of September 30, 2013 and 2012,
consisted of the following:
                    Obligations Incurred by Apportionment Type and Category
                                             (Dollars in Millions)

                                                                              2013                           2012
       Direct:
          Category A                                                  $             1,607           $             1,594
          Category B                                                              330,477                       341,320
          Exempt from Apportionment                                                   280                           419
         Total Direct Apportionment                                               332,364                       343,333
       Reimbursable:
         Exempt from Apportionment                                                       53                            36

       Obligations Incurred                                           $           332,417           $           343,369


Obligations incurred can be either direct or reimbursable. Reimbursable obligations are those
financed by offsetting collections received in return for goods and services provided, while all
other obligations are direct. Category A apportionments are those resources that can be
obligated without restriction on the purpose of the obligation, other than to be in compliance
with legislation underlying programs for which the resources were made available. Category B
apportionments are restricted by purpose for which obligations can be incurred. In addition,
some resources are available without apportionment by OMB.




84                                                               FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                                   FINANCIAL SECTION
                                                                                                  NOTES TO THE FINANCIAL STATEMENTS


Unused Borrowing Authority
Unused borrowing authority, as of September 30, 2013 and 2012, consisted of the following:
                                                     Unused Borrowing Authority
                                                                  (Dollars in Millions)
                                                                                                    2013                2012
           Beginning Balance, Unused Borrowing Authority                                  $             145,532     $       142,194
           Current Year Borrowing Authority                                                             195,185             209,614
           Funds Drawn From Treasury                                                                  (180,156)           (193,318)
           Borrowing Authority Withdrawn                                                               (21,866)            (12,958)

           Ending Balance, Unused Borrowing Authority                                     $            138,695      $      145,532


The Department is given authority to draw funds from Treasury to finance the Direct Loan,
FFEL, and TEACH Programs. Unused Borrowing Authority is a budgetary resource and is
available to support obligations. The Department periodically reviews its borrowing authority
balances in relation to its obligations and may cancel unused amounts.
Undelivered Orders at the End of the Period
Undelivered orders, as of September 30, 2013 and 2012, consisted of the following:
                                                               Undelivered Orders
                                                                  (Dollars in Millions)

                                                                                                    2013                2012
           Budgetary                                                                      $             56,901      $       61,713
           Non-Budgetary                                                                               158,703             169,062

           Undelivered Orders (Unpaid)                                                    $            215,604      $      230,775


Undelivered orders at the end of the period, as presented above, will differ from the undelivered
orders included in Unexpended Appropriations on the Net Position. Undelivered orders for trust
funds, reimbursable agreements, and federal credit financing and liquidating funds are not
funded through appropriations and are not included in Net Position. (See Note 13)
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, 2013 and 2012, consisted of the following:
                                                   Distributed Offsetting Receipts
                                                                  (Dollars in Millions)
                                                                                                    2013                2012
           Negative Subsidies and Downward Re-estimates:
             FFEL Program                                                                     $             9,946   $          16,371
             Direct Loan Program                                                                           38,436              24,258
             Facilities Loan Programs                                                                         198                   20
             TEACH Program                                                                                     17                    -
             Total Negative Subsidies and Downward Re-estimates                                            48,597              40,649
           Other                                                                                              128                 (37)
           Distributed Offsetting Receipts                                                $                48,725   $          40,612




FY 2013 Agency Financial Report—U.S. Department of Education                                                                         85
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


Explanation of Differences Between the Statement of Budgetary
Resources and the Budget of the United States Government
The FY 2015 Budget of the United States Government (President’s Budget), which presents
the actual amounts for the year ended September 30, 2013, has not been published as of the
issue date of these financial statements. The FY 2015 President’s Budget is scheduled for
release in February 2014. A reconciliation of the FY 2012 SBR to the FY 2014 President’s
Budget (FY 2012 actual amounts) for budgetary resources, obligations incurred, distributed
offsetting receipts, and net agency outlays is presented below.
                             SBR to Budget of the United States Government
                                                      (Dollars in Millions)
                                                                                               Distributed
                                                  Budgetary             Obligations            Offsetting
                                                  Resources              Incurred               Receipts            Net Outlays

       Combined Statement of Budgetary
       Resources                                  $   374,984           $     343,369         $      40,612         $    217,370
         Expired Funds                                 (1,287)                   (640)                      -                     -
         Amounts Included in the President’s
         Budget                                        12,041                  12,010                       -                     -
         Amounts Excluded from President’s
         Budget and Rounding                                   -                      1                     1                   (2)

         Distributed Offsetting Receipts                       -                      -                     -              40,612
       Budget of the United States
       Government1                                $   385,738           $     354,740         $      40,613         $    257,980
          1
           Amounts obtained from the Appendix, Budget of the United States Government, FY 2014.

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. Because 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 2012 SBR for the Federal Fund are compiled through combining
all guaranty agencies’ annual reports to determine a net valuation amount for the Federal Fund.




86                                                                        FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                                        FINANCIAL SECTION
                                                                                       NOTES TO THE FINANCIAL STATEMENTS


Note 17. 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,
2013 and 2012, are presented below:
                  Reconciliation of Budgetary Obligations to Net Cost of Operations
                                                               (Dollars in Millions)

                                                                                                2013            2012
 Resources Used to Finance Activities:
   Obligations Incurred                                                                    $      332,417   $    343,369
   Spending Authority from Offsetting Collections and Recoveries                                (110,224)        (85,170)
   Offsetting Receipts                                                                           (48,725)        (40,612)
       Net Budgetary Resources Obligated                                                         173,468         217,587
    Imputed Financing from Costs Absorbed by Others                                                    34              34
    Other Financing Sources                                                                      (51,054)        (37,522)
      Net Other Resources                                                                        (51,020)        (37,488)

    Net Resources Used to Finance Activities                                                     122,448         180,099

 Resources Used or Generated for Items Not Part of the Net Cost of Operations:
   Increase/(Decrease) in Budgetary Resources Obligated but Not Yet Provided                      14,721           (997)
   Resources that Fund Subsidy Re-estimates Accrued in Prior Period                               (3,922)          3,329
   Credit Program Collections                                                                     58,352          52,238
   Acquisition of Fixed Assets                                                                        (1)              -
   Acquisition of Net Credit Program Assets or Liquidation of Liabilities for Loan
   Guarantees                                                                                   (191,789)       (198,020)
   Resources from Non-Entity Activity                                                              51,229          37,447
     Net Resources That Do Not Finance the Net Cost of Operations                                (71,410)       (106,003)

 Net Resources Used to Finance the Net Cost of Operations                                         51,038          74,096

 Components of the Net Cost of Operations That Will Not Require or Generate Resources in the Current Period:
   Depreciation                                                                          6                    9
   Subsidy Amortization and Interest on the Liability for Loan Guarantees           8,109                4,259
   Other                                                                                27                 (17)
     Total Components Not Requiring or Generating Resources                         8,142                4,251

    Increase/(Decrease) in Annual Leave Liability                                                     (1)              (1)
    Accrued Re-estimates of Credit Subsidy Expense                                                (2,382)           3,922
    Increase in Exchange Revenue Receivable from the Public                                      (22,288)        (18,448)
    Change in Accrued Interest with Treasury                                                            2                1
    Other                                                                                            (39)             (48)
       Total Components Requiring or Generating Resources in Future
       Periods                                                                                   (24,708)        (14,574)
    Total Components That Will Not Require or Generate Resources in the
    Current Period                                                                               (16,566)        (10,323)

 Net Cost of Operations                                                                     $     34,472    $     63,773




FY 2013 Agency Financial Report—U.S. Department of Education                                                            87
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS


Note 18. Incidental Custodial Collections
The Department administers certain activities associated with the collection of non-exchange
revenues. The Department collects these amounts in a custodial capacity and transfers the
amounts collected to the General Fund of the Treasury at the end of each fiscal year. These
collections primarily consist of penalties on accounts receivable and are considered incidental
to the primary mission of the Department. During FY 2013 and FY 2012, the Department
collected $0.1 million and $1.2 million, respectively, in custodial revenues.


Note 19. American Recovery and Reinvestment Act of 2009 and
Education Jobs Fund
The Recovery Act provided $97,407 million to the Department in supplemental appropriations
for job preservation as well as state and local fiscal stabilization. This investment was made
available for use in saving jobs, supporting states and local school districts, and advancing
reforms and improvements in the education of the nation’s children and youth from early
learning programs through postsecondary education. As of September 30, 2013,
$93,884 million has been expended and $3,439 million is remaining available for future
expenditure. As of September 30, 2012, $91,491 million had been expended and $5,886 million
remained available for future expenditure.
Public Law 111-226, enacted on August 10, 2010, created an Education Jobs Fund, which
allows the Department to provide $10,000 million for assistance in saving and creating
education jobs. As of September 30, 2013, $9,990 million has been expended and $10 million
is remaining for future expenditure. As of September 30, 2012, $9,771 million had been
expended and $229 million remained available for future expenditure.


Note 20. Contingencies
Guaranty Agencies
The Department may assist guaranty agencies experiencing financial difficulties. No provision
has been made in the financial statements for potential liabilities. The Department has not done
so in fiscal years 2013 or 2012 and does not expect to in future years.
Federal Perkins Loan Program
The Federal Perkins Loan Program is a campus-based program that provides financial
assistance to eligible postsecondary school students. In FY 2013, the Department provided
funding of 82.8 percent of the capital used to make loans to eligible students through
participating schools at 5 percent interest. The schools provided the remaining 17.2 percent of
program funding. For the latest academic year ended June 30, 2013, approximately
499 thousand loans were made totaling $1 billion at 1,492 institutions, averaging $2,021 per
loan. The Department’s equity interest was approximately $6.7 billion as of September 30,
2013.
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.




88                                                      FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                FINANCIAL SECTION
                                                               NOTES TO THE FINANCIAL STATEMENTS


Litigation and Other Claims
The Department is involved in various lawsuits incidental to its operations. In the opinion of
management, the ultimate resolution of pending litigation will not have a material effect on the
Department’s financial position.
Other Matters
Some portion of the current-year financial assistance expenses (grants) may include funded
recipient expenditures that are subsequently disallowed through program review or audit
processes. In the opinion of management, the ultimate disposition of these matters will not
have a material effect on the Department’s financial position.




FY 2013 Agency Financial Report—U.S. Department of Education                                       89
                                                                                                                                                     United States Department of Education
90




                                                                                                                                                                                                                                                                                                                                          REQUIRED SUPPLEMENTARY INFORMATION
                                                                                                                                                                                                                                                                                                                                                                               FINANCIAL SECTION
                                                                                                                                                  Combining Statement of Budgetary Resources
                                                                                                                                                    For the Year Ended September 30, 2013
                                                                                                                                                                                  (Dollars in Millions)

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

                                                                                                                                                                 Non-Budgetary                                  Non-Budgetary                                                                                            Non-Budgetary
                                                                                                                                                                 Credit Reform                                  Credit Reform                                                                                            Credit Reform
                                                                                                                                                                   Financing                                      Financing                                                                                                Financing
                                                                                                                                             Budgetary             Accounts             Budgetary                 Accounts            Budgetary              Budgetary            Budgetary          Budgetary             Accounts
                                                               Budgetary Resources:
                                                                Unobligated Balance, Brought Forward, October 1                          $         12,622 $               18,993 $              10,366 $                 18,579 $              802 $                    314 $                 30 $          1,110 $                414
                                                                Recoveries of Prior Year Unpaid Obligations                                         1,191                 35,425                   358                   35,425                556                      110                   56              111                    -
                                                                Other Changes in Unobligated Balance (+ or -)                                       (428)               (39,189)                 (266)                 (39,189)                (72)                     (33)                   -              (57)                   -
                                                                Unobligated Balance from Prior Year Budget Authority (Net)               $         13,385 $               15,229 $              10,458 $                 14,815 $            1,286 $                    391 $                 86 $          1,164 $                414
                                                                Appropriations (Discretionary and Mandatory)                                       88,380                      5                44,578                        -             20,819                   15,622                    -            7,361                    5
                                                                Borrowing Authority (Discretionary and Mandatory) (Note 16)                             -               195,185                      -                 194,970                    -                        -                   -                 -                 215
                                                                Spending Authority from Offsetting Collections
                                                                (Discretionary and Mandatory)                                                            779             46,976                     711                 46,926                       -                    2                    -                 66                 50
                                                               Total Budgetary Resources (Note 16)                                       $        102,544 $             257,395 $               55,747 $               256,711 $            22,105 $                 16,015 $                 86 $          8,591 $                 684

                                                               Status of Budgetary Resources:
                                                                Obligations Incurred (Note 16)                                           $         86,337 $             246,080 $               41,797 $               245,639 $            21,314 $                 15,730 $                  2 $          7,494 $                 441
                                                                Unobligated Balance, End of Year:
                                                                 Apportioned                                                                       13,700                     -                 11,952                       -                 665                      154                    -              929                    -
                                                                 Unapportioned                                                                      2,507                11,315                  1,998                  11,072                 126                      131                   84              168                  243
                                                                Total Unobligated Balance, End of Year                                   $         16,207 $              11,315 $               13,950 $                11,072 $               791 $                    285 $                 84 $          1,097 $                243
                                                               Total Status of Budgetary Resources (Note 16)                             $        102,544 $             257,395 $               55,747 $               256,711 $            22,105 $                 16,015 $                 86 $          8,591 $                684

                                                               Change in Obligated Balance:
                                                                Unpaid Obligations:
                                                                 Unpaid Obligations, Brought Forward, October 1                          $          65,057 $             172,230 $               24,093 $               171,959 $            15,902 $                 9,248 $              6,115 $           9,699 $                271
                                                                 Obligation Incurred                                                                86,337               246,080                 41,797                 245,639              21,314                  15,730                     2            7,494                  441
FY 2013 Agency Financial Report—U.S. Department of Education




                                                                 Outlays (Gross) (-)                                                              (90,573)             (221,138)               (42,153)               (220,685)            (22,389)                (16,032)              (2,612)           (7,387)                (453)
                                                                 Recoveries of Prior Year Unpaid Obligations (-)                                   (1,191)              (35,425)                  (358)                (35,425)               (556)                   (110)                  (56)            (111)                    -
                                                                 Unpaid Obligations, End of Year                                         $          59,630 $             161,747 $               23,379 $               161,488 $            14,271 $                 8,836 $              3,449 $           9,695 $                259
                                                                Uncollected Payments:
                                                                 Uncollected Payments, Federal Sources, Brought Forward, October 1 (-)   $               (2) $              (26) $                        - $               (4) $                    - $                   - $                 - $               (2) $             (22)
                                                                 Change in Uncollected Payments, Federal Sources (+ or -)                                (1)                   1                          -                   1                      -                     -                   -                 (1)                  -
                                                                 Uncollected Payments, Federal Sources, End of Year (-)                  $               (3) $              (25) $                        - $               (3) $                    - $                   - $                 - $               (3) $             (22)
                                                                Memorandum (Non-add) Entries:
                                                                 Obligated Balance, Start of Year (+ or -)                               $         65,055 $             172,204 $                24,093 $              171,955 $            15,902 $                  9,248 $             6,115 $           9,697 $                249
                                                                 Obligated Balance, End of Year (+ or -)                                 $         59,627 $             161,722 $                23,379 $              161,485 $            14,271 $                  8,836 $             3,449 $           9,692 $                237

                                                               Budget Authority and Outlays, Net:
                                                                Budget Authority, Gross (Discretionary and Mandatory)                    $         89,159 $             242,166 $               45,289 $               241,896 $            20,819 $                 15,624 $                  - $          7,427 $                270
                                                                Actual Offsetting Collections (Discretionary and Mandatory) (-)                     (935)               (72,672)                 (844)                 (72,601)                  -                       (2)                   -              (89)                 (71)
                                                                Change in Uncollected Customer Payments from Federal Sources
                                                                (Discretionary and Mandatory) (+ or -)                                                 (1)                    1                       -                      1                   -                        -                    -               (1)                    -
                                                               Budget Authority, Net (Discretionary and Mandatory)                       $         88,223 $             169,495 $                44,445 $              169,296 $            20,819 $                 15,622 $                  - $          7,337 $                 199

                                                                Outlays, Gross (Discretionary and Mandatory)                             $          90,573 $            221,138 $                42,153 $              220,685 $            22,389 $                 16,032 $             2,612 $           7,387 $                453
                                                                Actual Offsetting Collections (Discretionary and Mandatory) (-)                      (935)              (72,672)                  (844)                (72,601)                  -                       (2)                  -               (89)                 (71)
                                                                Outlays, Net (Discretionary and Mandatory)                                          89,638              148,466                  41,309                148,084              22,389                   16,030               2,612             7,298                  382
                                                                Distributed Offsetting Receipts (-) (Note 16)                                     (48,725)                     -               (48,445)                       -                  -                         -                  -             (280)                     -
                                                               Agency Outlays, Net (Discretionary and Mandatory)
                                                               (Note 16)                                                                 $         40,913 $             148,466 $               (7,136) $              148,084 $            22,389 $                 16,030 $             2,612 $           7,018 $                382
                                                                             FINANCIAL SECTION




           Required Supplementary Stewardship Information

Stewardship Expenses

In the Department, discretionary spending constitutes the majority of the budget and
includes nearly all programs, the notable exceptions being student loan subsidy costs and
vocational rehabilitation state grants. Education in the United States is primarily a state and
local responsibility. States, communities, and public and private organizations establish
schools and colleges, develop curricula, and determine requirements for enrollment and
graduation. In addition, most of the governmental funding for education in the United States
comes from state and local governments.

Investment in Human Capital

The Department’s annual appropriations and outlays augments the state and local
government funding and helps to build human capital in the nation by supporting cradle- to-
career education programs. The Department invests in human capital through its grant and
loan programs, research, leadership, and technical assistance. These activities are
supported across the Department, primarily through expenditures to assist students who
attend institutions of higher education, grants, and support for state and local educational
agencies.

Human capital investments are expenses included in net cost for education and training
programs intended to: (1) increase or maintain national economic productive capacity, and
that (2) produce outputs and outcomes that provide evidence of maintaining or increasing
national productive capacity.

Primary support is offered by the Office of Federal Student Aid, which administers need-
based financial assistance programs for students pursuing postsecondary education and
makes available federal grants, direct loans, guaranteed loans, and work-study funding to
eligible undergraduate and graduate students.

The offices of Elementary and Secondary Education, Special Education and Rehabilitative
Services, Innovation and Improvement, English Language Acquisition, Vocational and Adult
Education, and Postsecondary Education provide leadership, technical assistance, and
financial support to state and local educational agencies and institutions of higher education
for reform, strategic investment, and innovation in education.

Institute of Education Sciences is the research arm of the Department. Its goal is the
transformation of education into an evidence-based field in which decision makers routinely
seek out the best available research and data before adopting programs or practices that
will affect significant numbers of students.

An interactive version of the Department’s organizational chart is available at:
http://www2.ed.gov/about/offices/or/index.html?src=ln.

The table presents the net cost to the Department for its investments in human capital. In
summary, human capital expenses include the cost of grants, loans, and salaries and
administrative expenses. These costs are offset by the estimated negative subsidy, which is
explained in more detail in Note 6: Credit Programs for Higher Education, in the footnotes to
the financial statements.



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                                 Summary of Human Capital Expenses


(Dollars in Millions)                       2013            2012            2011               2010              2009
Federal Student Aid Expense
 Direct Loan Subsidy                    $ (39,557)     $ (10,720)      $ (28,630)        $     (1,567)      $    (9,603)
 Federal Family Education Loan               (8,753)       (14,381)        (16,126)           (14,344)          (29,940)
 Program Subsidy
 Perkins Loans, Pell and Other Grants        33,542         34,310           39,008            26,799            17,302
 Salaries and Administrative                    222            192              193               208                186
     Subtotal                               (14,546)         9,401          (5,555)            11,096           (22,055)
Other Departmental
 Elementary and Secondary Education          22,221         22,137           21,195            21,608            21,443
 Special Education and Rehabilitative        15,919         16,139           15,357            15,227            15,075
 Services
 American Recovery and Reinvestment           2,623          7,651           27,945            44,019            21,616
 Act and Education Jobs Fund
 Other Departmental Programs                  6,175          6,211            7,341              7,067             7,150
 Salaries and Administrative                    703            481               504               502               472
     Subtotal                                47,641         52,619           72,342            88,423            65,756
                Grand Total             $    33,095    $    62,020     $     66,787       $    99,519       $    43,701




Program Outcomes

Dramatically boosting completion rates for bachelor’s and associate degrees is essential for
Americans to compete in a global economy. The President thus set a goal in 2009—that, by
2020, the U.S. will have the highest proportion of college graduates in the world. Education
is the stepping stone to higher living standards for American citizens, and it is vital to
national economic growth. Not only does education increase the average lifetime salary of
the more educated, it also reduces the risk of unemployment.

Economic outcomes, such as wage and salary levels, historically have been determined by
the educational attainment of individuals and the skills employers expect of those entering
the labor force. Both individuals and society as a whole have placed increased emphasis on
educational attainment as the workplace has become increasingly technological and
employers 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 related to the individual include higher earnings, better job opportunities, and jobs
that are less sensitive to general economic conditions. These refer not just to salary levels
over the lifetime of an individual, but include the employability of a person over one’s
lifetime as well. These individual benefits also support the economic well-being of the nation
through reduced reliance on welfare subsidies, increased participation in civic activities, and
greater productivity.




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Unemployment Rate. Individuals with lower levels of educational attainment are more
likely to be unemployed than those who had higher levels of educational attainment. The
September 2013 unemployment rate for adults (25 years old and over) who had not
completed high school was 10.3 percent, compared with 7.6 percent for those with four
years of high school and 3.7 percent for those with a bachelor’s degree or higher. Younger
people with only high school diplomas tended to have higher unemployment rates than
adults 25 and over with similar levels of education.

                                Unemployment Rate by Educational Level
    16%
    14%
    12%
    10%
     8%
     6%
     4%
     2%
     0%
                    2007                2008                  2009            2010              2011                 2012                2013

                                 College Degree                      High School Degree                    No High School Degree

  Source: Bureau of Labor Statistics (Department of Labor) Economic News Release, Table A-4:
  http://www.bls.gov/news.release/empsit.t04.htm

Annual Income. As of September 2013, the annualized median income for adults
(25 years old and over) varied considerably by education level. Men with a high school
diploma earned $38,584, compared with $71,656 for men with a college degree. Women
with a high school diploma earned $29,588, compared with $53,612 for women with a
college degree. Men and women with college degrees earned 80 percent more than men
and women with high school diplomas. These returns of investing in education directly
translate into the advancement of the American economy as a whole.

        Annualized Median Income for Men                                             Annualized Median Income for Women
       (25 Years Old and Over), 2009–2013*                                            (25 Years Old and Over), 2009–2013*

 $75,000                                                                        $75,000

 $60,000                                                                        $60,000

 $45,000                                                                        $45,000

 $30,000                                                                        $30,000

 $15,000                                                                        $15,000

       $0                                                                            $0
                2009         2010         2011         2012          2013                     2009         2010         2011         2012         2013
                          Men With a College Degree                                                   Women With a College Degree
                          Men With a High School Degree                                               Women With a High School Degree

  * The 2011–2013 data are annualized as of September of each year; the         * The 2011–2013 data are annualized as of September of each year; the
  2009 and 2010 data are annualized as of July of each year.                    2009 and 2010 data are annualized as of July of each year.




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                                           Information




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                    About the Other Information Section
This section includes improper payments reporting details, the schedule of spending, and
views of the Office of Inspector General about the Department’s management and
performance challenges for FY 2014.

Improper Payments Reporting Details

This revised section has been reorganized and streamlined to make it more readable. Links
have been added to provide context and increase the amount of information available in
fewer pages.

The Improper Payments Information Act of 2002 (IPIA; Public Law 107-300), as amended
by the Improper Payments Elimination and Recovery Act of 2010 (IPERA; Public Law
111-204), and the Improper Payments Elimination and Recovery Improvement Act of 2012
(IPERIA; Public Law 112-248), requires agencies to annually report information on improper
payments to the President and Congress, focusing on risk assessments, statistical
sampling, and corrective actions.

Schedule of Spending

The Schedule of Spending (SOS) presents an overview of how and where agencies are
spending (i.e., obligating) money for the reporting period. This schedule is prepared based
on the same underlying data used to populate the Statement of Budgetary Resources
(SBR). The SOS presents total budgetary resources and fiscal year-to-date total obligations
for the reporting entity.

Summary of Financial Statement Audit and Management
Assurances

All agencies are required to provide a summary table of Financial Statement Audit and
Management Assurances for any material weaknesses reported by the agency or through
the audit process.

Office of Inspector General’s Management and Performance
Challenges

The Office of Inspector General’s Management and Performance Challenges for Fiscal
Year 2014 report is summarized in this section. The FY 2014 management challenges are:

       (1) Improper Payments,
       (2) Information Technology Security,
       (3) Oversight and Monitoring,
       (4) Data Quality and Reporting, and
       (5) Information Technology System Development and Implementation.

These challenges reflect continuing vulnerabilities and emerging issues faced by the
Department as identified through OIG’s recent audit, inspection, and investigative work. A
summary of each management challenge area follows. For the full report, including the
Department’s response, visit the OIG web site.



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                          Improper Payments Reporting Details
The Department is committed to preventing improper payments with front end controls, and
detecting and recovering them if they occur. In FY 2013, the Department strengthened
efforts to: 1) assess the risk of improper payments, 2) estimate improper payments,
3) address root causes of improper payments, and 4) recover improper payments. These
four efforts are described in more detail below.

The Department implemented actions that meet the requirements of the Improper
Payments Elimination and Recovery Improvement Act of 2012 (IPERIA) (Public Law 112-
248) and the Improper Payments Elimination and Recovery Act of 2010 (IPERA) (Public
Law 111-204), both of which amend the Improper Payments Information Act of 2002 (IPIA)
(Public Law 107-300), as well as the Office of Management and Budget’s (OMB) Circular
A-123, Appendix C, Requirements for Effective Measurement and Remediation of Improper
Payments. OMB also has established specific reporting requirements for agencies with
programs that possess a significant risk of erroneous payments and for reporting on the
results of recovery auditing activities. Agencies are required to review and assess all
programs and activities to identify those susceptible to significant improper payments. The
OMB guidance defines significant improper payments as those in any particular program
that exceed both 2.5 percent of program payments and $10 million annually or that exceed
$100 million.

Internal Controls and Accountability

The Department has the internal controls, human capital, and information systems and
other infrastructure it needs in order to reduce improper payments to the levels the agency
has targeted. As detailed in the Analysis of Controls, Systems, and Legal Compliance
portion of this AFR, the Department’s internal control framework is robust. It includes
important controls at many levels of the payment process that are designed to help prevent
and detect improper payments. These controls are periodically assessed for design and
operating effectiveness as part of Department self-assessments of internal controls. For
example:

•    Schools are responsible and held accountable for recipient verification for need-based
     aid. FSA certifies a school’s eligibility for participation in Title IV programs, conducts
     periodic program reviews of schools to verify compliance, and evaluates school
     financial statement and compliance audits to ensure any potential compliance issues or
     control weaknesses are resolved. In addition, FSA offices, managers, and staff
     responsible for these programs are accountable for establishing and maintaining
     sufficient internal controls, including a control environment that prevents improper
     payments from being made, and promptly detects and recovers any improper payments
     that may occur. Offices and managers are held accountable through a variety of
     mechanisms and controls, including annual performance measures aligned to the
     strategic plan, organizational performance review criteria, and individual annual
     performance appraisal criteria. FSA contractors are held accountable through various
     contract management and oversight activities and functions, control assessments, and
     audits.
•    Department program staff work with the Department’s Risk Management Service (RMS)
     to use the Decision Support System (DSS) Entity Risk Reviews (ERR) to assess



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      grantee risk and assist in the determination of special conditions for grant awards. In
      FY 2013, for 7 of 8 requesting Principal Offices, RMS produced 77 reports assessing
      risk for 1,768 applicants, including 91 competitions for new competitive grant awards, or
      85 percent of all awards.
•     The Department leverages continuous controls monitoring software to help detect
      anomalies and potential issues in agency payment-related data, including Department
      and FSA payments made through the core financial system.

Risk Assessments

As required by the OMB Circular A-123, Appendix C, the Department conducts an
assessment of the risk of improper payments in each program at least once every three
years. Below is a summary of these assessments.

                                     Risk Assessment Results
                                                                      Last Risk                  Risk-
                             Program
                                                                     Assessment               Susceptible?
    FSA Managed Programs
      Federal Pell Grants                                               FY 2011                      Yes
      Academic Competitiveness Grants                                   FY 2011                       No
      National Science and Mathematics Access to Retain
                                                                        FY 2011                       No
      Talent Grant
      The Teacher Education Assistance for College and
                                                                        FY 2011                       No
      Higher Education Grant
      Federal Supplemental Educational Opportunity Grant                FY 2011                       No
      Leveraging Educational Assistance Partnership/Special
                                                                        FY 2011                       No
      Leveraging Educational Assistance Partnership
      Iraq and Afghanistan Service Grant                                FY 2011                       No
      Federal Perkins Loan Program                                      FY 2011                       No
      Federal Direct Loan Program                                       FY 2011                      Yes
      Federal Family Education Loan Program                             FY 2011                      Yes
      Federal Work-Study Program                                        FY 2011                       No
    Other Department Programs
      Other Grant Programs                                              FY 2013                       No
      Contract Payments                                                 FY 2013                       No

FSA-Managed Programs

The Department performed a risk assessment for all FSA-managed programs during
FY 2011 and determined that the Direct Loan (DL), Federal Family Education Loan (FFEL),
and Pell Grant programs were susceptible to risk of significant improper payments. The
methodology and results can be found in the FY 2011 AFR. For each program, risk
assessment meetings were held with program owners, key personnel, and other designees
to discuss the following ten risk factors:


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•    Volume of Payments;
•    Prior Improper Payments Reporting Results;
•    Newness of Program or Transactions;
•    Complexity of Program or Transactions;
•    Level of Manual Intervention;
•    Changes in Program Funding Authorities, Practices, and Procedures;
•    History of Audit Issues;
•    Human Capital Management;
•    Nature of Program Recipients; and
•    Management Oversight.

A risk rating was assigned to each factor based on established criteria. Weighted
percentages were assigned to each risk factor rating based on the probability of an
improper payment. An overall risk score was then computed for each program, calculated
by the average of the sum of the weighted scores for each risk factor and overall rating
scale.

Other Department Programs

The Department performed a risk assessment for all non-FSA grant programs during
FY 2013 using the methodology described in the FY 2011 AFR. This methodology relies on
an examination of the total questioned costs for each program that result from required
OMB Circular A-133 Single Audits. The Department’s FY 2013 assessment determined that
none of these non-FSA grant programs were susceptible to significant improper payments.
The specific grant programs reviewed are provided on our website.

During FY 2013, the Department also performed a risk assessment of all contract
payments, including those for FSA. The risk assessment was based on the results of an
ongoing FY 2013 contingency-based contract to review FY 2007 through FY 2012 contract
payments as well as cyclical A-123 risk assessments. Based on an evaluation of the risk
assessments and results of the recapture audit, we determined that contract payments are
not susceptible to significant improper payments.

The Department intends to expand its risk assessment to other administrative payments in
FY 2014, to include salary, benefits and travel payments.

Improper Payment Estimate Methodologies

FSA-Managed Programs

The Department continues to work with OMB to seek a mutually agreeable strategy for
estimating improper payments in the FSA programs. While this work continues, OMB has
agreed to the Department’s use of proposed methodologies to estimate DL and FFEL
program improper payments only for FY 2013 AFR reporting. The Department previously
developed an estimation methodology for the Pell program that compares student-reported



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data on FAFSA with IRS data on income levels. This methodology and its limitations are
described in the FY 2012 AFR. In an effort to address the limitations, FSA developed an
alternate methodology for use in the DL, FFEL, and Pell programs that leverages data
collected through FSA program reviews, which may include verifying student-reported
income levels, student academic performance, and eligibility on the disbursed funds for a
sample of students in each review. OMB has tentatively approved the reporting of
provisional improper payment rates in the FY 2013 AFR derived from the alternative
methodology for the DL and FFEL programs pending an overall agreement on a revised
strategy for estimating improper payments across the FSA portfolio. OMB did not approve
use of the alternative methodology for the Pell program, but instead, agreed that FSA use
its previously approved methodology to estimate the improper payments for the Pell
program using the IRS data. The methodologies for all three programs are described on the
Department’s improper payment website. The Department and OMB continue to work
collaboratively on suitable estimation methodologies for all three programs.

The Department believes improper payment estimates from these new methodologies yield
the most accurate estimates using available program data. The approach is cost effective
and it maximizes integration of existing program reviews. However, the Department
acknowledges that its approach is not designed to use strict random sampling techniques
intended solely to estimate improper payment rates. Accordingly, the Department considers
its approach to use alternative sampling methodologies. The Department will continue
working with OMB to examine our current methodologies versus other approaches with a
goal of agreement in FY 2014 on the most cost effective long-term methodologies for the
Pell, DL, and FFEL programs.

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

The Department estimates improper payments for this program using questioned cost data
in audit reports. This methodology is described in the FY 2012 AFR. No reduction targets
are proposed since the Department’s risk assessments have not identified Title I as a
program susceptible to significant improper payments; Title I is included in the table
because it is a Section 57 program.




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FY 2013 Agency Financial Report—U.S. Department of Education




                                                                                                                          Improper Payment Reduction Outlook
                                                                                                                                     ($ in millions)
                                                                Program or Activity
                                                                                                    FY 2012                   FY 2013                   FY 2014                   FY 2015                    FY 2016
                                                                                           Outlays                   Outlays                   Outlays                   Outlays                    Outlays
                                                                                              (2)  IP %       IP $      (3)  IP %       IP $      (4)  IP %       IP $      (4)  IP %       IP $       (4)  IP %       IP $
                                                                                            $                         $                         $                         $                          $
                                                                                     (1)
                                                                       Pell Grants         33,299    2.49     829    32,338    2.26     731    34,149    2.26     772    37,245    2.26      842    33,776    2.26      763

                                                                       Direct Loan          N/A      N/A      N/A 102,497 1.03          1,056 174,708 1.03        1,799 181,173 1.03        1,866 186,639 1.03         1,922

                                                                           FFEL             N/A      N/A      N/A    10,817    0.00      0     8,438     0.00      0      7,594    0.00       0      7,173    0.00       0

                                                                           Title I         15,208    .186     28.3   14,724    .385     56.7   14,003    .385     53.9   11,862    .385     45.7    13,327    .385     51.3


                                                               (1)
                                                                 Pell estimates are reported using the previously developed methodology that relies on a comparison of student data with IRS data. As a point of comparison,
                                                               the FY 2013 estimate for Pell using the alternate methodology that relies on data from FSA program reviews is 2.22 percent or $718 million.
                                                               (2)
                                                                     The source of FY 2012 outlays for Pell is FMS as presented in the FY 2012 AFR.




                                                                                                                                                                                                                               IMPROPER PAYMENTS REPORTING DETAILS
                                                               (3)
                                                                     The source of FY 2013 outlays for all program amounts is FMS.
                                                               (4)
                                                                 The source of FY 2014–2016 Pell outlay amounts is the supporting documentation for the FY 2014 President’s Budget request. The source of FY 2014–2016
                                                               Direct Loan and FFEL outlay amounts is the supporting documentation for the FY 2014 President’s Budget request at the Mid-Session Review.

                                                               NOTE: The FY 2013 Pell overaward improper payment rate estimate is 1.56 percent or $505 million and the underaward improper payment rate estimate is
                                                               0.70 percent or $226 million. The FY 2013 Direct Loan overaward improper payment rate estimate is 0.95 percent or $974 million and the underaward improper




                                                                                                                                                                                                                                                                     OTHER INFORMATION
                                                               payment rate estimate is 0.08 percent or $82 million. The FY 2013 FFEL overaward and underaward improper payment rate estimates round down to
                                                               0.000 percent or $0 million.
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Root Causes and Corrective Actions

General program information, charts summarizing the root causes of improper payments by
program and the corrective actions in progress or planned are presented in this section.

FSA continues to utilize the Internal Revenue Service Data Retrieval Tool (IRS DRT), which
enables Title IV student aid applicants and, as needed, parents of applicants, to transfer
certain tax return information from an IRS website directly to their online Free Application
for Federal Student Aid (FAFSA). In addition, FSA continues to enhance verification
procedures and require selected schools to verify specific information reported on the
FAFSA by student aid applicants. These and other ongoing corrective actions, such as
system edits, program reviews, and compliance audits, are described in the FY 2012 AFR.

In the charts that follow for each risk-susceptible program, the root causes presented were
identified through improper payment testing and categorized by the Improper Payments
Information Act of 2002 Error Category. The corrective actions presented are
recommendations to the schools (for Pell Grants and Direct Loans) and financial institutions
(for FFEL) for findings that resulted from FSA program reviews.

Pell Grant Program. The Pell Grant Program includes the drawdown of funds by schools
and the disbursement of aid from the school to the student; year-end closeout and the
return of unsubstantiated funds; return of undisbursed funds to Title IV collections from
schools; and collections by the school on overpayments from recipients.

Direct Loan Program. The Direct Loan Program includes the drawdown of funds by
schools, the origination of a loan and disbursement of funds from the school to the student
(or their account); consolidations; servicing of the loan and collections from loan holders;
and return of Title IV collections (undisbursed funds or overpayments) from schools.

Root Causes and Corrective Actions for the Pell Grant and Direct Loan
Programs

     IPIA Error
                       Root Cause                          Corrective Actions
      Category
Documentation      Incorrect Awards    •   Institutions with this finding are required to improve
and Administrative based on Expected       policies and procedures to ensure that discrepancies
Errors             Family Contribution     between student's application and Institution Student
                   (EFC)                   Information Report (ISIR) have been resolved prior to
                                           disbursement of funds and EFC calculations are
                                           properly calculated and verified.
                                       •   Institutions with this finding are required to improve
                                           written procedures to properly complete and retain
                                           EFC Verification Worksheets.
                                       •   Institutions with this finding are required to improve
                                           written procedures to properly calculate Pell Grant
                                           and/or Direct Loan disbursement amounts.




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       IPIA Error
                                    Root Cause                                 Corrective Actions
        Category
                               Incorrect                   •   Institutions with this finding are required to improve
                               Processing of                   policies and procedures to ensure timely updates of
                               Student Data                    student data are made.
                               During Normal
                               Operations                  •   Institutions with this finding are required to improve
                                                               written procedures to track and monitor the
                                                               completion of clock hours and to determine whether
                                                               the student is adequately progressing towards the
                                                               completion of the program within the maximum
                                                               timeframe.
                               Student Account     •           Institutions with this finding are required to regularly
                               Data Changes Not                conduct staff training courses (semi-annually)
                               Applied or                      designed to ensure proper and timely processing of
                               Processed Correctly             student data.
                                                           •   Institutions with this finding are required to improve
                                                               policies and procedures to ensure timely updates of
                                                               student data are made.
Verification Errors            Ineligibility for a Pell •      Institutions with this finding are required to regularly
                               Grant/Direct Loan               conduct staff training courses (semi-annually)
                               (e.g., validity of high         designed to prevent ineligible students from receiving
                               school attended,                Pell Grants and/or Direct Loans.
                               history of degrees
                               obtained)                •      Institutions with this finding are required to implement
                                                               standards of care and diligence in administering and
                                                               accounting for Pell Grants and Direct Loans.
                                                               Institutions are required to constantly remind Financial
                                                               Aid Administrators that their fiduciary responsibilities
                                                               obligate them to the highest level of due care.
                                                           •   Institutions with this finding are required to develop a
                                                               systematic process of oversight and internal tracking
                                                               to ensure correct student files are obtained and
                                                               retained.
                               Satisfactory       •            Institutions with this finding are required to administer
                               Academic Progress               semi-annual audits of student's academic transcripts.
                               (SAP) Not Achieved              Institutions are required to calculate Grade Point
                                                               Averages (GPA), course completion, and maximum
                                                               timeframes to establish conformity with Title IV
                                                               policies.
                                                           •   Institutions with this finding are required to improve
                                                               procedures and control mechanisms that will ensure
                                                               that students receiving Pell Grants and/or Direct
                                                               Loans are eligible in accordance with policies.
                               Incorrectly                 •   Institutions with this finding are required to improve
                               Calculated Return               written procedures to properly perform Return to Title
                               Period                          IV calculations and return applicable funds to the
                                                               correct party.




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Root Causes and Corrective Actions for the Direct Loan Consolidation
Program

    IPIA Error
                         Root Cause                           Corrective Actions
     Category
Documentation         Incorrect          •   The underlying root causes of improper payments
and                   Processing of Loan     identified were due to processing errors at the servicer
Administrative        Verification           level; however, the legacy servicer’s contract is ending
Errors                Certificate (LVC)      and the day-to-day servicing of newly made traditional
                      Processing of          Direct Loan Consolidations will be transferred to three
                      Duplicate LVCs         of the Title IV Additional Servicers (TIVAS) platforms
                      Loan Not Intended      for FY 2014. FSA will continue to monitor the transition
                      for Consolidation      of the consolidation function to these servicers.
                      was Processed
                                        •    Improper payments identified through the Direct Loan
                                             Consolidation testing for FY 2013 were remediated or
                                             are in the process of being remediated.

FFEL Program. During FY 2013, the FFEL Program made no new loan originations.
FY 2013 payment types and cash flows associated with the guarantees on loans originated
in prior years (i.e., the existing FFEL portfolio) include: Special Allowance (SAP), Interest
Benefits, Lender Fees, Origination Fees, Consolidation Loan Rebate Fees, Reinsurance,
and Account Maintenance Fees.

Root Causes and Corrective Actions for the FFEL Program

Most of the reporting errors observed during FY 2013 were the result of smaller lenders
using software systems that were not updated or were processed on bank systems not
designed for processing the reporting of FFEL Program loans.

IPIA Error Category            Root Cause                              Corrective Actions
Documentation      Manual Entries Processed        •     Lenders with this finding are required to
and Administrative Erroneously                           regularly conduct staff training courses
Errors             (e.g., using only one payment         designed to prevent incorrect usage of
                   code during the billing quarter       payment codes, including SAP codes, and
                   when an activity occurred that        incorrect calculation of average daily
                   required the use of two billing       balances.
                   codes)
                                                   •     Lenders with this finding are required to
                                                         establish procedures that eliminate
                                                         reporting errors related to manual entries
                                                         processed erroneously.
                                                     •   Lenders with this finding are required to
                                                         hire sufficient staff/employees that are
                                                         knowledgeable of the FFEL program.
                                                     •   If unable to perform servicing
                                                         requirements, lenders are required to seek
                                                         the services of other individuals or firms to
                                                         reduce and eliminate reporting errors due
                                                         to manual processing.




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                                                                          IMPROPER PAYMENTS REPORTING DETAILS


IPIA Error Category                         Root Cause                            Corrective Actions
                               Incorrect Calculation of the •           Lenders are required to obtain and install
                               Average Daily Balance due to             any necessary updates to their systems to
                               Software Formula Errors                  certify software formulas are accurate.

Root Cause Summary

Consistent with FY 2012, the results of the root cause analysis of improper payments
across all risk-susceptible programs from FY 2013 highlighted that the underlying root
cause was due to the processing errors which occur at the institution level.

Further analysis of the improper payment findings identified through testing and associated
root causes resulted in the following percentages of improper payment findings in dollars,
attributed to Documentation and Administrative Errors (i.e., the absolute dollar amount of
improper payments identified within the category proportional to the total dollar amount of
error in the sample reviewed) and Verification Errors (i.e., the absolute dollar amount of
improper payments identified within the category proportional to the total dollar amount of
error in the sample reviewed), as follows:

              IPIA Error Category                               Pell       Direct         Direct Loan      FFEL
                                                               Grants      Loans         Consolidations
Documentation and Administrative
                                                                27%         31%              100%          100%
Errors
Verification Errors                                             73%         69%               0%            0%

Recovery Auditing

Agencies are required to conduct recovery audits for contract payments and programs that
expend one million dollars or more annually if conducting such audits would be cost
effective. The following table presents a summary of the Department’s cost-benefit analysis.

                                 Additional Recovery Auditing Cost Effectiveness
                                     Recovery Audit Program Area            Cost Effective
                                 Non-FSA Grant Programs                             No
                                 FSA Programs                                       No
                                 Contracts                                          No

A comprehensive report on the cost effectiveness of the various recapture audit programs
can be found in the Department’s FY 2012 Report on the Department of Education’s
Payment Recapture Audits.

Contract Payment Recapture Audits. Although the Department has not found prior
contract recovery audits to be cost effective, the Department issued a contingency-based
contract during FY 2013 to audit all FY 2007 through FY 2012 contract payments for
possible errors and recapture. This contract was awarded with the expectation that
advances in data mining techniques might be able to detect payment errors that were
previously undetected. Although the audit is ongoing, as in prior years, the results indicate a
minimal level of improper payments.


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IMPROPER PAYMENTS REPORTING DETAILS

The following chart presents the results of previous recapture efforts:

                            Contract Payment Recapture Audit Reporting
                                          ($ in millions)
       Amount Subject to Review for Current Year (2013) Reporting*                                   $10,027
       Actual Amount Reviewed and Reported (2013)*                                                   $10,027
       Amounts Identified for Recovery (2013)                                                           $0
       Amounts Recovered (2013)                                                                         $0
       % of Amount Recovered out of Amount Identified (2013)                                            NA
       Amount Outstanding (2013)                                                                        $0
       % Amount Outstanding out of Amount Identified (2013)                                             NA
       Amount Determined Not to be Collectable (2013)                                                   $0
       % Amount Determined Not to be Collectable out of Amount Identified (2013)                        NA
       Amounts Identified for Recovery Prior Years (2005–13)                                            $0
       Amounts Recovered (2005–13)                                                                      $0
       Cumulative Amounts Identified for Recovery (2005–13)                                             $0
       Cumulative Amounts Recovered (2005–13)                                                           $0
       Cumulative Amounts Outstanding (2005–13)                                                         $0
       Cumulative Amounts Determined Not to be Collectable (2005–13)                                    $0
      *Includes FY 2007 through FY 2012 contract payments subject to the FY 2013 recapture audit contract.

The Department has not established formal recovery targets for contract payments given
the consistently insignificant findings. Since FY 2004, the Department’s audits have found
no improper payments for recovery, and there are no outstanding overpayments to report.
Should future contract payments be identified for recovery, the Department will establish
recovery targets, taking into consideration the nature of the overpayments and any potential
barriers to recovering funds.

Recoveries of Improper Payments. The Department works with grantees and Title IV
(FSA) program participants to resolve and recover amounts identified in Compliance Audits,
OIG Audits, and Department-conducted program reviews as potential improper payments.
Accounts receivable are established for amounts determined to be due to the Department
and collection actions are pursued. Recipients of Department funds can appeal the
management decisions regarding funds to be returned to the Department, thereby delaying
or decreasing the amounts the Department is able to collect. The following chart provides
estimates of the amounts identified and recovered through all Compliance Audits, OIG
Audits, and program reviews for FY 2011 through FY 2013. The Department anticipates
recovering similar amounts in FY 2014.




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                                                                       IMPROPER PAYMENTS REPORTING DETAILS

                     Overpayments Recaptured Outside of Payment Recapture Audits
                                             ($ in millions)
     Agency             Amount     Amount    Amount       Amount  Cumulative      Cumulative
     Source            Identified Recovered Identified Recovered    Amount          Amount
                      (FY 2013) (FY 2013)* (FY 2012) (FY 2012)*    Identified      Recovered
                                                                 (FY 2011–13)    (FY 2011–13)
Compliance
                           19.8              7.7               21.7   4.3         70.2                16.2
Audit Reports
OIG Audit
                           22.1              5.2               2.7    .2          38.3                 8.8
Reports
Program
                           38.9              8.0               30.7   6.7        107.9                24.5
Reviews
*Includes all amounts recovered during the year, not just the recoveries of amounts identified during the year.

In addition to the amounts above, for the Pell Grant Program, recoveries also occur when
overpayments to students are assigned to Federal Student Aid for collection. Pell amounts
recovered through student debt collection were approximately $13.0 million in FY 2013,
$6.2 million in FY 2012, and $100.0 million cumulative from FY 2013 to FY 2004. While all
programs may have student debts transferred to debt collection, the categorization of
resulting collections as an improper payment recovery is unique to Pell. Unlike loans, Pell
grant payments transferred to debt collection commonly indicate a potential improper
payment at time of disbursement.

Statutory and Regulatory Barriers

The high burden of proof in the requirements of the General Education Provisions Act
(GEPA) is a significant reason why the Department generally recovers a small percentage
of the original questioned costs in audits. The GEPA, 20 U.S.C. 31 Subchapter IV § 1234a,
requires the Department to establish a prima facie case for the recovery of funds, including
an analysis reflecting the value of services obtained. In accordance with 20 U.S.C. 31
Subchapter IV § 1234b, any amount returned must be proportionate to the extent of harm
the violation caused to an identifiable federal interest.




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            OTHER INFORMATION



                                                  Schedule of Spending
            The Schedule of Spending (SOS) presents the total amounts agreed to be spent by the
            Department broken out by (a) what money was available to spend and (b) how the money
            was spent. The total amounts agreed to be spent on the SOS are the same as the
            obligations incurred amounts reported on the Statement of Budgetary Resources (SBR).
            The SBR provides useful information on the budgetary resources provided to a federal
            agency as well as the status of those resources at the end of a fiscal year.
            USASpending.gov is a searchable website provided by the Office of Management and
            Budget (OMB) that provides information on federal awards and is accessible to the public at
            no cost.

                                                Department of Education
                                                  Schedule of Spending
                                    For the Years Ended September 30, 2013 and 2012
                                                             (Dollars in Millions)

                                                                                        FY 2013                                 FY 2012
                                                                                          Non-Budgetary                           Non-Budgetary
                                                                                           Credit Reform                           Credit Reform
                                                                                             Financing                               Financing
                                                                               Budgetary     Accounts                   Budgetary    Accounts


Section I: What Money Is Available to Spend?
This section presents resources that were available to spend by the Department.

Total Resources                                                                $     102,544       $     257,395        $ 104,710              $   270,274
Amount Available but Not Agreed to be Spent                                          (13,700)                   -         (10,480)                      (1)
Amount Not Available to be Spent                                                      (2,507)            (11,315)          (2,142)                 (18,992)
Total Amounts Agreed to be Spent                                               $      86,337       $     246,080        $ 92,088               $   251,281

Section II: How Was the Money Spent?
This section presents services and items purchased, is grouped by major program, and is based on outlays.

Increase College Access, Quality, and Completion
Credit Program Loan Disbursements and Claim Payments                           $          79     $       141,724        $        56            $   154,449
Credit Program Subsidy Transfers                                                       6,405              48,598              8,337                 40,650
Federal Interest Payments                                                                   -             28,453                  -                 26,629
Other Credit Program Payments                                                              3               1,692                  4                  2,581
Federal Student Loan Reserve Fund Valuation                                              279                   -                419                      -
Grants                                                                                38,344                   -             39,364                      -
Personnel Compensation and Benefits                                                      258                   -                258                      -
Contractual Services                                                                   1,216                 671              1,073                    475
Rent, Utilities, and Communication                                                        31                   -                 25                      -
Land, Structures, and Equipment                                                            4                   -                  4                      -
Travel and Transportation                                                                  3                   -                  5                      7
Other 1/                                                                                   2                   -                  3                      -
                                                                                      46,624             221,138             49,548                224,791
Improve Preparation for College and Career from Birth Through 12th
Grade, Especially for Children with High Needs
Grants                                                                                22,334                      -          22,154                       -
Personnel Compensation and Benefits                                                       72                      -              74                       -
Contractual Services                                                                      86                      -             114                       -
Rent, Utilities, and Communication                                                        12                      -              11                       -
Land, Structures, and Equipment                                                            1                      -               2                       -
Travel and Transportation                                                                  1                      -               1                       -
                                                                                      22,506                      -          22,356                       -


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                                                                                                               SCHEDULE OF SPENDING

                                                     Department of Education
                                                       Schedule of Spending
                                         For the Years Ended September 30, 2013 and 2012
                                                                       (Dollars in Millions)

                                                                                                  FY 2013                        FY 2012
                                                                                                    Non-Budgetary                  Non-Budgetary
                                                                                                     Credit Reform                  Credit Reform
                                                                                                       Financing                      Financing
                                                                                         Budgetary     Accounts          Budgetary    Accounts
 Ensure Effective Educational Opportunities for All Students
 Grants                                                                                        16,713               -         16,889                 -
 Personnel Compensation and Benefits                                                              160               -            168                 -
 Contractual Services                                                                              57               -             64                 -
 Rent, Utilities, and Communication                                                                21               -             20                 -
 Land, Structures, and Equipment                                                                    1               -              2                 -
 Travel and Transportation                                                                          2               -              3                 -
                                                                                               16,954               -         17,146                 -
 Enhance the Education System’s Ability to Continuously Improve
 Grants                                                                                         1,330               -           1,179                -
 Personnel Compensation and Benefits                                                               82               -              88                -
 Contractual Services                                                                             433               -             399                -
 Rent, Utilities, and Communication                                                                13               -              11                -
 Land, Structures, and Equipment                                                                    1               -               2                -
 Travel and Transportation                                                                          1               -               2                -
 Other 1/                                                                                          16               -               1                -
                                                                                                1,876               -           1,682                -
 American Recovery and Reinvestment Act and Education Jobs Fund                                                                                      -
 Other Credit Program Payments                                                                      -               -               4                -
 Grants                                                                                         2,598               -           7,787                -
 Personnel Compensation and Benefits                                                                -               -              10                -
 Contractual Services                                                                              15               -               -                -
                                                                                                2,613               -           7,801                -

 Total Spending                                                                          $     90,573 $      221,138     $     98,533 $        224,791

 Amounts Remaining to be Spent2/                                                               (4,236)        24,942           (6,445)          26,490

 Total Amounts Agreed to be Spent                                                        $     86,337    $   246,080     $     92,088 $        251,281
1/
 Other primarily consists of building rental payments, equipment purchases, and transportation.
2/
 The “Amounts Remaining to be Spent” line item shown in the schedule above represents the difference between spending and amounts
agreed to be spent during the fiscal year presented. Actual spending during a particular fiscal year may include spending associated with
amounts agreed to be spent during previous fiscal years, which may result in negative amounts shown for the “Amounts Remaining to be
Spent” line.




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OTHER INFORMATION



      Summary of Financial Statement Audit and Management
                           Assurances
The following tables provide a summarized report on the Department’s financial statement
audit and its management assurances. For more details, the auditor’s report can be found
beginning on page 94 and the Department’s management assurances on pages 33–42.

                             Summary of Financial Statement Audit
Audit Opinion: Unqualified
Restatement: No
                                   Beginning                                                               Ending
 Material Weaknesses                                 New            Resolved         Consolidated
                                    Balance                                                                Balance

 Total Material Weaknesses             1               0                1                   0                   0


                             Summary of Management Assurances
  Effectiveness of Internal Control over Financial Reporting—Federal Managers’ Financial Integrity Act
                                                (FMFIA) 2
Statement of Assurance: Unqualified
                                  Beginning                                                                  Ending
 Material Weaknesses                           New     Resolved     Consolidated         Reassessed
                                   Balance                                                                   Balance

 Total Material Weaknesses            0          0         0                0                   0                   0
The Department had no material weaknesses in the design or operation of the internal control over financial
reporting.

                      Effectiveness of Internal Control over Operations—FMFIA 2
Statement of Assurance: Unqualified
                                  Beginning                                                                  Ending
 Material Weaknesses                           New     Resolved     Consolidated         Reassessed
                                   Balance                                                                   Balance

 Total Material Weaknesses            1          0         1                0                   0                   0


               Conformance with Financial Management System Requirements—FMFIA 4
Statement of Assurance: The Department systems conform to financial management system requirements.
                                  Beginning                                                                  Ending
 Non-Conformance                               New     Resolved     Consolidated         Reassessed
                                   Balance                                                                   Balance

 Total Non-Conformance                1          0         1                0                   0                   0


                    Compliance with Federal Financial Management Improvement Act
                                                           Agency                                Auditor
 Overall Substantial Compliance                  No noncompliance noted                Noncompliance noted

 1.   System Requirements                        No noncompliance noted                Noncompliance noted

 2.   Federal Accounting Standards               No noncompliance noted              No noncompliance noted
 3.   United States Standard General Ledger
                                                 No noncompliance noted              No noncompliance noted
      at Transaction Level




136                                                            FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                             OTHER INFORMATION
                                                               MEMORANDUM FROM THE OFFICE OF INSPECTOR GENERAL




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OTHER INFORMATION



        Office of Inspector General’s (OIG) Management and
            Performance Challenges for Fiscal Year 2014
                         Executive Summary
The Office of Inspector General (OIG) works to promote efficiency, effectiveness, and
integrity in the programs and operations of the U.S. Department of Education (Department).
Through our audits, inspections, investigations, and other reviews, we continue to identify
areas of concern within the Department’s programs and operations and recommend actions
the Department should take to address these weaknesses. The Reports Consolidation Act
of 2000 requires the OIG to identify and report annually on the most serious management
challenges the Department faces. The Government Performance and Results
Modernization Act of 2010 requires the Department to include in its agency performance
plan information on its planned actions, including performance goals, indicators, and
milestones, to address these challenges.

Last year we presented four management challenges: improper payments, information
technology security, oversight and monitoring, and data quality and reporting. While we
noted some progress by the Department in addressing these areas, each remains as a
management challenge for fiscal year (FY) 2014. We also added a new challenge related to
the Department’s information technology system development and implementation.

The FY 2014 management challenges are:

         (1) Improper Payments,
         (2) Information Technology Security,
         (3) Oversight and Monitoring,
         (4) Data Quality and Reporting, and
         (5) Information Technology System Development and Implementation.

These challenges reflect continuing vulnerabilities and emerging issues faced by the
Department as identified through OIG’s recent audit, inspection, and investigative work. A
summary of each management challenge area follows. 1

Management Challenge 1—Improper Payments

Why This Is a Challenge

The Federal Pell Grant (Pell) program is 1 of 13 programs the Office of Management and
Budget (OMB) designated as "high-priority." In addition to the Pell program, the Department
identified the William D. Ford Federal Direct Loan (Direct Loan) and Federal Family
Education Loan (FFEL) programs as susceptible to significant improper payments. The
Department must be able to ensure that the billions of dollars entrusted to it are reaching
the intended recipients.

Our recent work has demonstrated that the Department remains challenged to meet new
requirements and to intensify its efforts to successfully prevent, identify, and recapture
improper payments. We have identified concerns in numerous areas relating to improper

1
 The FY 2014 management challenges report will be available at
http://www2.ed.gov/about/offices/list/oig/managementchallenges.html.



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                                       OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2014

payments to include calculation of the estimated improper payment rate for the Pell, FFEL,
and Direct Loan programs, and improper payments involving grantees and contractors. Our
Semiannual Reports to Congress from April 1, 2010, through March 31, 2013, included
audit reports with findings involving more than $88 million in questioned or unsupported
costs.

Progress in Meeting the Challenge

The Department has revised its estimation methodologies for each of its risk-susceptible
programs (Pell, Direct Loan, and FFEL); however, the Department was working to obtain
OMB approval of the new methodologies as of September 2013.

The Department has identified root causes for improper payments in its risk-susceptible
programs that included documentation, administrative, and verification errors. In response,
the Department identified numerous corrective actions that were planned or completed.
This included a voluntary data exchange program with the Internal Revenue Service that is
intended to improve the accuracy of financial aid applicant’s income data reported on the
online Free Application for Federal Student Aid (FAFSA), enhanced system edits within the
National Student Loan Data System to flag students with unusual enrollment history to
assist in identifying applications for verification, and various internal controls to prevent and
detect errors integrated into its Direct Loan systems and activities.

What Needs to Be Done

The Department needs to continue to explore additional opportunities for preventing,
identifying, and recapturing improper payments. The Department should continue to work
with OMB to ensure its improper payment estimation methodologies and reporting are
reasonable.

Management Challenge 2—Information Technology Security

Why This Is a Challenge

Department systems contain or protect an enormous amount of confidential information
such as personal records, financial information, and other personally identifiable
information. Without adequate management, operational, and technical security controls in
place, the Department’s systems and information are vulnerable to attacks. Unauthorized
access could result in losing data confidentiality and integrity, limiting system availability,
and reducing system reliability.

OIG has identified repeated problems in information technology (IT) security and noted
increasing threats and vulnerabilities to Department systems and data. Over the last
several years, IT security audits have identified controls that need improvement to
adequately protect the Department’s systems and data. This included weaknesses in
configuration management, identity and access management, incident response and
reporting, risk management, security training, plan of action and milestones, remote access
management, and contingency planning. In addition, investigative work performed by the
OIG has identified IT security control concerns in areas such as the FSA PIN system,
mobile IT devices, malware, incident response, email spear phishing, and the Department’s
external email interface.



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OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2014

Progress in Meeting the Challenge

The Department provided corrective action plans to address the recommendations in our
audits and has procured services to provide additional intrusion detection capabilities for its
primary enterprise environment and related data center. The Department also awarded a
contract for a continuous monitoring program of its enterprise infrastructure. It has nearly
completed the requirement of implementing two-factor authentication for Government and
contractor employees, and is well into the process of supplying and implementing
multifactor authentication for its external business partners.

The Department also stated that it is laying a foundation for increased security oversight
and efficiency with an in-house Cyber Security Operations Center, with initial operating
capability planned for late FY 2013 and full capacity planned by mid FY 2014.

What Needs to Be Done

The Department needs to continue its efforts to develop more effective capabilities to
respond to potential IT security incidents. It also should continue its progress towards fully
implementing and enforcing the use of two-factor authentication when accessing its system.
The Department should strive towards a robust capability to identify and respond to
malware installations.

Management Challenge 3—Oversight and Monitoring

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

Oversight and Monitoring—SFA Program Participants

Why This Is a Challenge

The Department must provide effective oversight and monitoring of participants in the SFA
programs under Title IV of the Higher Education Act of 1965, as amended, to ensure that
the programs are not subject to fraud, waste, and abuse. In FY 2013, the Federal
Government planned to provide $170.3 billion in grants, loans, and work-study assistance
to help students pay for postsecondary education. The Department’s FY 2014 budget
request outlines $182.9 billion to Federal student aid, including $35.3 billion in Pell Grants
and over $145 billion in student loans. Nearly 14.7 million students would be assisted in
paying the cost of their postsecondary education at this level of available aid.

Our audits and inspections and work conducted by the Government Accountability Office
continue to identify weaknesses in Federal Student Aid’s (FSA’s) oversight and monitoring
of SFA program participants. In addition, our external audits of individual SFA program



140                                                   FY 2013 Agency Financial Report—U.S. Department of Education
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                                       OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2014

participants frequently identified noncompliance, waste, and abuse of SFA program funds.
OIG investigations have also identified various schemes by SFA program participants to
fraudulently obtain Federal funds.

Progress in Meeting the Challenge

FSA identified numerous initiatives that were completed, in progress, or under
consideration to assist in ensuring that SFA funds are delivered accurately and efficiently.
For example, FSA provides training opportunities to financial aid professionals that are
intended to enhance their ability to effectively implement the Department’s student aid
programs. Other planned actions include the use of automation to improve various aspects
of operations. This includes projects such as an enhanced online origination tool to improve
the application process; an expanded Common Origination and Disbursement system to
improve funds control; and the Integrated Partner Management initiative to improve
management of partner entities, ranging from schools to third party servicers, as they
administer Title IV Financial Aid for Students.

What Needs to Be Done

Overall, FSA needs to continue to assess and improve its oversight and monitoring of
postsecondary institutions; FFEL program guaranty agencies, lenders, and servicers; and
other SFA program participants. It further needs to act effectively when issues are identified
in its oversight and monitoring processes. FSA also needs to evaluate the risks within its
programs and develop strategies to address risks identified to ensure effective operations.
It further needs to assess its control environment, using information from OIG reviews, and
other sources as appropriate, and implement actions for improvement.

Oversight and Monitoring—Distance Education

Why This Is a Challenge

Distance education refers to courses or programs offered through a technology, such as the
Internet, that supports regular and substantive interaction between postsecondary students
and instructors, either synchronously or asynchronously. The flexibility offered is popular
with students pursuing education on a nontraditional schedule. Many institutions offer
distance education programs as a way to increase their enrollment.

Management of distance education programs presents a challenge for the Department and
school officials because of limited or no physical contact to verify the student’s identity or
attendance. In addition, laws and regulations are generally modeled after the traditional
classroom environment which does not always fit delivering education through distance
education. Our investigative work has noted an increasing threat to fraudulently obtain
Federal student aid from distance education programs. Our audits have identified
noncompliance by distance education program participants that could be reduced through
more effective oversight and monitoring.

Progress in Meeting the Challenge

The Department has taken or plans to take numerous actions in response to our work in
this challenge area. For example, starting in the January 2013 FAFSA cycle (for the
2013–14 award year), applicants selected for verification that are in a distance education


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OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2014

program must provide a notarized copy of a government-issued identification to the school.
For the same FAFSA cycle, the Department began screening applicants for unusual
attendance, such as a pattern of enrolling at several schools, receiving aid, and then
withdrawing. In these instances, schools will need to follow up with the applicant to assure
their educational purpose to attend school, or aid cannot be disbursed. The Department has
also begun tracking applicants using the same email and IP address and will consider
implementing new controls for the January 2014 FAFSA cycle (for the 2014–2015 school
year).

What Needs to Be Done

FSA needs to increase its monitoring and oversight of schools providing distance
education. The Department should also gather information to identify students who are
receiving SFA program funds to attend distance education programs—and gather other
information as needed—in order to analyze the differences between traditional education
and distance education. Based on this analysis, the Department should develop and
implement requirements to specifically address potential problems inherent in distance
education.

Oversight and Monitoring—Grantees

Why This Is a Challenge

Effective monitoring and oversight are essential for ensuring that grantees meet grant
requirements and achieve program goals and objectives. The Department’s early learning,
elementary, and secondary education programs annually serve nearly 16,000 public school
districts and 49 million students attending more than 98,000 public schools and
28,000 private schools. Key programs administered by the Department include Title I of the
Elementary and Secondary Education Act (ESEA), which under the President’s 2014
request would deliver $14.5 billion to help 23 million students in high poverty schools make
progress toward State academic standards and the Individuals with Disabilities Education
Act, Part B Grants to States, which would provide $11.6 billion to help States and school
districts meet the special educational needs of 6.5 million students with disabilities.

OIG work has identified a number of weaknesses in grantee oversight and monitoring.
These involve Local Educational Agency (LEA) fiscal control issues, State Educational
Agency (SEA) control issues, fraud perpetrated by LEA and charter school officials, and
internal control weaknesses in the Department’s oversight processes.

Progress in Meeting the Challenge

The Department has planned or completed numerous corrective actions in response to our
audits. This includes enhancing guidance to applicants and reviewers, updating and
clarifying internal guidance and policy, developing formal monitoring plans, and developing
training to grantees and Department staff. The Department has also developed and
implemented a software analysis tool that is intended to assist in identifying areas of
potential risk in the Department’s grant portfolio and developing appropriate monitoring,
technical assistance, and oversight plans as a part of grants management.




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                                                                                     OTHER INFORMATION
                                       OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2014

What Needs to Be Done

The Department should continue to improve its monitoring efforts for recipients of formula
and discretionary grant funds. This includes pursuing efforts to enhance risk management,
increase financial expertise among its grants monitoring staff, and develop mechanisms to
share information regarding risks and monitoring results. The Department also should
consider adding language to its regulations so that prime recipients are fully cognizant of
their responsibilities related to minimum requirements for monitoring subrecipients. The
Department should include a reporting requirement for fraud and criminal misconduct in
connection with all ESEA-authorized programs when the Education Department General
Administrative Regulations are revised.

Oversight and Monitoring—Contractors

Why This Is a Challenge

Contract monitoring is an integral part of the Federal acquisition life cycle. Proper oversight
is necessary to ensure that contractors meet the terms and conditions of each contract;
fulfill agreed-upon obligations pertaining to quality, quantity, and level of service; and
comply with all applicable regulations. The Department contracts for many services that are
critical to its operations. These services include systems development, operation, and
maintenance; loan servicing and debt collection; technical assistance for grantees;
administrative and logistical support; and education research and program evaluations. As
of May 2013, the value of the Department’s active contracts exceeded $5.5 billion.

Once a contract is awarded, the Department must effectively monitor performance to
ensure that it receives the quality and quantity of products or services for which it is paying.
OIG audits have identified issues relating to the lack of effective oversight and monitoring of
contracts and contractor performance. This is primarily related to the appropriateness of
contract payments and the effectiveness of contract management. In addition, OIG
investigations have noted contractor activities, such as false claims, that resulted in
improper billings and payments.

Progress in Meeting the Challenge

The Department has provided corrective action plans to address the issues noted in our
audit work. It has also developed and implemented several training programs and
procedures within this area.

What Needs to Be Done

The Department needs to ensure that it has an appropriately qualified staff in place and in
sufficient numbers to provide effective oversight of its contracts.

Management Challenge 4—Data Quality and Reporting

Why This Is a Challenge

Data are used by the Department to make funding decisions, evaluate program
performance, and support a number of management decisions. SEAs annually collect data
from LEAs and report various program data to the Department. The Department, its


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OTHER INFORMATION
OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2014

grantees, and its subrecipients must have effective controls to ensure that reported data is
accurate and reliable.

Our work has identified a variety of weaknesses in the quality of reported data and
recommended improvements at the SEA and LEA level, as well as actions the Department
can take to clarify requirements and provide additional guidance. This includes weaknesses
in controls over the accuracy and reliability of program performance, academic
assessments, and American Recovery and Reinvestment Act of 2009 recipient data.

Progress in Meeting the Challenge

To address concerns related to one program’s performance data the Department plans to
provide training to staff around assessing the SEA's efforts to sufficiently test performance
data and provide reasonable assurance of its validity and completeness. It also plans to
revise its site visit monitoring instrument to ensure staff sufficiently evaluate SEA monitoring
activities related to the reliability of program performance data.

The Department requires management certifications regarding the accuracy of some SEA-
submitted data. The Department also conducts an ongoing peer review process to evaluate
State assessment systems, and it currently includes a review of test security practices
during its scheduled program monitoring visits. In June 2011, the Secretary sent a letter to
Chief State School Officers suggesting steps that could be taken to help ensure the integrity
of the data used to measure student achievement. The Department also has a contract to
provide technical assistance to improve the quality and reporting of outcomes and impact
data from Department grant programs that runs through 2015.

What Needs to Be Done

While the Department identified its commitment to work to improve staff and internal system
capabilities for analyzing data and using it to improve programs, it must continue to work to
ensure that effective controls are in place at all applicable levels of the data collection,
aggregation, and analysis processes to ensure that accurate and reliable data is reported.

Management Challenge 5—Information Technology System
Development and Implementation

Why This Is a Challenge

The Department faces an ongoing challenge of efficiently providing services to growing
numbers of program participants and managing additional administrative requirements with
consistent staffing levels. The Department reported that its inflation adjusted administrative
budget is about the same as it was 10 years ago while its FTE has declined by 6 percent.
This makes effective information systems development and implementation, and the
greater efficiencies such investments can provide, critical to the success of its activities and
the achievement of its mission.

Data from the Federal IT Dashboard reported the Department’s total IT spending for
FY 2013 as $622.5 million. The Department identified 30 major IT investments accounting
for $506.5 million of its total IT spending. Our recent work has identified weaknesses in the
Department’s processes to oversee and monitor systems development that have negatively



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                                                                                     OTHER INFORMATION
                                       OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2014

impacted operations and may have resulted in improper payments. In addition, the
Department self-reported two material weaknesses relating to financial reporting of federal
student aid data and operations of the Direct Loan and FFEL programs that resulted from
system functionality issues occurring after large-scale system conversions in October 2011.

Progress in Meeting the Challenge

The Department reported it has taken action to correct the financial reporting deficiencies
associated with the system conversions. It also reported that FSA implemented other
internal control improvements that resulted in system fixes and restored system
functionality.

The Department further reported that actions to correct the root causes of the internal
control deficiencies impacting operation of Direct Loan and FFEL programs are ongoing.
Actions include research into borrower balances and root cause analysis of system
limitations to inform recommendations on system and process fixes.

What Needs to Be Done

The Department needs to continue to monitor contractor performance to ensure that system
deficiencies are corrected and that system performance fully supports the Department’s
financial reporting and operations. Further actions needed to address this challenge include
improving management and oversight of system development and life cycle management
(to include system modifications and enhancements) and ensuring that appropriate
expertise to managing system contracts (to include acceptance of deliverables) is obtained.




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Appendices
APPENDICES




 Appendix A: Selected Department Web Links and Education
                        Resources

College Cost Lists

The Department provides college affordability and transparency lists under the Higher
Education Opportunity Act of 2008. Each list is broken out into nine different sectors to
allow students to compare costs at similar types of institutions, including career and
technical programs. http://collegecost.ed.gov/catc/

College Navigator

The Department provides a multi-dimensional review of higher education options for
students and provides links to other sites. http://nces.ed.gov/collegenavigator/

College Scorecards

College Scorecards in the Department’s College Affordability and Transparency Center
make it easier to find out more about a college’s affordability and value.
http://www.whitehouse.gov/issues/education/higher-education/college-score-card

One-Stop Shopping for Student Loans

The Department provides a site from which students can manage their loans.
http://studentloans.gov/

College Preparation Checklist

This Departmental tool gives prospective college students step-by-step instructions on how
to prepare academically and financially for education beyond high school. Each section is
split into subsections for students and parents, explaining what needs to be done and which
publications or websites might be useful to them. http://studentaid.ed.gov

Additional resources within the checklist assist students in finding scholarships and grants.

http://studentaid.ed.gov/students/publications/checklist/main.html

http://studentaid.ed.gov/students/publications/checklist/MoreSourcesOfStudentAid.html

College Completion Toolkit

The College Completion Toolkit provides information that governors and other state leaders
can use to help colleges in their state increase student completion rates. It highlights key
strategies and offers models to learn from, as well as other useful resources.
http://www.ed.gov/sites/default/files/cc-toolkit.pdf




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                                                                                           ACKNOWLEDGMENTS
                                                     SELECTED DEPARTMENT W EB LINKS AND EDUCATION RESOURCES


Resources for Adult and Career and Technical Education

The Department, through the Perkins Collaborative Resource Network, offers resources
and tools for the development and implementation of comprehensive career guidance
programs. This includes guides for students, parents, teachers, counselors, and
administrators across relevant topics, such as planning and exploring careers, selecting
institutions, finances, and guidance evaluation. This source is an example of
interdepartmental cooperation between the Department and the U.S. Department of Labor.
http://cte.ed.gov/nationalinitiatives/gandctools.cfm?&pass_dis=1

Program Inventory

The GPRA Modernization Act of 2010, P.L. 111-352, requires that OMB establish a single
website with a central inventory of all federal programs, including the purpose of each
program and its contribution to the mission and goals of the Department. In 2013, the
Department describes each program within 27 budgetary accounts, as well as how the
programs support the Department’s broader Strategic Goals and Objectives.
http://www2.ed.gov/programs/inventory.pdf

Grants Information and Resources

In addition to student loans and grants, the Department offers other discretionary grants,
which are awarded using a competitive process, and formula grants, which use formulas
determined by Congress with no application process. This site lists Department
discretionary grant competitions previously announced, as well as those planned for later
announcement, for new awards organized according to the Department’s principal program
offices. http://www2.ed.gov/fund/grant/find/edlite-forecast.html

For more information on the Department’s programs, see
http://www2.ed.gov/programs/gtep/gtep.pdf

Federal Registry for Educational Excellence

Federal Registry for Educational Excellence (FREE) provides easily accessible resources in
a wide gamut of subjects for educators. The tool breaks resources into categories, ranging
from art and music to science and mathematics. FREE is built on the Learning Registry, an
open database for sharing educational resources. It also offers a wide variety of primary
documents, photos, and videos. In addition, FREE allows educators to follow via Twitter, a
social network, which facilitates the sharing of ideas. This tool acts as a library of digital
resources for educators to help them enrich their lessons. http://free.ed.gov/

Practice Guides for Educators

The Department offers guides that help educators address everyday challenges they face
in their classrooms and schools. Developed by a panel of nationally recognized experts,
practice guides consist of actionable recommendations, strategies for overcoming potential
roadblocks, and an indication of the strength of evidence supporting each recommendation.
The guides themselves are subjected to rigorous external peer review. Users can sort by
subject area, academic level, and intended audience to find the most recent, relevant, and
useful guides. http://ies.ed.gov/ncee/wwc/publications_reviews.aspx



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APPENDICES
SELECTED DEPARTMENT W EB LINKS AND EDUCATION RESOURCES


Performance Data

EDFacts is a Department initiative to put performance data at the center of policy,
management, and budget decisions for all K-12 educational programs.
http://www.ed.gov/about/inits/ed/edfacts/index.html

Condition of Education and Digest of Education Statistics

The Condition of Education is a congressionally mandated annual report that summarizes
developments and trends in education using the latest available statistics. The report
presents statistical indicators containing text, figures, and data from early learning through
graduate-level education. http://nces.ed.gov/programs/coe/

The primary purpose of the Digest of Education Statistics is to provide a compilation of
statistical information covering the broad field of American education from pre-kindergarten
through graduate school. The Digest includes a selection of data from many sources, both
government and private, and draws especially on the results of surveys and activities
carried out by the National Center for Education Statistics.
http://nces.ed.gov/programs/digest/

Projections of Education Statistics to 2021

For the 50 states and the District of Columbia, the tables, figures, and text in this report
contain data on projections of public elementary and secondary enrollment and public high
school graduates to the year 2021. The report includes a methodology section that
describes the models and assumptions used to develop national and state-level projections.
http://nces.ed.gov/pubsearch/pubsinfo.asp?pubid=2013008

Open Government Initiative

The Department’s Open Government Initiative is designed to improve the way the
Department shares information, learns from others, and collaborates to develop the best
solutions for America’s students. http://www2.ed.gov/about/open.html

National Assessment of Educational Progress

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

Government Accountability Office

The Government Accountability Office supports Congress in meeting its constitutional
responsibilities and helps improve the performance and accountability of the federal
government for the benefit of the American people.
http://www.gao.gov/docsearch/agency.php




150                                                   FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                           ACKNOWLEDGMENTS
                                                     SELECTED DEPARTMENT W EB LINKS AND EDUCATION RESOURCES


Office of Inspector General

The Office of Inspector General conducts independent and objective audits, investigations,
inspections, and other activities to promote the efficiency, effectiveness, and integrity of the
Department’s programs and operations. http://www.ed.gov/about/offices/list/oig/index.html

For a list of recent reports, go to: http://www2.ed.gov/about/offices/list/oig/reports.html




FY 2013 Agency Financial Report—U.S. Department of Education                                            151
APPENDICES




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

ACG          Academic Competitiveness Grant

AFR          Agency Financial Report

APG          Agency Priority Goals

APR          Annual Performance Report

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

CAP          Corrective Action Plan

CAT          Core Assessment Team

CCRAA        College Cost Reduction and Access Act of 2007

CFO          Chief Financial Officer

CPSS         Contract and Purchasing Support System

CRA          Civil Rights Act of 1964

CSPR         Consolidated State Performance Report

CSRS         Civil Service Retirement System

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

DD&B         Death, Disability and Bankruptcy

DOL          U.S. Department of Labor

DSS          Decision Support System

DST          Data Strategy Team

ECASLA       Ensuring Continued Access to Student Loans Act of 2008

EDCAPS       Education’s Central Automated Processing System

ESEA         Elementary and Secondary Education Act of 1965

ESRA         Education Sciences Reform Act of 2002

FAFSA        Free Application for Federal Student Aid

FASAB        Federal Accounting Standards Advisory Board

FECA         Federal Employees’ Compensation Act

FERS         Federal Employees Retirement System




152                                                 FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                   ACKNOWLEDGMENTS
                                                               GLOSSARY OF ACRONYMS AND ABBREVIATIONS


FFB                Federal Financing Bank

FFEL               Federal Family Education Loan

FFMIA              Federal Financial Management Improvement Act of 1996

FISMA              Federal Information Security Management Act of 2002

FMFIA              Federal Managers’ Financial Integrity Act of 1982

FMSS               Financial Management Support System

FREE               Federal Resources for Educational Excellence

FSA                Federal Student Aid

FSEOG              Federal Supplemental Educational Opportunity Grant

FY                 Fiscal Year

G5                 Grants Management System

GAO                Government Accountability Office

GEAR UP            Gaining Early Awareness and Readiness for Undergraduate Programs

GEPA               General Education Provisions Act

GMRA               Government Management Reform Act of 1994

GPRA               Government Performance and Results Act of 1993

GPRAMA             GPRA Modernization Act of 2010

GSA                General Services Administration

HBCUs              Historically Black Colleges and Universities

HEA                Higher Education Act of 1965

HR                 Hurricane Education Recovery

IASG               Iraq and Afghanistan Service Grant

IDEA               Individuals with Disabilities Education Act

IES                Institute of Education Sciences

IP                 Improper Payments

IPA                Independent Public Accountant

IPEDS              Integrated Postsecondary Education Data System

IPERA              Improper Payments Elimination and Recovery Act of 2010




FY 2013 Agency Financial Report—U.S. Department of Education                                      153
APPENDICES
GLOSSARY OF ACRONYMS AND ABBREVIATIONS


IPERIA      Improper Payments Elimination and Recovery Improvement Act of 2012

IPIA        Improper Payments Information Act of 2002

IRS         Internal Revenue Service

IRS DRT     IRS Data Retrieval Tool

i3          Investing in Innovation fund

IT          Information Technology

KEA         Kindergarten Entry Assessment

LEA         Local Educational Agency

LEAP        Leveraging Educational Assistance Partnership

LLR         Lender of Last Resort

LVC         Loan Verification Certificates

MD&A        Management’s Discussion and Analysis

NAEP        National Assessment of Educational Progress

NCES        National Center for Education Statistics

NCLB        No Child Left Behind Act of 2001

NIST        National Institute of Standards and Technology

NSLDS       National Student Loan Data System

OCR         Office for Civil Rights

OELA        Office of English Language Acquisition

OESE        Office of Elementary and Secondary Education

OIG         Office of Inspector General

OII         Office of Innovation and Improvement

OMB         Office of Management and Budget

OPE         Office of Postsecondary Education

OPEPD       Office of Planning, Evaluation, and Policy Development

OPM         Office of Personnel Management

OPR         Organizational Performance Report

OSERS       Office of Special Education and Rehabilitative Services




154                                                    FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                   ACKNOWLEDGMENTS
                                                               GLOSSARY OF ACRONYMS AND ABBREVIATIONS


OST                Office of School Turnaround

OVAE               Office of Vocational and Adult Education

PARCC              Partnership for Assessment of Readiness for College and Careers

PBO                Performance-Based Organization

PIC                Performance Improvement Council

PII                Personally Identifiable Information

PIO                Performance Improvement Officer

PUMS               Public Use Microdata Sample

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

RCA                Reports Consolidation Act of 2000

REAP               Rural Education Achievement Program

RESPECT            Recognizing Educational Success, Professional Excellence, and Collaborative
                   Teaching

RFI                Request for Information

RMS                Risk Management Service

RTT-ELC            Race to the Top-Early Learning Challenge

SAFRA              SAFRA Act

SAP                Special Allowance Payment

SASS               Schools and Staffing Survey

SAT                Senior Assessment Team

SBR                Statement of Budgetary Resources

SEA                State Educational Agency

SFSF               State Fiscal Stabilization Fund

SIG                School Improvement Grant

SLA                Service Level Agreement

SLEAP              Special Leveraging Educational Assistance Partnership

SLM                Student Loan Model

SMART              National Science and Mathematics Access to Retain Talent Grant




FY 2013 Agency Financial Report—U.S. Department of Education                                      155
APPENDICES
GLOSSARY OF ACRONYMS AND ABBREVIATIONS


SOAR        Strategic Objectives Annual Report

SOS         Schedule of Spending

STEM        Science, Technology, Engineering, and Mathematics

SY          School Year

TEACH       The Teacher Education Assistance for College and Higher Education Grant

TIF         Teacher Incentive Funds

VR          Vocational Rehabilitation




156                                              FY 2013 Agency Financial Report—U.S. Department of Education
                                                                                              ACKNOWLEDGMENTS




                                                Acknowledgments
This Agency Financial Report (AFR) was                          Other Contributors:
produced with the energies and talents of our
employees and contract partners.                                Office of the Deputy Secretary

Within the Office of the Chief Financial Officer,               Federal Student Aid
the office of Financial Management Operations
(FMO) is responsible for certifying, processing,                Office of the Inspector General
reconciling, evaluating, and reporting all agency
financial transactions; preparing annual financial              Budget Service
statements and related notes and schedules;
and coordinating the external audit of the
                                                                Office of Communications and
agency’s financial statements.
                                                                Outreach
Financial Improvement and Post Audit
Operations (FIPAO) provides leadership and                      Office of the Chief Information Officer
direction in the areas of internal control
assessment, financial management training, post                 Partners:
audit activities, and indirect cost determination.
                                                                Office of Management and Budget
Contracts and Acquisitions Management (CAM)
is responsible for the solicitation, award,                     Department of Treasury
administration, and closeout of all contracts and
other acquisition instruments for the Department.               Government Accountability Office

We offer our sincerest thanks and                               Association of Government
acknowledgment to staff of all participating                    Accountants
principal offices. In particular, we recognize the
following organizations for their contribution:




                       The following companies were contracted to assist in the preparation of the
                            U.S. Department of Education FY 2013 Agency Financial Report:

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



                                           The FY 2013 Agency Financial Report

                                              U.S. Department of Education
                                             Office of the Chief Financial Officer

                            An electronic version is available on the World Wide Web at
                                http://www2.ed.gov/about/reports/annual/index.html

                                     U.S. Department of Education, December 2013




FY 2013 Agency Financial Report—U.S. Department of Education                                              157
OUR MISSION IS TO PROMOTE STUDENT ACHIEVEMENT AND PREPARATION FOR
 GLOBAL COMPETITIVENESS BY FOSTERING EDUCATIONAL EXCELLENCE AND
                     ENSURING EQUAL ACCESS.

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