oversight

Financial Statement Audits for Fiscal Years 2013 and 2012 - Federal Student Aid

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)

ANNUAL REPORT 2013
United States Department of Education
Arne Duncan
Secretary

Federal Student Aid
James W. Runcie
Chief Operating Officer

Finance Office
Jay Hurt
Chief Financial Officer

December 11, 2013

About This Report

Federal Student Aid, a principal office of the United States Department of Education, is
required by legislation to produce an Annual Report, which details Federal Student Aid’s
financial and program performance. The Federal Student Aid Annual Report for Fiscal Year
2013 is a comprehensive document that provides an analysis of Federal Student Aid’s
financial and program performance results. The report enables the President, Congress, and
the public to assess the organization’s performance relative to its mission, and determine
whether Federal Student Aid has demonstrated accountability for the resources entrusted to it.

This report presents information about Federal Student Aid’s performance as a Performance-
Based Organization, its accomplishments, initiatives, and challenges, as required by Office of
Management and Budget Circular A-11, Preparation, Submission and Execution of the
Budget, Part 6, Section 260, and Circular A-136, Financial Reporting Requirements. The
report also satisfies the requirements included in the following federal statutes:

   Federal Managers’ Financial Integrity Act of 1982
   Chief Financial Officers Act of 1990
   Government Performance and Results Act of 1993
   Government Management Reform Act of 1994
   Federal Financial Management Improvement Act of 1996
   Higher Education Amendments of 1998
   Reports Consolidation Act of 2000
   Improper Payment Information Act of 2002
   Government Performance and Results Modernization Act of 2010
   Improper Payments Elimination and Recovery Act of 2010

The United States Department of Education, of which Federal Student Aid is a principal office,
produces the Agency Financial Report. This report provides a comprehensive view of the
Department’s stewardship over its resources and includes a summary of the information
contained in the Federal Student Aid Annual Report. The Fiscal Year 2013 Agency
Financial Report can be accessed by clicking on the link above.




                               Federal Student Aid Annual Report–FY 2013
                                           Letter from the Chief Operating Officer of Federal Student Aid


Letter from the Chief Operating Officer of Federal Student Aid




  Dear Federal Student Aid Colleagues, Partners, and Customers:

  I am honored to present the Fiscal Year (FY) 2013
  Annual Report for Federal Student Aid (FSA). This
  report provides a comprehensive overview of Federal
  Student Aid’s progress over the last year.

  Federal Student Aid witnessed some significant
  milestones in FY 2013. The federal student loan
  portfolio crossed the $1 trillion threshold, reflecting an
  increase of 9.7 percent from FY 2012. The total
  number of borrowers with outstanding loans rose to
  40 million, an increase of 5.3 percent from the
  previous year. As the nation’s economy improved, we
  began to see the total amount of aid disbursed and
  students assisted actually decrease to $137.6 billion
  disbursed to more than 14 million students and their
  families.

  As always, our first priority remains focused on
                                                                        James W. Runcie
  serving our customers and facilitating access to                   Chief Operating Officer
  postsecondary education. Federal Student Aid
  applied particular efforts to increase accessibility to the Free Application for Federal
  Student Aid (FAFSASM) and ease of use. As a result, the average time to complete a
  FAFSA application in the 2012–2013 application cycle was down to 22 minutes, a
  significant improvement from 60 minutes or more found in the 2009–2010 application cycle.
  We also saw a greater adoption of automated retrieval of income tax data from the Internal
  Revenue Service into the FAFSA application. More than 9 million applicants used the
  automated retrieval feature during the 2012–13 application cycle.

  Federal Student Aid also utilized online tools to improve customer engagement and support
  its legislative requirement to raise public awareness about the availability of federal student
  aid and to further drive access. FSA’s website consolidation has exceeded customer
  service expectations and in one year, StudentAid.gov received 31.5 million unique visitors.
  During FY 2012–2013, FSA’s Facebook friends, Twitter followers, and YouTube
  subscribers increased at substantial rates ranging from 500 percent to 1,250 percent.
  Additionally, FSA developed the Financial Aid Toolkit, a website that features pre-made
  presentations, how-to guides and publications organized by target audience and topic for
  use by counselors, educators and community organizations for customizing their own
  college access and outreach strategies.

  Federal Student Aid, in conjunction with our colleagues from across the Department, also
  worked to develop new resources like the Model Award Letter, also known as the Shopping
  Sheet, to make it easier for students and their families to compare college costs and make
  informed decisions about higher education. We also helped produce the College
                                   Federal Student Aid Annual Report–FY 2013
                                      Letter from the Chief Operating Officer of Federal Student Aid

Scorecard by providing the data that delivers easy-to-understand information about each
college’s graduation rate, net price, the median amount of funds borrowed, and the share of
students that default on their loans.

In 2013, Federal Student Aid developed new tools and resources to help student borrowers
manage their financial obligations and mitigate the incidence of default and delinquency.
Launched in March, the Repayment Estimator allows student borrowers to view and
compare repayment plans, providing comparisons between monthly payment amounts,
total amounts paid, and total interest paid based on each plan. Furthermore, we introduced
the Pay As You Earn Plan in December, which helps borrowers manage their student loan
burden by limiting monthly payments to 10 percent of their discretionary income. More than
60,000 borrowers have taken advantage of this plan since its introduction.

Federal Student Aid worked with our loan servicers to enhance loan counseling for armed
service veterans, increasing awareness of benefits such as the Public Service Loan
Forgiveness repayment program. We also successfully implemented regulatory changes to
Total and Permanent Disability Discharges and completed the transition of all remaining
borrowers from our legacy servicing platform. To increase awareness of Federal Student
Aid’s programs, products and services, we began airing a new public service
announcement last spring, which has resulted in 1.7 billion total impressions with a total
media value of over $17 million.

In addition to providing these resources and tools for students and families, Federal
Student Aid carried on our work with schools, better equipping them to manage the Title IV
programs on their campuses. This past year, we conducted 12 workshops and 14
webinars on Title IV administration, and held our annual training conference for more than
5,000 financial aid professionals. Likewise, we strengthened our programs by increasing
our monitoring and oversight activities. We developed a new unit focused solely on
oversight of third-party school servicers. Additionally, we established a central office to
receive and manage school compliance complaints from students and parents to more
effectively respond to the needs of our customers and highlight to schools areas of non-
compliance, as necessary.

These successes were only possible due to the incredible dedication of the Federal
Student Aid workforce, and their commitment to making postsecondary education possible
for every American. I want to thank them and acknowledge their work and service.

Sincerely,



James W. Runcie
Chief Operating Officer
Federal Student Aid
U.S. Department of Education
December 11, 2013




                               Federal Student Aid Annual Report–FY 2013
                                                                               Table of Contents


                          Table of Contents

     Letter From the Chief Operating Officer of Federal Student Aid


     iii     Federal Student Aid at a Glance
     iv      How Federal Student Aid Benefits the Public
     v       Guide to Federal Student Aid Programs
     vii     Introduction to the Federal Student Aid Annual Report

1    Management’s Discussion and Analysis

      3      Mission And Organizational Structure
     13      Performance Management
             13   Performance Management Processes at Federal Student Aid
             15   FY 2013 Strategic Goals, Objectives, and Performance Metrics
             27   Agency Priority Goal
             28   Quality of Performance Data
     29      Financial Management Discussion and Analysis
     40      Analysis of Systems, Controls and Legal Compliance
     45      Limitations of Financial Statements


47   Annual Performance Report

     50      Introduction to the Annual Performance Report
     52      Performance Results by Strategic Goal
             53   Strategic Goal A:   Provide superior service and information to students and
                                      borrowers.
             58   Strategic Goal B:   Work to ensure that all participants in the system of
                                      funding postsecondary education serve the interests of
                                      students, from policy to delivery.
             60   Strategic Goal C:   Develop efficient processes and effective capabilities
                                      that are among the best in the public and private
                                      sectors.
             62   Strategic Goal D:   Ensure program integrity and safeguard taxpayers’
                                      interests.
             66   Strategic Goal E:   Strengthen FSA’s performance culture and become one
                                      of the best places to work in the federal government.
     67      FY 2013 Accomplishments of Federal Student Aid
     71      Legislative and Regulatory Recommendations
     72      Annual Bonus Awards
     73      Report of the Federal Student Aid Ombudsman

                    Federal Student Aid Annual Report–FY 2013                                    i
                                                                     Table of Contents

79    FINANCIAL SECTION


       81     Message From the Chief Financial Officer
       83     Financial Statements
       87     Notes to the Financial Statements
      123     Required Supplementary Stewardship Information
      125     Required Supplementary Information
      129     Independent Auditors’ Report


155   Other Information


159   Appendices


      161     Appendix A:   Glossary of Acronyms and Terms
      165     Appendix B: Availability of the Federal Student Aid Annual Report




                    Federal Student Aid Annual Report–FY 2013                      ii
                                                                     Federal Student Aid At A Glance



                        Federal Student Aid at a Glance


Established as a Performance-Based Organization              1998


Headquarters                                                 830 First Street, NE
                                                             Washington, DC 20202

Website                                                      StudentAid.gov


FY 2013 Administrative Budget                                $1.4 billion


Total Employees                                              1,246 employees


Regional Offices                                             10


Total Applications Processed                                 21 million


Total Postsecondary Students Served                          14 million


Total Federal Student Aid Delivered                          $137.6 billion


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




                                 Federal Student Aid Annual Report–FY 2013                        iii
                                                         How Federal Student Aid Benefits the Public



           How Federal Student Aid Benefits the Public

Designated as a Performance-Based Organization in 1998, Federal Student Aid (FSA) performs
a vital service within the system of funding postsecondary education in the United States. As a
principal office of the United States Department of Education (the Department), FSA ensures
that all eligible Americans have access to federal financial assistance for education or training
beyond high school. In Fiscal Year (FY) 2013, FSA supported the funding of billions of dollars
in student financial aid, which enabled millions of students to attend college or career school.
The list below details some of the ways in which the organization serves the public. FSA
ensures that students and their families benefit from its programs by:

   Informing students and families of the availability of the federal student aid programs and on
    the process of applying for and receiving aid from those programs;

   Developing the Free Application for Federal Student Aid (FAFSASM) and processing over
    21 million FAFSA submissions;

   Accurately disbursing, reconciling, and accounting for all federal student aid funds that are
    delivered to students each year through approximately 6,200 colleges and career schools;

   Managing the outstanding federal student loan portfolio and securing repayment from
    federal student loan borrowers;

   Offering free assistance to students, parents, and borrowers throughout the entire financial
    aid process; and

   Providing oversight and monitoring of all program participants—schools, financial entities,
    and students—to ensure compliance with the laws, regulations, and policies governing the
    federal student aid programs.

While FSA employees are committed to assisting students in achieving their postsecondary
education goals, they also provide benefits to the community through direct service. The ideals
of service are demonstrated through their participation in various government, Departmental,
and FSA-sponsored community service programs. Employee efforts have positively influenced
the community in the following ways:

   Tutoring students at local area schools;

   Contributing to various charities through the Combined Federal Campaign;

   Donating food to various food banks, through the Feds Feed Families program, a
    government-wide food drive;

   Supporting and participating in the Susan G. Komen Race for the Cure;

   Donating holiday gifts to children in local schools though the Operation Santa program; and

   Assisting in the renovation and rebuilding of affordable housing for families through the
    Habitat for Humanity program.
                                Federal Student Aid Annual Report–FY 2013                            iv
                                                             Guide to Federal Student Aid Programs



                Guide to Federal Student Aid Programs

FSA delivered $137.6 billion in federal financial student aid to approximately 14 million students
in FY 2013. This aid was provided in the form of 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 three main categories of federal student aid are:

   Loans
     o Student aid funds that are borrowed to help pay for eligible education programs and
         must be repaid with interest;
   Grants
     o Student aid funds that do not have to be repaid (unless other conditions apply); and
   Work-Study
     o A part-time work program that allows students to earn money to help pay for school.

The information below presents a brief overview of the various aid programs included in each
category. For more information about the FSA programs, please refer to page 37 of the
Department of Education Federal Program Inventory, Student Financial Assistance.

Loans
 Direct Subsidized Loans
    o Federal loans based on financial need made to undergraduate students for which the
       federal government does not charge interest while the borrower is in school, in grace,
       or in deferment status. For Direct Subsidized Loans first disbursed between
       July 1, 2012, and July 1, 2014, the borrower is responsible for paying any interest that
       accrues during the grace period. If the interest is not paid during the grace period, the
       interest will be added to the loan’s principal balance.

   Direct Unsubsidized Loans
     o Federal loans made to undergraduate students and graduate students for which the
         borrower is fully responsible for paying the interest regardless of the loan status.
         Interest on unsubsidized loans accrues from the date of disbursement and continues
         throughout the life of the loan.

   Direct PLUS Loans
     o Federal loans made to graduate or professional students and parents of dependent
         undergraduate students for which the borrower is fully responsible for paying the
         interest regardless of the loan status.

   Direct Consolidation Loans
     o Federal loans made that allow the borrower to combine one or more federal student
         loans into one new loan. The borrower will only have to make one monthly payment
         on the consolidation loan and the repayment term of the loan may be longer than the
         terms on the original loans.

   Federal Perkins Loans
     o Federal student loans, made by schools, to undergraduate and graduate students who
         demonstrate financial need. Participating schools receive a certain amount of funds
         each year from FSA for distribution under this program, which supplement funds in a
                               Federal Student Aid Annual Report–FY 2013                             v
                                                             Guide to Federal Student Aid Programs

         school’s revolving fund, from which new disbursements are made. Once the full
         amount of the school’s funds has been awarded to students, no more loans can be
         made under this program for the year.

Grants
 Federal Pell Grants
    o Federal financial aid awarded to undergraduate students with demonstrated financial
       need. This form of aid does not require repayment.

   Federal Supplemental Educational Opportunity Grants
     o Federal grants distributed under this program are administered directly by the
         financial aid office at each participating school and are known as “campus-based”
         aid. Each participating school receives a certain amount of Federal Supplemental
         Educational Opportunity Grant funds each year from FSA. Once the full amount of
         the school’s grant funds has been awarded to students, no more awards can be
         made under this program for the year.

   Teacher Education Assistance for College and Higher Education Grants
     o Federal grants awarded annually to eligible undergraduate or graduate students who
        agree to teach mathematics, science, or other specialized subjects in high-need
        schools for at least four years, within eight years of their graduation. Eligible students
        may be awarded grants totaling up to $4,000 annually. If students fail to fulfill the
        service requirements, the grants will convert to Direct Unsubsidized loans, with
        interest accrued from the time of the award.

   Iraq and Afghanistan Service Grants
      o Federal grants awarded to students who are not eligible for a Federal Pell Grant on
          the basis of Expected Family Contribution, but meet the remaining Federal Pell
          Grant eligibility requirements, and:
               Have a parent or guardian who was a member of the U.S. Armed Forces and
                 died as a result of military service performed in Iraq or Afghanistan after the
                 9/11 events; and
               Were under 24 years old or enrolled in college at least part-time at the time of
                 the parent or guardian’s death.

Federal Work-Study
 Federal program that provides part-time jobs for undergraduate, graduate and
   professional students with financial need, allowing them to earn money to help pay
   education expenses. The program is available to full-time or part-time students and
   encourages community service work. The work is often related to the student’s course of
   study and is administered by the schools who participate in the Federal Work-Study
   program.

FSA provides several options for students to finance their education; however, to obtain
federal financial aid, prospective aid recipients must complete the financial aid process. For
more information on obtaining federal student aid and to see a graphic of the financial aid
process, click on StudentAid.gov/financial-aid.




                                Federal Student Aid Annual Report–FY 2013                            vi
                                             Introduction to the Federal Student Aid Annual Report



   Introduction to the Federal Student Aid Annual Report

The FY 2013 Federal Student Aid Annual Report provides financial and performance
information that enables the President, Congress, and the public to assess how FSA has
performed in accomplishing its mission and achieving its goals. The report is organized into
the following sections:

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

The Annual Performance Report presents the strategic goals included in the Federal
Student Aid: Strategic Plan, Fiscal Years 2012–16 and discusses the results of the various
performance metrics as related to each strategic goal. Targets established for each
performance metric are compared to FSA’s actual performance during the year. These
results are presented to demonstrate the organization’s effectiveness in accomplishing its
mission. The Annual Performance Report also presents the fiscal year accomplishments of
the organization and discusses the process by which it provides legislative and regulatory
recommendations to the Department on issues that affect federal student financial aid. The
Annual Performance Report concludes with the subsections, Annual Bonus Awards, which
details executive compensation in the organization, and the Report of the Federal Student Aid
Ombudsman, which details its processes in assisting borrowers in obtaining resolutions to
federal student aid issues.

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

As part of the Financial Section, the Independent Auditors’ Report subsection presents the
combined audit report issued by the Independent Auditors. The subsection consists of the
Office of Inspector General Audit Transmittal Letter and the combined Independent Auditors’
Report, which includes the Opinion on the financial statements, the Report on Internal Control,
and the Report on Compliance and Other Matters. The subsection concludes with the
Management’s Response to the Audit, which is the official response of FSA’s executive
management to the findings and recommendations contained in the audit report.

The Other Information section includes the Schedule of Spending, which presents an
overview of how and where FSA spent its money during the fiscal year. This section also
provides links to the Department’s FY 2013 Agency Financial Report, which includes a




                               Federal Student Aid Annual Report–FY 2013                          vii
                                           Introduction to the Federal Student Aid Annual Report

discussion of FSA’s improper payments in compliance with the Improper Payment Information
Act of 2002, as amended by the Improper Payments Elimination and Recovery Act of 2010.
The section concludes with a link to the Summary of Financial Statement Audit and
Management Assurances and a link to FSA’s Management Challenges.

The Appendices section includes the glossary of acronyms and terms, and the details on the
availability of this Annual Report.




                             Federal Student Aid Annual Report–FY 2013                        viii
                                    Management’s Discussion and Analysis




Management’s Discussion
     and Analysis




       Federal Student Aid Annual Report–FY 2013                      1
                                                                                     Management’s Discussion and Analysis


           Fiscal Year 2013 Financial and Performance Highlights
                           of Federal Student Aid
                                                 Operational Highlights
                                                                                                                       Percentage
                                                               FY 2013            FY 2012            Difference
                                                                                                                        Change
Total Student Aid Loan Portfolio*                          $ 1,040 billion   $     948 billion   $      92 billion               9.7%


Total Federal Student Loan Borrowers Outstanding                40 million          38 million          2 million                5.3%


Total Number of Postsecondary Education Institutions                6,178               6,252                  (74)           (1.2)%

Audit Opinion                                                  Unqualified       Unqualified     Not applicable       Not applicable%


                                                   Financial Highlights
                                                     (Dollars in millions)
                                                                                                                       Percentage
                                                               FY 2013           FY 2012             Difference
                                                                                                                        Change
Total Assets                                               $      897,245    $       752,738     $       144,507              19.2%


Total Liabilities                                                 867,251            729,965             137,286              18.8%


Net Position                                                       29,994             22,773               7,221              31.7%


Net Cost                                                          (13,422)            10,683            (24,105)            (225.6)%

Total Budgetary Resources Available for Spending
(Budgetary Credit Reform Financing Accounts)                       55,748             56,695                (947)             (1.7)%
Total Budgetary Resources Available for Spending
(Non-Budgetary Credit Reform Financing Accounts)                  256,711            269,586            (12,875)              (4.8)%

Total Outlays, Net
(Budgetary Credit Reform Financing Accounts)                       (7,136)              3,774           (10,910)            (289.1)%
Total Outlays, Net
(Non-Budgetary Credit Reform Financing Accounts)                  148,084            159,988            (11,904)              (7.4)%


                                                Performance Highlights
                                                                                  FY 2013             FY 2013         Performance
                        Performance Measures
                                                                                   Target              Actual           Results
                                                                                                                          Met
Customer Satisfaction Score (ACSI)                                                  78.0                78.4

                                                                                                                           Met
Percent of Borrowers>90 Days Delinquent                                           <=10.1%              8.3%
                                                                                                                           Met
Collection Rate**                                                                  $34.31             $41.57

         *The amounts provided for the Total Student Aid Portfolio includes both amounts managed by Federal
          Student Aid and federal loans held by lenders or schools.

         **Collection Rate for the purpose of this metric is defined as the amount of dollars collected from borrowers
          in the fiscal year per dollar spent to collect.


                                               Federal Student Aid Annual Report–FY 2013                                                2
                                                                Management’s Discussion and Analysis
                                                                        Mission and Organizational Structure




    Mission and Organizational Structure

Federal Student Aid (FSA), a principal office of the United States (U.S.) Department of
Education (the Department), seeks to ensure that all eligible individuals can benefit from
federal financial assistance for education beyond high school. As the nation’s largest provider
of student financial aid, FSA is responsible for implementing and managing federal student
financial assistance programs authorized under the Higher Education Act of 1965, as
amended (HEA). Specifically, Title IV of the HEA (Title IV) authorizes the federal student
assistance programs for which FSA is responsible. These programs provide grants, loans,
and work-study funds to students attending college or career school.

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

    Educating students and families about the process of obtaining financial aid;

    Processing millions of student financial aid applications;

    Disbursing billions of dollars in student financial aid;

    Insuring billions of dollars in guaranteed student loans previously issued by financial
     institutions;

    Enforcing financial aid rules and regulations;

    Servicing millions of student loans and helping borrowers avoid default;

    Securing repayment from borrowers who have defaulted on their loans; and

    Partnering with schools, financial institutions, and guaranty agencies to prevent program
     fraud, waste, and abuse.

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




                                           FSA Fact
    FSA administers the Title IV programs, the largest source of postsecondary education
    funding. Examples of the Title IV programs include the Federal Direct Loan, Federal
    Pell Grant and Federal Work-Study programs. To learn more about these and other
    Title IV programs administered by FSA, visit StudentAid.gov/Types.

                                  Federal Student Aid Annual Report–FY 2013                                    3
                                                                Management’s Discussion and Analysis
                                                                          Mission and Organizational Structure

Legislative Authority that Influences the Mission of Federal Student Aid
FSA’s mission is “Funding America’s Future, One Student at a Time.” Historically, there have
been several legislative acts that have significantly impacted FSA as an organization. The
Higher Education Amendments of 1998 established FSA as a PBO, to administer the Title IV
programs at the Department. Several other key pieces of legislation have influenced FSA’s
mission and are detailed in the following table.


                                 Overview of Legislative Authority

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

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

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

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

     Higher Education Reconciliation Act of 2005
         Allowed graduate and professional students to utilize the Parent Loans for Undergraduate
         Students.

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

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

     Higher Education Opportunity Act of 2008
         Reauthorized the federal student financial assistance programs, promoted program integrity
         and institutional accountability, and established requirements concerning institutions’ net
         prices of attendance.

     SAFRA Act
         Provided that beginning July 1, 2010, all new loans are to be originated under the Federal
         Direct Loan Program.

     Bipartisan Student Loan Certainty Act of 2013
         Established that federal student loan interest rates will be tied to financial markets and that
         each loan will have a fixed interest rate for the life of the loan.




                                 Federal Student Aid Annual Report–FY 2013                                       4
                                                                             Management’s Discussion and Analysis
                                                                                      Mission and Organizational Structure

FSA Stakeholders

The community of stakeholders in the student aid delivery system includes students and
parents, lenders, guaranty agencies, postsecondary institutions, contracted servicers and
collection agencies, as well as the taxpayers and other federal entities, such as Congress and
the Office of Management and Budget (OMB).

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

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


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

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




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

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




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


                                        Federal Student Aid Annual Report–FY 2013                                            5
                                                          Management’s Discussion and Analysis
                                                                   Mission and Organizational Structure

FSA Organizational Structure

FSA currently operates under a functional organizational structure that aligns the organization
closely with its strategic drivers, business objectives, and mission goals. A Chief Operating
Officer (COO), who is appointed to a five-year term by the Secretary of Education (Secretary),
leads FSA. The Secretary appointed James W. Runcie as the COO on September 15, 2011.
The following graphic illustrates the current functional organizational structure of FSA.




During Fiscal Year (FY) 2013, the organization operated on an annual administrative budget
of approximately $1.4 billion. FSA is staffed by 1,246 full-time employees and is augmented
by contractors who provide outsourced business operations. The workforce is based in
Washington, D.C., with ten regional offices located throughout the country as reflected in the
following graphic. The number of full-time employees at each location is shown in
parentheses immediately following the location name.




                               Federal Student Aid Annual Report–FY 2013                                  6
                                                           Management’s Discussion and Analysis
                                                                    Mission and Organizational Structure

Programs

The federal student financial assistance programs collectively represent the nation’s largest
source of federal financial aid for postsecondary students. In FY 2013, FSA processed more
than 21 million Free Applications for Federal Student Aid (FAFSASM), resulting in the delivery
of $137.6 billion in Title IV aid to more than 14 million postsecondary students and their
families. These students attend approximately 6,200 active institutions of postsecondary
education that participate in student aid programs and are accredited by dozens of agencies.




                 Types of Federal Student Financial Assistance Programs

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


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


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




              Funding America’s Future, One Student at a Time




                                         FSA Fact
  In order to receive federal student aid, students must complete the FAFSA. Completion of
  this free application is the first step in obtaining aid. More than 21 million FAFSAs were
  processed in FY 2013. To find out more about the FAFSA, go to StudentAid.gov/FAFSA.

                               Federal Student Aid Annual Report–FY 2013                                   7
                                                                           Management’s Discussion and Analysis
                                                                                    Mission and Organizational Structure

 On August 2, 2011, Congress passed the Budget Control Act of 2011 (Pub. L. 112-25), which
 put into place automatic federal budget cuts, known as “sequestration”, to take effect if
 Congress did not enact legislation to reduce the federal deficit by March 1, 2013. Because
 Congress did not act, these budget cuts went into effect. The impact of sequestration on aid
 available to students varied by program and is reflected in amounts presented in the following
 table. The table below presents a comparison of the amounts of Title IV aid disbursed to
 students by program in 2013 and 2012. A summary of each of the Title IV student assistance
 programs is presented in the paragraphs that follow the table.

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

                                                     2013                     2012                         Percent
                                                 Aid Disbursed           Aid Disbursed                    Increase/
Programs                                          to Students             to Students     Difference     (Decrease)
Loan Programs

William D. Ford Federal Direct Loan Program      $      102,497     $          105,810   $     (3,313)          (3)%

Federal Perkins Loan Program                               1,008                   945             63             7%
Subtotal Loan Programs                           $      103,505     $          106,755   $    (3,250)           (3)%
Grant Programs

Federal Pell Grant Program                       $       32,338     $           33,299   $      (961)           (3)%
Federal Supplemental Educational
Opportunity Grant Program                                    739                   715             24             3%
Academic Competitiveness Grant Program                          -                    5             (5)        (100)%
National Science and Mathematics Access to
Retain Talent Grant Program                                     -                    4             (4)        (100)%
The Teacher Education Assistance for College
and Higher Education Grant Program                           106                   120           (14)          (12)%

Other Grant Programs/Rounding                                  1                     -              1          N/A

Subtotal Grant Programs                          $       33,184     $           34,143   $      (960)           (3)%
Work-Study Programs

Federal Work-Study Program                       $           959    $              965   $         (6)          (1)%
Grand Total                                       $      137,648 $            141,863 $        (4,215)          (3)%
 Aid disbursed to students as cited in the table above, and in the following sections concerning the Federal Loan
 Programs, the Federal Grant Programs and the Federal Work-Study Program in the Management’s Discussion and
 Analysis section, excluding the Federal Perkins Loan Program amounts, are derived from amounts from FSA’s and
 the Department’s Financial Systems. All amounts are fiscal year-to-date amounts, except for the Federal Perkins
 Loan Program, which is reported as an award year amount. The number of awards or recipients reported in the
 Management’s Discussion and Analysis section is derived from amounts used to support the President’s Budget
 and is based on award year.

 Funding for the Academic Competitiveness Grant and National Science and Mathematics Access to Retain Talent
 Grant Programs expired at the end of academic year 2010–11.




                                       Federal Student Aid Annual Report–FY 2013                                           8
                                                               Management’s Discussion and Analysis
                                                                        Mission and Organizational Structure

Federal Loan Programs

In fulfilling its program responsibilities, FSA directly manages or oversees more than
$1.0 trillion in outstanding loans—representing nearly 176 million student loans to
approximately 40 million borrowers. These loans were primarily made through the first two
federal student loan programs described below.

The William D. Ford Federal Direct Loan (Direct Loan) Program lends funds directly to
students and parents through participating schools. Created in 1993, this program is funded
by borrowings from the U.S. Department of the Treasury (Treasury), as well as an
appropriation for subsidy costs. As of September 30, 2013, FSA’s portfolio of direct loans
included $679.1 billion in credit program receivables, net of a negative subsidy allowance in
the amount of $65.2 billion. In FY 2013, the Department made $102.5 billion1 in net loans to
10.6 million recipients. With the enactment of the SAFRA Act, formerly known as the Student
Aid and Fiscal Responsibility Act, which was included as part of the Health Care and
Education Reconciliation Act of 2010 (HCERA) (Pub. L. 111-152), beginning in July 2010, no
new loans were originated under the Federal Family Education Loan (FFEL) Program.

During FY 2012, the Department offered a short-term initiative, Special Direct Consolidation
Loans (SDCL) to assist eligible borrowers in managing their debt by making one payment to
one entity. Eligible borrowers had to have at least one loan owned by the Department and
one commercially-held FFEL loan in order to qualify for this consolidation opportunity. The
SDCL opportunity began in January 2012 and ended June 30, 2012, but borrowers were
allowed to add additional eligible loans within the 180-day period after the initial SDCL
opportunity had expired. The initiative disbursed approximately $0.6 billion in FY 2013.

Under the Federal Family Education Loan Program, students and parents obtained federal
loans through private lenders. Guaranty agencies insured lenders against borrower default;
the federal government, in turn, reinsured guaranty agencies. Federal subsidies ensured
private lenders earned at least a certain yield on the loans they made. Although the passage
of the SAFRA Act ended the origination of new FFEL Program loans as of July 1, 2010,
lenders and guaranty agencies continue to service and collect outstanding FFEL Program
loans. FSA, FFEL lenders, and guaranty agencies held a FFEL Program loan portfolio of
approximately $423.0 billion, as of September 30, 2013. In FY 2013, FSA made gross
payments of approximately $1.3 billion to lenders for interest and special allowance subsidies
and $9.5 billion to guaranty agencies for reinsurance claims and fees paid to guaranty
agencies for account maintenance, default aversion, and collection activities.

In addition to the above described FFEL Program, the Ensuring Continued Access to Student
Loans Act of 2008 (ECASLA) authorized the Department to implement a number of programs
to ensure credit market disruptions did not deny eligible students and parents access to
federal student loans for the 2008–09 and 2009–10 academic years. Under this authorization,
the Department implemented three activities, two of which allowed for loan purchase
commitments and purchases of loan participation interests. The authority to make these
purchases expired after September 30, 2010; as a result, loan purchase commitments and
purchases of loan participation interests concluded. Although, these programs were
successfully closed-out on October 15, 2010, any loans purchased under the ECASLA
authorization are owned and continue to be serviced by FSA.

1
Excludes consolidation loans of $27.4 billion.
                                     Federal Student Aid Annual Report–FY 2013                                 9
                                                            Management’s Discussion and Analysis
                                                                     Mission and Organizational Structure



A third program the Department implemented under the authority of ECASLA is the Asset-
Backed Commercial Paper (ABCP) Conduit Program (Conduit) Program. Under this program,
which began operations in mid-2009, the Department entered into forward purchase
commitments with a Conduit. The Conduit issues commercial paper backed by qualifying
student loans made between October 1, 2003, and September 30, 2009. If no other financing
is available to retire this paper as it matures, the Department commits to provide the needed
funds by purchasing the underlying student loans, thereby providing a federal subsidy that has
the effect of providing low cost capital to private lenders. Lenders were able to place loans
into the Conduit until June 30, 2010. By that time, 25 lenders had participated, and backed by
their loans, the Conduit issued a total of $41.5 billion in commercial paper. Under the Put
Agreement with the Conduit, the Department purchases loans subject to certain events, for
example, when a loan becomes 255 days delinquent. As of September 30, 2013, the
Department has purchased $2.6 billion in delinquent loans from the Conduit. The option to
sell loans to the Department ends in January 2014. As of September 30, 2013, the number of
lenders that continue to participate in the Conduit has dropped to two, with a combined
$587.9 million in outstanding loans pledged to the conduit. Twenty lenders removed their
portfolios from the Conduit during FY 2013.

The Federal Perkins Loan Program is one of three campus-based programs through which
the Department provides funds directly to eligible institutions. Funds provided through this
program enable eligible institutions to offer low-interest loans to students based on need. In
FY 2013, approximately $1.0 billion were disbursed through approximately 499,000 campus-
based awards.

Federal Grant Programs

In its responsibility for administering Title IV aid, FSA oversaw the disbursement of
$33.2 billion in grants to 10.8 million recipients via several grant programs. The following
provides a summary for each grant program, including aid disbursed for FY 2013.

The Federal Pell Grant (Pell Grant) Program helps ensure financial access to
postsecondary education by providing grant aid to low-income and middle-income
undergraduate students. As the most need-based of the Department’s student aid programs,
Pell Grants vary according to the financial circumstances of students and their families. In
FY 2013, the Department disbursed $32.3 billion in Pell Grants averaging approximately
$3,678 to more than 9 million students. The maximum Pell Grant award was $5,550 for the
2012–13 award year and increased to $5,645 for the 2013–14 award year.

The Federal Supplemental Educational Opportunity Grant Program is one of three
campus-based programs through which the Department provides funds directly to eligible
institutions. Funds provided through this program enable eligible institutions to offer grants to
students based on need. In FY 2013, approximately $739.0 million were disbursed through
approximately 1.6 million campus-based awards.

The Teacher Education Assistance for College and Higher Education (TEACH) Grant
Program, authorized by the College Cost Reduction and Access Act of 2007 (CCRAA),
provides up to $4,000 per year to students agreeing to teach mathematics, science, or other
specialized subjects in a high-poverty school for at least four years within eight years of their
graduation. Under sequestration, award amounts for any TEACH Grant first disbursed after

                                Federal Student Aid Annual Report–FY 2013                               10
                                                         Management’s Discussion and Analysis
                                                                  Mission and Organizational Structure

March 1, 2013, were reduced by 6.0 percent from the award amount for which a recipient
would otherwise have been eligible. The maximum award of $4,000 was reduced by $240,
resulting in a maximum award amount of $3,760. If students fail to fulfill the service
requirements, TEACH Grants convert to Direct Unsubsidized loans, with interest accrued from
the time of the award. This grant program began in the 2008–09 school year, starting July 1,
2008. In FY 2013, the Department disbursed approximately 39,000 grants for $106.0 million
under TEACH.

The Iraq and Afghanistan Service Grant Program, which became effective July 1, 2010,
provides non-need-based grants to students whose parent or guardian was a member of the
Armed Forces and died in Iraq or Afghanistan as a result of performing military service after
September 11, 2001. These grants are equal to the maximum Pell Grant for a given award
year. Under sequestration, award amounts for any Iraq and Afghanistan Service Grant first
disbursed after March 1, 2013 were reduced by ten percent from the award amount for which
a recipient would otherwise have been entitled. For example, the 2012–13 maximum award
of $5,550 was reduced by $555, resulting in a maximum award amount of $4,995; the
2013–14 maximum award of $5,645 is reduced by $564.50, resulting in a maximum award of
$5,080.50. The Department disbursed approximately $206,935 to support less than 1,000
awards in FY 2013.

Federal Work-Study Program

The Federal Work-Study (FWS) Program is one of three campus-based programs through
which the Department provides funds directly to eligible institutions. Funds provided through
this program enable eligible institutions to offer employment to students based on financial
need. In FY 2013, approximately $959.5 million were disbursed through approximately
701,000 campus-based awards.




                                        FSA Fact

    The Federal Pell Grant has enabled millions of students to go to college. More than
    $32 billion were disbursed for Pell Grants during FY 2013. For more information about
    obtaining a Pell Grant, go to StudentAid.gov/types/grants-scholarships/Pell.


                               Federal Student Aid Annual Report–FY 2013                             11
                                                               Management’s Discussion and Analysis
                                                                       Mission and Organizational Structure

Vision, Mission, and Core Values

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




     Vision

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



     Mission

     Funding America’s Future, One Student at a Time



     Core Values

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


               Funding America’s Future, One Student at a Time



As discussed in detail in the next section, FSA has translated this vision into a set of clearly
defined strategic goals and objectives and related measurable performance metrics. The
realization of these goals will enable the organization to accomplish its mission successfully.




                                  Federal Student Aid Annual Report–FY 2013                               12
                                                              Management’s Discussion and Analysis
                                                                               Performance Management




    Performance Management
This section of the FSA Annual Report provides a general overview of the performance
management processes at FSA; a summary of FSA’s FY 2013 performance metrics, objectives,
and results; discussion of FSA’s Agency Priority Goal; and discussion of FSA’s efforts to validate
the quality of performance data reported.

Performance Management Processes at Federal Student Aid

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

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

Five-Year Strategic Plan

As part of the strategic planning process, FSA continuously identifies and evaluates key drivers
that significantly influence FSA’s long-term goals and objectives. FSA analyzes these drivers to
identify long-term core strategic goals that will serve as the foundation of FSA’s long-term strategic
planning. These strategic goals collectively provide the framework for continuous improvement at
FSA, guiding the organization in managing its programs more effectively and providing clear
strategic direction to all of FSA’s internal and external constituencies. The strategic goals
developed must be:

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

Each strategic goal encompasses objectives and identifies performance metrics to measure FSA’s
level of success in meeting the strategic goal. For each performance metric, FSA identifies a
target level of performance for each fiscal year. FSA sets the target level of performance at a
challenging, but realistic level that is achievable within the timeframe. Meeting or exceeding the
target indicates that FSA succeeded in meeting the performance metric, while falling short of the
target indicates that FSA did not meet the performance metric. The following table summarizes
the key components of the Federal Student Aid: Strategic Plan, FY 2012–16 (FSA Strategic Plan,
FY 2012–16).




                                Federal Student Aid Annual Report–FY 2013                          13
                                                               Management’s Discussion and Analysis
                                                                                 Performance Management

                 Key Components of FSA Strategic Plan, FY 2012–16

                  Key Component                                         Description



                                                       Statements of long-term purpose outlined in
                                                       the FSA Strategic Plan, FY 2012–16 that
 Strategic Goals                                       define how FSA will accomplish its mission.
                                                       These goals are aligned to FSA’s
                                                       responsibilities as a PBO.
                                                       Statements that describe the tactical
 Objectives                                            activities FSA will perform to achieve the
                                                       associated strategic goal.
                                                       Levels of performance over a period of time
                                                       used to gauge FSA’s success in reaching its
 Performance Metrics
                                                       strategic goals. These metrics include
                                                       targets and timeframes.
                                                       Indicators of the desired performance levels
                                                       or specific desired results targeted for a
                                                       given fiscal year. Targets are expressed in
 Targets
                                                       quantifiable terms and compared to the
                                                       actual result to determine level of
                                                       performance.

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

Annual Performance Report

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

Annual Organizational Performance Review

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




                                Federal Student Aid Annual Report–FY 2013                             14
                                                             Management’s Discussion and Analysis
                                                                               Performance Management

FY 2013 Strategic Goals, Objectives, and Performance Metrics

In its earlier strategic plans, FSA focused primarily on achieving operational efficiency and system
integration, both of which are key to its designation as a PBO. As part of the initial update to its
earlier plans, FSA developed and implemented a strategic plan that would improve the overall
system of funding for postsecondary education by (1) equipping students and their families with
better information to make improved decisions about postsecondary education; and (2) actively
shaping the behavior of participants in education funding, by using FSA’s knowledge, data,
oversight authority, and relationships to improve the coordination of all participants in the system.

FSA’s current strategic plan, the FSA Strategic Plan, FY 2012–16, continued to build upon the
most recent goals established in the previous year’s strategic plan, by clarifying the organization’s
objectives and updating performance standards to better reflect the progress made in meeting the
stated objectives. As part of the process of developing this plan, FSA identified the key strategic
drivers listed in the following table.

                                                 Relevance to FSA’s Strategic Planning
            Key Strategic Driver
                                                               Process


 The Higher Education Act of 1965               Prescribes Title IV program and PBO
 legislation                                    requirements (i.e., improve service, reduce
                                                costs, improve and integrate support
                                                systems, develop delivery and information
                                                systems, and enhance staff development
                                                and talent).
 Student and borrower needs                     Students and borrowers are key customers
                                                of FSA services and products.

 Key trends and conditions for the financial    Indicates student aid environment within
 aid environment                                which FSA must operate. Key trends in
                                                FY 2013 are listed below.
                                                     Rising cost of attendance for
                                                        postsecondary education.
                                                     Decline in availability of nonfederal
                                                        sources of postsecondary education
                                                        funding.
                                                     Anticipated increase in enrollment.
                                                     Increase in enrollment at two-year
                                                        and proprietary institutions, and
                                                        distance learning.
                                                     Increased role of the federal
                                                        government in providing funding for
                                                        postsecondary education.




                               Federal Student Aid Annual Report–FY 2013                           15
                                                               Management’s Discussion and Analysis
                                                                                 Performance Management


                                                   Relevance to FSA’s Strategic Planning
               Key Strategic Driver
                                                                 Process


    The Department’s Five-Year Strategic Plan    Requires FSA’s support of the Department’s
                                                 strategic goals related to postsecondary
                                                 education.
    President Obama’s higher education goal      Requires the Department’s and FSA’s
    that, by 2020, America will have the         support to achieve goal.
    highest proportion of college graduates in
    the world
    The Office of Inspector General’s            Requires the Department and FSA senior
    Management Challenges                        management’s consideration for
                                                 establishing priorities. The Office of
                                                 Inspector General’s Management
                                                 Challenges for FY 2013 include:
                                                      Improper Payments;
                                                      Information Technology Security;
                                                      Oversight and Monitoring; and
                                                      Data Quality and Reporting.
    The Office of Inspector General and          Requires FSA senior management’s
    Government Accountability Office audits      consideration for establishing priorities to
                                                 address findings and recommendations.
    Federal financial management laws and        Prescribes financial management
    regulations                                  requirements.
    Federal performance reporting legislation    Prescribes performance and reporting
    and requirements                             requirements.
    Federal budget deficits                      Requires FSA to look for opportunities to
                                                 reduce operating costs through improved
                                                 efficiency.


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

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

The remainder of this section provides a discussion of each strategic goal, including the associated
objectives and a summary of performance metric results. For a more detailed discussion, refer to
the Annual Performance Report section of this document.
                                  Federal Student Aid Annual Report–FY 2013                         16
                                                                  Management’s Discussion and Analysis
                                                                                 Performance Management

How the remainder of this section is organized
This section is organized by the five strategic goals. For each strategic goal, this section provides
an overview of the goal, lists the associated objectives that support the strategic goal, and details
the performance metrics used to measure performance. Specifically, the following information is
included for each strategic goal:

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

Objective: Includes a brief discussion of the objectives identified for the strategic goal.

Performance Metrics measured: Includes a brief summary of FSA’s performance as measured
by the performance metrics for the strategic goal, followed by a table that details, for each
performance metric, the prior year actual results, the current reporting period target, the actual
result, and the page reference to the detail contained in the Annual Performance Report section of
this document. The following is the legend for the performance result indicator included in the
table.


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

                      Performance result did not meet the              Not met
                      target.
                      Performance result is not applicable
                      because the performance metric was not             N/A
                      developed, the performance metric was
                      not implemented, or the required data
                      were not available in time for inclusion.


The performance metric results reported are as of fiscal year-end (i.e., September 30, 2013)
unless otherwise noted. If the required data are not available as of fiscal year-end in sufficient time
for inclusion, data as of the most recent period available is used. Data as of fiscal year-end may
not be available in some instances, where the required data are obtained from external sources
(i.e., state and private nonprofit guaranty agencies, lenders and loan servicers, grant and loan
recipients, etc.).




                                             FSA Fact
       FSA, one of the first federal government offices designated as a Performance Based
       Organization, focuses on providing tangible results and efficient management. For
       more information about FSA’s performance as a PBO, go to StudentAid.gov/strategic-
       planning-reporting.

                                Federal Student Aid Annual Report–FY 2013                           17
                                                               Management’s Discussion and Analysis
                                                                                 Performance Management

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


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

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

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

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

Performance Metrics measured:
To determine the success of FSA’s efforts to meet this strategic goal, FSA identified a set of
performance metrics, including a target level of performance. For this strategic goal, the following
table lists the performance metrics, prior year actual results, FY 2013 target and actual
performance levels, result (i.e., met, not met, etc.), and reference to supporting detail in the Annual
Performance Report section of this document. In summary, FSA met or exceeded the target for
four performance metrics presented under this strategic goal and did not meet the target for one
performance metric.




                                Federal Student Aid Annual Report–FY 2013                           18
                                                                 Management’s Discussion and Analysis
                                                                                Performance Management



                               Performance Summary for Strategic Goal A




                               FY 2011   FY 2012      FY 2013       FY 2013     Result    Reference
Performance Metrics
                                Actual    Actual       Target        Actual                 Page



% of first-time FAFSA filers                                                     Met
                                52.0%     54.0%      52.0%–54.0%      52.2%                   53
among high school seniors
% of first-time FAFSA filers
aged 19-24 among those in                                                        Met
population that are high         —        28.4%      26.0%–28.0%      27.1%                   54
school graduates, no
college
% of first-time FAFSA filers
among workforce aged                                                             Met
                                3.8%      3.7%       2.8%–3.4%        3.3%                    55
25+, high school graduates,
no college
% of first-time FAFSA filers                                                    Not met
among low-income                54.8%     60.3%      57.9%–62.7%      57.1%                   56
students

Customer Satisfaction                                                            Met
                                78.0       78.5         78.0          78.4                    57
Score (ACSI)




                                                  FSA Fact
        FSA continues to work to make the process of completing the FAFSA easier and
        more efficient. This effort has resulted in an average online completion time of 22
        minutes for the FAFSA, a reduction of more than 30 minutes since FY 2009.

                                   Federal Student Aid Annual Report–FY 2013                       19
                                                               Management’s Discussion and Analysis
                                                                                 Performance Management

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

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

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

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

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

   Objective 1: Improve FSA’s support, communications, and processes for postsecondary and
    financial institutions.
   Objective 2: Provide ideas, data, and analyses to inform policymakers about opportunities
    and challenges in postsecondary education funding.
   Objective 3: Support system participants in implementing legislative, regulatory, executive,
    and other requirements.

Performance Metrics measured:
To determine the success of FSA’s efforts to meet this strategic goal, FSA identified a set of
performance metrics, including a target level of performance. For this strategic goal, the following
table lists the performance metrics, prior year actual results, FY 2013 target and actual
performance levels, result (i.e., met, not met, etc.), and reference to supporting detail in the Annual
Performance Report section of this document. In summary, FSA met or exceeded the target for
both performance metrics included under this strategic goal.




                                Federal Student Aid Annual Report–FY 2013                            20
                                                                Management’s Discussion and Analysis
                                                                               Performance Management



                             Performance Summary for Strategic Goal B




                                   FY 2011    FY 2012   FY 2013      FY 2013     Result   Reference
Performance Metrics
                                    Actual     Actual    Target       Actual                Page



Ease of Doing Business school       Survey                                        Met
                                                74         74           74                    58
survey (1-100 Scale)               launched

Percent of borrowers > 90 days                                                    Met
                                    9.9%       9.5%     <=10.1%        8.3%                   59
delinquent




                                              FSA Fact
        Borrowers have several options available to make the repayment of federal student
        loans more affordable. These options include the Income Based Repayment Plan
        and the Pay as You Earn. More information about these plans and other available
        options can be found at StudentAid.gov/Repay-loans/understand/plans.

                                 Federal Student Aid Annual Report–FY 2013                         21
                                                               Management’s Discussion and Analysis
                                                                                 Performance Management

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

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

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

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

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

   Objective 1: Deliver funds to students accurately, efficiently, and promptly, to create high
    levels of customer satisfaction.
   Objective 2: Strengthen FSA’s Information Technology (IT) function to achieve systems
    modernization and active management of technology to ensure that FSA’s delivery systems
    are secure and privacy of personal information is maintained.
   Objective 3: Continuously refine and manage FSA’s acquisition strategy and contract
    performance to realize cost savings and operating efficiencies, and mitigate risk.
   Objective 4: Improve the organizational capacity to anticipate and manage external change.
   Objective 5: Enhance the risk management organization, systems, and processes.
   Objective 6: Develop a methodology to measure and track cost reductions to increase
    efficiency and productivity.
   Objective 7: Build stronger business management capabilities and increase operational
    transparency to improve cross-functional coordination.




                                Federal Student Aid Annual Report–FY 2013                            22
                                                                  Management’s Discussion and Analysis
                                                                                  Performance Management

Performance Metrics measured:
To determine the success of FSA’s efforts to meet this strategic goal, FSA identified a set of
performance metrics, including a target level of performance. For this strategic goal, the following
table lists the performance metrics, prior year actual results, FY 2013 target and actual
performance levels, result (i.e., met, not met, etc.), and reference to supporting detail in the Annual
Performance Report section of this document. In summary, FSA met the target for one
performance metric and did not meet the target for one performance metric.


                                Performance Summary for Strategic Goal C




                                      FY 2011     FY 2012    FY 2013    FY 2013    Result     Reference
Performance Metrics
                                       Actual      Actual     Target     Actual                 Page



                                                                                     Met
Aid delivery costs per application      $9.89      $10.85     $11.23     $11.16                  60

                                                                                   Not met
Loan servicing costs per borrower       $18.15     $18.94     $21.02     $21.42                  61




                                                 FSA Fact
          The Direct PLUS Loan Program can be used to help pay for an undergraduate,
          graduate, or professional education. For more information on the Direct PLUS
          Loan program, go to StudentAid.gov/types/loans/PLUS.

                                     Federal Student Aid Annual Report–FY 2013                        23
                                                               Management’s Discussion and Analysis
                                                                                 Performance Management

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


As the nation’s largest provider of federal student assistance, FSA’s role requires the organization
to provide careful oversight of taxpayer dollars. FSA annually disburses more than $100 billion in
aid and administers a loan portfolio valued at more than $1 trillion. Even small variances in the
financial performance of this portfolio can have a large impact on the U.S. federal budget. FSA is
committed to upholding the highest standards of integrity with the Title IV Programs and continues
to work with institutions on increased monitoring and oversight efforts.

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

Strategic Goal D aims for continuous improvement of FSA’s oversight functions to maintain
program integrity and safeguard taxpayers’ interests by using program dollars effectively and
efficiently. FSA has oversight and enforcement responsibility for almost 6,200 schools and over
1,700 financial institutions. As such, FSA must leverage and focus its resources to optimize
oversight and monitoring activities; and its administrative, sanction, and enforcement actions; when
warranted.

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

   Objective 1: Improve quality control and reduce errors, waste, fraud, abuse, and
    mismanagement in the delivery of Title IV aid.
   Objective 2: Manage funds owed to the Department and provide transparency about student
    aid portfolio risk exposure.

Performance Metrics measured:
To determine the success of FSA’s efforts to meet this strategic goal, FSA identified a set of
performance metrics, including a target level of performance. For this strategic goal, the following
table lists the performance metrics, prior year actual results, FY 2013 target and actual
performance levels, result (i.e., met, not met, etc.), and reference to supporting detail in the Annual
Performance Report section of this document. In summary, FSA met the target for two
performance metrics; and did not meet the target for one metric.




                                Federal Student Aid Annual Report–FY 2013                            24
                                                                        Management’s Discussion and Analysis
                                                                                           Performance Management



                            Performance Summary for Strategic Goal D




                                FY 2011        FY 2012        FY 2013         FY 2013       Result      Reference
Performance Metrics
                                 Actual         Actual         Target          Actual                     Page



                                               Pell Grant     Pell Grant     Pell Grant
                                                2.49%          2.10%          2.26%

                                              Direct Loan    Direct Loan     Direct Loan    Not met
Improper Payment rate              —                                                                        62
                                                 0.58%          0.58%           1.03%

                                                FFEL            FFEL           FFEL
                                                1.93%           1.93%         <0.005%


                                                                                              Met
Direct Loan default rate         11.3%           9.6%            9.8%           9.8%                        64



                                                                                              Met
Collection rate*                   —            $31.90          $34.31         $41.57                       65

  *Collection Rate for the purpose of Performance Metric D.3 is defined as the amount of dollars collected from
  borrowers in the fiscal year per dollar spent to collect.




                                                  FSA Fact
      The Income-Based Repayment Plan is an online application recently launched by FSA,
      which enables borrowers with eligible loans to apply for repayment options with
      greater ease and accuracy. For more information on the Income Based Repayment
      Plan, visit StudentAid.gov/repay-loans/understand/plans/income-based.


                                   Federal Student Aid Annual Report–FY 2013                                      25
                                                                    Management’s Discussion and Analysis
                                                                                      Performance Management

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

FSA achieved substantial improvement in operational performance after its transformation to a
PBO in 1998, successfully and reliably delivering aid under changing legislative conditions. The
results of the previous Employee Viewpoint Surveys (EVS) highlighted additional areas in need of
improvement. A significant number of FSA’s staff is eligible for retirement over the next several
years. In order to meet the performance challenges facing FSA and to fulfill its rapidly expanding
role, the organization will have to rebuild its human capital foundations.

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

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

      Objective 1: Improve the integrity of core human capital processes to attract, develop, and
       retain talented FSA employees from diverse backgrounds; help them achieve their full
       performance potential and recognize their contribution to FSA’s mission.
      Objective 2: Further develop a student-centric culture among all managers and employees
       that will fully deliver on FSA’s mission, vision, and strategy.

Performance Metric measured:
To determine the success of FSA’s efforts to meet this strategic goal, FSA identified a performance
metric, including a target level of performance. For this strategic goal, the following table lists the
performance metrics, FY 2013 target and actual performance levels, result (i.e., met, not met, etc.),
and reference to supporting detail in the Annual Performance Report section of this document.


                                 Performance Summary for Strategic Goal E




                                              FY 2011   FY 2012   FY 2013   FY 2013    Result   Reference
    Performance Metrics
                                               Actual    Actual    Target    Actual               Page



    FSA Morale Index
    (Subset of Questions from Government-                                               Met
    wide View Point Survey) - % of positive      —        —         57         57                   66
    responses to survey (does not include
    neutral responses)




                                       Federal Student Aid Annual Report–FY 2013                         26
                                                            Management’s Discussion and Analysis
                                                                             Performance Management

Agency Priority Goal

An Agency Priority Goal is a measurable commitment to a specific result the federal government
will deliver for the American people. These goals represent high priorities for both the
administration and the Department, have high relevance to the public or reflect the achievement of
key agency missions, and will produce significant results over a 24-month period. As required by
OMB’s guidance for implementing the Government Performance and Results Modernization Act of
2010 (Pub. L. 111-352), the Department identified a limited number of new Priority Goals for
FY 2012–13 during the budget, policy, and strategic planning processes.

These new Priority Goals reflect the importance of teaching and learning at all levels of the
education system. Because they reflect a limited number of priorities, they do not fully reflect the
agency’s strategic goals nor cover the entire agency mission. As such, FSA is not responsible for
one specific Priority Goal for FY 2012–13. Instead, FSA will continue to provide support as needed
to the Department in accomplishing the Departmental Priority Goals. For more information on the
Department’s Priority goals, see The Department's FY 2012–13 Priority Performance Goals.




                                           FSA Fact
          FSA disbursed almost $102.5 billion in direct loans during FY 2013. For more
          information on the Direct Loan Program, go to StudentAid.gov/types/Loans.


                               Federal Student Aid Annual Report–FY 2013                         27
                                                             Management’s Discussion and Analysis
                                                                              Performance Management

Quality of Performance Data

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

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

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




                               Federal Student Aid Annual Report–FY 2013                             28
                                                                  Management’s Discussion and Analysis
                                                                  Financial Management Discussion and Analysis



Financial Management Discussion and Analysis

The financial management discussion and analysis provides an overview of FSA’s financial
results for FY 2013. This section is included to assist readers in understanding FSA’s financial
results, position, and condition as portrayed in the financial statements and notes located in the
Financial Section of this report. The financial analysis discussion explains major changes in
assets, liabilities, costs, and budgetary resources. It also includes comparisons of the current
year to the prior year and discusses the relevance of significant balances and amounts reflected
in the financial statements and notes.

FSA is committed to providing sound management, financial systems, and controls to ensure
that students receive aid and repay loans according to applicable laws and regulations. FSA’s
financial statements are prepared in accordance with established federal accounting standards.
The financial statements are subject to an annual independent audit to ensure that FSA’s
financial position has been fairly presented. In FY 2013, FSA achieved an unqualified audit
opinion on its financial statements for the twelfth consecutive year.

FSA presents its financial statements and notes in the format required by the OMB Circular
A-136, Financial Reporting Requirements. For the comparative fiscal years, FY 2013 and
FY 2012, the balance sheet, statement of net cost, and statement of changes in net position
were prepared on a consolidated basis, whereas the statement of budgetary resources was
prepared on a combined basis. The Independent Auditors’ Report on these statements, which
includes the Opinion on the Financial Statements, the Report on Internal Control, and the
Report on Compliance and Other Matters, can be found in the subsection Independent Auditors’
Report.

Federal Student Aid has oversight responsibilities for over $1.0 trillion in federal student loans,
of which approximately $758.5 billion is directly owned and managed by FSA. As described in
Notes 1 and 6, FSA reports this portfolio on its balance sheet as the line item Credit Program
Receivables, net of a subsidy cost allowance to adjust the portfolio amount to its present
value. As of September 30, 2013, FSA reported $825.7 billion in Credit Program Receivables,
net of a negative allowance for subsidy cost of approximately $67.1 billion. FSA’s portfolio of
net Credit Program Receivables has seen significant growth, increasing by 22.7 percent over
the September 30, 2012 net portfolio balance. This growth continues to be driven by the
expansion of the Direct Loan program, as dictated by the SAFRA Act legislation. Operationally,
FSA must manage the resources it has available to ensure that this portfolio is serviced
efficiently and effectively, and that quality customer service is provided to its borrowers. FSA
must mitigate several risks that to ensure this portfolio is effectively managed. These risks are
discussed at the conclusion of the analysis of the financial statements.




                                Federal Student Aid Annual Report–FY 2013                             29
                                                                                  Management’s Discussion and Analysis
                                                                                  Financial Management Discussion and Analysis

The FY 2013 FSA Financial Highlights tables presented below provide a condensed summary
of the significant balances in FSA’s financial statements for the current and prior years, as of
September 30, 2013 and 2012 respectively, and the percentage change between the two years.

                                       FY 2013 FSA Financial Highlights
                                          Condensed Balance Sheet
                                                (Dollars in millions)
                                                                                                           Percentage
                                                       FY 2013              FY 2012      Difference
                                                                                                            Change
 Fund Balance with Treasury                       $       69,997        $     78,452     $       (8,455)        (10.8)%
 Credit Program Receivables, Net                         825,660             672,835            152,825           22.7%
 Remaining Assets                                          1,588               1,451                 137          9.4%
     Total Assets                                 $      897,245        $    752,738     $      144,507          19.2%

 Debt                                             $      851,258        $    714,324     $      136,934          19.2%
 Other Intragovernmental Liabilities                       8,786               7,009               1,777         25.4%
 Remaining Liabilities                                     7,207               8,632             (1,425)        (16.5)%
     Total Liabilities                            $      867,251        $    729,965     $      137,286          18.8%

 Unexpended Appropriations                        $       33,595        $     30,361     $        3,324          10.7%
 Cumulative Results of Operations                         (3,601)             (7,588)             3,987         (52.5)%
    Net Position                                  $       29,994        $     22,773     $        7,221          31.7%
    Total Liabilities & Net Position              $      897,245        $    752,738     $      144,507          19.2%


                                                Cost Summary
                                                (Dollars in millions)
                                                                                                           Percentage
                                                       FY 2013              FY 2012          Difference
                                                                                                            Change
 Gross Cost                                        $       13,266       $       35,989   $      (22,723)       (63.1)%
 Less: Earned Revenue                                    (26,688)             (25,306)           (1,382)         5.5 %
     Net Cost of Operations                        $     (13,422)       $       10,683   $      (24,105)      (225.6)%


The Balance Sheet
The balance sheet presents the recorded value of assets and liabilities retained or managed by
FSA as of a specific point in time. The assets represent resources available for use by FSA to pay
its liabilities or to satisfy its future service needs. The liabilities are amounts FSA owes, the
probable and measurable future outflows of its resources arising from past transactions or events.
The difference between the assets and the liabilities represents FSA’s net position.

Composition of FSA Assets
The consolidated balance sheet shows that FSA had total assets of $897.2 billion as of
September 30, 2013, an increase of $144.5 billion, or 19.2 percent over the September 30, 2012
total assets balance of $752.7 billion. The difference resulted primarily from the continuing growth
of FSA’s net Credit Program Receivables, $152.8 billion, offset by decreases in its various
programs’ Fund Balances with Treasury, of $8.5 billion. Together, FSA’s Fund Balance with
Treasury and its net Credit Program Receivables accounted for over 99 percent of FSA’s total
assets as of September 30, 2013, as illustrated in the Composition of Assets chart on the next
page. Following the Composition of Assets chart is the Comparison of Assets chart that presents
the growth of these two principal balance sheet line items over the past five fiscal years.




                                       Federal Student Aid Annual Report–FY 2013                                          30
                                                                                    Management’s Discussion and Analysis
                                                                                    Financial Management Discussion and Analysis

         Composition of Federal Student Aid’s Assets for Fiscal Years 2009–13
 100%

  90%

  80%
                                                                                                             Credit Program
  70%                                                                                                        Receivables, Net

  60%       77.0%
                                86.6%              89.2%               89.4%             92.0%               Fund Balance with
  50%                                                                                                        Treasury

  40%
                                                                                                             Remaining Assets
  30%

  20%
            22.0%
  10%
                                12.6%              10.5%               10.4%             7.8%
   0%        1.0%               0.8%               0.3%                0.2%              0.2%
           FY 2009             FY2010             FY 2011            FY 2012          FY 2013


         Comparison of Federal Student Aid’s Assets for Fiscal Years 2009–13
                                                  (Dollars in Billions)
$1,000

 $900

 $800

 $700

 $600

 $500

 $400                                                                                                         $825.7
                                                                                     $672.8
 $300
                                                            $530.0
 $200                            $367.4
         $234.0 $66.8                                                                         $78.5                    $70.0
 $100                                     $53.5                      $62.2
                        $3.2                      $3.3                       $1.8                     $1.5                     $1.5
   $0
             FY 2009                    FY 2010                 FY 2011                   FY 2012                 FY 2013

                        Credit Program Receivables, Net                   Fund Balance with Treasury
                        Remaining Assets                                  Total Assets




                                   Federal Student Aid Annual Report–FY 2013                                                      31
                                                                                                   Management’s Discussion and Analysis
                                                                                                   Financial Management Discussion and Analysis

Credit Program Receivables. With a September 30, 2013 balance in the amount of
$825.7 billion, Credit Program Receivables net of subsidy allowance represent FSA’s most
important asset category and accounted for 92.0 percent of Total Assets. Credit Program
Receivables are comprised of principal, interest, and fees owed by students for Direct Loans,
TEACH Grants, Perkins loans, and FFEL loans acquired under the Conduit, Loan Participation
Purchase, Loan Purchase Commitment, and defaulted guaranteed loan programs.

The majority of the $152.8 billion increase in net Credit Program Receivables during the 12
months ended September 30, 2013 was due to the Direct Loan Program, which increased
$153.1 billion or 29.1 percent to $679.1 billion. This growth was driven by new loan originations
($102.5 billion) and consolidations ($27.4 billion), and a related increase in accrued interest
($8.3 billion). In addition, there was a $(33.2) billion increase in negative allowance for subsidy
as a result of current year subsidy transfers which arose mainly from interest rate differential,
and also from subsidy re-estimates due to interest rate re-estimates. These changes are
explained in more detail in Note 6.

              Total Federal Student Aid Loan Portfolio for Fiscal Years 2009–13
                                                                         (Dollars in Billions)
                                                             $900
                           Credit Program Receivables, Net




                                                             $800
                                                             $700
                                                             $600
                                                             $500
                                                             $400
                                                             $300
                                                             $200
                                                             $100
                                                               $0
                                                                     FY 2009         FY 2010     FY 2011       FY 2012       FY 2013
        Direct Loans                                                  $152.8          $228.2     $381.5         $526.0        $679.1
        FFEL, ECASLA Acquired Loans                                   $57.1           $112.4     $115.7         $113.8        $108.4
        FFEL, Guaranteed Loans (Non-
                                                                      $23.9            $26.4      $32.3         $32.3          $37.4
                 ECASLA)
        Other Programs                                                 $0.2            $0.3       $0.5           $0.7          $0.8
        Total Credit Program Receivables,
                                                                      $234.0          $367.3     $530.0         $672.8        $825.7
                        Net



The $679.1 billion in net Direct Loan Credit Program Receivables at the end of FY 2013
comprised $613.9 billion in principal, interest, and fees, net of a negative subsidy allowance in
the amount of $65.2 billion. Of the fiscal year-end gross amount, $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 Student Aid Annual Report–FY 2013                              32
                                                                       Management’s Discussion and Analysis
                                                                       Financial Management Discussion and Analysis

The increase in net Direct Loan Credit Program Receivables was offset slightly by a reduction of
$374.0 million in the net FFEL Credit Program Receivables, a 0.3 percent decrease compared
to the September 30, 2012 balance. The changes observed in both the Direct Loan and FFEL
net credit receivables are principally related to the impact of the SAFRA Act, which as of
June 30, 2010 eliminated all new loan disbursements under the FFEL Program in favor of direct
lending, and also, due to the impact of the SDCL opportunity. The latter provided an opportunity
from January 17 through June 30, 2012, for eligible borrowers who had at least one Direct Loan
Program loan or Department-held FFEL Program loan and at least one commercially-held FFEL
loan, to consolidate such loans into a SDCL. The SDCL opportunity ended on June 30, 2012,
but borrowers were allowed to add additional eligible loans within the 180-day period after the
initial SDCL had been made.

Fund Balance with Treasury. FSA’s Fund Balance with Treasury represents the funds it has
available to pay its current liabilities, make purchases and finance authorized loans to
borrowers. Treasury processes cash receipts from borrowers and cash disbursements for
FSA’s loan and grant programs. As of September 30, 2013, FSA reported a Fund Balance with
Treasury amount of $70.0 billion, a decrease of 10.8 percent over the September 30, 2012
balance. The offsetting impacts of the FFEL and Grant programs accounted for most of this
$8.5 billion change, with year-on-year changes in their Fund Balances with Treasury of
$(11.6) billion and $2.8 billion respectively. The decrease in the FFEL Fund Balance with
Treasury from $22.1 billion to $10.5 billion was principally due to decreases in new borrowings
and increased repayments to Treasury, offset by the net impact of subsidy re-estimate
transactions. The much smaller $2.8 billion increase in the Grants program Fund Balance with
Treasury to $35.0 billion was mainly attributable to decreased funding resulting from
sequestration, offset by decreased Pell and ACG/SMART grant disbursements.

Composition of FSA Liabilities
FSA’s liabilities represent probable and measurable future outflows of resources arising from
past transactions or events. As of September 30, 2013, FSA had total liabilities of
$867.3 billion, which represents an increase of $137.3 billion or 18.8 percent over the
September 30, 2012 total. The primary component of these liabilities was FSA’s Debt,
$851.3 billion or 98.2 percent of total liabilities, as shown in the Composition of Liabilities chart
depicted below.

          Composition of Federal Student Aid Liabilities for Fiscal Years 2009–13

          100%                                       1.5%       0.8%
                                          3.9%       0.6%       1.0%
                                6.6%                97.9%      98.2%
            95%                           1.2%
                     11.1%
                                          94.9%                                 Remaining Liabilities
                                3.1%
            90%
                               90.3%
                                                                                Other Intragovernmental
                     4.1%
            85%                                                                 Liabilities
                     84.8%                                                      Debt
            80%

            75%
                   FY 2009    FY 2010 FY 2011      FY 2012 FY 2013


                                 Federal Student Aid Annual Report–FY 2013                                 33
                                                                            Management’s Discussion and Analysis
                                                                            Financial Management Discussion and Analysis

FSA’s Debt increased 19.2 percent to $851.3 billion during the twelve months ended
September 30, 2013, primarily, as a result of new borrowings to support the growing loan
volume in the Direct Loan Program. This trend has continued throughout the past five years,
with the annual rates of increase in Direct Loan related debt averaging 33.5 percent throughout
that period compared to an overall rate of debt increase of 28.3 percent, as illustrated in the
chart below:

              Comparison of Federal Student Aid Debt for Fiscal Years 2009–13
                                                 (Dollars in Billions)
                             $900
                             $800
                             $700
                             $600
                             $500
                             $400
                             $300
                             $200
                             $100
                               $0
                                        FY 2009             FY 2010      FY 2011       FY 2012        FY 2013
         DL Program                      $154.2              $237.2       $392.4        $549.3         $698.4
         FFEL, ECASLA Acquired Loan
                                         $79.1              $125.6       $124.1         $121.4         $109.2
                  Program
         FFEL, Guaranteed Loan (Non-
                                          $1.5               $10.7        $29.5         $43.3          $43.3
             ECASLA) Program
         Other Programs                   $0.1                $0.1        $0.3           $0.4           $0.5
         Total Debt                      $234.9             $373.7       $546.3         $714.3         $851.3



During the same period, Liabilities for Loan Guarantees decreased by $5.3 billion to a negative
liability amount of $(4.2) billion, although the balance sheet actually reports a zero balance for
FY 2013. This is because the negative liability in FY 2013 was reclassified to the asset line item
Credit Program Receivables, net. The FY 2013 activity was mainly due to technical and default
subsidy re-estimates in the amount of $7.9 billion, offset by $2.6 billion in other activity
associated with negative special allowance payments. Please refer to Note 6 for details.

Other Intragovernmental Liabilities increased by $1.8 billion or 25.4 percent, of which $1.2 billion
was attributable to Direct Loan activity, and a further $0.6 billion to the FFEL program. As
detailed in Note 11, these changes result principally from a $2.3 billion increase in
miscellaneous receipt accounts, representing an increased liability for downward subsidy re-
estimates resulting from updated economic assumptions, including probabilistic estimating,
discount rates, and interest rates. This was offset by a $0.5 billion reduction in capital transfers.
When executed, the downward subsidy re-estimates will be paid to the General Fund of
Treasury. Please refer to Note 11 for further details.




                                    Federal Student Aid Annual Report–FY 2013                                   34
                                                                                 Management’s Discussion and Analysis
                                                                                 Financial Management Discussion and Analysis

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

                    Composition of FSA Net Cost for Fiscal Years 2009–13
                                               (Dollars in Billions)
                    $50.000
                    $40.000
                    $30.000
                    $20.000
                    $10.000
                         $-
                   $(10.000)
                   $(20.000)
                   $(30.000)
                   $(40.000)
                   $(50.000)
                   $(60.000)
                                   FY 2009           FY 2010           FY 2011           FY 2012        FY 2013
              DL Program           $(9.603)          $(1.567)          $(28.631)         $(10.720)      $(39.557)
              FFEL Program         $(30.561)        $(15.332)          $(14.825)         $(14.018)      $(8.753)
              Grant Program         $17.262          $26.750           $38.947           $34.224        $33.508
              Other Programs        $0.761            $0.906            $1.109            $1.174         $1.380
              Recovery Act          $7.664            $8.920            $0.027            $0.023           $-
              Total FSA Net Cost   $(14.477)         $19.677           $(3.373)          $10.683        $(13.422)



FSA’s net costs in FY 2013 decreased $24.1 billion or (225.6) percent to a negative net cost of
$13.4 billion compared to a positive net cost of $10.7 billion in FY 2012. In other words, total
costs decreased compared to the same period last year, and the excess of revenues over
expenses increased. The net change was the result of both a $22.7 billion decrease in Gross
Costs and a $1.4 billion increase in Earned Revenue, with each of these changes being
attributable primarily to the Direct Loan Program.

Net costs associated with the Direct Loan Program decreased by $28.8 billion or 269 percent to
$(39.5) billion during the twelve months ended September 30 2013, compared to the same
period during the prior fiscal year, as a result of a decrease in the Direct Loan program subsidy
expense of the same amount. There was a $12.5 billion downward adjustment of re-estimated
subsidy cost compared to a $12.2 billion upward adjustment the prior year, representing an
overall decrease in Direct Loan Program subsidy cost of $24.7 billion. In addition, there was a
further $4.1 billion increase in negative costs (i.e., net cost reduction) due to current year Direct
Loan subsidy transfers, mainly attributable to the interest rate differential.

The other significant change in FSA’s net costs in the twelve months ending September 30, 2013
versus 2012, was the offsetting $5.3 billion increase in FFEL program net costs. Of this total

                                   Federal Student Aid Annual Report–FY 2013                                         35
                                                                  Management’s Discussion and Analysis
                                                                 Financial Management Discussion and Analysis

cost increase, $3.9 billion was due to FFEL Guaranteed Loan Program Subsidy re-estimates and
a further $1.9 billion resulted from Loan Participation Purchase and Loan Purchase subsidy re-
estimates.

Note that subsidy expenses are the estimated costs of funding Direct Loans and the loan
guarantees for FFEL loans. The amount of the subsidy expense equals the present value of
estimated cash outflows over the life of the loans minus the present value of estimated cash
inflows. Please refer to Note 6 for further details on subsidy related expenses.

Statement of Changes in Net Position

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

FSA’s net position as of September 30, 2013, was $30.0 billion, an increase of $7.2 billion, or
31.7 percent over the previous September 30 net position of $22.8 billion. The difference
reflects an increase in unexpended appropriations of $3.2 billion that mainly related to grant
programs, together with an increase in cumulative results of operations in the amount of
$4.0 billion relating principally to unfunded upward subsidy re-estimates, other unfunded
expenses and net investments of capitalized assets in the Direct Loan Program.

Statement of Budgetary Resources

The Statement of Budgetary Resources compares the budgetary resources provided with the
status or execution of those resources. It also details the composition of the resources and
shows the amount of net outlays. Appropriations are available to cover the subsidy cost of each
loan program and administrative expenses. Subsidy expense represents the difference
between the net present value of expected future cash flows and the face value of each loan
portfolio. Appropriation authority is available as needed on a permanent basis to finance costs
resulting from loans guaranteed in the years before FY 1992. The Pell Grant Program receives
appropriations to cover actual grant disbursements.

This statement shows that as of September 30, 2013, FSA had $312.5 billion in combined
budgetary resources, of which $13.1 billion remained unobligated and unapportioned. This
$13.8 billion change compared to September FY 2012 represented a 4.2 percent decrease
compared to combined budgetary resources a year earlier of $326.3 billion, of which
$20.4 billion were unobligated and unapportioned. The FFEL program accounted for
$13.7 billion of this reduction in budgetary resources, mainly due to the decrease in current year
borrowing authority for the FFEL Guaranteed, Loan Participation Purchase and Loan Purchase
Commitment programs.

FSA had total net outlays as of September 30, 2013 of $140.9 billion, a decrease of $22.8 billion
or 13.9 percent compared to the prior September 30 total of $163.8 billion. The Direct Loan
program accounted for $20.2 billion of this change, mainly due to a $14.2 billion increase in
budgetary Distributed offsetting Receipts arising from increased downward subsidy re-estimates
that resulted from interest rate differential, together with increased negative subsidy. This
change was accompanied by an increase in non-budgetary Actual Offsetting Collections
(Discretionary and Mandatory) in the amount of $6.4 billion, representing an increase in the
actual amount of principal, interest, and fees collected from borrowers net of a decrease in the
current fiscal year appropriation received.

                               Federal Student Aid Annual Report–FY 2013                             36
                                                                  Management’s Discussion and Analysis
                                                                  Financial Management Discussion and Analysis



More details on FSA’s sources of funds and spending are presented in the Schedule of
Spending located in the Other Information section. This schedule includes the sections, What
Money is Available to Spend and How Was the Money Spent.

Financial Management Risks

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

System/Service Implementations. Over the next few years, FSA will continue to re-compete
contracts associated with several of its major business processes, primarily those that focus on
application processing, loan and grant origination and disbursement, loan consolidation, and
defaulted debt servicing and collection. Some recent major implementation efforts continue to
be very successful, including the additional Not-For-Profit (NFP) Servicers and Title IV
Additional Servicers (TIVAS) servicing capacity, the transition of TEACH grant processing, and
the initial phases of FSA’s Enterprise Identity Management Services. In addition, as further
detailed in the Analysis of Systems, Controls and Legal Compliance section, FSA has
remediated material weaknesses in the conversion to the new Debt Management and Collection
System (DMCS2). The remaining significant deficiencies are continuing evidence of the
significant financial management risks associated with the conversion to new systems.
Exacerbating this risk associated with contract re-competes are the numerous program changes
that FSA has been asked to implement in recent years, and which will continue to be required of
FSA into the foreseeable future.

To prevent future weaknesses in its processes and controls as new servicers are brought on
board, FSA has initiated a number of improvements in its system or servicer implementation
process. For example, FSA created a baseline Enterprise Sequencing Plan and performs a
monthly review of its Investment Portfolio, identifying and resolving any emerging issues with
the portfolio. In addition, FSA established new enterprise-wide teams, such as the Servicer
Monitoring Group, and new monitoring tools, such as the monthly Financial Monitors Report, to
closely monitor dozens of financial metrics for all loan servicing contractors, including DMCS2.

Administrative Budget and Government Shutdowns. The Budget Control Act of 2011 put
into place an automatic process of across-the-board reductions in budgetary resources, known
as a sequestration, which would be required if a bill containing at least $1.2 trillion in deficit
reductions was not enacted prior to March 1, 2013. Because the legislation was not enacted
prior to that date, the sequestration went into effect. The sequestration did not only impact
2013, but will also impact all years up through 2021.

Because most of FSA’s servicing costs, and all personnel costs, are administrative in nature,
any reduction in the funds available may impact FSA’s ability to appropriately service borrower
accounts. Many of the organization’s costs are driven by volume activities, such as grant/loan
origination and disbursement, and loan servicing. For example, loan servicing costs are driven
by the number of borrower accounts, the status of a borrower’s loan(s) (e.g., In-School,
Repayment, Deferment\Forbearance), and when the borrowers’ loans are disbursed. Grant and
loan origination and disbursement costs are driven by the number of originations and
disbursements. The budgeting formulation process generally sets the initial budget for a fiscal

                                Federal Student Aid Annual Report–FY 2013                             37
                                                                   Management’s Discussion and Analysis
                                                                   Financial Management Discussion and Analysis

year 18 months before the start of that fiscal year. However, even a small variation in any of
FSA’s volumes can significantly impact its budget. This places all other expenditures and plans
associated with those expenditures at-risk. This risk must be managed as long as the federal
government pays for mandatory Direct Loan expenditures using discretionary administration
funding.

In addition, at the beginning of FY 2014, Congress did not pass appropriation legislation,
resulting in a federal government shutdown. As a result of the shutdown, FSA suspended many
of its operational controls, as they were not deemed excepted activities. This, in turn, increased
financial management costs and risks. For example, delays in administrative payment
processing will likely result in a significant increase in Prompt Pay interest in FY 2014. Also,
suspended program compliance activities will likely result in delays in the identification and
remediation of program findings at schools, lenders, lender servicers, and guaranty agencies.
The full impact of this government shutdown will be more thoroughly analyzed during the first
quarter of FY 2014. Any future shutdowns will further limit operational controls and increase
financial management costs and risks.

Improper Payments. Based on OMB criteria, risk susceptible programs administered by FSA
include Direct Loan Program, FFEL Program, and Pell Grant Program. FY 2013 outlays for
these programs were as follows:

   Direct Loan Program – $102.5 billion
   FFEL Program – $10.8 billion (interest and special allowance subsidies to Lenders and
    reinsurance claims and fees to Guaranty Agencies)
   Pell Grant Program – $32.3 billion
Risks include undetected fraud, waste, and abuse. For more information regarding FSA’s
assessment of improper payment risk and planned strategies to mitigate this risk, please refer to
the Improper Payments Reporting Details narrative in the Other Information section located in
the Department's Agency Financial Report (AFR).

Debt Collection. As of September 30, 2013, the Department managed a Net Credit Program
Receivable portfolio of approximately $825.7 billion, an increase of 22.7 percent from FY 2012.
This portfolio includes FSA’s Direct Loan Program, FFEL Program (guaranteed loans held by
guaranty agencies or FSA), FFEL loans acquired via authorization of the ECASLA, Federal
Perkins Loans Program, and TEACH Program receivables. FSA realizes that as the size of the
loan portfolio significantly grows from year to year, so does the level of financial risk associated
with the collections on these loans.

To ensure that FSA maximizes collections, while minimizing defaults and negative borrower
impacts, FSA has been working with the Department, Treasury, and OMB to implement more
effective performance metrics. For example, through coordinated efforts with an OMB/Treasury
Debt Collection working group, FSA has clarified the requirements of the Treasury Report on
Receivables and begun implementing those clarified requirements with all 13 of its current loan
servicing contractors. These more detailed and consistent performance metrics will assist FSA,
the Department, and the federal government in making more informed debt collection decisions.

Guaranteed Loan Portfolio. As of September 30, 2013, the $423.0 billion guaranteed loan
portfolio (non-ECASLA FFEL) included $264.0 billion in principal balances owned by private
lenders and $153.4 billion in principal, interest and fees held by FSA (unassigned serviced by
                                Federal Student Aid Annual Report–FY 2013                              38
                                                                  Management’s Discussion and Analysis
                                                                 Financial Management Discussion and Analysis

guaranty agencies or assigned serviced by FSA). This is an overall reduction by 6.4 percent of
the FFEL portfolio since the end of last fiscal year. Because the SAFRA Act eliminated the
origination of guaranteed FFEL loans, FSA needs to ensure that the infrastructure (i.e.,
participating organizations processes, controls, and systems) are sufficient to administer federal
student loans consistent with relevant laws and regulations.

On August 14, 2013, the Secretary invited guaranty agencies with agreements to participate in
the FFEL Program to submit requests to enter into a Voluntary Flexible Agreement (VFA).
Guaranty agencies whose requests are accepted will operate under the requirements of the
VFAs in lieu of the guaranty agency agreements established under the HEA. The Secretary
intends to enter into VFAs with a small number of guaranty agencies (likely three or fewer) that
will assume responsibility for all or some of the defaulted and non-defaulted FFEL Program
loans transferred to it by the Secretary from a guaranty agency whose HEA agreements with the
Secretary are, or will be, terminated.




                               Federal Student Aid Annual Report–FY 2013                             39
                                                                                Management’s Discussion and Analysis
                                                                          Analysis of Systems, Controls and Legal Compliance




Analysis of Systems, Controls and Legal Compliance


  FSA management adheres to the Government Accountability Office (GAO) published
  guidance on internal control and recognizes that internal control is an integral part of
  managing an organization. Internal control includes the plans, methods, and procedures
  that are used to meet the organization’s missions, goals, and objectives. In carrying out
  these components of internal control, FSA supports an environment for performance-based
  management. Internal control also serves as the first line of defense in safeguarding
  assets, and preventing and detecting errors and fraud. Internal control helps government
  program managers achieve desired results through effective stewardship of public
  resources.

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

     Effectiveness and efficiency of operations, including the use of the entity’s resources;
     Reliability of financial reporting, including reports on budget execution, financial
      statements, and other reports for internal and external use; and
     Compliance with applicable laws and regulations.2

  FSA management is responsible for establishing and maintaining effective internal control
  and financial management systems that meet the objectives of the Federal Managers’
  Financial Integrity Act of 1982. FSA conducted its assessment of the effectiveness and
  efficiency of its internal controls over operations and compliance with applicable laws and
  regulations in accordance with OMB Circular A-123, Management’s Responsibility for
  Internal Control (OMB Circular A-123). Based on the results of this assessment, FSA
  reported to the Department’s management that its internal control over operations and
  compliance with applicable laws and regulations, as of September 30, 2013, was operating
  effectively.

  In 2012, FSA identified and reported two material weaknesses related to the ACS
  Education Servicing System (ACES) and DMCS2 system conversion and/or functionality
  issues that impacted Direct Loan and FFEL servicing and default systems and processes
  operated under the Common Services for Borrowers agreement with Xerox Education
  Solutions, Limited Liability Corporation (Xerox, LLC) which was formerly Affiliated
  Computer Services, Incorporated. Corrective actions taken in FY 2012 and FY 2013
  sufficiently remediated the underlying conditions such that, for the year ended September
  30, 2013, the remaining deficiencies no longer aggregate to a material weakness. Please
  refer to the Management’s Assurances section within the Management’s Discussion and
  Analysis of the Department’s FY 2012 AFR for additional information on these material
  weaknesses and to this same section, as well as the Analysis of Systems, Controls and
  Legal Compliance section of the Department’s FY 2013 AFR for additional information on
  corrective actions.

  2
   Government Accountability Office Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1,
  November 1999, p. 4-5.


                                          Federal Student Aid Annual Report–FY 2013                                      40
                                                              Management’s Discussion and Analysis
                                                         Analysis of Systems, Controls and Legal Compliance

In addition, FSA, working with the Department’s management, conducted its current year
assessment of the effectiveness of internal control over financial reporting, which includes
safeguarding of assets and compliance with applicable laws and regulations, in accordance
with the requirements of Appendix A of OMB Circular A-123. The scope of FSA’s
assessment included, based on a rotation plan, the following processes and select sub-
processes (notated in parentheses below), that impact the Department's financial
statements:

   Direct Loan Consolidations
   Conduit – Fees
   Human Resource Management (2)
   Debt Collection*
   Student Eligibility
   Grant Program Operations (Pell and TEACH*)
   Financial Reporting (4)
   Funds Control Management (4)
   Procurement Management (3)
   Total and Permanent Disability
   Servicing of Direct Loans and ECASLA-acquired FFEL Program Loans by 4 TIVAS*, 11
    NFPs*, and ACES*
   Servicer Oversight
   Entity-Level controls
   IT/General Computer Controls over: Financial Management System, Direct Loan
    Consolidation System, DMCS2*, Central Processing System (CPS), ACES*, Financial
    Partner Data Mart, Common Origination Disbursement, Postsecondary Education
    Participants System, Great Lakes Commercial System*, Nelnet Commercial System*,
    Pennsylvania Higher Education Assistance Agency Commercial System*, Sallie Mae
    Commercial System*, MOHELA servicing system*, ESA/EdFinancial servicing system*,
    CornerStone servicing system*, Aspire servicing system*, Granite State servicing
    system* OSLA servicing system*, EdManage servicing system*, VSAC servicing
    system*, Kentucky servicing system*, CFI servicing system*, COSTEP servicing
    system*, and the Virtual Data Center*

In FY 2013, FSA significantly increased its reliance on audits of loan servicers conducted
by independent public accountants in accordance with Statement on Standards for
Attestation Engagements (SSAE) Number 16, Reporting on Controls at a Service
Organization. In the list above, an asterisk (*) indicates full or partial reliance on SSAE16
Service Organization Control 1(SOC1) reports for relevant process and IT controls.




                                Federal Student Aid Annual Report–FY 2013                               41
                                                           Management’s Discussion and Analysis
                                                       Analysis of Systems, Controls and Legal Compliance

With this reliance on SSAE16 SOC1s, the number of key business process controls
assessed in FY 2013, at 934 demonstrates an increase from prior year totals. As illustrated
below, this total number of key business process controls assessed includes 578 controls
covered by SSAE16 SOC1s and 356 tested by the FSA self-assessment team. While the
number of controls assessed increased, the total number of deficiencies identified in
FY 2013 decreased in total number, and as a percentage of controls assessed, from
FY 2012.

                             FSA FY 2011–13 A-123A
                 Business Process Controls and Deficiency Analysis




                              Federal Student Aid Annual Report–FY 2013                               42
                                                              Management’s Discussion and Analysis
                                                         Analysis of Systems, Controls and Legal Compliance

The total number of IT controls subject to assessment increased in FY 2013 over FY 2012
as additional NFP servicers came online and were included in scope. As illustrated in the
chart below, the total number of IT controls assessed in FY 2013 likewise increased over
FY 2012. The total number assessed at 2,347 includes 2,114 controls covered by SSAE16
SOC1s and 233 tested by the FSA self-assessment team. The number of deficiencies
depicted below for FY 2013 at 84 includes deficiencies identified from both SSAE16 SOC1
reports (75) and A-123A testing (9). The deficiency counts for the prior year include only
those deficiencies identified directly from A-123A testing.

                                FSA FY 2011–13 A-123A
                           IT Controls and Deficiency Analysis




Based on the results of this evaluation, FSA provided reasonable assurance to the
Department's management that its internal control over financial reporting as of
June 30, 2013 was operating effectively.

FSA’s participation in the Department's implementation of the requirements of OMB
Circular A-123, including Appendix A, enables it to continue to build upon its internal control
framework. This framework will be used in continuing efforts to monitor and improve
internal control. Please refer to the Analysis of Systems, Controls and Legal Compliance
section of the Department’s AFR for additional information related to management’s
assurances and disclosures.




                                Federal Student Aid Annual Report–FY 2013                               43
                                                           Management’s Discussion and Analysis
                                                      Analysis of Systems, Controls and Legal Compliance

Please also refer to the Analysis of Systems, Controls and Legal Compliance section of the
Department’s AFR for information related to the Department's compliance with the Federal
Financial Management Improvement Act of 1996.

FSA’s financial management systems strategy is formulated and managed as part of the
Department’s strategy. For details on FSA’s financial management systems strategy,
please refer to the Financial Management Systems Strategy narrative found in the
Management’s Discussion and Analysis section of the Department’s AFR.




                              Federal Student Aid Annual Report–FY 2013                              44
                                                              Management’s Discussion and Analysis
                                                                           Limitations of Financial Statements

4

    Limitations of Financial Statements
Management has prepared the accompanying financial statements to report the financial
position and operational results for FSA, for FY 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 FSA in accordance
with generally accepted accounting principles for federal entities and the formats prescribed by
OMB, these statements are in addition to the financial reports used to monitor and control
budgetary resources, which are prepared from the same books and records.

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




                               Federal Student Aid Annual Report–FY 2013                                45
                                   Management’s Discussion and Analysis
                                            Limitations of Financial Statements




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Federal Student Aid Annual Report–FY 2013                                46
                                                    Annual Performance Report




Annual Performance Report




        Federal Student Aid Annual Report–FY 2013                        47
                                                                                    Annual Performance Report



        FY 2013 Performance Highlights of Federal Student Aid

               Performance Metrics                       FY 2013       FY 2013         Result     Reference
                                                          Target        Actual                      Page
Strategic Goal A: Provide superior service and information to students and borrowers.

% of first-time FAFSA filers among high school                                          Met
                                                      52.0%–54.0%       52.2%                         53
seniors

% of first-time FAFSA filers aged 19-24 among                                           Met
those in population that are high school graduates,   26.0%–28.0%       27.1%                         54
no college

% of first-time FAFSA filers among workforce aged                                       Met
                                                       2.8%–3.4%        3.3%                          55
25+, high school graduates, no college
                                                                                      Not met
% of first-time FAFSA filers among low-income
                                                       57.9%–62.7%      57.1%                         56
students
                                                                                        Met
Customer satisfaction score (ACSI)                         78.0          78.4                         57

Strategic Goal B: Work to ensure that all participants in the system of funding postsecondary education
                   serve the interests of students, from policy to delivery.
                                                                                     Met
Ease of doing business school survey
                                                           74             74                       58
(1-100 Scale)

                                                                                        Met
Percent of borrowers>90 days delinquent                 <=10.1%         8.3%                          59

Strategic Goal C: Develop efficient processes and effective capabilities that are among the best in the
                     public and private sectors.
                                                                                     Met
Aid delivery costs per application                     $11.23          $11.16                        60

                                                                                      Not met
Loan servicing costs per borrower                        $21.02         $21.42                        61

Strategic Goal D: Ensure program integrity and safeguard taxpayers’ interests.
                                                        Pell Grant     Pell Grant
                                                         2.10%          2.26%

                                                       Direct Loan    Direct Loan      Not met
Improper Payment rate                                                                                 62
                                                          0.58%          1.03%

                                                          FFEL          FFEL
                                                          1.93%        <0.005%
                                                                                         Met
Direct Loan default rate                                  9.8%           9.8%                         64

                                                                                         Met
Collection rate*                                         $34.31         $41.57                        65



                                       Federal Student Aid Annual Report–FY 2013                           48
                                                                                             Annual Performance Report



               Performance Metrics                             FY 2013          FY 2013           Result        Reference
                                                                Target           Actual                           Page
Strategic Goal E: Strengthen FSA’s performance culture and become one of the best places to work in the
                  federal government.
FSA Morale Index (Subset of questions from
government-wide view point survey) – % of positive                                                 Met
                                                                   57               57                                  66
responses to survey (does not include neutral
responses)
    *The Collection Rate for the purpose of Performance Metric D.3 is defined as the amount of dollars collected from
    borrowers in the fiscal year per dollar spent to collect.




                                                      FSA Fact
          FSA offers a publication titled, College Preparation Checklist, to assist students and
          parents in preparing for college. This publication provides several checklists with
          suggested steps that will prepare students (of all age levels) both academically and
          financially for college. To download a copy of the College Preparation Checklist, visit
          StudentAid.gov/sites/default/files/college-prep-checklist.pdf.

                                         Federal Student Aid Annual Report–FY 2013                                           49
                                                                                Annual Performance Report
                                                                    Introduction to the Annual Performance Report




Introduction to the Annual Performance Report
To guide FSA towards achieving its vision “To be the most trusted and reliable source of student
financial aid, information, and services in the nation,” FSA updated its Five-Year Strategic Plan to
document the strategic goals, objectives, and performance metrics of the organization. FSA is
required by the PBO-enabling legislation to report annually its level of performance. This section,
the Annual Performance Report, satisfies this annual reporting requirement.

For additional performance related information, including a more complete discussion of FSA’s
mission, organization, and performance management, refer to the Management’s Discussion and
Analysis section of this document.

The current strategic plan, FSA Strategic Plan, FY 2012–16 was implemented at the beginning of
FY 2012. This plan builds on the previous strategic plan by clarifying FSA’s objectives and
updating organizational performance standards to better reflect its progress in meeting the stated
objectives. The strategic goals are as follows:

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

To gauge its success in meeting these strategic goals, FSA identified and included 13 performance
metrics in its Strategic Plan. For more information on FSA’s strategic goals and its performance
metrics, click on the following link to go directly to the FSA Strategic Plan, FY 2012–16.

                          StudentAid.gov/strategic-planning-reporting




                               Federal Student Aid Annual Report–FY 2013                               50
                                                                                     Annual Performance Report
                                                                         Introduction to the Annual Performance Report


The following table provides a summary of results, by Strategic Goal, as measured by the FY 2013
performance metrics.

                   Summary of Performance Results by Strategic Goal
                                                                           Not        No
 Strategic Goal                                                    Met                         N/A      Total
                                                                           met      target
 Goal A:
 Provide superior service and information to students and           4       1         —        —          5
 borrowers.
 Goal B:
 Work to ensure that all participants in the system of funding
 postsecondary education serve the interests of students, from      2       —         —        —          2
 policy to delivery.
 Goal C:
 Develop efficient processes and effective capabilities that are    1       1         —        —          2
 among the best in the public and private sectors.
 Goal D:
 Ensure program integrity and safeguard taxpayers’ interests.       2       1         —        —          3

 Goal E:
 Strengthen FSA’s performance culture and become one of the         1       —         —        —          1
 best places to work in the federal government.

 Total                                                             10       3         —        —          13




                                                 FSA Fact
         FSA, working with the Department, helped to developed the College Scorecard.
         This new planning tool, released in February 2013, assists students and their
         families in making more educated decisions about college by providing information
         such as college’s graduation rate, net costs, average amount borrowed, etc. The
         College Scorecard can be accessed at whitehouse.gov/issues/education/higher-
         education/college-score-card.

                                  Federal Student Aid Annual Report–FY 2013                                   51
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                                                                                Performance Results by Strategic Goal




Performance Results by Strategic Goal

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

How this section is organized
This section is organized by the five strategic goals and the associated performance metric(s). The
section contains the following information for each performance metric:

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

                            Performance Result Indicator Legend
                         Performance result met or exceeded the           Met
                         target.
                         Performance result did not meet the            Not met
                         target.
                         Performance result is not applicable
                         because the performance metric was not           N/A
                         developed, the performance metric was
                         not implemented, or the required data
                         were not available in time for inclusion.


The performance metric results reported are as of fiscal year-end (i.e., September 30, 2013) unless
otherwise noted. If the required data are not available as of fiscal year-end in sufficient time for
inclusion, data as of the most recent reporting period available are presented. Fiscal year-end data
may not be available in instances where the required data are obtained from external sources (i.e.,
state and private nonprofit guaranty agencies, lenders and loan servicers, grant and loan recipients,
etc.).

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

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

Data Quality and Limitations: Describes the source of data required to calculate the actual result
for the performance metric, any calculation required to determine the actual result, and any known
data quality issues or limitations. For an overview of FSA’s business process to confirm the quality
of performance data, please see Quality of Performance Data in the Management’s Discussion and
Analysis section of this Annual Report.



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                                                                              Performance Results by Strategic Goal

Strategic Goal A: Provide superior service and information to students and
                      borrowers.
 Strategic Goal A: Provide superior service and information to students and borrowers.
Performance Metric A.1: % of first-time FAFSA filers among high school seniors


                           FY 2009          FY 2010        FY 2011   FY 2012             FY 2013
Fiscal Year
                            Actual           Actual        Actual    Actual         Target         Actual
Performance              Recent performance measure
                                                            52.0%     54.0%       52.0%–54.0%       52.2%
                         (Prior year data not available)    Met       Met                   Met
    Performance Result




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

Analysis of Progress:
FSA met its target for this performance metric with approximately 52.2 percent of high school
seniors from June 2012 submitting a FAFSA during the 2012–13 application cycle (January 2012
through June 2013). This metric has increased significantly since the 2007–08 application cycle,
when fewer than 45 percent of high school seniors filed FAFSAs. Historical data for this metric are
not presented in the table above because the measure was not included as a performance metric in
the prior years’ Strategic Plans.

Data Quality and Limitations:
For a given fiscal year, data for this metric are derived from FSA’s CPS to identify FAFSA filers
ages 18 and under submitting an original application (not a renewal application) for the most recent
award year and who indicate they never attended college, divided by the total number of high
school graduates from the most recent (i.e. the preceding) high school academic year reported by
the National Center for Education Statistics (NCES). For any given award year (e.g. 2012–13) the
18-month period during which FAFSAs can be submitted by applicants (the “Application Cycle”)
begins on the preceding January 1 (i.e. January 1, 2012 in this example) and extends through June
30 of the following year. The corresponding NCES data would be for the 2011–12 academic year.
NCES estimates for a given year are revised from time to time as more information becomes
available. If the metrics for FY 2011 and FY 2012 (corresponding to award years 2010–11 and
2011–12) are recalculated using the data drawn from the same NCES table used for the FY 2013
calculation, the revised metric results are 50.0 percent and 51.6 percent respectively due to the
higher estimate of 2009–10 and 2010–11 high school graduates in the revised table.




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Performance Metric A.2: % of first-time FAFSA filers aged 19–24 among those in population
                        that are high school graduates, no college

                          FY 2009     FY 2010       FY 2011    FY 2012                FY 2013
Fiscal Year
                          Actual       Actual        Actual    Actual          Target           Actual
Performance                                                     28.4%       26.0%–28.0%          27.1%
                              New performance measure
                             (Prior-year data not available)     Met                     Met
Performance Result



Target Context:
The economy and job market require that more workers develop skills and master knowledge
beyond the high school level. Although progress has been made over the years to increase college
attendance and graduation levels for all individuals, work is still needed to address the gap for
nontraditional students. Increasing college completion rates and the number of graduates is a
priority of this administration, as evidenced by the President’s 2020 goal for America to have the
highest proportion of college graduates in the world. This performance metric measures the
percentage of FAFSAs for another customer segment, individuals ages 19–24. It was added to the
FSA Strategic Plan, FY 2012–16 to include the universe of first-time FAFSA filers.

Analysis of Progress:
FSA met its target for this performance metric, with approximately 27.1 percent of the target
population submitting FAFSAs during the 2012–13 application cycle (January 2012 through
June 2013). This is a substantial increase from the 2008–09 application cycle, when just 22
percent of the population aged 19–24 filed FAFSAs for the first time. Historical data for this metric
are not presented in the table above because the measure was not included as a performance
metric in the prior years’ Strategic Plans.

Data Quality and Limitations:
For a given fiscal year, data for this metric are derived from FSA’s CPS to identify FAFSA filers
ages 19–24 submitting an original application (not a renewal application) for the most recent award
year and who indicate they have never attended college, divided by the number of 19–24 year olds
in the population that have completed high school, have not attended college and are not currently
enrolled in a postsecondary education program reported in the Census Bureau’s Current
Population Survey, Fall Enrollment. For any given award year (e.g. 2012–13) the 18-month period
during which FAFSAs can be submitted by applicants (the “Application Cycle”) begins on the
preceding January 1 (i.e. January 1, 2012) and extends through June 30 of the following
year. Census bureau data are not available for the current year at the time that the metric must be
calculated; therefore, an estimate is made by multiplying the average population change in the
identified segment for the past three years by the actual population segment for the prior year. If
the FY 2012 metric were recalculated using the actual FY 2012 population segment, the result
achieved would have been 28.8 percent.




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Performance Metric A.3: % of first-time FAFSA filers among workforce aged 25+, high school
                        graduates, no college

                         FY 2009           FY 2010        FY 2011   FY 2012              FY 2013
Fiscal Year
                          Actual            Actual        Actual    Actual         Target         Actual
Performance                                                3.8%      3.7%         2.8%–3.4%        3.3%
                        Recent performance measure
                        (Prior-year data not available)   Not met     Met                   Met
Performance Result



Target Context:
Increasing college completion rates and the number of graduates is a priority of this administration,
as evidenced by the President’s 2020 goal for America to have the highest proportion of college
graduates in the world. Although progress has been made over the years to increase participation
and graduation levels for all individuals, work needs to continue to drive enrollment among non-
traditional aged students. This performance metric measures the penetration of FAFSAs for a third
customer segment, individuals 25 years and older.

Analysis of Progress:
FSA met this metric by achieving an actual result of 3.3 percent. This metric peaked at 3.9 percent
in award cycle 2009–10 when the unemployment rate rose sharply, and data analysis correctly
projected that this segment would decrease as the economy improved. However, continued efforts
to target this population likely ensured that the FAFSA filings for this segment did not decrease
further. Historical data for this metric are not presented in the table above because the measure
was not included as a performance metric in the prior years’ Strategic Plans.

Data Quality and Limitations:
For a given fiscal year, data for this metric are derived from FSA’s CPS to identify FAFSA filers
aged 25 and over submitting an original application (not a renewal application) for the most recent
award year and who indicate they have never attended college, divided by the total number of
people in the workforce aged 25 and older who are high school graduates that have never attended
college. For any given award year (e.g. 2012–13) the 18-month period during which FAFSAs can
be submitted by applicants (the “Application Cycle”) begins on the preceding January 1 (i.e.
January 1, 2012) and extends through June 30 of the following year. Workforce data are reported
by the Bureau of Labor Statistics.




                                               FSA Fact
          The Financial Awareness Counseling Tool (FACT) is available to assist student
          borrowers in managing their student loan debt. This interactive tool, launched by
          FSA in 2012, provides students with tutorials that cover topics ranging from
          managing a budget to avoiding default. To get more information about FACT, go
          to StudentLoans.gov.


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Performance Metric A.4: % of first-time FAFSA filers among low-income students


                          FY 2009        FY 2010       FY 2011     FY 2012              FY 2013
Fiscal Year
                           Actual         Actual       Actual      Actual         Target          Actual
Performance                                              54.8%      60.3%      57.9%–62.7%        57.1%
                         Recent performance measure
                        (Prior-year data not available) Baseline     Met                Not met
Performance Result



Target Context:
Focusing on the students least able to afford college, FSA measures the percentage of original
FAFSA filers who come from low-income households. Although progress has been made over the
years to increase the participation and graduation levels for all individuals, work needs to continue
to address the gap for low-income students. This measure looks at the effectiveness of FSA’s
outreach in getting low-income students to file a FAFSA application for the first time.

Analysis of Progress:
FSA did not meet its target for this performance metric for FY 2013. This may be due, in part, to
economic variables; as stated elsewhere, the historic volume of completed FAFSAs in prior years
may have represented a peak correlated with an unusually weak economy and may be unlikely to
repeated in the near future.

FSA has worked to improve outreach among these populations by working with community groups
and other nonfederal organizations with deeper roots in target areas. These efforts began in
FY 2012 and will continue for the next several years. Further, FSA understands that the efficacy of
targeted outreach is strengthened by the availability of sophisticated customer segmentation
analysis. For this reason, FSA in FY 2013 directed its Customer Analytics group to undertake such
a project. It is expected to be completed in FY 2014.

Data Quality and Limitations:
Data for the numerator of this measure, FAFSA first-time filers who are age 18 or younger and who
are from households with incomes that are 150 percent or less of the poverty level, comes from
CPS. This numerator is divided by the number of high school graduates from households with
incomes that are 150 percent or less of the poverty level as estimated based on data extracted from
NCES and the most recent School Enrollment Supplement, Current Population Survey.

Because the data extracted from NCES are projections, and because NCES updates them over
time for accuracy, the denominator for this metric is recalculated during the year. This recalculation
has the effect of updating both current year results and future year targets. Both targets and results
decrease proportionally; as a consequence, FSA’s methodology of assessing its performance has
not changed since prior years. Thus, FSA initially reported an FY 2011 baseline of 57 percent, an
FY 2012 target and metric result of ≥57 percent and 63.1 percent respectively, and an FY 2013
target range of 60.6–65.6 percent.




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Performance Metric A.5: Customer Satisfaction Score (ACSI)


                           FY 2009          FY 2010        FY 2011   FY 2012             FY 2013
Fiscal Year
                            Actual           Actual        Actual     Actual       Target         Actual
Performance                                                  78.0       78.5         78.0          78.4
                         Recent performance measure
                         (Prior-year data not available)     Met        Met                 Met
Performance Result



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

Analysis of Progress:
FSA met the target for this metric. FSA’s FAFSA simplification efforts have improved an applicant’s
ability to successfully navigate and complete the application. As a result, FAFSA On The Web
scored a 90 for the first quarter of the fiscal year, and, according to a press release by a leader in
customer satisfaction surveying, only one other organization (the Social Security Administration)—
public or private—has scored in the 90s.

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




                                              FSA Fact
          At FSA’s Annual Training Conference held in FY 2013, more than 5,700
          attendees, many of whom were financial aid administrators, were able to obtain
          the latest information related to FSA policies and procedures.


                               Federal Student Aid Annual Report–FY 2013                                  57
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Strategic Goal B: Work to ensure that all participants in the system of
                  postsecondary education funding serve the interests of
                  students, from policy to delivery.

Performance Metric B.1: Ease of doing business school survey (1-100 scale)


                            FY 2009           FY 2010        FY 2011    FY 2012            FY 2013
 Fiscal Year
                             Actual            Actual        Actual      Actual       Target         Actual
                                                              Survey
 Performance                                                 launched
                                                                            74          74             74
                           Recent performance measure
                           (Prior-year data not available)     Met          Met                Met
 Performance Result



Target Context:
FSA works closely with postsecondary institutions to provide millions of students with federal
student aid. Successfully delivering aid through a complex system depends on FSA’s ability to
work well with its institutional, financial, and state partners by supporting them with technical
assistance that will help them improve their performance; and by providing adequate oversight to
ensure that participants are complying with program requirements. To ensure that all participants in
the postsecondary education funding system can easily access the information they need to
perform their important functions and serve the interests of students, FSA conducts a survey with
postsecondary institutions and partners every quarter to gauge the “ease of doing business with
FSA.” The first year for the survey was FY 2011; FSA set a target for this metric, of launching the
survey and establishing the baseline. The survey was launched in FY 2011 as planned and the
established baseline was 72. FSA’s goal is to maintain or improve survey results each year.

Analysis of Progress:
FSA achieved a performance result of 74, meeting the established target. This survey goes out to
financial aid administrators at colleges and universities and improvement on this score is significant
because it happened during a great time of transition as the Direct Loan portfolio continues to grow and
schools increasingly look to FSA as the source of information on student loans. FSA’s score also reflects
a greater focus on the schools as its customers and an increased capacity to hear and respond to their
requests as they work to provide quality information about federal aid to their students.

Data Quality and Limitations:
A 10–12 question survey regarding the ease of doing business with FSA is sent to schools
quarterly. The same exact survey has been sent to the schools quarterly since its initial launching
in FY 2011. The questions focus on how easy it is to interact with FSA’s major delivery and
information systems. The 1–10 score is indexed to a scale of 1–100 for consistency with other
customer satisfaction metrics and to allow greater accuracy in significance testing.




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Performance Metric B.2: Percent of borrowers>90 days delinquent


                           FY 2009          FY 2010         FY 2011    FY 2012            FY 2013
 Fiscal Year
                            Actual           Actual         Actual     Actual        Target         Actual
 Performance                                                 9.9%       9.5%         <=10.1%         8.3%
                          Recent performance measure
                          (Prior-year data not available)                Met                  Met
 Performance Result                                         Baseline




Target Context:
When developing this metric, FSA investigated possible ways to measure the extent to which
postsecondary institutions and partners are actively supporting the interest of students and
borrowers. The previous focus on default rates did not fully capture the extent of borrowers’
difficulties in repaying student loans. Focusing on reducing the number of borrowers who are more
than 90 days delinquent will provide FSA additional insight on how to communicate information
about repayment options in a more targeted and timely way. FSA developed a new delinquency
metric as performance metric B.2, which is the percentage of borrowers serviced by the TIVAS and
NFP servicers who are more than 90 days delinquent. The baseline was set in FY 2011 at
9.9 percent; FSA’s goal is to maintain a rate of less than or equal to 10.1 percent.

Analysis of Progress:
FSA was successful in FY 2013 and achieved a performance result of 8.3 percent for this metric.
TIVAS and NFPs can best serve the interest of borrowers by helping them cure delinquencies,
especially the severely delinquent loans that have a greater likelihood of going into default and
tarnishing borrowers’ credit. By providing data on delinquencies to servicers, FSA will strengthen
relationships and ensure its partners are functioning at their best in the service of FSA’s customers.

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




                                               FSA Fact
         Borrowers who work full-time in a public service job and have a Direct Loan or a
         Direct Consolidation Loan may qualify for the Public Service Loan Forgiveness
         Program. To find more about the Public Service Loan Forgiveness Program, go to
         StudentAid.gov/repay-loans/forgiveness-cancellation/charts/public-service.

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

Performance Metric C.1: Aid delivery costs per application


                             FY 2009           FY 2010       FY 2011    FY 2012         FY 2013
 Fiscal Year
                              Actual            Actual       Actual     Actual      Target      Actual
 Performance                                                  $9.89      $10.85      $11.23         $11.16
                           Recent performance measure
                           (Prior-year data not available)                Met                 Met
 Performance Result                                          Baseline




Target Context:
FSA developed two measures to gauge the efficiency and effectiveness of aid delivery. The first
unit cost measure is the aid delivery cost per application. This unit cost tracks the direct cost to
process FAFSAs and originate aid in the 12-month period, divided by the number of original
FAFSAs processed in the period. The fiscal time period measured is July through June. The
FY 2011 baseline was $9.89.

Analysis of Progress:
The calculated unit cost for aid delivery in FY 2013 is $11.16. This unit cost reflects data for the
four quarters ending June 30, 2013 (FY 2012/Quarter 4 through FY 2013/Quarter 3) because the
full FY 2013 unit costs are not available until the December-January timeframe. The unit cost for
FAFSAs is expected to increase in the near future as FSA refines specific cost assignment
methodologies.

Data Quality and Limitations:
The cost data for this metric are derived from general ledger data uploaded to FSA’s Activity-Based
Costing model, which is updated on a quarterly basis and reconciled to FSA’s Statement of Net
Cost, ensuring all costs assigned to FSA are included in the cost model. The FAFSA volumes are
derived from the CPS.




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Performance Metric C.2: Loan servicing costs per borrower


                          FY 2009           FY 2010         FY 2011    FY 2012         FY 2013
 Fiscal Year
                           Actual            Actual         Actual     Actual     Target     Actual
 Performance                                                 $18.15     $18.94     $21.02     $21.42
                          Recent performance measure
                          (Prior-year data not available)                Met            Not met
 Performance Result                                         Baseline




Target Context:
The second measure developed to gauge the efficiency and effectiveness of aid delivery is the loan
servicing-related cost per borrower. This unit cost tracks the overall costs of loan servicing
operations and maintenance, including labor, non-labor, and contracts. The FY 2011 baseline was
$18.15.

Analysis of Progress:
The calculated unit cost for loan servicing in FY 2013 is $21.42. The loan servicing unit cost
reflects a rolling four quarters (FY 2011/Quarter 4 through FY 2012/Quarter 3) time period because
the full FY 2012 unit costs are not available until the December to January timeframe. While the
loan-servicing unit cost had generally been trending downward in previous years, FSA expected
loan-servicing costs to increase due to the inclusion of new NFP servicers, which have higher cost
structures. FSA also expects the maturation of its loan portfolio to increase loan-servicing costs.
Specifically, FSA expects the proportion of borrowers that enter repayment to increase over the
next few years. Based upon the fee structure of FSA’s contracts with loan servicers, fees for
servicing loans in repayment, as opposed to loans for borrowers in-school, are greater. Therefore,
this expected increase in loans in repayment will increase FSA’s servicing costs.

The FY 2013 Loan Servicing measure experienced a slightly higher than targeted unit cost primarily
due to the continuation of low volumes in CSB past the December 2012 TIVAS transition
deadline. The decreased borrower account volumes generally incurred higher rates under the
contract tiered pricing schedule. On a positive note, the actual portfolio mix of borrower accounts
was also weighted more heavily toward the In-School, Repayment, and Deferment/Forbearance
categories than what was previously forecasted. Since these categories carry higher rates, this
greater percentage of borrowers away from Delinquency also contributed to the 1.9 percent
increase in the actual versus targeted FY 2013 unit cost.

Data Quality and Limitations:
Data for this measure are derived from FSA’s Activity-Based Costing model, which is updated on a
quarterly basis and reconciled to FSA’s Statement of Net Cost, ensuring all costs assigned to FSA
are included in the cost model. Specifically, the measure is defined as the total direct costs for
servicing in the year ending June 30, divided by the average number of borrowers in servicing for
the year.

                                              FSA Fact
         The Pay as You Earn Plan, recently made available for eligible borrowers, enables
         borrowers with eligible loans to limit monthly payments to 10 percent of their
         discretionary income. For more information on this repayment option, visit
         StudentAid.gov/repay-loans/understand/plans/pay-as-you-earn.

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

Performance Metric D.1: Improper Payment rate


                              FY 2009        FY 2010      FY 2011         FY 2012                 FY 2013
    Fiscal Year
                               Actual         Actual       Actual         Actual            Target         Actual
                                                                          Pell Grant       Pell Grant     Pell Grant
                                                                           2.49%            2.10%          2.26%

                                                                         Direct Loan      Direct Loan     Direct Loan
    Performance                                                             0.58%            0.58%           1.03%
                                  Recent performance measure
                                  (Prior-year data not available)
                                                                           FFEL              FFEL           FFEL
                                                                           1.93%             1.93%         <0.005%
                                                                             Met                     Not met
    Performance Result



Target Context:
In FY 2012, FSA reported two sets of improper payment estimates in the Department’s AFR: one
for the Pell Grant program based on a methodology previously approved by OMB; a second newly
developed for all risk-susceptible programs (i.e., Pell Grant, Direct Loan, and FFEL) based on
proposed new methodologies that address the limitations of the other.3 In FY 2013, FSA continued
to refine the proposed methodologies, which resulted in a more robust estimate for each program,
but these proposed methodologies have not yet completed the OMB approval process. While the
review process with OMB for the new methodology continues into FY 2014, FSA will report, in
accordance with an OMB agreement, in the FY 2013 AFR, the Pell Grant estimate of 2.26 percent
based on the previously approved methodology and Direct Loan and FFEL estimates of
1.03 percent and 0.00 percent based on the new methodology. The FY 2013 Pell estimate of
2.26 percent is a decrease from or improvement over FY 2012’s 2.49 percent estimate, but it
exceeds the target. As the Pell estimates and the Pell target were developed from different
methodologies, they are not directly comparable. Further, the refinements to the proposed
methodologies resulted in estimates for Direct Loan and FFEL that are also not directly comparable
to the prior year targets. FSA will work with OMB in FY 2014 to obtain approval for all proposed
methodologies and to set new targets consistent with these methodologies.

Analysis of Progress:
As reported in the FY 2012 Annual Report, the new estimation methodology represents significant
improvement over prior year approaches. The refinements to the methodology in FY 2013 included
adopting a two-stage sampling process to strengthen the improper payment estimates. In addition,
the new methodology leverages the significant volume of work performed by FSA’s Program
Compliance area to more effectively identify root causes and plan corrective actions that ultimately
should result in actual reductions to improper payments. FSA will continue working with OMB in
FY 2014 on the review of the new methodology and developing targets for each program.

3
  The FY 2012 AFR presents two rates for Pell: 2.49 percent, derived from the previously approved methodology; and
2.10 percent, derived from the proposed new methodology. The actual Pell Grant estimate reported in the FY 2012 FSA
Annual Report for this performance metric was 2.10 percent. The Department agreed with OMB to defer reporting a Pell
Grant rate for this new methodology.

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Data Quality and Limitations:
The improper payment estimation methodology leverages FSA program reviews at schools and
financial institutions. FSA will continue to evaluate program review data to address limitations such
as accounting for non-randomness of sample selection and developing more representative
samples for various attributes.




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Performance Metric D.2: Direct Loan default rate


                          FY 2009            FY 2010         FY 2011   FY 2012         FY 2013
 Fiscal Year
                           Actual             Actual         Actual    Actual     Target         Actual
 Performance                                                  11.3%     9.6%        9.8%          9.8%
                           Recent performance measure
                           (Prior-year data not available)     Met      Met                Met
 Performance Result



Target Context:
FSA is responsible for overseeing approximately $137.6 billion in annually disbursed aid and
overseeing a loan portfolio valued at more than $1.0 trillion. Safeguarding taxpayer resources
requires accurate oversight and management. One indication of FSA’s performance is the rate at
which borrowers default on their loans.

Analysis of Progress:
For the third year in a row, FSA met or exceeded the Direct Loan default rate performance metric.
In efforts to help borrowers avoid default, FSA provides borrowers the early awareness and
assistance they need in the form of financial literacy so that they can avoid defaulting on their
student loans. This year, FSA made substantive improvements to its counseling tools and methods
for applying for flexible repayment options.

In addition, the performance-based servicing contracts for the TIVAS require vendors to compete
for additional loan volume. This allocation is partially based on the vendor’s success in avoiding
defaults. Finally, FSA pays the TIVAS a higher borrower servicing fee for those borrowers who are
not in a delinquent status.


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




                                             FSA Fact
      Borrowers can use the FSA provided Repayment Estimator to determine the
      repayment plan for which their loan is eligible. This website provide estimates for the
      amount that would be paid monthly based on the borrower’s outstanding loan. To use
      the Repayment Estimator, visit
      Studentloans.gov/myDirectLoan/repaymentEstimatorLoginRedirect.action.

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                                                                                                 Annual Performance Report
                                                                                           Performance Results by Strategic Goal


Performance Metric D.3: Collection rate*


                                 FY 2009        FY 2010         FY 2011           FY 2012               FY 2013
 Fiscal Year
                                  Actual         Actual          Actual            Actual          Target         Actual
 Performance                           New performance measure                      $31.90         $34.31         $41.57
                                      (Prior-year data not available)                Met                    Met
 Performance Result
*Collection Rate for the purpose of this metric is defined as the amount of dollars collected from borrowers in the fiscal
year per dollar spent to collect.

Target Context:
The Collection Rate metric as defined in the FSA Strategic Plan, FY 2012–16 only identified the
amount of money being collected for the year compared to the total average outstanding portfolio
amount for the year (excluding loans in certain non-repayment statuses). This measurement did
not provide FSA with actionable results. FSA is always looking for ways to improve on how
performance is measured, and aims to measure only what matters and what the organization can
effect, regardless of the timing of the Performance Planning cycle. After the FSA Strategic Plan,
FY 2012–16 was finalized; a small working group (including some FSA Operating Committee
members) continued to meet to discuss performance measures. It was during this continuous
improvement process that it was determined that a better collection rate methodology would be one
that compared the cost incurred for FSA’s efforts to collect, against the actual amount
collected. This new methodology measures FSA’s efficiencies—something that the organization
can influence and affect.

Analysis of Progress:
The baseline for this new metric is $34.31, and FSA met its target with an actual rate of $41.57.
This represents a 21 percent improvement from the prior year.

Data Quality and Limitations:
This metric measures the amount of dollars collected from borrowers in the fiscal year per dollar spent to
collect. Collections are defined as the total amount of principal collected on both current and
defaulted debt during the 12-month period ending June 30 of each year. Costs include the total
direct costs calculated for loan servicing plus debt collections for the same period using FSA’s
Activity-Based Costing process.




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                                                                                 Annual Performance Report
                                                                            Performance Results by Strategic Goal

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

Performance Metric E.1: FSA Morale Index (Subset of questions from government-wide View
                        Point Survey) – % of positive responses to survey (does not include
                        neutral responses)

                           FY 2009         FY 2010        FY 2011   FY 2012              FY 2013
 Fiscal Year
                            Actual          Actual         Actual   Actual       Target         Actual
 Performance                                                          —             57             57
                                New performance measure
                               (Prior-year data not available)        N/A                 Met
 Performance Result



FSA measures its progress on Strategic Goal E: Strengthen FSA’s performance culture and
become one of the best places to work in the federal government via the FSA Morale Index. To
develop this index, FSA aggregates total ‘positive’ percentage scores on a subset of questions from
the government-wide EVS. Prior to 2012, FSA measured progress based on its rank in government
on the Partnership for Public Service’s Best Places To Work In Government. This was changed
during the updating of the FSA Strategic Plan, FY 2012–16, as the new index is a better indicator of
employee engagement.

Analysis of Progress:
FSA evaluated and analyzed the seven questions that make up the FSA Morale Index. Those
questions range from “I like the kind of work I do” to “Considering everything, how satisfied are you
with your job?” FSA met its target score of 57.

Data Quality and Limitations:
The Morale Index consists of seven questions from the government-wide EVS. The results
measure the percentage of positive responses to those questions, and do not include neutral
responses. Additionally, because of the timing of the annual EVS and related analytical work, the
reporting of results for FSA’s Morale Index lags by a fiscal year. Thus, the FY 2013 Morale Index
actual result is based on data collected in the 2012 EVS.




                                              FSA Fact
         In addition to recently launching a new website, StudentAid.gov, FSA has also
         increased its presence in social media. To get the latest information updates on
         federal student financial aid, like FSA on Facebook; follow FSA on Twitter
         @FAFSA or find it on YouTube.


                               Federal Student Aid Annual Report–FY 2013                                 66
                                                                           Annual Performance Report
                                                            FY 2013 Accomplishments of Federal Student Aid




FY 2013 Accomplishments of Federal Student Aid
During FY 2013, FSA realized additional accomplishments that were not specifically
measured by the performance metrics implemented to measure performance against FSA’s
Strategic Plan. Although not measured by FSA performance metrics, these additional
accomplishments were the result of initiatives FSA undertook to support the implementation
of this Strategic Plan or legislative changes. This section describes its additional
accomplishments.

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

   Since FY 2012, FSA has worked to implement a multi-faceted initiative to dramatically
    change the agency’s approach to customer engagement. This “Multiplier Model”
    embraces methods designed to increase intra-customer communications, which enable
    the agency to ‘multiply’ its impact, reach, and penetration into target markets and among
    key customer segments. Data from the first year of operations strongly validated this
    approach and FSA has strengthened its support in response. A critical element involves
    the use of sophisticated new media techniques. The agency engaged in three targeted
    media campaigns: two on social media, on FAFSA Completion and Student Loan
    Repayment; and one leveraging traditional Public Service Announcement platforms,
    including television, radio, print, and web banner ads in both English and Spanish, which
    encouraged viewers to explore FSA’s presence online. FSA also expanded its on-going
    outreach activities, which include expanded social media engagements such as a
    monthly Twitter “Town Hall” in which hundreds of questions are answered live, in English
    and in Spanish, by staff and special guests such as the Secretary of Education Arne
    Duncan, and various institutional experts.

   Additionally, FSA invited key community-based organizations to FSA-sponsored
    roundtables where they learned about FSA products and services and were asked to
    invest in a shared college access agenda. These organizations were encouraged to
    transform aid awareness into a community-sponsored initiative, and were provided with
    FSA-built tools, such as infographics, videos, and action plans. Outreach ambassadors
    are also sent to participatory events to increase awareness among students and
    professionals, such as a series of “Train the Trainer” events for civilian and military
    groups representing the service branches of the Department of Defense.

   Following the 33 percent growth in FAFSA volume since the 2008–09 application cycle,
    FSA has focused particular efforts on increasing FAFSA accessibility and ease of
    use. Although the recent increase in applications—partially the product of an unusually
    languid economy—is unlikely to be repeated in the near term, the volume remains high
    at 21.8 million FAFSAs processed for the most recent 18-month application cycle for the
    2012–13 award year, an annual decrease of less than 1 percent from the 2011–12
    award year peak. Similarly, 18.3 million FAFSAs were received during the first nine
    months of the 2013–14 award year application cycle, a year-over-year decrease of just
    2.6 percent compared to the first nine months of the 2012–13 award year application
    cycle. Moreover, demographics are changing: since the 2008–09 application cycle, low-
    income applicants have increased by 41 percent; first generation filers have increased
                               Federal Student Aid Annual Report–FY 2013                             67
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                                                              FY 2013 Accomplishments of Federal Student Aid

    by 32 percent; and adult learners have increased by over 38 percent. To ensure a
    positive experience for these users, FSA built and implemented various enhancements
    to the FAFSA process. These include enhanced partnerships with states, federal
    agencies, nonprofits, and the private sector.

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

   Legislative changes to the federal aid process in FY 2012 provided borrowers with
    several repayment options in which monthly payments are based, in part, on annual
    income. However, although these are often the most economically optimal of the offered
    repayment plans, they remained unused by many borrowers during their first year of
    availability, due to low awareness by borrowers and the relative complexity of the
    application. FSA undertook a two-pronged strategy to combat this issue. First, the
    agency redesigned its loan counseling tools, incorporating principles of financial literacy,
    sound budgeting techniques, and a clear overview of federal loans and repayment
    options, and consolidated them into a single website within the StudentLoans.gov portal.
    This included Loan Entrance and Exit Counseling, both of which borrowers are legally
    required to complete; the Financial Aid Counseling Tool, an optional tool that aims to
    improve borrowers’ understanding of financial concepts and student loans; and a
    Repayment Estimator, which provides borrowers with accurate repayment estimates for
    each of the repayment options. Second, the agency implemented an Income-Driven
    Repayment Application, which is pre-populated with borrower income retrieved directly
    from the Internal Revenue Service, and which recommends the best option for a
    particular borrower. This application serves to lower barriers to entry and increase the
    ease with which borrowers can take advantage of the loan repayment options that are
    best for them.

   Prior to FY 2013, borrowers wishing to discharge their student loans due to Total or
    Permanent Disability (TPD) were required to work with their individual set of loan
    servicers or guaranty agencies, each with a different set of forms and processes, which
    often led to confusion and frustration at various points during the multi-year, multi-step
    application process. In July of 2013, FSA implemented a new, streamlined process that
    features a standardized approach and a single point of contact for all borrowers
    throughout the lifecycle of a TPD discharge application.

   FSA's Experimental Sites program is the mechanism by which the agency field-tests the
    effects of various policy changes at a small number of pilot schools across the nation.
    Due to the high quality of data provided by recent experiments—including one that tests
    the effect of extending Pell grant eligibility to specific populations and one piloting
    programs to improve employability in local labor markets—the agency has decided to
    bolster the program’s size and processes. In order to improve the forcefulness of policy
    conclusions, the agency invited additional schools to participate; moreover, FSA
    improved the user experience by redesigning its participant website and providing
    streamlined, simpler reporting templates for schools.

   FSA made two significant changes to its call center systems in FY 2013. First, it
    consolidated the ten-plus servicer contact numbers used by schools into a single
    ‘umbrella’ number, Reach FSA. Schools calling the Reach FSA number are presented

                                Federal Student Aid Annual Report–FY 2013                              68
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                                                              FY 2013 Accomplishments of Federal Student Aid

    with three options: to directly route to a requested servicer, to select a servicer from a
    comprehensive directory, or to identify their reason for calling and be routed to an
    appropriate party. Second, the agency implemented a new call center system, the Angel
    Virtual Call Center Solution, for its program compliance staff who handle escalated
    collections issues from defaulted borrowers. The new cloud-based system delivers
    more personalized customer interaction, provides powerful security, call recordings,
    enhanced reporting, and more accountability for individual performance.

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

   To standardize the effective management of projects across the enterprise, FSA
    reorganized its office to create the Investment Management Group. This redesign
    fundamentally changed the manner in which investments are managed across the
    agency. Prior to FY 2013, the Strategic Investments Governance consisted of several
    Senior Project Managers, each of whom was responsible for directly managing a select
    number of high-priority agency projects, supported by a staff of project management
    experts. The reorganization transformed these Senior Project Managers into
    Portfolio/Project Managers assigned to individual business units for whom they develop
    governance capacity, monitor agency-level trends for actionable effects on particular
    projects, and provide sophisticated analytical capabilities for budgeting, scheduling, and
    resource monitoring purposes.

   Faced with an upward trend in the amount of Personally Identifiable Information handled,
    as well as the rising sophistication of external network threats, in FY 2013, FSA
    continued to strengthen its IT systems security. FSA’s two-pronged approach aimed to
    proactively prevent unauthorized access and accidental or deliberate data loss from FSA
    systems. To ensure that potential threats are appropriately tracked, identified, and
    managed, FSA developed the FSA Security Operations Center, to work in conjunction
    with the Department’s own security center. The Security Operations Center allows real-
    time threat detection and tracking, comprehensive reporting of security events and
    incidents, vulnerability identification and trending, and incident and remediation tracking.
    At the same time, to strengthen authentication security and reduce potential network
    access fraud, FSA enhanced the capabilities of the Access and Identity Management
    System, provided FSA users with a simplified logon for major systems, expanded Two
    Factor Authentication token distribution, and enhanced the Enterprise Identity
    Management Solution to consolidate, centralize, and migrate authentication services and
    identification management of FSA system users.

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

   FSA has continued to develop its risk management processes during FY 2013,
    enhancing the agency’s analytical capabilities and strengthening its ability to recognize
    and mitigate risks in its operational and credit portfolios. Operationally, FSA has
    developed a customized risk diagnostic tool that categorizes all key business processes
    under five major risk types. The results of this tool are shared monthly with senior
    leadership to improve executive decision-making. To better manage FSA’s credit
    portfolio, the agency has developed a Loan and Grants Portfolio Analytics Process,


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                                                             FY 2013 Accomplishments of Federal Student Aid

    which tracks various metrics, including lifetime and 36-month default rates, and
    incorporates them into quarterly and monthly reports given to senior management.


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

   To improve efficiency and ensure the integrity of its hiring methods, FSA
    comprehensively redesigned its hiring processes in FY 2013. Among several significant
    improvements, FSA developed stronger policies regarding the review and
    standardization of Position Descriptions for newly-hired employees, and strengthened
    the procedures for the use of selective factors. These changes help ensure integrity of
    the hiring process and reduce the amount of time required for a manager to post a
    position and hire a well-qualified candidate.

   FSA developed a seminar for supervisors, team leaders and management officials that
    highlighted seven core elements of effective management. The series included live
    instruction, review of uniform management agreements, EVS survey analyses, role-
    playing and scenarios. Twelve sessions have been delivered in the Headquarters and
    the Regional offices.

   FSA welcomed its second cadre of First Class Managers in July 2013. Participants, who
    are selected competitively, commit to a year-long management development program
    designed in conjunction with the Partnership for Public Service. For its second cadre,
    FSA updated the curriculum, revised and extended the in-class schedule, developed
    post-program practicum experiences, and improved the worked with Partnership for
    Public Service to improve the methods of analyzing and reporting the cadre’s
    development.

   FSA significantly enhanced two of its signature employee engagement programs in
    FY 2013: the FSASSY awards, FSA’s annual employee awards ceremony, and FSA
    Cares, FSA’s volunteerism initiative. To improve the rigor of the FSASSY selection
    process, the organization replaced its single selection panel with two panels, comprised
    of representatives from the Employee Union, management, and employees at large,
    each of which coordinate to identify finalists. The organization also developed a
    weighted points system so that finalists are determined based on objective data in the
    event of a tie, which is not an uncommon occurrence. FSA also improved the
    confidentiality and anonymity of the panel selection process, a change designed to
    improve the program’s integrity. For the FY 2013 FSASSY awards, 233 nominations
    were received across 15 categories, a record amount.

    Separately, to improve the value of FSA Cares, the organization redesigned the
    volunteering process to align more closely with the Department’s Education Volunteer
    Initiative. FSA also expanded its volunteer options, incorporating organizations such as
    Habitat for Humanity, Chicago Reads, KaBooM!, Cultural Tourism DC, and the National
    Park Service’s White House Presidential Park. Participation in FSA Cares has also
    increased 116 percent, with 121 employees volunteering in FY 2013, compared to 56
    employees volunteering in FY 2012.



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                                                                 Legislative and Regulatory Recommendations




Legislative and Regulatory Recommendations

One of FSA’s mission responsibilities is to provide input on legislative proposals (both from
the Congress and from the administration) and to support the Department’s regulatory
activity. FSA also may suggest legislative changes for consideration by the Department’s
senior policy officials. These recommendations customarily center on improving and
simplifying the Title IV programs, minimizing administrative costs, and improving program
integrity. FSA’s recommendations inform the Department’s policymaking process, including
its activities and decisions related to each year’s budget process. These activities are
usually accomplished by direct contact with colleagues within various offices of the
Department, such as the Office of Postsecondary Education and the Office of the Under
Secretary, at both the senior policy level and at a staff level. While a portion of this policy
advising is accomplished on an ongoing, informal daily basis, during the past year, FSA
provided specific recommendations to policy officials on the following issues: (1) reducing
improper payments in the Pell Grant Program; (2) improving and simplifying the FAFSA;
(3) developing policy for compliance with the Windsor decision that invalidated a portion of
the Defense of Marriage Act; (4) developing framework for expansion of the Experimental
Sites Initiative; (5) developing policy for the structured wind down of the FFEL Program,
particularly as it relates to the activities and function of guaranty agencies; and (6) various
budget and legislative initiatives. In addition, FSA’s staff also contributed to the
Department’s Rulemaking process, most importantly, to the on-going effort to develop
regulations in the area of gainful employment.




                                         FSA Fact
   In August 2013, President Obama signed the Bipartisan Student Loan Certainty Act of
   2013, which made several important changes to the interest rates of federal student
   loans. To find more about those changes, go to
   StudentAid.gov/about/announcements/interest-rate.

                                Federal Student Aid Annual Report–FY 2013                             71
                                                                          Annual Performance Report
                                                                                  Annual Bonus Awards



Annual Bonus Awards

FY 2013 performance ratings and related awards for FSA senior managers and Senior
Executive Service staff were not finalized at the time this report was prepared.

At the end of FY 2012, there were 51 FSA senior managers. There were also nine Senior
Executive Service members. Eight of the 51 senior managers and 3 of the 9 Senior Executive
Service staff served on the FSA Operating Committee and reported directly to the COO. The
remaining 43 senior managers and 6 Senior Executive Service staff served in a variety of senior
positions and capacities within FSA.

For FY 2012, the composition of ratings for the 46 senior managers who did not serve on the
Operating Committee last year were as follows: 15 achieved a performance rating of
Exceptional Results, 23 achieved a performance rating of High Results and 14 achieved a
performance rating of Results Achieved.

Award amounts for those senior managers achieving an Exceptional Results rating ranged from
a low of $3,870 to a high of $9,985 with a median award of $7,277. Award amounts for those
achieving a High Results rating ranged from a low of $1,918 to a high of $6,804 with a median
award of $6,089.

There were also FY 2012 ratings and awards for seven senior manager members of the
Operating Committee. The composition of those rated includes: one achieved a performance
rating of Exceptional Results; six achieved a performance rating of High Results, and none
received a performance rating of Results Achieved. The three Senior Executive Service
members on the Operating Committee received a performance rating of Exceptional Results.
Of the nine remaining Senior Executive Service members who were not on the Operating
Committee, one achieved a performance rating of Exceptional Results, three achieved a
performance rating of High Results, three achieved a performance rating of Results Achieved.

Award amounts for the Operating Committee ranged from approximately $12,500 to $60,000,
depending on the performance rating of each individual. Only individuals with performance
ratings of High Results Achieved or Exceptional Results achieved were eligible for performance-
based awards.

For additional information, please refer to:
Higher_Education_Amendments_1998/sec101D.html




                              Federal Student Aid Annual Report–FY 2013                           72
                                                                           Annual Performance Report
                                                              Report of the Federal Student Aid Ombudsman



Report of the Federal Student Aid Ombudsman

The FSA Ombudsman entered its fourteenth year of service to federal student aid recipients in
FY 2013. Established by the 1998 amendments to the HEA, the Ombudsman began
operations on September 30, 1999.

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

Since 1999, the Ombudsman has received 294,264 customer contacts, including 33,916 in
FY 2013. The Ombudsman has generally received more customer contacts in each
succeeding year of operation, attributable, in part, to growing awareness of the Ombudsman
and the increase in the number of individuals receiving federal student aid. However, the
33,916 customer contacts received in FY 2013 were fewer than the 34,909 contacts in
FY 2012.

    FY           New Customer Contacts              Percentage Change from Previous FY
   2010                 30,346                                   +27.7%
   2011                 32,922                                   +8.5%
   2012                 34,909                                   +6.0%
   2013                 33,916                                    -2.8%

The Ombudsman classifies customer contacts as one of two types: General Assistance,
which are typically resolved almost immediately through the provision of information or referral
to the appropriate entity within the student loan community; and Research, which present a
more complex problem, are assigned to a research specialist to address and may take several
months to close. As the table below demonstrates, in the past four years, Research cases
have increased as a higher percentage of total customer contacts than has been the historical
experience of the Ombudsman Group.

                                      Percentage Change in               Research Cases as
   FY        Research Cases           Research Cases from                Percentage of Total
                                          Previous FY                    Customer Contacts
  2010            6,828                     + 29.8%                            22.5%
  2011            8,208                     + 20.2%                            24.9%
  2012            11,570                    + 41.0%                            33.1%
  2013            9,414                      -18.6%                            27.8%



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                                                              Report of the Federal Student Aid Ombudsman

Case Volume

Customer contacts to the Ombudsman in FY 2013 were fewer than those received in FY 2012
but greater than FY 2011. The reduction is due, in part, to an unusually high number of cases
received in FY 2012.

In FY 2012, seven new entities began Direct Loan servicing operations, and FSA transferred
more than 4 million loan accounts to these new servicers. In addition, FSA undertook major
computer system conversions that affected a large portion of the Department-held portfolio.
The Ombudsman received an increase in contacts in FY 2012 from customers who reported
confusion about who was servicing their loans or problems in accessing on-line accounts or
making payments. Although account transfers continued into late FY 2013, contacts to the
Ombudsman Group about the negative impact on customers decreased.

The Ombudsman Group uses issue categories and sub-categories to classify the nature of the
question, issue or observation brought to it by customers. As noted above, in FY 2013, the
Ombudsman Group saw a slight decline in the overall number of requests for assistance
(cases) received. Eleven of the 16 major issue categories reflected that overall decline.
Focusing on Research cases, 14 of the 16 major issue categories saw a decrease.
In FY 2013, the top five issues for Research cases were consistent with prior years with one
exception. The top five were:

   Account Balance: Customer requests for assistance concern disagreement over account
    balances, interest accrual, or how payments are applied.

   Repayment Plans/Amounts: Customer requests for assistance concern the desire to
    establish, revise, or complain about their repayment plans.

   Loan Cancellation/Discharge: Customers assert their loans should be cancelled or
    discharged because of existing conditions or services performed

   Default: Customers assert the default status of their loans is wrong, or customers are
    asking for options for removing defaulted status of their loans.

   Credit Reporting: Customer requests for assistance concern issues involved with their
    credit reports as affected by their Federal student loans

In a notable exception to the overall volume decrease, the 742 customer contacts in FY 2013
relating to Credit Reporting represent an increase of 103.8 percent over the 364 cases
received in FY 2012. With the increase, Credit Reporting rose from the tenth most common
issue for Research Cases in FY 2012 to fifth in FY 2013.

It is possible the surge in Credit Reporting issues reflects a gradual improvement in overall
economic conditions. As job growth occurs in certain sectors, and more individuals feel able
to make major purchases, some are finding that negative credit reports relating to
delinquencies or defaults on federal student loans are making it more difficult to get approval
for credit. In addition, the Ombudsman has noted that credit repair services encourage their
customers to contact their loan holders to seek removal of adverse comments. In our
experience, loan servicers will not remove adverse comments unless a servicing error is
proven.
                               Federal Student Aid Annual Report–FY 2013                             74
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                                                               Report of the Federal Student Aid Ombudsman



A series of initiatives undertaken by the Ombudsman, FSA business units, and federal student
loan servicers are also believed to be contributing to a reduction in the number of customer
contacts to the Ombudsman and to a reduction in Research cases. The mission of the FSA
Ombudsman is to assist borrowers who have been unable to resolve their problem with the
current loan holder. Borrowers contacting the Ombudsman who have not exhausted the
problem resolution options at their loan holder are referred to the loan holder and counseled to
re-contact the Ombudsman if those efforts are unsuccessful.

Each of the TIVAS has in place second-tier escalation processes to handle issues not
resolved at the first level of contact. Additionally, FSA took steps in the past two years to
concentrate with designated servicers, the servicing of accounts eligible for certain program
benefits such as Public Service Loan Forgiveness (PSLF), and Teacher Loan Forgiveness.
This strategy permits the specialization of servicer expertise on program benefits of high
customer interest and improves the consistency in the processing of these benefits and the
service provided to customers. The strategy, to the extent it is successful in resolving issues,
reduces the need for borrowers to contact the Ombudsman.

The Ombudsman worked collaboratively in FY 2013 with FSA’s Default Resolution Group
(DRG) to develop an escalation process for defaulted borrowers whose loans are with DRG.
When borrowers in these circumstances contact the Ombudsman, the contact is logged into
the OCTS, and the case is referred to DRG and assigned to an escalation team that will work
with the borrower to resolve any problems. The referral is handled via a personal contact by
Ombudsman Group staff during which borrowers are advised to return to the Ombudsman
Group if the work with the DRG does not yield a satisfactory outcome.

Analysis of Outcomes

In FY 2013, the Ombudsman began an effort to analyze case outcomes. OCTS allows the
logging of the case outcome using case closing categories and sub-categories. The
Ombudsman Group believes improved analysis of these data will help bring a better
understanding of the nature of the issues customers bring to the Ombudsman, point out areas
in which service quality can be improved, and identify systemic problems that lead to borrower
complaints.

Challenges were immediately evident. Resolutions of the problems customers present to the
Ombudsman are rarely binary – the customer receives or does not receive the outcome
sought. For one thing, customers seek outcomes for which they are not eligible based on
statute and regulation. Furthermore, customers are sometimes unaware of the option or
options that provide the best way to manage their student loan debt, and the best service that
can be provided by the Ombudsman is to create awareness of the available options.

The Ombudsman has learned that outcomes can be classified into at least three broad,
general classifications:

   Action: An action occurred on the customer’s account, e.g., a change in loan status,
    payments reapplied, loan balance was adjusted, etc.

   Confirmation: No change occurred in the customer’s account, e.g., loan balance was
    verified, the interest rate was found to be accurate, the sought after benefit was properly
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                                                              Report of the Federal Student Aid Ombudsman

    denied, etc. In these situations, the Ombudsman staff will provide guidance for the
    borrower on the available options for managing their student loans and refer them to the
    appropriate entity for initiating the desired option.

   Information: The customer was provided with information or guidance, e.g., loan servicer
    was identified, requirements for Public Service Loan Forgiveness or Income Based
    Repayment were explained, contact information was provided, referral was made, etc.

The Ombudsman has learned that roughly two-thirds of Research requests result in Action or
Confirmation, with a smaller proportion resulting in Information. This initiative is a work in
progress. The Ombudsman will continue to examine case outcomes using this methodology
in FY 2014 and further refine the classification strategy.

Other FY 2013 Highlights

Consumer Financial Protection Bureau

The Ombudsman continued its collaboration with the Consumer Financial Protection Bureau
(CFPB) Private Student Loan Ombudsman. The FSA Ombudsman’s enabling statute limits
jurisdiction to the federal student loan program, so a major part of this collaboration is a
mutual referral process that ensures that borrowers with private student loans receive
assistance from the CFPB. Borrowers who contact the Ombudsman Group call center with
private student loan problems are referred to CFPB; and conversely, borrowers with federal
student loans who contact CFPB are referred to the FSA Ombudsman. In FY 2013, 612 of
our customers told us they were referred by the CFPB.

As in past years, the CFPB Private Student Loan Ombudsman participated in the annual
Student Loan Ombudsman Caucus Meeting to share information and engage in discussion
with colleagues throughout the student loan community.

Contacts from Service Members and Veterans

The Ombudsman employs an indicator to identify and track customer contacts from active
duty military personnel and veterans. In FY 2013, the Ombudsman received 272 contacts
from individuals in these groups. About 15.1 percent of these contacts, the largest single
category concerned Loan Cancellation/Discharge for TPD. Congress enacted provisions for
expedited disability discharge for veterans who are considered 100 percent disabled or unable
to work due to service-connected disabilities. In isolated instances, the expedited process
does not work as well as intended by the legislation, and a veteran asks the Ombudsman to
intervene. Veterans whose disabling condition is not service-connected or whose disability
rating from the Department of Veterans Affairs is not at the required level must apply for TPD
through the standard process, which requires a doctor’s certification of the disability. On rare
occasions over the years, veterans have reported to the Ombudsman difficulty in having
Department of Veterans Affairs doctors complete the TPD discharge forms.




                               Federal Student Aid Annual Report–FY 2013                             76
                                                                            Annual Performance Report
                                                                Report of the Federal Student Aid Ombudsman

Customer Satisfaction Survey

Customer satisfaction with the Ombudsman Group is measured, in part, through
independently conducted telephone surveys. Closed cases are chosen at random, and
customers are asked to rate service accessibility, Ombudsman representative’s knowledge,
timeliness of case resolution, level of satisfaction with the resolution, and overall service. On
a scale of one to five, with five being the highest rating, survey results are calculated weekly
and cumulatively for the fiscal year. Only ratings of 4.0 or higher meet the Ombudsman
customer satisfaction performance goal. The average FY 2013 customer satisfaction for
Research cases was 4.66 on a 5.00 scale. Customers also write or call independently to
express appreciation for the assistance from the Ombudsman.

Student Loan Borrower Interest Groups Roundtable

In the spring of 2013, the Ombudsman Group implemented a new initiative to reach out to
organizations that have an interest in issues regarding federal student loans. Through
periodic conference calls, the Ombudsman provides a forum for these organizations to share
concerns they have with how federal student loans are serviced. The goal is to provide an
efficient line of communication for advocacy groups to present global issues relating to
servicing to FSA and for FSA to communicate to the groups how it will respond to these
issues.

The Office of the Ombudsman has held five calls this year. Participants have included legal
aid societies, consumer protection groups, as well as organizations that focus on student aid
policy. The concerns they have shared with the Ombudsman has touched on topics such as
loan discharges and cancellation, Income Based Repayment and loan transfers. The
Ombudsman hopes that these calls will enhance FSA’s ability to continuously improve
customer service for FSA’s borrowers.




                                Federal Student Aid Annual Report–FY 2013                              77
                                            Annual Performance Report
                               Report of the Federal Student Aid Ombudsman




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Federal Student Aid Annual Report–FY 2013                             78
                                              Financial Section




   Section 1. 0

Financial Section




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                                            Financial Section




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Federal Student Aid Annual Report–FY 2013              80
                                                                                       Financial Section
                                                                  Message from the Chief Financial Officer



Message From the Chief Financial Officer




  During Fiscal Year (FY) 2013, Federal Student Aid (FSA) delivered
  $137.6 billion of federal aid to 14 million postsecondary students
  and their families. In addition, the loan portfolio overseen by FSA
  grew by 9.7 percent, from $948.0 billion to $1.0 trillion. This is an
  enormous financial responsibility to students seeking financial
  assistance, borrowers who are paying off their student loans, and
  taxpayers who expect fiscal prudence and stewardship. Thanks to
  the dedicated and talented staff at the United States Department of
  Education (the Department) and FSA, we met the unprecedented
  challenges presented by this financial responsibility and continued
  to maintain our high standards of financial management and fiscal
  reporting.

  Examples of FSA’s successful financial management include the
  following:                                                                  John W. Hurt, III
                                                                            Chief Financial Officer
     Internal control framework. FSA’s A-123A assessment
      tested 934 business process and 2,347 Information Technology (IT) system internal
      controls across 38 business processes (and sub-processes) and 24 IT systems,
      respectively. These 3,281 internal controls are tested on an ongoing basis. This strong
      underlying internal control framework helps FSA leverage its relatively small number of staff
      to manage loan and grant operations that impact a relatively large percentage of the U.S.
      population. Recent improvements to the internal control framework include the
      establishment of a more consistent and structured approach to audits of our loan servicers’
      controls performed by independent public accountants in accordance with Statement on
      Standards for Attestation Engagements (SSAE) Number 16, Reporting on Controls at a
      Service Organization. By clarifying the specific 578 business process and 2,114 IT controls
      tested by the independent public accountants as part of these SSAE16 audits, FSA was
      able to improve the level of control while reducing the amount of annual effort for managing
      the control environment. FSA was able to shift labor hours spent testing these controls,
      including the processing of related prepared-by-client deliverables across all servicers to
      focus on documenting the onboarding of eight new Not for Profit servicers, completing the
      servicer controls rationalization effort, and coordinating and reviewing the servicer’s
      SSAE16 efforts. In addition, new monitoring groups and monitoring tools were added to
      the control environment to better track loan servicers’ compliance with our requirements.
      Improvements in our internal control framework resulted in a reduction of a previously
      reported material weakness in internal control being reduced to an aggregated significant
      deficiency.

     Receivables and payables management. FSA aggressively manages all administrative
      and program receivables and payables in a way that demonstrates exceptional cash
      management. For example, during FY 2013, FSA processed over 8,000 Federal Family
      Education Loans partner invoices totaling over $12 billion in outlays, along with associated
      collections exceeding $4.5 billion. As of the end of this fiscal year, only 0.005 percent of
                                Federal Student Aid Annual Report–FY 2013                              81
                                                                                    Financial Section
                                                               Message from the Chief Financial Officer

    our outstanding lender receivables were over 90 days delinquent. For the administrative
    budget, the number of Intra-Governmental Payment and Collection Systems items over 30
    days old was 7, the central travel card delinquency rate was 0 percent, the purchase card
    delinquency rate was 0 percent, and the amount of penalty interest paid was only $616.11
    for $1.8 billion in total invoice payments.

   Investment management processes. In FY 2013, FSA spent $1.4 billion to deliver the
    $137.6 billion in aid and manage the $1.0 trillion loan portfolio. The $1.4 billion
    administrative budget is managed largely through FSA’s investment management
    processes. FSA uses these processes to manage all major aspects (i.e., scope, schedule,
    and cost) of the investments in order to deliver our promised performance levels. This past
    year, FSA further enhanced a number of aspects of our investment management
    processes, including baselining an Enterprise Sequencing Plan, establishing monthly
    Portfolio Reviews, and further refining our cost allocation and estimation procedures.
    These enhancements allow us to better plan for the timing and integration of all
    investments and identify gaps or deficiencies in our plans. In addition, the improvements to
    our cost management procedures allow us to identify and capture cost savings and more
    accurately predict the cost of new investments. For example, through a joint effort with the
    Customer Experience, Technology Office, and Cost Management teams, FSA was able to
    reduce Free Application for Federal Student Aid (FAFSASM) processing costs by over
    $250,000, through in-depth analysis of trends from the past two FAFSA Peak Seasons.

As part of our self-assessment of the effectiveness of internal control over financial reporting
last year, FSA reported a material weakness as of June 30, 2012 associated with the system
conversions of the ACS Education Servicing System (ACES) and of the Debt Management and
Collection System (DMCS2). The financial statement auditors also reported that same material
weakness for the period ending September 30, 2012. Starting September 30, 2012, however,
management asserted that we had made substantial progress such that the significant
deficiency was no longer a material weakness. Since that time, we have continued to make
progress on the remaining deficiencies and can report again that as of June 30, 2013, the
deficiencies related to ACES and DMCS2 do not aggregate to a material weakness. The
detailed results of this assessment effort are described further in the Analysis of Systems,
Controls and Legal Compliance section of this report.

Also, through cooperative efforts between FSA and the Department‘s Office of the Chief
Financial Officer, Office of Chief Information Officer, and Budget Service, the Department
continued to correct two significant deficiencies in credit reform estimation and information
systems controls that were identified in previous internal control reports. The complexity of
these issues has required an ongoing multi-year effort. As a result of these concerted efforts,
the auditors recognized improvements in both areas in the FY 2013 Report on Internal Control.

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

Sincerely,



John W. Hurt, III
Chief Financial Officer
December 11, 2013

                              Federal Student Aid Annual Report–FY 2013                             82
                                                                                                             Financial Section
                                                                                                    Consolidated Balance Sheet




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


                                                                                  Fiscal Year               Fiscal Year
                                                                                     2013                      2012
       Assets:
        Intragovernmental:
1001         Fund Balance with Treasury (Note 3)                              $           69,997      $             78,452
1003         Accounts Receivable (Note 4)                                                      1                         -
          Total Intragovernmental                                                         69,998                    78,452
2001     Cash and Other Monetary Assets (Note 5)                                          1,482                      1,307
2003     Accounts Receivable, Net (Note 4)                                                   90                        123
2004     Credit Program Receivables, Net (Note 6)                                       825,660                    672,835
2006     Property and Equipment, Net (Note 7)                                                 2                          6
2007     Other Assets (Note 8)                                                               13                         15
       Total Assets (Note 2)                                                  $         897,245       $            752,738

       Liabilities:
        Intragovernmental:
3001         Accounts Payable (Note 9)                                        $               1       $                  1
3002         Debt (Note 10)                                                             851,258                    714,324
3003         Guaranty Agency Federal Funds Due to Treasury (Note 5)                       1,482                      1,307
3005         Other Intragovernmental Liabilities (Note 11)                                8,786                      7,009
          Total Intragovernmental                                                       861,527                    722,641

4001     Accounts Payable (Note 9)                                                         3,942                     3,958
4002     Accrued Grant Liability (Note 12)                                                 1,727                     2,269
4003     Liabilities for Loan Guarantees (Note 6)                                              -                     1,037
4005     Other Liabilities (Note 11)                                                          55                        60
       Total Liabilities (Note 11)                                            $         867,251       $            729,965

         Commitments and Contingencies (Note 19)

       Net Position:
6001     Unexpended Appropriations (Note 13)                                  $           33,595      $             30,361
         Cumulative Results of Operations (Note 13)                                       (3,601)                   (7,588)

       Total Net Position (Note 13)                                           $           29,994      $             22,773
       Total Liabilities and Net Position                                     $         897,245       $            752,738
                                                                                                0                         0



       The accompanying notes are an integral part of these statements.




                                        Federal Student Aid Annual Report–FY 2013                                         83
                                                                                                Financial Section
                                                                                Consolidated Statement of Net Cost


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


                                                                       Fiscal Year             Fiscal Year
                                                                          2013                    2012
Program Costs
    Increase College Access, Quality, and Completion
  # Gross Costs                                               $                  13,266 $                 35,966
  # Earned Revenue                                                             (26,688)                 (25,306)
         Net Program Costs                                                      (13,422)                  10,660

  Total Program Costs                                         $                (13,422) $                10,660


    American Recovery and Reinvestment Act and
    Education Jobs Fund
  # Gross Costs                                               $                      - $                      23
  # Earned Revenue                                                                   -                         -
         Net Program Costs                                                           -                        23

  Total Program Costs                                         $                      - $                      23


Grand Total Program Costs                                     $                (13,422) $                10,683



Net Cost of Operations (Notes 14 & 17)                        $                (13,422) $                10,683




The accompanying notes are an integral part of these statements.




                                Federal Student Aid Annual Report–FY 2013                                    84
                                                                                                                                            Financial Section
                                                                                           Consolidated Statement of Changes in Net Position

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


                                                                                           Fiscal Year                                    Fiscal Year
                                                                                              2013                                           2012


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


Beginning Balances
 1.Beginning Balances                                              $                 (7,588) $                30,361 $                 (3,138) $            21,441


Budgetary Financing Sources:
  4.Appropriations Received                                         $                    - $                  44,797 $                     - $              52,927
  5.Appropriations Transferred - In/Out                                                  -                       (10)                      -                     -
  6.Other Adjustments (Rescissions, etc.)                                                -                      (261)                     (1)                 (271)
  7.Appropriations Used                                                             41,292                   (41,292)                 43,736               (43,736)
  8.Nonexchange Revenue                                                                 10                         -                       1                     -
 10.Nonexpenditure Financing Sources - Transfers-Out                                     -                         -                     (29)                    -
Other Financing Sources:
14. Imputed Financing from Costs Absorbed by Others                $                       11 $                       - $                 11 $                      -
15. Negative Subsidy Transfers, Downward Subsidy
15. Re-estimates, and Other                                                        (50,748)                           -               (37,485)                      -
Total Financing Sources                                            $                 (9,435) $                 3,234 $                 6,233 $               8,920

Net Cost of Operations                                             $                13,422 $                          - $             (10,683) $                    -

Net Change                                                         $                 3,987 $                   3,234 $                 (4,450) $             8,920

19. Ending Balances (Note 13)                                      $                 (3,601) $                33,595 $                 (7,588) $            30,361



The accompanying notes are an integral part of these statements.




                                               Federal Student Aid Annual Report–FY 2013                                                                     85
                                                                                                                               Financial Section
                                                                                              Combined Statement of Budgetary Resources

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

                                                                               Fiscal Year                          Fiscal Year
                                                                                  2013                                 2012
                                                                                      Non-Budgetary                        Non-Budgetary
                                                                                       Credit Reform                        Credit Reform
                                                                                         Financing                            Financing
                                                                       Budgetary         Accounts           Budgetary         Accounts
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1                    $         10,366    $       18,579   $         3,415    $         15,004
Recoveries of Prior Year Unpaid Obligations                                     359            35,425               488              18,649
Other Changes in Unobligated Balance (+ or -)                                 (266)          (39,189)             (499)            (20,691)
Unobligated Balance from Prior Year Budget Authority (Net)         $         10,459    $       14,815   $         3,404    $         12,962
Appropriations (Discretionary and Mandatory)                                 44,578                 -            52,919                  35
Borrowing Authority (Discretionary and Mandatory) (Note 16)                       -          194,970                  -            209,379
Spending Authority from Offsetting Collections
(Discretionary and Mandatory)                                                   711           46,926                372             47,210
Total Budgetary Resources (Note 16)                                $         55,748    $     256,711    $        56,695    $       269,586

Status of Budgetary Resources:
Obligations Incurred (Note 16)                                     $         41,798    $     245,639    $        46,329    $       251,007
Unobligated Balance, End of Year:
 Apportioned                                                                 11,952                -              8,562                  -
 Unapportioned                                                                1,998           11,072              1,804             18,579
Total Unobligated Balance, End of Year                             $         13,950    $      11,072    $        10,366    $        18,579
Total Status of Budgetary Resources (Note 16)                      $         55,748    $     256,711    $        56,695    $       269,586

Change in Obligated Balance:
 Unpaid Obligations:
  Unpaid Obligations, Brought Forward, October 1                   $         24,094    $      171,959   $         23,240   $        164,196
  Obligation Incurred                                                        41,798           245,639             46,329            251,007
  Outlays (Gross) (-)                                                      (42,153)         (220,685)           (44,987)          (224,595)
  Recoveries of Prior Year Unpaid Obligations (-)                             (359)          (35,425)              (488)           (18,649)
  Unpaid Obligations, End of Year                                  $         23,380    $      161,488   $         24,094   $        171,959
 Uncollected Payments:
  Uncollected Payments, Federal Sources, Brought Forward,
  October 1 (-)                                                    $               -   $         (4)    $              -   $            (5)
  Change in Uncollected Payments, Federal Sources (+ or -)                         -             1                     -                 1
  Uncollected Payments, Federal Sources, End of Year (-)           $               -   $         (3)    $              -   $            (4)
 Memorandum (Non-add) Entries:
  Obligated Balance, Start of Year (+ or -)                        $         24,094    $     171,955    $        23,240    $       164,191
  Obligated Balance, End of Year (+ or -)                          $         23,380    $     161,485    $        24,094    $       171,955
Budget Authority and Outlays, Net:
 Budget Authority, Gross (Discretionary and Mandatory)             $         45,289    $     241,896    $        53,291    $       256,624
 Actual Offsetting Collections (Discretionary and Mandatory) (-)              (844)          (72,601)             (559)            (64,607)
 Change in Uncollected Customer Payments from Federal
 Sources (Discretionary and Mandatory) (+ or -)                                    -               1                   -                 1
Budget Authority, Net (Discretionary and Mandatory)                $         44,445    $     169,296    $        52,732    $       192,018
Outlays, Gross (Discretionary and Mandatory)                       $         42,153    $     220,685    $         44,987   $       224,595
Actual Offsetting Collections (Discretionary and Mandatory) (-)               (844)          (72,601)              (559)           (64,607)
Outlays, Net (Discretionary and Mandatory)                                   41,309          148,084              44,428           159,988
Distributed Offsetting Receipts (-) (Note 16)                              (48,445)                 -           (40,654)                  -
Agency Outlays, net (discretionary and mandatory)
(Note 16)                                                          $         (7,136)   $     148,084    $         3,774    $       159,988


The accompanying notes are an integral part of these statements.




                                                Federal Student Aid Annual Report–FY 2013                                                     86
                                                                                     Financial Section
                                                                       Notes to the Financial Statements



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…
 Federal Student Aid (FSA) was created as a Performance Based Organization (PBO) within
 the United States (U.S.) Department of Education (the Department) under the Higher
 Education Act of 1965 (HEA) from previously existing Department student financial assistance
 program offices. FSA operates under the PBO mandate to develop a management structure
 driven by strong incentives to manage for results. FSA’s primary goal is to assist lower-income
 and middle-income students in overcoming the financial barriers that make it difficult to attend
 and complete postsecondary education. FSA is responsible for administering direct loans,
 guaranteed loans, and grant programs, as discussed below.

 The William D. Ford Federal Direct Loan (Direct Loan) Program, added to the HEA by the
 Student Loan Reform Act of 1993, authorizes FSA to make loans directly to eligible
 undergraduate and graduate students and their parents through participating schools. FSA
 borrows money from the United States Department of Treasury (Treasury) to fund the loans.
 The program does not charge interest to eligible borrowers while they are in school or in
 qualified deferment periods. Under this Direct Loan Program, 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 Federal Family Education Loan (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.

 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.

 Grant appropriations funding the Federal Pell Grant (Pell Grant) Program and campus-based
 student aid programs enable FSA to provide educational grants and other financial assistance
 to eligible applicants. Grants are not repaid to the federal government. The Pell Grant Program
 provides grant aid to low-income and middle-income undergraduate students. Awards vary in
 proportion to the financial circumstances of students and their families. The campus-based
 student aid programs provide educational grants and other financial assistance to eligible
                               Federal Student Aid Annual Report–FY 2013                             87
                                                                                     Financial Section
                                                                       Notes to the Financial Statements

applicants. These programs include the Supplemental Educational Opportunity Grant, Federal
Work Study (FWS) and Federal Perkins Loan Programs. Campus-based programs are not
material to these statements and have been included with other programs reported under grant
programs.

The 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.

The American Recovery and Reinvestment Act of 2009 (Recovery Act), enacted on
February 17, 2009, as Public Law 111-5, provided funding for improving schools, raising
students’ achievement, driving reform and producing better results for children and young
people for the long-term health of the nation. As of fiscal year 2013, this program is winding
down. The Recovery Act program has less than 1 percent remaining to be expended as of
September 30, 2013.

   Basis of Accounting and Presentation
These financial statements have been prepared to report the financial position, net cost of
operations, changes in net position, and budgetary resources of the FSA reporting group, as
required by the Chief Financial Officers Act of 1990 and the Government Management Reform
Act of 1994. The financial statements were prepared from the books and records of FSA, in
accordance with accounting principles generally accepted in the United States of America for
federal entities, issued by the Federal Accounting Standards Advisory Board, and 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 FSA’s use of
budgetary resources.

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

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

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




                              Federal Student Aid Annual Report–FY 2013                              88
                                                                                      Financial Section
                                                                        Notes to the Financial Statements

   Credit Reform Accounting: Federal Credit Reform Act
The Federal Credit Reform Act of 1990 (Credit Reform Act) 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 the Credit Reform Act, 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. The Credit Reform Act 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 Credit Reform Act 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 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
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
                              Federal Student Aid Annual Report–FY 2013                               89
                                                                                     Financial Section
                                                                       Notes to the Financial Statements

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.

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

FSA and the Department use a 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 FSA and the
Department at the time the financial statements were prepared. Assumptions and their impact
are updated after the Mid-Session Review to account for significant subsequent changes in
activity. Management has a process to review these estimates in the context of subsequent
changes in activity and assumptions, and to reflect the impact of changes, as appropriate.

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

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


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                                                                                     Financial Section
                                                                       Notes to the Financial Statements

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 and the TEACH Program. Subsidy and administrative costs of the
programs are funded by appropriations. Budgetary resources from collections are used
primarily to repay FSA’s debt to Treasury. Major sources of collections include principal and
interest collections from borrowers, related fees, and interest from Treasury on balances in
Credit Financing Accounts that make and administer loans and guarantees.

Borrowing authority is an indefinite budgetary resource authorized under the Credit Reform Act.
This resource, when realized, finances the unsubsidized portion of the Direct Loan Program,
ECASLA Programs, and the TEACH Program. In addition, borrowing authority is requested in
advance of expected collections to cover negative subsidy. Treasury prescribes the terms and
conditions of borrowing authority and lends to the Financing Account amounts as appropriate.
Amounts borrowed, but not yet disbursed, are included in uninvested funds and earn interest.
Treasury uses the same weighted average interest rates for both the interest charged on
borrowed funds and the interest earned on uninvested funds. The Department may carry
forward borrowing authority to future fiscal years provided that cohorts are disbursing loans. All
borrowings from Treasury are effective on October 1 of the current fiscal year, regardless of
when the Department borrowed the funds, except for amounts borrowed to make annual
interest payments.

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 all the cash flow activity resulting from credit reform
Financing Accounts. In compliance with A-136 guidance, the activity in the Financing Account
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 accounts.

   Entity and Non-Entity Assets
Assets are classified as either entity or non-entity assets. Entity assets are those that FSA has
authority to use for its operations. Non-entity assets are those held by FSA but not available for
use in its operations. FSA 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, 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 FSA. FSA’s records are
reconciled with those of the Treasury.

                              Federal Student Aid Annual Report–FY 2013                              91
                                                                                    Financial Section
                                                                      Notes to the Financial Statements

A portion of the general fund 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. 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
available to incur new obligations. Obligated balances not yet disbursed include receivables for
undelivered orders and unpaid expended authority.

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

Estimates for the allowance for loss on uncollectible accounts are based on historical data.

   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.

FSA and the Department disburse 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.
                              Federal Student Aid Annual Report–FY 2013                             92
                                                                                     Financial Section
                                                                       Notes to the Financial Statements

   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 FSA that are expected from the receivables over their projected lives.
Similarly, liabilities for loan guarantees are valued at the present value of the cash outflows
from FSA less the present value of related inflows. The estimated present value of net long-
term cash outflows of FSA for subsidized costs is net of recoveries, interest supplements, and
offsetting fees. FSA 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
may be prior to purchasing loans, and is recognized as subsidy expense in the Statement of
Net Cost. The cash flows of these authorities also include inflows and outflows associated with
the underlying or purchased loans and other related activities, including any positive or
negative subsidy transfers.

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




                              Federal Student Aid Annual Report–FY 2013                              93
                                                                                                Financial Section
                                                                                  Notes to the Financial Statements

   Property and Equipment, Net
In accordance with the Department’s policy, FSA capitalizes single items of property and
equipment with a cost of $50,000 or more that have an estimated useful life of two years or
more. Additionally, FSA capitalizes bulk purchases of property and equipment with an
aggregate cost of $500,000 or more. A bulk purchase is defined as the purchase of like items
related to a specific project, or the purchase of like items occurring within the same fiscal year
that have an estimated useful life 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 agency’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
FSA’s Other Assets (with the public) consist of payments made to grant recipients in advance
of their expenditures and in-process disbursements of interest benefits and special allowance
payments for the FFEL Program.

   Liabilities
Liabilities represent actual and estimated amounts to be paid as a result of transactions or
events that have already occurred. However, no liabilities can be paid by FSA or the
Department without budget authority. Liabilities for which an appropriation has not been
enacted are classified as liabilities not covered by budgetary resources, and there is no
certainty that an appropriation will be enacted. The government, acting in its sovereign
capacity, can abrogate liabilities that arise from activities other than contracts. FFEL Program
and Direct Loan Program liabilities are entitlements covered by permanent indefinite budget
authority.

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




                                  Federal Student Aid Annual Report–FY 2013                                     94
                                                                                   Financial Section
                                                                     Notes to the Financial Statements

   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. FSA 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. As discussed in the Credit Programs for Higher
Education note, the interest received by FSA from borrowers will vary from the rate paid to
Treasury. Principal and interest payments to Treasury are made annually.

   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. 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.

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

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

Contributions for CSRS, FERS, and other retirement benefits are insufficient to fund the
programs fully, and are subsidized by the Office of Personnel Management (OPM). The

                             Federal Student Aid Annual Report–FY 2013                             95
                                                                                     Financial Section
                                                                      Notes to the Financial Statements

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

   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, 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, which are payable to Treasury, but that have not yet been transferred, should be
reported on Other Financing Sources on the Statement of Changes in Net Position, Transfers-
Out was reduced by $12 million while Negative Subsidy Transfers, Downward Subsidy Re-
Estimates, and Other was increased by $12 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, costs of the ABCP Conduit will be re-estimated after the
                              Federal Student Aid Annual Report–FY 2013                             96
                                                                                                     Financial Section
                                                                                     Notes to the Financial Statements

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.

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
       With the Public:
           Cash and Other Monetary Assets                               $         1,482     $            1,307
           Credit Program Receivables, Net                                          369                    351
           Accounts Receivable, Net                                                  30                     28
    Total With the Public                                                         1,881                  1,686
    Total Non-Entity Assets                                                       1,881                  1,686
    Entity Assets                                                               895,364                751,052
    Total Assets                                                        $       897,245     $          752,738


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 consist of deposit fund and receipt 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                                                           $      35,832       $       33,139
    Revolving Funds                                                                34,148                  45,299
    Special Funds                                                                      17                      14
    Fund Balance with Treasury                                              $      69,997       $          78,452


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.




                                   Federal Student Aid Annual Report–FY 2013                                        97
                                                                                                              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                                                                 $        11,952           $       8,562
      Unavailable                                                                        11,588                  19,076
    Obligated Balance, Not Yet Disbursed                                                 46,457                  50,814
    Fund Balance with Treasury                                                  $        69,997           $      78,452


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
FSA, 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                      $                   1           $               -          $                  1
    With the Public                                         103                         (13)                         90

    Total                                  $                104            $            (13)          $              91


                                                                                 2012
                                                 Gross
                                               Receivables                     Allowance               Net Receivables

    Intragovernmental                      $                    -          $               -          $                  -
    With the Public                                         123                            -                         123

    Total                                  $                123            $               -          $              123




                                  Federal Student Aid Annual Report–FY 2013                                                  98
                                                                                             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 program and the William D. Ford Federal Direct Loan program. The
Health Care and Education Reconciliation Act of 2010 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

                                  Federal Student Aid Annual Report–FY 2013                                  99
                                                                                       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 guarantee 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-
                               Federal Student Aid Annual Report–FY 2013                              100
                                                                                        Financial Section
                                                                         Notes to the Financial Statements

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.
The estimated FFEL liability for loan guarantees is reported as the present value of estimated
net cash outflows. Defaulted FFEL loans are reported net of an allowance for subsidy
computed using net present value methodology, including defaults, collections, and loan
cancellations. The same methodology is used to estimate the allowance on Direct Loan
receivables.
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. FSA 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.
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


                               Federal Student Aid Annual Report–FY 2013                                101
                                                                                             Financial Section
                                                                               Notes to the Financial Statements

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 InterBank Offered Rate
initiative.

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


                                                                            2013             2012
    Direct Loan Program Loan Receivables, Net                           $    679,107     $     526,035
    FFEL Program
      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 Program Loan Receivables, Net                        369              351
    TEACH Program Receivables, Net                                                 453              344

    Total                                                               $    825,660     $     672,835




                                    Federal Student Aid Annual Report–FY 2013                              102
                                                                                             Financial Section
                                                                               Notes to the Financial Statements

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
      Receivables                                                        613,860               493,959
    Allowance for Subsidy                                                 65,247                32,076

    Direct Loan Program Total                                       $    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 Student Aid Annual Report–FY 2013                                  103
                                                                                              Financial Section
                                                                                Notes to the Financial Statements

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. 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
         Receivables                                                       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
         Receivables                                                       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
           Receivables                                                     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
           Receivables                                                     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
           Receivables                                                      2,401                 2,171
        Allowance for Subsidy                                               (537)                 (440)
      ABCP Conduit, Net                                                     1,864                 1,731

    FFEL Program Total                                               $     145,731       $      146,105


All loans purchased by the Department under the temporary loan purchase authority are
defaulted and non-defaulted federal assets.
                                 Federal Student Aid Annual Report–FY 2013                                  104
                                                                                                                    Financial Section
                                                                                                Notes to the Financial Statements

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.
TEACH 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.


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.




                                         Federal Student Aid Annual Report–FY 2013                                                 105
                                                                                                                    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, as
under federal Generally Accepted Accounting Principles, 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
presents both years.




                                         Federal Student Aid Annual Report–FY 2013                                                      106
                                                                                                    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
      Direct Asset Activities 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 Cancellations                                                            197                    157
      Direct Asset Activities 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
                                    Federal Student Aid Annual Report–FY 2013                                     107
                                                                                                       Financial Section
                                                                                       Notes to the Financial Statements

capabilities, the Department is now accruing interest on a monthly basis. In addition, no
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
                                  Federal Student Aid Annual Report–FY 2013                                         108
                                                                                                 Financial Section
                                                                                   Notes to the Financial Statements

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.

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 were 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
                                  Federal Student Aid Annual Report–FY 2013                                    109
                                                                                                                     Financial Section
                                                                                              Notes to the Financial Statements

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.


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



                                Federal Student Aid Annual Report–FY 2013                                                           110
                                                                                                          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                    $                129     $       (127)      $               2
    Furniture and Fixtures                                                   2             (2)                      -

    Property and Equipment, Net                         $                131     $       (129)      $               2


                                                                                    2012
                                                                                 Accumulated            Net Asset
                                                                Cost             Depreciation            Value

    Information Technology, Internal Use Software,
    and Telecommunications Equipment                     $               125     $       (119)      $           6
    Furniture and Fixtures                                                   2             (2)                      -

    Property and Equipment, Net                         $               127      $       (121)      $           6


The depreciation expense has not changed from FY 2012 and remains $8 million as of
September 30, 2013.
The majority of the asset costs relate to financial management systems and other information
technology and communications improvements. The Department acquires information
technology to enhance its capabilities to manage student loan and grant operations.

Leases
FSA leases information technology and telecommunications equipment as part of a contractor-
owned contractor-operated services contract. Lease payments associated with the equipment
are classified as operating leases and as such are expensed as incurred. The non-cancelable
lease term is one year, with the right to extend the lease term by exercising additional one-year
options.

Note 8.         Other Assets
Other Assets (with the public) consist of payments made to grant recipients in advance of their
expenditures and in-process invoices for interest benefits and special allowances for the FFEL
Program. Other Assets (with the public) were $13 million and $15 million as of
September 30, 2013 and 2012, respectively.




                                   Federal Student Aid Annual Report–FY 2013                                            111
                                                                                                  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                                                                      237                    200
       FFEL Claim Payments                                                           52                   163
    Contractual Services                                                           172                      -
    Other                                                                          (15)                    23
    Accounts Payable to the Public                                               3,942                  3,958

    Intragovernmental Accounts Payable                                               1                     1

    Total Accounts Payable                                            $          3,943     $            3,959


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.




                                  Federal Student Aid Annual Report–FY 2013                                     112
                                                                                                     Financial Section
                                                                                       Notes to the Financial Statements

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

                                                                           2013
                                    Beginning                                                              Ending
                                     Balance                   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
Total                           $       714,324            $            179,931    $     (42,997)     $       851,258

                                                                            2012
                                    Beginning                                                             Ending
                                     Balance                  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
Total                           $       546,264           $         193,160        $    (25,100)      $      714,324



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
and TEACH programs had increased borrowings.
The maturity date for borrowing from Treasury is based on the time period used in subsidy
calculation, not on 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.




                                Federal Student Aid Annual Report–FY 2013                                               113
                                                                                                                         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
         Employer Contributions and Payroll Taxes                $           2          $          -     $        2      $          -
         Accrued Payroll and Benefits                                            -                 9               -            9
         Deferred Revenue                                                        -            31                   -           36
         Liabilities in Miscellaneous Receipt Accounts                  6,050                      -          3,749                 -
    Total Other Liabilities Covered by Budgetary
    Resources                                                           6,052                 40              3,751            45
    Liabilities Not Covered by Budgetary Resources
      Current
         Accrued Unfunded Annual Leave                                           -            10                   -           10
      Non-Current
         Accrued Unfunded FECA Liability                                     1                     -              2                 -
         Liabilities in Miscellaneous Receipt Accounts                    358                      -            342                 -
                              1
         Capital Transfers                                              2,375                      -          2,914                 -
         Accrued FECA Actuarial Liability                                        -                 5               -            5
    Total Other Liabilities Not Covered by Budgetary
    Resources                                                           2,734                 15              3,258            15

    Other Liabilities                                            $      8,786           $     55        $     7,009      $     60
            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 $2,749 million and
$3,273 million as of September 30, 2013 and 2012, respectively.
As of September 30, 2013 and 2012, liabilities on the Balance Sheet totaled $867.3 billion and
$730.0 billion, respectively. Of this amount, liabilities covered by budgetary resources totaled
$864.5 billion as of September 30, 2013, and $726.6 billion as of September 30, 2012.



                                         Federal Student Aid Annual Report–FY 2013                                                      114
                                                                                                         Financial Section
                                                                                          Notes to the Financial Statements

Note 12.        Accrued Grant Liability
FSA’s Accrued Grant Liability was $1,727 million and $2,269 million as of September 30, 2013
and 2012, respectively.

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                                                          $           11,952        $          8,562
      Not Available                                                                     403                     294
    Undelivered Orders                                                               21,240                  21,505

    Unexpended Appropriations                                            $           33,595        $         30,361


FSA had Cumulative Results of Operations of $(3,601) million and $(7,588) million as of
September 30, 2013 and 2012, respectively. Cumulative Results of Operations consists mostly
of unfunded upward subsidy re-estimates, other unfunded expenses, and net investments of
capitalized assets.
Other Financing Sources on the Statement of Changes in Net Position was primarily comprised
of negative subsidy transfers, downward subsidy re-estimates, capital transfers, and other, as
of September 30, 2013 and 2012 as presented in the following table:
                Negative Subsidy Transfers, Downward 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)
  Grants                                   -                         -                  (52)             (52)
  TEACH                                    -                      (18)                     -             (18)
  Total                           $ (27,010)             $    (23,686)       $          (52)       $ (50,748)


                                                                  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)
  Grants                                   -                         -                   (35)            (35)
  TEACH                                    -                         -                      -               -
  Total                           $ (22,907)             $    (14,674)           $        96       $ (37,485)




                                Federal Student Aid Annual Report–FY 2013                                             115
                                                                                                Financial Section
                                                                                  Notes to the Financial Statements

Note 14.       Intragovernmental Cost and Exchange Revenue by Program
As required by the Government Performance and Results Act Modernization Act of 2010,
FSA’s reporting organization has been aligned with Strategic Goal 1 presented in the
Department’s Strategic Plan 2011—2014. Strategic Goal 1, Increase college access, quality,
and completion by improving higher education and lifelong learning opportunities for youth and
adults, is a sharply defined directive that guides divisions to carry out the vision and
programmatic mission of FSA.
The goals of the Recovery Act are consistent with the Department’s current strategic goals and
programs. For reporting purposes, an American Recovery and Reinvestment Act net cost
program has been created. 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.
Gross costs and earned revenue are classified as intragovernmental (exchange transactions
between FSA and other entities within the federal government) or with the public (exchange
transactions between FSA and non-federal entities). “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 table presents FSA's gross
cost and exchange revenue by program for FY 2013 and FY 2012.

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

                                                                           2013                 2012


    Increase College Access, Quality, and Completion
    Intragovernmental Gross Cost                                       $     28,513         $      26,750
    Public Gross Cost                                                       (15,247)                   9,216
      Total Gross Program Costs                                              13,266                35,966
    Intragovernmental Earned Revenue                                         (3,685)               (5,343)
    Public Earned Revenue                                                   (23,003)              (19,963)
     Total Program Earned Revenue                                           (26,688)              (25,306)
    Total Program Cost                                                      (13,422)               10,660


    American Recovery and Reinvestment Act
    Intragovernmental Gross Cost                                                    -                      -
    Public Gross Cost                                                               -                     23
      Total Gross Program Costs                                                     -                     23
    Intragovernmental Earned Revenue                                                -                      -
    Public Earned Revenue                                                           -                      -
     Total Program Earned Revenue                                                   -                      -
    Total Program Cost                                                              -                     23


    Net Cost of Operations                                             $     (13,422)       $          10,683




                                   Federal Student Aid Annual Report–FY 2013                                    116
                                                                                                                  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
    Total                                $ 28,421      $ (1,783)      $ 26,638             $   4,037   $ 22,601   $ 26,638


                                                                                    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
    Total                                $ 26,620      $ (1,440)       $ 25,180            $   5,254   $ 19,926 $ 25,180



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.




                                    Federal Student Aid Annual Report–FY 2013                                                  117
                                                                                               Financial Section
                                                                                 Notes to the Financial Statements

Note 16.       Statement of Budgetary Resources
The Statement of Budgetary Resources compares budgetary resources with the status of those
resources. As of September 30, 2013, budgetary resources were $312,459 million and net
agency outlays were $140,948 million. As of September 30, 2012, budgetary resources were
$326,281 million and net agency outlays were $163,762 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 Category
Obligations incurred by apportionment category, as of September 30, 2013 and 2012,
consisted of the following:
                       Obligations Incurred by Apportionment Category
                                              (Dollars in Millions)

                                                                          2013                2012
    Direct:
      Category A                                                      $        1,019     $           980
      Category B                                                             286,137             295,938
      Exempt from Apportionment                                                  281                 418

    Obligations Incurred                                              $      287,437     $       297,336


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.




                                  Federal Student Aid Annual Report–FY 2013                                  118
                                                                                                                    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                             $        145,238           $        141,977
Current Year Borrowing Authority                                                   194,970                    209,379
Funds Drawn From Treasury                                                         (179,931)                  (193,160)
Borrowing Authority Withdrawn                                                      (21,866)                   (12,958)

Ending Balance, Unused Borrowing Authority                                $        138,411           $        145,238


FSA is given authority to draw funds from Treasury to finance the Direct Loan, FFEL, and
TEACH Programs. Unused Borrowing Authority is a budgetary resource and is available to
support obligations. FSA periodically reviews its borrowing authority balances in relation to its
obligations and may cancel unused amounts.

    Undelivered Orders at the End of the Period
Undelivered orders, as of September 30, 2013 and 2012, consisted of the following:
                                           Undelivered Orders
                                                  (Dollars in Millions)

                                                                                     2013                       2012
    Budgetary                                                                 $           21,304         $            21,573
    Non-Budgetary                                                                        158,444                     168,791

    Undelivered Orders (Unpaid)                                               $          179,748         $           190,364


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 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
      TEACH Program                                                                             17                          -
      Total Negative Subsidies and Downward Re-estimates                                    48,399                     40,629
    Other                                                                                       46                         25

    Distributed Offsetting Receipts                                           $             48,445       $             40,654

                                  Federal Student Aid Annual Report–FY 2013                                                      119
                                                                                  Financial Section
                                                                    Notes to the Financial Statements

   Explanation of Differences Between the Statement of Budgetary Resources and the
   Budget of the United States Government
Budgetary accounting as shown in the President’s Budget includes a public enterprise fund that
reflects the gross obligations by the FFEL Program for the estimated activity of the
consolidated Federal Funds of the guaranty agencies. Ownership by the federal government is
independent of the actual control of the assets. Since the actual operation of the Federal Fund
is independent from the Department’s direct control, budgetary resources and obligations are
estimated and disclosed in the President’s Budget to approximate the gross activities of the
combined Federal Funds. Amounts reported on the FY 2012 Statement of Budgetary
Resources for the Federal Fund are compiled through combining all guaranty agencies’ annual
reports to determine a net valuation amount for the Federal Fund.




                             Federal Student Aid Annual Report–FY 2013                            120
                                                                                                       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                                                           $     287,437    $      297,336
   Spending Authority from Offsetting Collections and Recoveries                      (109,229)           (84,302)
   Offsetting Receipts                                                                 (48,445)           (40,654)
   Net Budgetary Resources Obligated                                                    129,763           172,380
   Transfers In/Out Without Reimbursements (+/-)                                            (10)                 -
   Imputed Financing from Costs Absorbed by Others                                            11                11
   Other Financing Sources                                                             (50,748)           (37,477)
   Net Other Resources                                                              (50,747)              (37,466)
   Net Resources Used to Finance Activities                                           79,016              134,914
   Resources Used or Generated for Items Not Part of the Net Cost of Operations:
   Increase/(Decrease) in Budgetary Resources Obligated but Not Yet
   Provided                                                                           10,168               (9,073)
   Resources that Fund Subsidy Re-estimates Accrued in Prior Period                  (3,922)                 3,329
   Credit Program Collections                                                         58,293               52,178
   Acquisition of Fixed Assets                                                            (2)                    -
   Acquisition of Net Credit Program Assets or Liquidation of Liabilities for Loan
   Guarantees                                                                      (191,364)             (197,846)
   Resources from Non-Entity Activity                                                 50,923                37,512
   Net Resources That Do Not Finance the Net Cost of Operations                     (75,904)             (113,900)
   Net Resources Used to Finance the Net Cost of Operations                       3,112              21,014
   Components of the Net Cost of Operations That Will Not Require or Generate Resources in the Current
   Period:
   Depreciation                                                                       8                     8
   Subsidy Amortization and Interest on the Liability for Loan Guarantees         8,100                4,239
   Other                                                                             20                  (16)
   Total Components Not Requiring or Generating Resources                         8,128                4,231
   Accrued Re-estimates of Credit Subsidy Expense                                       (2,382)              3,922
   Increase in Exchange Revenue Receivable from the Public                             (22,288)           (18,441)
   Other                                                                                      8                (43)
   Total Components Requiring or Generating Resources in Future
   Periods                                                                             (24,662)           (14,562)
   Total Components That Will Not Require or Generate Resources in the
   Current Period                                                                      (16,534)           (10,331)
   Net Cost of Operations                                                     $        (13,422)    $       10,683




                                   Federal Student Aid Annual Report–FY 2013                                          121
                                                                                      Financial Section
                                                                       Notes to the Financial Statements

Note 18.      American Recovery and Reinvestment Act of 2009
The Recovery Act provided $16,543 million for student aid administration and student financial
assistance programs managed and administered by FSA. Funds provided for student financial
assistance programs included additional Pell Grant authority for low and middle-income
undergraduate students, an increase to the per Pell grant amount, and additional funding made
available in the federal work study program. Additional student aid administration funding was
provided to increase the number of Title IV student loan servicing vehicles and to improve
operational performance to collect and deliver loan and grant data. As of September 30, 2013,
$16,542 million has been expended and one million dollars remains available for expenditure;
which has remained the same since September 30, 2012.
Note 19.      Contingencies
   Guaranty Agencies
FSA may assist guaranty agencies experiencing financial difficulties. No provision has been
made in the financial statements for potential liabilities. FSA 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 $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.
   Litigation and Other Claims
The Department is involved in various lawsuits incidental to its operations. In the opinion of
management, the ultimate resolution of pending litigation will not have a material effect on
FSA’s financial position.
   Other Matters
Some portion of the current-year financial assistance expenses (grants) may include funded
recipient expenditures that are subsequently disallowed through program review or audit
processes. In the opinion of management, the ultimate disposition of these matters will not
have a material effect on the FSA’s financial position.




                              Federal Student Aid Annual Report–FY 2013                            122
                                                                                                       Financial Section
                                                                        Required Supplementary Stewardship Information



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

  Year to date expenses incurred for human capital investments consisted of the following as of
  September 30, 2013 and the preceding four fiscal year ends:

                                  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)
    FFEL Program Subsidy                         (8,753)         (14,381)       (16,126)    (14,344)    (29,940)
    Perkins Loans, Pell and Other Grant          33,542            34,310        39,008      26,799      17,302
    Recovery Act                                        0                23            18     8,869       7,571
    Salaries and Administrative                      222                192         193         208         186
   Total                                       ($14,546)           $9,424       ($5,537)    $19,965    ($14,484)


  The William D. Ford Federal Direct Loan (Direct Loan) Program is a direct-lending program in
  which loan capital is provided to students by the federal government through borrowings from
  the United States (U.S.) Department of Treasury. This program has expanded dramatically
  since the passage of 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),
  under which no new loan originations were permitted to be made from the Federal Family
  Education Loan (FFEL) program after June 30, 2010, so that loans that may have previously
  been made through the FFEL program are now made through the Direct Loan Program. In
  addition, the Special Direct Consolidation Loan (SDCL) initiative allowed borrowers who had
  at least one Direct Loan Program loan or U.S. Department of Education (the Department)-held
  FFEL Program loan and at least one commercially-held FFEL Program loan to consolidate
  their eligible commercially-held FFEL Program loans into a SDCL during a limited window of
  time from January 17 through June 30, 2012. In addition, borrowers were allowed to add
  additional eligible loans within the 180-day period after the initial SDCL had been made.

  The FFEL Loan Program has originated no new loans since June 30, 2010, but its permanent
  budget authority allows it to continue to operate with state and private nonprofit guaranty
  agencies to honor loan guarantees and for the Department to pay interest supplements on
  outstanding loans by private lenders to eligible students. The FFEL Loan Program expenses
  include the Loan Participation Purchase and Loan Purchase Commitment expenses of
  $(377) million and $(544) million respectively.

  Perkins Loan and Grant programs include the Federal Pell Grant Program that awards direct
  grants through participating institutions to undergraduate students with financial need.
  Participating institutions either credit the appropriated funds to the student’s school account or
  pay the student directly once per term.




                                     Federal Student Aid Annual Report–FY 2013                                     123
                                                                                      Financial Section
                                                         Required Supplementary Stewardship Information

The Teacher Education Assistance for College and Higher Education (TEACH) Grant program
awards annual grants to students who agree to teach in a high-need subject area in a public
or private elementary or secondary school that serves low-income students. If the students do
not satisfy their agreement to serve, the grants are converted to Direct Unsubsidized Loans.
The President’s 2013 Budget proposes to overhaul the TEACH Grant program as of the end
of the 2012–2013 academic year, and replace it with a new, targeted teacher recruitment and
retention program called the Presidential Teaching Fellows. This new program would provide
grants to states that meet certain conditions to supply scholarships of up to $10,000 to
talented individuals attending the most effective programs in the state. These individuals
would commit to teaching for at least three years in a high need school and subject. To be
eligible for funds, states would measure the effectiveness of their teacher preparation
programs based on the student achievement data of their graduates among other measures;
hold teacher preparation programs accountable for results; and upgrade licensure and
certification standards.

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

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

Returns, or benefits, of investing in education come in many forms. While some returns
accrue for the individual, others benefit society and the nation in general. Returns related to
the individual include higher earnings, better job opportunities, and jobs that are less sensitive
to general economic conditions. Returns related to the economy and society include reduced
reliance on welfare subsidies, increased participation in civic activities and greater
productivity.

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




                              Federal Student Aid Annual Report–FY 2013                              124
                                                                                                                                            Financial Section
                                                                                                                    Required Supplementary Information



   Required Supplementary Information

                                               United States Department of Education
                                                          Federal Student Aid
                                              Combining Statement of Budgetary Resources
                                                    For the Year Ended September 30, 2013
                                                                       (Dollars in Millions)

                                                                                                             American
                                                                                                          Recovery and
                                                                          Combined                       Reinvestment Act        Non-ARRA Combined
                                                                             Non-Budgetary                                               Non-Budgetary
                                                                             Credit Reform                                                Credit Reform
                                                                               Financing                                                    Financing
                                                                   Budgetary   Accounts                      Budgetary         Budgetary    Accounts
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1                    $    10,366 $             18,579      $                -    $   10,366 $       18,579
Recoveries of Prior Year Unpaid Obligations                                359               35,425                       1           358         35,425
Other Changes in Unobligated Balance (+ or -)                             (266)             (39,189)                      -          (266)       (39,189)
Unobligated Balance from Prior Year Budget Authority (Net)         $    10,459 $             14,815      $                1    $   10,458 $       14,815
Appropriations (Discretionary and Mandatory)                            44,578                    -                       -        44,578              -
Borrowing Authority (Discretionary and Mandatory) (Note 16)                  -             194,970                        -             -       194,970
Spending Authority from Offsetting Collections
(Discretionary and Mandatory)                                               711                46,926                     -          711         46,926
Total Budgetary Resources (Note 16)                                $    55,748     $       256,711       $                1    $   55,747   $   256,711
Status of Budgetary Resources:
Obligations Incurred (Note 16)                                     $    41,798     $       245,639       $                1    $   41,797   $   245,639
Unobligated Balance, End of Year:
 Apportioned                                                            11,952                      -                     -        11,952             -
 Unapportioned                                                           1,998                 11,072                     -         1,998        11,072
Total Unobligated Balance, End of Year                             $    13,950     $           11,072    $                -    $   13,950   $    11,072
Total Status of Budgetary Resources (Note 16)                      $    55,748     $       256,711       $                1    $   55,747   $   256,711
Change in Obligated Balance:
 Unpaid Obligations:
  Unpaid Obligations, Brought Forward, October 1                   $     24,094 $          171,959       $                1    $    24,093 $     171,959
  Obligation Incurred                                                    41,798            245,639                        1         41,797       245,639
  Outlays (Gross) (-)                                                   (42,153)          (220,685)                        -       (42,153)     (220,685)
  Recoveries of Prior Year Unpaid Obligations (-)                          (359)            (35,425)                     (1)          (358)       (35,425)
  Unpaid Obligations, End of Year                                  $     23,380 $          161,488       $                1    $    23,379 $     161,488
 Uncollected Payments:
  Uncollected Payments, Federal Sources, Brought Forward,
  October 1 (-)                                                    $           -   $               (4)   $                -    $        -   $          (4)
  Change in Uncollected Payments, Federal Sources (+ or -)                     -                    1                     -             -               1
  Uncollected Payments, Federal Sources, End of Year (-)           $           -   $               (3)   $                -    $        -   $          (3)
 Memorandum (Non-add) Entries:
  Obligated Balance, Start of Year (+ or -)                        $    24,094     $       171,955       $                1    $   24,093   $   171,955
  Obligated Balance, End of Year (+ or -)                          $    23,380     $       161,485       $                1    $   23,379   $   161,485
Budget Authority and Outlays, Net:
 Budget Authority, Gross (Discretionary and Mandatory)             $    45,289 $           241,896       $                -    $   45,289 $     241,896
 Actual Offsetting Collections (Discretionary and Mandatory) (-)          (844)             (72,601)                      -          (844)       (72,601)
 Change in Uncollected Customer Payments from Federal
 Sources (Discretionary and Mandatory) (+ or -)                                -                   1                      -             -              1
Budget Authority, Net (Discretionary and Mandatory)                $    44,445     $       169,296       $                -    $   44,445   $   169,296
Outlays, Gross (Discretionary and Mandatory)                       $     42,153 $          220,685       $                -    $    42,153 $    220,685
Actual Offsetting Collections (Discretionary and Mandatory) (-)            (844)            (72,601)                      -           (844)      (72,601)
Outlays, Net (Discretionary and Mandatory)                               41,309            148,084                        -         41,309      148,084
Distributed Offsetting Receipts (-) (Note 16)                           (48,445)                  -                       -        (48,445)            -
Agency Outlays, net (discretionary and mandatory)
(Note 16)                                                          $     (7,136) $         148,084       $                -    $   (7,136) $    148,084




                                                            Federal Student Aid Annual Report–FY 2013                                                        125
                                                                                                                                  Financial Section
                                                                                                             Required Supplementary Information



                                             United States Department of Education
                                                      Federal Student Aid
                                          Combining Statement of Budgetary Resources
                                                  For the Year Ended September 30, 2013
                                                                      (Dollars in Millions)


                                                                       Direct Student Loan Program                    Teach Grant Program
                                                                                       Non-Budgetary                             Non-Budgetary
                                                                                       Credit Reform                             Credit Reform
                                                                                         Financing                                 Financing
                                                                       Budgetary         Accounts                   Budgetary       Accounts
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1                   $                    -      $     3,016       $             9 $              -
Recoveries of Prior Year Unpaid Obligations                                            -           23,229                     1               20
Other Changes in Unobligated Balance (+ or -)                                          -          (26,086)                   (6)             (20)
Unobligated Balance from Prior Year Budget Authority (Net)        $                    -      $       159       $             4 $              -
Appropriations (Discretionary and Mandatory)                                       3,274                -                   15                 -
Borrowing Authority (Discretionary and Mandatory) (Note 16)                            -          193,721                     -              128
Spending Authority from Offsetting Collections
(Discretionary and Mandatory)                                                          -           25,917                    -                26
Total Budgetary Resources (Note 16)                               $                3,274      $   219,797       $           19    $          154
Status of Budgetary Resources:
Obligations Incurred (Note 16)                                    $                3,274      $   216,446       $           15    $          153
Unobligated Balance, End of Year:
 Apportioned                                                                             -              -                    -                 -
 Unapportioned                                                                           -          3,351                    4                 1
Total Unobligated Balance, End of Year                            $                      -    $     3,351       $            4    $            1
Total Status of Budgetary Resources (Note 16)                     $                3,274      $   219,797       $           19    $          154
Change in Obligated Balance:
 Unpaid Obligations:
  Unpaid Obligations, Brought Forward, October 1                  $                     - $         86,011      $              5 $            82
  Obligation Incurred                                                               3,274          216,446                   15              153
  Outlays (Gross) (-)                                                              (3,274)        (191,612)                 (15)            (140)
  Recoveries of Prior Year Unpaid Obligations (-)                                       -          (23,229)                   (1)            (20)
  Unpaid Obligations, End of Year                                 $                     - $         87,616      $              4 $            75
 Uncollected Payments:
  Uncollected Payments, Federal Sources, Brought Forward,
  October 1 (-)                                                   $                      -    $          -      $             -   $           (4)
  Change in Uncollected Payments, Federal Sources (+ or -)                               -               -                    -                1
  Uncollected Payments, Federal Sources, End of Year (-)          $                      -    $          -      $             -   $           (3)
 Memorandum (Non-add) Entries:
  Obligated Balance, Start of Year (+ or -)                       $                      -    $    86,011       $            5    $           78
  Obligated Balance, End of Year (+ or -)                         $                      -    $    87,616       $            4    $           72
Budget Authority and Outlays, Net:
Budget Authority, Gross (Discretionary and Mandatory)             $                3,274      $   219,638       $           15    $          154
Actual Offsetting Collections (Discretionary and Mandatory) (-)                        -          (42,913)                   -               (30)
Change in Uncollected Customer Payments from Federal
Sources (Discretionary and Mandatory) (+ or -)                                         -                -                     -                1
Budget Authority, Net (Discretionary and Mandatory)               $                3,274 $        176,725       $            15 $            125
Outlays, Gross (Discretionary and Mandatory)                      $                3,274 $        191,612       $            15 $            140
Actual Offsetting Collections (Discretionary and Mandatory) (-)                        -          (42,913)                    -              (30)
Outlays, Net (Discretionary and Mandatory)                                         3,274          148,699                    15              110
Distributed Offsetting Receipts (-) (Note 16)                                    (38,436)               -                   (17)               -
Agency Outlays, net (discretionary and mandatory)
(Note 16)                                                         $              (35,162) $       148,699       $            (2) $           110




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                                                                                                         Required Supplementary Information



                                          United States Department of Education
                                                    Federal Student Aid
                                        Combining Statement of Budgetary Resources
                                                For the Year Ended September 30, 2013
                                                                  (Dollars in Millions)


                                                                     Federal Family Education        Perkins Loans       Administrative
                                                                          Loan Program                and Grants            Funds
                                                                                Non-Budgetary
                                                                                Credit Reform
                                                                                   Financing
                                                                    Budgetary      Accounts              Budgetary           Budgetary
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1                    $        1,511 $        15,563    $         8,741     $           105
Recoveries of Prior Year Unpaid Obligations                                    19          12,176                308                  30
Other Changes in Unobligated Balance (+ or -)                                (222)        (13,083)               (38)                  -
Unobligated Balance from Prior Year Budget Authority (Net)         $        1,308 $        14,656    $         9,011     $           135
Appropriations (Discretionary and Mandatory)                                3,102               -             36,853               1,334
Borrowing Authority (Discretionary and Mandatory) (Note 16)                     -           1,121                  -                   -
Spending Authority from Offsetting Collections
(Discretionary and Mandatory)                                                 711         20,983                   -                   -
Total Budgetary Resources (Note 16)                                $        5,121     $   36,760     $        45,864     $         1,469
Status of Budgetary Resources:
Obligations Incurred (Note 16)                                     $        3,525     $   29,040     $        33,609     $         1,374
Unobligated Balance, End of Year:
 Apportioned                                                                    -              -              11,896                 56
 Unapportioned                                                              1,596          7,720                 359                 39
Total Unobligated Balance, End of Year                             $        1,596     $    7,720     $        12,255     $           95
Total Status of Budgetary Resources (Note 16)                      $        5,121     $   36,760     $        45,864     $         1,469
Change in Obligated Balance:
 Unpaid Obligations:
  Unpaid Obligations, Brought Forward, October 1                   $           36 $        85,866    $         23,471    $           581
  Obligation Incurred                                                       3,525          29,040              33,609              1,374
  Outlays (Gross) (-)                                                      (3,507)        (28,933)            (34,042)            (1,315)
  Recoveries of Prior Year Unpaid Obligations (-)                             (19)        (12,176)               (308)               (30)
  Unpaid Obligations, End of Year                                  $           35 $        73,797    $         22,730    $           610
 Uncollected Payments:
  Uncollected Payments, Federal Sources, Brought Forward,
  October 1 (-)                                                    $              -   $         -    $               -   $               -
  Change in Uncollected Payments, Federal Sources (+ or -)                        -             -                    -                   -
  Uncollected Payments, Federal Sources, End of Year (-)           $              -   $         -    $               -   $               -
 Memorandum (Non-add) Entries:
  Obligated Balance, Start of Year (+ or -)                        $            36    $   85,866     $        23,471     $          581
  Obligated Balance, End of Year (+ or -)                          $            35    $   73,797     $        22,730     $          610
Budget Authority and Outlays, Net:
Budget Authority, Gross (Discretionary and Mandatory)              $        3,813 $        22,104    $        36,853     $         1,334
Actual Offsetting Collections (Discretionary and Mandatory) (-)              (844)        (29,658)                 -                   -
Change in Uncollected Customer Payments from Federal
Sources (Discretionary and Mandatory) (+ or -)                                  -               -                  -                   -
Budget Authority, Net (Discretionary and Mandatory)                $        2,969 $        (7,554)   $        36,853     $         1,334
Outlays, Gross (Discretionary and Mandatory)                       $        3,507 $        28,933    $        34,042     $         1,315
Actual Offsetting Collections (Discretionary and Mandatory) (-)              (844)        (29,658)                 -                   -
Outlays, Net (Discretionary and Mandatory)                                  2,663            (725)            34,042               1,315
Distributed Offsetting Receipts (-) (Note 16)                              (9,946)              -                (46)                  -
Agency Outlays, net (discretionary and mandatory)
(Note 16)                                                          $       (7,283) $        (725)    $        33,996     $         1,315




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Other Information

                                                            Department of Education
                                                              Federal Student Aid
                                                             Schedule of Spending
                                                  For Year Ended September 30, 2013 and 2012
                                                                    (Dollars in Millions)



                                                                                      September, 2013                         September, 2012

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



The Schedule of Spending presents the total amounts agreed to be spent 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 this schedule are the same as the obligations incurred amounts reported on the Statement of
Budgetary Resources, which 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, a searchable website established by the Office of Management and Budget, provides
information on federal awards and is accessible to the public.



Section I: What Money is Available to Spend?
This section presents resources that were available to spend by the Department.
    Total Resources                                                    $         55,748                    256,711 $         56,695             269,586
    Amount Available but Not Agreed to be Spent                                 (11,952)                       -             (8,562)                -
    Amount Not Available to be Spent                                             (1,998)                   (11,072)          (1,804)            (18,579)
Total Amounts Agreed to be Spent                                         $            41,798               245,639 $         46,329             251,007



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              141,500 $              55            154,291
    Credit Program Subsidy Transfers                                                   6,391                48,399            8,312              40,629
    Federal Interest Payments                                                            -                  28,423              -                26,620
    Other Credit Program Payments                                                           3                1,692                 4              2,581
    Federal Student Loan Reserve Fund Valuation                                          279                   -                419                 -
    Grants                                                                            34,038                   -             34,963                 -
    Personnel Compensation and Benefits                                                  174                   -                177                 -
    Contractual Services                                                               1,165                   671            1,016                 474
    Rent, Utilities, and Communication                                                     18                  -                  13                -
    Land, Structures, and Equipment                                                         3                  -                   3                -
    Travel and Transportation                                                               2                  -                   2                -
    Other 1/                                                                                1                  -                   2                -
                                                                         $            42,153               220,685 $         44,966             224,595


American Recovery and Reinvestment Act and Education Jobs Fund
  Grants                                                    $                                -                 -     $           21                 -
                                                            $                                -                 -     $           21                 -


Total Spending                                                           $            42,153               220,685 $         44,987             224,595

       Amounts Remaining to be Spent2/                                                      (355)           24,954            1,342              26,412
Total Amounts Agreed to be Spent                                         $            41,798               245,639 $         46,329             251,007



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.




                                            Federal Student Aid Annual Report–FY 2013                                                                      157
                                                                                  Other Information



Improper Payment Information Act Reporting Details

For improper payments information, FSA’s activities are part of an overall Departmental
integrated reporting effort. Please refer to the Improper Payments Reporting Details
narrative found in the Other Information section located within the Department's AFR.


Summary of Financial Statement Audit and Management Assurances

For details on FSA programs, please refer to the Analysis of Systems, Controls and
Legal Compliance discussion found in the Management’s Discussion and Analysis
section of this document as well as the Summary of Financial Statement Audit and
Management Assurances narrative located in the Other Information section of the
Department’s AFR.

Management Challenges

For details on FSA Management Challenges, please refer to relevant items included in
the Office of Inspector General’s Management Challenges for FY 2014 Executive
Summary found in the Other Information section located within the Department’s AFR.




                        Federal Student Aid Annual Report–FY 2013                              158
                                            Appendices




 Appendices




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                                                                                         Appendices
                                                            Appendix A: Glossary of Acronyms and Terms




Appendix A: Glossary of Acronyms and Terms


 Acronym             Description
 A
 ABCP Conduit        Asset-Backed Commercial Paper Conduit
 ACES                ACS Education Servicing System
 ACSI                American Customer Satisfaction Index
 AFR                 Agency Financial Report

 C
 CCRAA               College Cost Reduction and Access Act of 2007
 CFPB                Consumer Financial Protection Bureau
 Conduit             Asset-Backed Commercial Paper Conduit
 COO                 Chief Operating Officer
 CPS                 Central Processing System
 Credit Reform Act   Federal Credit Reform Act of 1990
 CSRS                Civil Service Retirement System
 D
 the Department      U.S. Department of Education
 Direct Loan         William D. Ford Federal Direct Loan
 DMCS2               Debt Management and Collection System
 DOL                 U.S. Department of Labor
 DRG                 Default Resolution Group
 E
 ECASLA              Ensuring Continued Access to Student Loans Act of 2008
 ED                  U.S. Department of Education

 EVS                 Employee Viewpoint Survey

 F
 FACT                Financial Awareness Counseling Tool


                      Federal Student Aid Annual Report–FY 2013                                   161
                                                                                            Appendices
                                                               Appendix A: Glossary of Acronyms and Terms


Acronym               Description
FAFSA                 Free Application for Federal Student Aid
FECA                  Federal Employees’ Compensation Act
Federal Fund          Federal Student Loan Reserve Fund
FERS                  Federal Employees Retirement System
FFEL                  Federal Family Education Loan
FFELP                 Federal Family Education Loan Program
FSA                   Federal Student Aid
FSA Strategic Plan,   Federal Student Aid: Strategic Plan, Fiscal Years 2012–16
FY 2012–16
FWS                   Federal Work-Study
FY                    Fiscal Year
G
GAO                   Government Accountability Office
H

HCERA                 Health Care and Education Reconciliation Act of 2010
HEA                   Higher Education Act of 1965, as amended
I
IT                    Information Technology
M
Met                   Performance result met or exceeded target

N

N/A                   Performance result is not applicable because the performance
                      metric was not developed, the performance metric was not
                      implemented, or the required data were not available in time for
                      inclusion.
NCES                  National Center for Education Statistics
NFP                   Not-For-Profit
Not met               Performance result did not meet target

O

OCTS                  Ombudsman Case Tracking System


                       Federal Student Aid Annual Report–FY 2013                                     162
                                                                                        Appendices
                                                           Appendix A: Glossary of Acronyms and Terms


Acronym              Description
OMB                  Office of Management and Budget
OMB Circular A-123   OMB Circular A-123, Management’s Responsibility for Internal
                     Control
OPM                  Office of Personnel Management
OPR                  Organizational Performance Review

P

PBO                  Performance-Based Organization
Pell Grant           Federal Pell Grant Program

R

Recovery Act         American Recovery and Reinvestment Act of 2009

S

SBR                  Statement of Budgetary Resources

Secretary            Secretary of Education
SDCL                 Special Direct Consolidation Loan

SSAE                 Statement on Standards for Attestation Engagements

SOC1                 Service Organization Control 1

T

TEACH                Teacher Education Assistance for College and Higher Education
                     Grant
Title IV             Title IV of the Higher Education Act of 1965, as amended
TIVAS                Title IV Additional Servicers
TPD                  Total and Permanent Disability
Treasury             United States Department of the Treasury

U

U.S.                 United States




                      Federal Student Aid Annual Report–FY 2013                                  163
                                                                                 Appendices
                                                    Appendix A: Glossary of Acronyms and Terms


Acronym      Description

V

VFA          Voluntary Flexible Agreement

X

Xerox, LLC   Xerox Education Solutions, Limited Liability Corporation




              Federal Student Aid Annual Report–FY 2013                                   164
                                                                                                     Appendices
                                                  Appendix B: Availability of the Federal Student Aid Annual Report



Appendix B: Availability of the Federal Student Aid
            Annual Report
 FSA’s publicly available FY 2013 Annual Report is accessible on FSA’s and the
 Department’s websites at:


                       StudentAid.gov/strategic-planning-reporting

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



 The Federal Student Aid: Strategic Plan, Fiscal Years 2012–16 and previous years’ Annual
 Reports are also available on the websites listed above.

 To become connected to Federal Student Aid through social media, visit the Federal
 Student Aid website at Studentaid.ed.gov.




 This report is in the public domain. Authorization to reproduce it in whole or in part is
 granted. While permission to reprint this publication is not necessary, the citation should be:
 U.S. Department of Education, Federal Student Aid, Annual Report–FY 2013, Washington,
 D.C., 2013.

                           Federal Student Aid Annual Report–FY 2013                                          165